10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended: July 1, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 000-30684

Bookham, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-1303994
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
2584 Junction Avenue San Jose, California	95134 (Zip Code)
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code:

408-383-1400

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

Title of each class:	Name of each exchange on which registered:
Common stock, par value $0.01 per share	The NASDAQ Global Market

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

None

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

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

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 o     No þ

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

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

Large accelerated filer  o     Accelerated filer  þ     Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ

The aggregate market value of the common stock held by non-affiliates of the registrant was $175,610,528 based on the last reported sale price of the registrant’s common stock on September 1, 2006 as reported by the NASDAQ Global Market ($3.09 per share) (reference is made to Part II, Item 5 herein for a Statement of Assumptions upon which this calculation is based). As of September 1, 2006, there were 57,978,908 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended July 1, 2006. Portions of the proxy statement are incorporated herein by reference into Part III of this Annual Report on Form 10-K.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JULY 1, 2006

TABLE OF CONTENTS

PART I
	Item 1.	Business	3
	Item 1A.	Risk Factors	14
	Item 1B.	Unresolved Staff Comments	26
	Item 2	Properties	26
	Item 3	Legal Proceedings	27
	Item 4.	Submission of Matters to a Vote of Security Holders	28
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
	Item 6.	Selected Financial Data	29
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	55
	Item 8.	Financial Statements and Supplementary Data	55
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
	Item 9A.	Controls and Procedures	56
	Item 9B.	Other Information	58
PART III
	Item 10.	Directors and Executive Officers of the Registrant	59
	Item 11.	Executive Compensation	59
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	59
	Item 13.	Certain Relationships and Related Transactions	59
	Item 14.	Principal Accountant Fees and Services	59
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	59
EXHIBIT 10.53
EXHIBIT 10.54
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, about our plans, objectives, expectations and intentions. You can identify these statements by words such as “expect,” “anticipate,” “intend,” “objective,” “plan,” “goal”, “attempt,” “believe,” “seek,” “estimate,” “may,” “will” and “continue” or similar words or phrases. You should read statements that contain these words or phrases carefully. They 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. Our actual results could differ significantly from results discussed in these forward-looking statements. You should not place undue reliance on 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. Several of the important factors that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements are identified in the sections captioned “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K and the documents incorporated herein by reference.

PART I

Item 1.   Business

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. We believe we are the second largest vendor of optical components used for fiber optic telecommunications networks applications, on the basis of revenue.

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

We believe we offer one of the most comprehensive end-to-end portfolios of optical component solutions to the telecommunications market, enabling us to deliver more of the components our customers require. Our product portfolio includes several leading products (on the basis of our market share), such as our 10 gigabit per second, or Gb/s, discrete transmitters, receivers and optical amplifiers. We intend to maintain our leadership position for these products, as well as develop new solutions that leverage the knowledge and capital invested in our current generation of offerings.

We believe our advanced component design and manufacturing facilities, which would be prohibitively expensive to replicate in the current market environment, are a significant competitive advantage. On-chip, or monolithic, integration of functionality is more difficult to achieve without access to the production process, and requires advanced process know-how and equipment. Although the market for optical integrated circuits is still in its early stages, it shares many characteristics with the semiconductor market, including the positive relationship between the number of features integrated on a chip, the wafer size and the cost and sophistication of the fabrication equipment. For this reason, we believe our 3-inch wafer indium phosphide semiconductor fabrication facility in Caswell, U.K. provides us a competitive advantage as it allows us to increase the complexity of the circuits that we design and manufacture.

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We intend to draw upon our internal development and manufacturing capability to continue to create innovative solutions for our customers, such as our pluggable telecommunications transceiver products and our small form factor 10 Gb/s transmitter. One example of a monolithically integrated component we make is our LMC10 transmitter, which integrates a 10 Gb/s modulator and a transmit laser on two single indium phosphide chips in a single package. On-chip integration enables us to fit the device inside a package identical in size to current, slow speed lasers, making it easier for our customers to upgrade their equipment for 10 Gb/s transmission. We believe the LMC10 transmitter is the only transmitter of its kind on the market today, and it is currently sole-sourced to a number of customers.

Through our acquisition and integration of seven optical components companies and businesses including those of Nortel Networks Corporation, which we refer to as Nortel Networks, and Marconi Optical Components Limited, which we refer to as Marconi, we significantly increased our product portfolio and manufacturing expertise, and we believe we enhanced established relationships with leading optical systems vendors. As part of the process of integrating acquired businesses and companies, we have taken significant steps to rationalize production capacity, adjust headcount and restructure resources to reduce manufacturing and operating overhead.

We acquired the optical components business of Nortel Networks in 2002 in a transaction financed in part through promissory notes issued to Nortel Networks having an aggregate principal amount of $50 million. In connection with the acquisition, Nortel Networks entered into a supply agreement with us which specified a minimum amount of products to be purchased from us. This supply agreement has since been amended three times, most recently by the third addendum to the supply agreement in January 2006. Under the second addendum, which we entered into in May 2005, Nortel Networks agreed to purchase approximately $100 million of products from us, equally divided into two categories of products: those we will discontinue manufacturing following fulfillment of the Nortel Networks orders, which we call “last-time buy” products, and products that we will continue to manufacture. In addition, pursuant to this second addendum, the price of certain products covered by the supply agreement were increased. The third addendum to the supply agreement, among other things, (i) extended the term of the supply agreement to the end of calendar 2006, and (ii) requires Nortel Networks to purchase approximately $72 million of products from us. Remaining obligations of approximately $30 million under the supply agreement, as amended, are expected to be fulfilled by the end of the December 2006 quarter. As of July 1, 2006, substantially all of Nortel Network’s “last-time buy” obligations have been fulfilled. Non-“last-time buy” purchases will be transacted at the then current market prices and not at the increased prices which were agreed to in the second addendum. In January 2006, in connection with a series of transactions, we paid all outstanding principal and interest on the promissory notes we issued to Nortel Networks, and the security agreements and related security interests securing our obligations under the notes and the supply agreement were terminated.

Nortel Networks has been our largest customer over the past three fiscal years, and accounted for 48% of our revenue for the fiscal year ended July 1, 2006. Over the past two quarters, revenues from Nortel Networks have been decreasing as its “last-time buy” obligations under supply agreements, as amended, have been fulfilled. We expect quarterly revenues from Nortel Networks to remain flat or decline through the remainder of calendar 2006. During the quarters ended April 1, 2006 and July 1, 2006, our quarterly revenues from all customers other than Nortel Networks have increased by 11% and 25%, respectively. One of our key strategic objectives is to continue diversifying our customer and revenue base by increasing revenues from customers other than Nortel Networks.

Bookham, Inc., a Delaware corporation, was incorporated on June 29, 2004. On September 10, 2004, pursuant to a scheme of arrangement under the laws of the United Kingdom, Bookham, Inc. became the publicly traded parent company of the Bookham Technology plc group of companies, including Bookham Technology plc, a public limited company incorporated under the laws of England and Wales whose stock was previously traded on the London Stock Exchange and the NASDAQ National Market. Our common stock is traded on the NASDAQ Global Market under the symbol “BKHM.”

We maintain a Web site with the address www.bookham.com. Our Web site includes links to our Code of Business Conduct and Ethics, and our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee charters. We are not including the information contained in our Web site as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge, through our Web site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K,

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and amendments to these reports, as soon as reasonably practical after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

Industry Background

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

During the late 1990s, demand for telecommunications equipment, and the components that went into that equipment, grew dramatically. This demand was driven in part by bandwidth demands resulting from the rise of the Internet and in part by regulatory changes in the U.S. that opened the telecommunications markets to new network service providers. Many of these new networking companies elected to draw upon optical networking technology and to build their own networks in response to forecasts for exponential network traffic growth and supported by ready availability of capital.

The business climate for telecommunications companies became less favorable in late 2000, as network service providers began to experience significant financial difficulties. Unable to obtain financing for continued growth, and with actual network utilization below expectations due to an overbuilt infrastructure network, service providers stopped buying new equipment. In turn, many equipment providers stopped buying components, which severely affected optical component manufacturers, who were left with significant inventories, excess production capacity and cost structures not aligned with industry demand levels. In response, optical component suppliers have reduced manufacturing and operating cost overheads dramatically in order to sustain their businesses during a period of reduced demand and to achieve cost efficiencies required to meet their customers’ pricing objectives.

As the market for optical systems declined, optical systems vendors were exposed to many of the same inefficiencies confronting independent optical component companies. These challenges, as well as the prioritization on optical systems design manufacturing, resulted in the divestiture or closure of many captive optical component businesses. As a result, during the last three years, optical systems vendors have been seeking component suppliers with (i) a depth of technology expertise and breadth of product portfolio that no longer exists within their own organizations, and (ii) the manufacturing capabilities that they have sold, outsourced or eliminated.

Fewer customers, each demanding more complete solutions and requiring continued innovation at reduced cost, have led to significant consolidation among optical component suppliers. We have played an active role in this consolidation, acquiring the optical components businesses of Nortel Networks and Marconi, among others. We believe that the trend toward consolidation will continue, providing companies positioned as consolidators with the opportunity to capture increased market share and to improve profitability through increased capacity utilization and other operating efficiencies.

The market for optical components, modules and subsystems continues to evolve. Telecommunications network vendors are requiring optical component suppliers to take advantage of developments in product integration and miniaturization to provide solutions incorporating multiple optical components on a single subsystem or module, thereby reducing the need for component assembly and additional testing by the vendor. Accordingly, optical component suppliers who are able to offer more integrated, technologically-advanced modules and subsystems have an advantage over suppliers who can only offer discrete optical components. In addition, optical component suppliers have increasingly had to address the requirements of both the telecommunications and data communications markets. Historically, telecommunications products were characterized by high performance, high cost and significant product customization, while data communications products were characterized by high volume, low cost and standard product specifications. This distinction is becoming blurred as technologies evolve that cost-effectively address both sets of applications at attractive price points, creating an opportunity to leverage technologies that meet the broader demands of the two markets. In addition, optical technologies originally

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developed for the communications industry, such as high-power lasers, are also being deployed in industrial, automotive, aerospace and military applications. These technologies offer optical component suppliers the opportunity to achieve improved margins and leverage embedded research and development expertise in new applications that are less dependent on the cycles of the telecommunications industry.

In early 2004, the optical components market showed signs of recovery, driven by customers and service providers with stronger balance sheets, a growing economy and regulatory changes that spurred competition among providers of voice, video and data services. Certain signs of recovery in the industry have been continuing. We believe that there are three primary drivers of this market: (i) the continued recovery of spending by telecommunications networking equipment companies, (ii) the introduction of new, more cost-effective product technologies, such as 10 Gb/s pluggable transceivers, and (iii) the expansion of optical networking in the metro space, driven by the build out of broadband access networks such as fiber-to-the-home initiatives. In addition, the growing competition among cable network operators offering voice, video and data services and traditional telephony service providers is resulting in increased utilization of optical networking technologies as communications networks converge.

To succeed in such a challenging and evolving market, we believe that an optical component supplier must:

•  Offer a broad product portfolio of components, modules and subsystems to provide equipment manufacturers solutions at different levels of integration;

•  Maintain strong relationships with leading optical systems vendors;

•  Develop innovative products that address challenges currently faced by equipment providers and technologies that provide a foundation for new products in the future;

•  Invest in integrated, cost-efficient manufacturing facilities which incorporate a variety of process technologies; and

•  Possess the necessary scale and cost structure to be cost-competitive, and the financial resources to endure periodic industry cycles.

Our Solution

We are a leading supplier of optical component solutions for the telecommunications market. Through a focused acquisition strategy, we have significantly increased our product portfolio and manufacturing expertise, and enhanced established relationships with leading optical systems vendors. We believe we are well-positioned to succeed as an optical component vendor for the following reasons:

•  Breadth of technology and products.  We believe that we offer one of the most comprehensive end-to-end portfolios of optical component solutions to the telecommunications market. We believe that our range of technical capabilities allows us to provide customers with integrated solutions to satisfy their optical component needs, including integrated subsystems and pluggable modules.

•  Leading networking customers.  We are suppliers to leading equipment system vendors, such as Nortel Networks, Huawei, Cisco and others. For many of our designs, we are sole-sourced by certain customers , including small form factor 10 Gb/s transmitters and certain optical amplifiers and receivers. We believe this reflects the technical superiority of our products and our customers’ satisfaction with our products and service.

•  Product innovation and technology leadership.  Through internal development and selective acquisitions of external technology, we continue to innovate and introduce new products for the telecommunications market. In general, we focus our development efforts on the higher performance segment of the market, as we find customers in this segment value technology differentiation. We also intend to work to maintain our leadership in existing areas of special expertise, such as 10Gb/s transmitters, receivers, optical amplifiers and pump laser chips.

•  Advanced semiconductor manufacturing facilities.  We believe our advanced component design and manufacturing facilities, which would be prohibitively expensive to replicate in the current market

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environment, is a significant competitive advantage. On-chip integration of functionality is more difficult without access to the production process, and requires advanced process know-how and equipment. Our 3-inch wafer indium phosphide semiconductor fabrication facility in Caswell U.K. utilizes advanced production processes to improve production yields and increase the complexity of the circuits we design and manufacture.

•  Low-cost, advanced assembly facilities.  Our Shenzhen, China facility is an advanced production facility with approximately 250,000 square feet of manufacturing and office space that we expect will significantly reduce our assembly and test costs. We have substantially completed our transition of our assembly and test to this facility. All of our major product platforms manufactured in our Shenzhen facility have been qualified to ship to customers. The substantial portion of our revenues are now derived from products shipping out of our Shenzhen facility. We believe that the transfer of our assembly and test operations to Shenzhen, while maintaining our Caswell and Zurich facilities, among others, has enabled us to reduce our costs over the most recent fiscal year while helping to preserve our technology differentiation.

•  Realigned cost structure and improved financial condition.  As part of the process of integrating acquired businesses and companies, we have taken significant steps to rationalize production capacity, decrease headcount and restructure resources to reduce manufacturing and operating overhead. These steps have resulted in reduced expenses over the most recently completed fiscal year and enabled us to deliver our customers component solutions at lower cost. In addition to restructuring and streamlining measures, we have also taken measures to improve our capital position during the most recently completed fiscal year, including raising approximately $101 million in various financing activities (net of estimated fees incurred in connection with these financings), and we entered into a series of transactions that resulted in, among other things, the payment to Nortel Networks of $45.9 million which constituted the outstanding aggregate principle amount under the promissory notes issued to Nortel Networks, and the conversion of $25.5 million of our outstanding convertible debentures into common stock. In August 2006 we entered into a three-year senior secured revolving credit facility of $25 million, under which advances are available based on a percentage of accounts receivable at the time the advance is requested. For additional information about these series of transactions, see Note 17 — “Debt”, to our consolidated financial statement, appearing herein. In September 2006, we also entered into a definitive agreement for the private placement of 8,696,000 shares of our common stock at $2.70 per share, and warrants to purchase 2,174,000 shares of common stock, with selected institutional investors, for gross proceeds of approximately $23.5 million. The warrants have a term of five years and become exercisable after March 1, 2007, and have an exercise price of $4.00 per share. Certain additional institutional investors will have the right to purchase, on or before September 19, 2006, up to 2,898,667 shares of common stock and warrants to purchase up to 724,667 shares of common stock at the same purchase price.

We continue to evaluate further means of enhancing our financial position through various forms of financing, which could include the sale of certain assets.

Our Strategy

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

•  Leveraging broad product portfolio and technology expertise.  We believe that our broad product portfolio positions us to increase our penetration of existing customers, such as Nortel Networks, Cisco and Huawei and gives us a competitive advantage in winning new customers. In addition, we intend to continue to apply our optical component technologies to opportunities in other, non-telecommunications markets, including military, industrial research, semiconductor capital equipment and biotechnology, where we believe the use of those technologies is expanding.

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

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•  Broadening sales, marketing and customer support capabilities.  We intend to develop our sales and marketing infrastructure and customer support functions that will (i) allow our customer relationships to evolve after products are deployed, (ii) aid in the retention of existing customers and (iii) help identify areas for further technical improvement and development.

•  Continuing to improve cost structure.  We intend to continue to identify and implement cost-saving programs across our organization, including programs to align our manufacturing resources appropriately. We are implementing plans to transfer our remaining manufacturing and supply chain management functions from our Paignton U.K. facility to our lower cost Shenzhen facility. These plans also include the rationalization of our Caswell U.K. wafer facility capacity to match our near term fabrication requirements. We intend to continue to focus on managing our variable costs through yield improvements, labor productivity gains, component substitutions and aggressive supply chain management.

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

Our Product Offerings

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

We believe that our acquisitions of the optical component businesses of Nortel Networks and Marconi, as well as our acquisitions of Ignis Optics, New Focus, Avalon and Onetta and the assets of Cierra Photonics, Inc., which we refer to as Cierra Photonics, have significantly enhanced our product portfolio. We believe our enhanced portfolio will enable us to provide optical systems suppliers with subsystems and modules based on our components. This ability to offer a more comprehensive array of products addresses our customers’ goals of reducing the number of suppliers from whom they purchase.

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

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

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

•  Tunable lasers and transmitter modules.  Our tunable laser products include both thermally and electronically tunable devices that are co-packaged with a modulator to optimize performance and reduce the size of the product. We also have innovative technology to deliver wide band electronic tunability.

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

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

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

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

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

•  TOA/ROA.  Transmitter optical assemblies, or TOAs, and receiver optical assemblies, or ROAs, are card-level transmitter and receiver assemblies that are customized for the Nortel Networks 10 Gb/s network systems. These products integrate several individual optical components onto one circuit board that contains components sourced both internally and from third parties.

The optical technology originally developed for the telecommunications industry is also increasingly being deployed in other markets, such as industrial, consumer display and life sciences, in addition to the test and measurement market where it has been deployed for some time. Advancements in laser technology have improved the cost, size and power of devices, making them more suitable for non-telecommunications applications. We believe that we are positioned to benefit from the increased use of lasers in new markets as a leading provider of such technology, including advanced pump laser technology for industrial applications. Optical thin film filter technology is already widely deployed outside of telecommunications; we are focusing our efforts on developing applications for life sciences, biotechnology and consumer display industries.

Through our New Focus division, we develop photonics and microwave solutions for diversified markets such as research, semiconductor capital equipment and the military. We sell two primary families of products in the area of photonics and microwave solutions: advanced photonic tools principally used for generating, measuring, moving, manipulating, modulating and detecting optical signals, and tunable lasers for test and measurement applications. We sell our products to the research market primarily via an extensive catalog, and believe we benefit from the broad market awareness of our New Focus brand in this market. We pursue a direct sales approach for the semiconductor capital equipment and military markets, and currently sell to several of the leading companies in the semiconductor capital equipment market.

Customers, Sales and Marketing

We principally sell our optical component products to telecommunications systems vendors as well as to customers in the data communications, military, aerospace, industrial and manufacturing industries. Customers for our photonics and microwave product portfolio include academic and governmental research institutions that engage in advanced research and development activities, and semiconductor capital equipment manufacturers.

We operate in two business segments: (i) optics and (ii) research and industrial. Optics relates to the design, development, manufacture, marketing and sale of optical solutions for telecommunications and industrial applications. Research and industrial relates to the design, manufacture, marketing and sale of photonics and microwave solutions.

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

Revenues by Segment

					Six Months
	Year Ended		Year Ended		Ended		Year Ended
	July 1,		July 2,		July 3,		December 31,
	2006		2005		2004		2003
	(In thousands)
Optics	$	206,019	$	176,598	$	69,315	$	146,197
Research and Industrial		25,630		23,658		10,448		—
Total Revenues	$	231,649	$	200,256	$	79,763	$	146,197

For additional information on the optics and research and industrial segments, see Note 12 — “Segments of an Enterprise and Related Information” — to our consolidated financial statements appearing elsewhere herein.

Nortel Networks accounted for 48% of our total revenue in the year ended July 1, 2006 (or fiscal 2006), 45% in the year ended July 2, 2005, 46% in the six-month period ended July 3, 2004, and 59% in the year ended December 31, 2003, respectively. Marconi accounted for 13% of our total revenue in the year ended December 31, 2003. In addition to our efforts to rationalize and streamline our operations, we have also undertaken efforts to realign our relationship with our largest customer, Nortel Networks, with whom we have entered into several agreements. In connection with our purchase of Nortel Networks’ optical components business in 2002, Nortel Networks agreed to a long-term supply agreement which, among other things, required Nortel Networks to purchase a specified level of products from us, and they obtained certain rights from us. We financed the acquisition of the optical components business in part through the issuance of two promissory notes having an initial aggregate principal amount of $50 million, which were settled in full in January 2006, at which time the security agreements we entered into with Nortel Networks and related security interests securing our obligations under the promissory notes and the supply agreement were terminated. Pursuant to the third addendum to the supply agreement, Nortel Networks is obligated to purchase $72 million of product from us through the end of calendar 2006.

During the past three years, Nortel Networks has been our largest customer. In the process of completing the delivery of a majority of the “last-time buys” required under the second addendum to the Nortel Networks supply agreement, our revenues from Nortel Networks decreased in the third and fourth quarters of fiscal 2006, from $34.3 million in the second quarter of fiscal 2006, to $24.1 million in the third quarter of fiscal 2006, to $18.5 million in this fourth quarter of fiscal 2006. Under the third addendum to the Nortel Networks supply agreement, we anticipate our quarterly revenues from Nortel Networks will continue to drop through the remaining two quarters of calendar 2006, which are the first two quarters of our fiscal 2007, and potentially decline further in future quarters.

General

We believe it is essential to maintain a comprehensive and capable direct sales and marketing organization. As of July 1, 2006, we had an established direct sales and marketing force of 91 people for all of our products sold in the U.K., China, France, Germany, Switzerland, Canada, Italy and the U.S. In addition to our direct sales and marketing force, we also sell and market our products through international sales representatives and resellers that extend our commercial reach to smaller geographic locations and customers that are not currently covered by our direct sales and marketing force. Our products targeted at research and industrial applications are sold through catalogs.

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

In certain instances, support services for our products include customer service and technical support. Customer service representatives assist customers with orders, warranty returns and other administrative functions. Technical support engineers provide customers with answers to technical and product-related questions. Technical support engineers also provide application support to customers who have incorporated our products into custom applications.

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

Revenues by Geographic Region

					Six Months
	Year Ended		Year Ended		Ended		Year Ended
	July 1,		July 2,		July 3,		December 31,
	2006		2005		2004		2003
	(In thousands)
Canada	$	107,445	$	85,006	$	35,529	$	78,373
United States		47,762		54,660		20,446		13,584
China		27,781		19,420		9,426		14,155
Europe Other Than United Kingdom		18,896		19,274		8,797		13,356
Asia Other Than China		15,655		5,019		1,449		840
United Kingdom		9,857		15,727		4,023		25,069
Rest of the World		4,253		1,150		93		820
Total Revenues	$	231,649	$	200,256	$	79,763	$	146,197

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

Intellectual Property

We believe that our proprietary technology provides us with a competitive advantage, and we intend to continue to protect our technology, as appropriate, including design, process and assembly aspects. We believe that our intellectual property portfolio is a strategic asset that we can use to develop our own sophisticated solutions and applications, or in conjunction with the technologies of the companies with whom we collaborate, for use in optical networking. Our intellectual property portfolio is supplemented by our expertise and application and process engineering know-how developed by our personnel, including personnel who joined us from Nortel Networks, Marconi, Cierra Photonics, Ignis Optics, New Focus, Avalon and Onetta. We believe that the future success of our business will depend on our ability to translate our intellectual property portfolio and the technological expertise and innovation of our personnel into new and enhanced products.

As of August 1, 2006, we held 292 U.S. patents and 173 non-U.S. patents, and we had approximately 295 patent applications pending in various countries. The patents we currently hold expire between 2006 and 2025. We maintain an active program to identify technology appropriate for patent protection. We require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individuals during their work for us and require that all proprietary information disclosed will remain confidential. While such agreements may be binding, we may not be able to enforce them in all jurisdictions.

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

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Research and Development

Since the inception of Bookham Technology plc in 1988, we have been committed to our research and development activities. We spent $42.6 million during the year ended July 1, 2006, $44.8 million during the year ended July 2, 2005, $26.9 million during the six-month period ended July 3, 2004, and $50.4 million during the year ended December 31, 2003 on our research and development programs. We believe that continued focus on the development of our technology is critical to our future competitive success and our goal is to expand and develop our line of telecommunications products, particularly in the area of subsystems, expand and develop our line of non-telecommunications products and technologies for use in a variety of different applications, enhance our manufacturing processes to reduce production costs, provide increased device performance and reduce product time to market. We also believe it is critical to focus our resources on those technologies where our strengths as a company may translate into the most significant potential for product demand and profitability. Accordingly, in connection with our most recent cost reduction plan announced in May 2006, we are rationalizing our product development portfolio to focus on such programs. As of July 1, 2006, our research and development organization comprised 352 people.

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

Manufacturing

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

We lease an advanced 3-inch wafer indium phosphide semiconductor fabrication facility, which we believe is one of our key competitive differentiators, in Caswell U.K. under a 20 year lease with an option to extend an additional 5 years after the initial 20 year period and for additional 2 year increments indefinitely after the initial 25 year period. We previously owned this facility, but in March 2006 we sold it to a subsidiary of Scarborough Development as a part of a sale-leaseback arrangement. For additional information about the sale-leaseback arrangement of the Caswell facility, see Note 5 — “Commitments and Contingencies” to our consolidated financial statement, appearing herein. We also have assembly and test facilities in Shenzhen, China and San Jose, California, and an assembly and test facility in Paignton U.K. a substantial portion of the manufacturing related activities at the Paignton U.K. facility has been transferred to Shenzhen, and the remainder are expected to be transferred no later than the end of the December 2006 quarter. We have a wafer fabrication facility in Zurich, Switzerland, and a TTF manufacturing facility in Santa Rosa, California. We previously had manufacturing facilities in Abingdon, Harlow and Swindon, U.K.; Columbia, Maryland; Poughkeepsie, New York; and Ottawa, Canada, all of which are now closed. During 2003, we consolidated our Ottawa manufacturing equipment and activities into our existing Caswell facility and consolidated our optical amplifier assembly and test operations and chip-on-carrier operations into our Paignton site. In 2003, we substantially underutilized our existing manufacturing capacity. In 2004, we implemented a restructuring plan which included a reduction in our excess manufacturing floor space to 700,000 square feet and the transfer of a majority of our assembly and test operations from Paignton to Shenzhen in order to take advantage of the comparatively low manufacturing costs in China. In the quarter ended October 2, 2004, we commenced assembly and test operations in Shenzhen. Revenues shipped from our Shenzhen facility have increased from $3.1 million in the quarter ended March 31, 2005 to $36.8 million in the quarter ended July 1, 2006. The transfer of assembly and test operations from our Paignton facility was substantially complete by the end of the quarter ended April 1, 2006, except for a remaining assembly process expected to transition to Shenzhen by the end of December 2006. In May 2006, we announced plans to transition all remaining supply chain and manufacturing overhead support from Paignton to Shenzhen.

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

Long-Lived Tangible Assets

	July 1,		July 2,
	2006		2005
	(In thousands)
United Kingdom	$	30,319	$	40,813
China		14,529		14,905
Europe Other Than United Kingdom		4,806		5,312
United States		1,893		2,229
Canada		616		897
Total long-lived tangible assets	$	52,163	$	64,156

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

Total Assets

	July 1,		July 2,
	2006		2005
	(In thousands)
United Kingdom	$	121,337	$	150,876
United States		46,115		47,695
China		47,611		24,940
Europe Other Than United Kingdom		19,090		11,660
Canada		2,644		3,407
Total assets	$	236,797	$	238,578

Competition

The market for our products is highly competitive. We believe we compete favorably with respect to the following factors:

•  product quality, performance and price;

•  future product evolution;

•  manufacturing capabilities; and

•  customer service and support.

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

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

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

•  broad-based merchant suppliers of components, principally JDSU, Avanex, Opnext and CyOptics; and

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

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In addition, as we integrate and expand our offerings into new markets, we may compete against market leaders, such as Agilent, Finisar and Marvell, which acquired Intel’s communications business, in industries such as semiconductor and data communications, who may have significantly more resources than we do.

In the area of photonics and microwave solutions, we compete with a number of companies including Melles Griot, Newport, Thermo Oriel (a unit of the Thermo Photonics Division of Thermo Electron Corporation), Thorlabs, Miteq and Aeroflex.

Employees

As of July 1, 2006, we employed 2,123 persons, including 352 in research and development, 1,571 in manufacturing, 90 in sales and marketing, and 110 in finance and administration. None of our employees are subject to collective bargaining agreements. We believe that our relations with our employees are good.

Item 1A.   Risk Factors

Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below in addition to the other information included or incorporated by reference in this Annual Report on Form 10-K. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

Risks Related to Our Business

We have a history of large operating losses and we expect to generate losses in the future unless we achieve further cost reductions and revenue increases.

We have never been profitable. We have incurred losses and negative cash flow from operations since our inception. As of July 1, 2006, we had an accumulated deficit of $954 million.

Our net loss for the year ended July 1, 2006 was $87.5 million, which included an $18.8 million loss on conversion of convertible debt and early extinguishment of debt, a $11.7 million tax gain, and an aggregate of $11.2 million of restructuring charges. For the year ended July 2, 2005 our net loss was $248 million, which included goodwill and intangibles impairment charges of $114.2 million and restructuring charges of $20.9 million.

Even though we generated positive gross margins in each of the past five fiscal quarters, we have a history of negative gross margins. In the quarter ended April 1, 2006, we experienced a decrease in margins when compared with the prior fiscal quarter, which is the result of a shift to lower margin products as we transition to new products, underutilization of our semiconductor facility located in Caswell, U.K. as a result of the changing product mix, and costs associated with the shutdown of certain production lines in our Paignton assembly and test facility. We may not be able to maintain positive gross margins if we do not address these issues, continue to reduce our costs, improve our product mix and generate sufficient revenues from new and existing customers to offset the revenues we will lose after Nortel Networks completes its “last-time-buy” purchases and its other purchases pursuant to the supply agreement, as amended.

In order to continue as a going concern, we will need capital in excess of our current cash resources.

Based on our cash balances, and given our continuing and expected losses for the foreseeable future, if we fail to meet management’s current cash flow forecasts, or we are unable to draw sufficient amounts under the three year $25 million senior secured revolving credit agreement with Wells Fargo Foothill, Inc. and other lenders, which was entered into in August 2006, for any reason, we will need to raise additional funding of at least $10 million to $20 million through external sources prior to July 2007 in order to maintain sufficient financial resources in order to operate as a going concern through the end of fiscal 2007. If necessary, we will attempt to raise additional funds by any one or a combination of the following: (i) completing the sale of certain assets; (ii) issuing equity, debt or convertible debt (iii) selling certain non core businesses. There can be no assurance of our ability to raise sufficient capital through the above, or any other efforts.

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We remain highly dependent on sales to Nortel Networks and we expect revenues from Nortel Networks to decrease at least through calendar 2006.

Historically, Nortel Networks has been our largest customer. In the fiscal year ended July 1, 2006 and in the fiscal year ended July 2, 2005, we sold $110.5 million and $89.5 million of products and services to Nortel Networks, or 48% and 45% of our total revenues, respectively.

In connection with the third addendum to the supply agreement with Nortel Networks we entered into on January 13, 2006, Nortel Networks is obligated to purchase $72 million of our products through calendar year 2006. There can be no assurance Nortel Networks will continue to buy any of our products after the supply agreement, as amended, is completed, or if Nortel Networks does not continue to buy at its current level, that we can replace the loss of revenue from Nortel Networks with revenue from other customers. To the extent that we may rely on Nortel Networks for revenues in the future, Nortel Networks has experienced significant losses in the past and any future adverse change in Nortel Networks’ financial condition could adversely affect their demand for our products.

Our success will depend on our ability to anticipate and respond to evolving technologies and customer requirements.

The market for telecommunications equipment is characterized by substantial capital investment and diverse and evolving technologies. For example, the market for optical components is currently characterized by a trend toward the adoption of “pluggable” components and tunable transmitters that do not require the customized interconnections of traditional fixed wave length “gold box” devices and the increased integration of components on subsystems. Our ability to anticipate and respond to these and other changes in technology, industry standards, customer requirements and product offerings and to develop and introduce new and enhanced products will be significant factors in our ability to succeed. We expect that new technologies will continue to emerge as competition in the telecommunications industry increases and the need for higher and more cost efficient bandwidth expands. The introduction of new products embodying new technologies or the emergence of new industry standards could render our existing products uncompetitive from a pricing standpoint, obsolete or unmarketable.

We may encounter unexpected costs or delays in transferring our assembly and test operations from the United Kingdom to Shenzhen, China.

A key element of our restructuring and cost reduction efforts is the successful transfer of substantially all of our assembly and test operations from Paignton, U.K. to Shenzhen, China. Accordingly, we expect that our ability to transfer manufacturing capabilities to, and to operate effectively in, China is critical to the overall success of our business. We began to implement the transfer of our assembly and test operations from Paignton to Shenzhen in the fall of 2004. The substantial portion of the manufacturing transfer has been completed as of July 1, 2006. In November 2005, we announced that our chip-on-carrier assembly will also be transferred from Paignton to Shenzhen. We expect that the transfer of chip-on-carrier assembly operation to Shenzhen will continue at least into the quarter ended December 31, 2006. In May 2006, we announced that substantially all remaining manufacturing and supply chain management and related activities in Paignton would also be transferred to Shenzhen, and that transfer will also continue at least into the quarter ended December 31, 2006. Our business and results of operations would be materially adversely affected if we experience delays in, increased costs related to, or if we are ultimately unable to:

•  qualify our manufacturing lines and the products we produce in Shenzhen, as required by our customers;

•  transfer our assembly and test equipment, including chip-on-carrier equipment, from Paignton to Shenzhen;

•  attract qualified personnel to operate our Shenzhen facility;

•  retain employees at our Shenzhen facility;

•  achieve the requisite production levels for products manufactured at our Shenzhen facility; and

•  wind down operations at our Paignton facility.

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During the year ended July 1, 2006, we recorded significant unanticipated costs related to the wind-down of manufacturing activities in Paignton, and the transfer of the related activities to Shenzhen, and we may continue to do so in the future. If we continue to incur these unanticipated costs in connection with transferring certain operations to our Shenzhen facility, our business and results of operations will be adversely affected.

The market for optical components continues to be characterized by excess capacity and intense price competition which has had, and will continue to have, a material adverse affect on our results of operations.

By 2002, actual demand for optical communications equipment and components was dramatically less than that forecasted by leading market researchers only two years before. Even though the market for optical components has been recovering recently, particularly in the metro market segment, there continues to be excess capacity, intense price competition among optical component manufacturers and continued consolidation of the industry. As a result of this excess capacity, and other industry factors, pricing pressure remains intense. The continued uncertainties in the telecommunications industry and the global economy make it difficult for us to anticipate revenue levels and therefore to make appropriate estimates and plans relating to cost management. Continued uncertain demand for optical components has had, and will continue to have, a material adverse effect on our results of operations.

A default under our supply agreement with Nortel Networks would have an adverse impact on our ability to conduct our business.

We are party to a supply agreement with Nortel Networks that has been amended three times, most recently in January 2006. The supply agreement, as amended, requires that we grant a license for the assembly, test, post-processing and test intellectual property (but excluding wafer technology) of certain critical products to Nortel Networks and to any designated alternative supplier, if at any time, we: are unable to manufacture critical products for Nortel Networks in any material respect for a continuous period of not less than six weeks, or are subject to an insolvency event, such as a petition or assignment in bankruptcy, appointment of a trustee, custodian or receiver, or entrance into an arrangement for the general benefit of creditors. In addition, if there is an insolvency event, Nortel Networks will have the right to buy all Nortel Networks inventory we hold, and we will be obligated to grant a license to Nortel Networks or any alternative supplier for the manufacture of all products covered by the first addendum to the supply agreement. Our revenues and business would be substantially harmed if we were required to license this assembly, test, post-processing and test intellectual property to Nortel Networks or any supplier they were to designate.

We and our customers are each dependent upon a limited number of customers.

Historically, we have generated most of our revenues from a limited number of customers. Sales to one customer, Nortel Networks, accounted for 48% and 45% of our revenues for the year ended July 1, 2006 and the year ended July 2, 2005, respectively. In addition to the reduced outlook for revenue from Nortel Networks after the purchase orders under the supply agreement, as amended, are filled, we expect that revenue from our other major customers may decline or fluctuate significantly during the remainder of calendar year 2006 and beyond. We may not be able to offset any such decline in revenues from our existing major customers with revenues from new customers.

Our dependence on a limited number of customers is due to the fact that the optical telecommunications systems industry is dominated by a small number of large companies. Similarly, our customers depend primarily on a limited number of major telecommunications carrier customers to purchase their products that incorporate our optical components. Many major telecommunication systems companies and telecommunication carriers are experiencing losses from operations. The further consolidation of the industry, coupled with declining revenues from our major customers, may have a material adverse impact on our business.

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As a result of our global operations, our business is subject to currency fluctuations that have adversely affected our results of operations in recent quarters and may continue to do so in the future.

Our financial results have been materially impacted by foreign currency fluctuations and our future financial results may also be materially impacted by foreign currency fluctuations. At certain times in our history, declines in the value of the U.S. dollar versus the U.K. pound sterling have had a major negative effect on our profit margins and our cash flow. Despite our change in domicile from the United Kingdom to the United States and the implementation of our restructuring program to move all assembly and test operations from Paignton, U.K. to Shenzhen, China, the majority of our expenses are still denominated in U.K. pounds sterling and substantially all of our revenues are denominated in U.S. dollars. Fluctuations in the exchange rate between these two currencies and, to a lesser extent, other currencies in which we collect revenues and pay expenses will continue to have a material affect on our operating results. Additional exposure could result should the exchange rate between the U.S. dollar and the Chinese Yuan vary more significantly than it has to date.

We engage in currency transactions in an effort to cover any exposure to such fluctuations, and we may be required to convert currencies to meet our obligations. Under certain circumstances, these transactions can have an adverse effect on our financial condition.

We are increasing manufacturing operations in China, which exposes us to risks inherent in doing business in China.

We are taking advantage of the comparatively low manufacturing costs in China by transferring substantially all of our assembly and test operations, chip-on-carrier operations and manufacturing and supply chain management operations to our facility in Shenzhen, China. Operations in China are subject to greater political, legal and economic risks than our operations in other countries. In order to operate the facility, we must obtain and retain required legal authorization and train and hire a workforce. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations such as those related to taxation, import and export tariffs, environmental regulations, land use rights, intellectual property and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China and costs or operational limitations may be imposed in connection with obtaining and complying with such permits.

We have been advised that power may be rationed in the location of our Shenzhen facility, and were power rationing to be implemented, it could either have an adverse impact on our ability to complete manufacturing commitments on a timely basis or, alternatively, could require significant investment in generating capacity to sustain uninterrupted operations at the facility. Our ability to transfer chip-on-carrier operations and manufacturing and supply chain management operations from our facilities in the U.K. to China would be hindered by a power rationing. We may also be required to expend greater amounts than we currently anticipate in connection with increasing production at the facility. Any one of these factors, or a combination of them, could result in unanticipated costs, which could materially and adversely affect our business.

We intend to export the majority of the products manufactured at our Shenzhen facility. Under current regulations, upon application and approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and will be exempt from certain duties on imported materials that are used in the manufacturing process and subsequently exported from China as finished products. However, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation and duties in China or may be required to pay export fees in the future. In the event that we become subject to new forms of taxation in China, our business and results of operation could be materially adversely affected.

Fluctuations in operating results could adversely affect the market price of our common stock.

Our revenues and operating results are likely to fluctuate significantly in the future. The timing of order placement, size of orders and satisfaction of contractual customer acceptance criteria, as well as order or shipment delays or deferrals, with respect to our products, may cause material fluctuations in revenues. Our lengthy sales cycle, which may extend to more than one year, may cause our revenues and operating results to vary from period to period and it may be difficult to predict the timing and amount of any variation. Delays or deferrals in purchasing

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decisions may increase as we develop new or enhanced products for new markets, including data communications, aerospace, industrial and military markets. Our current and anticipated future dependence on a small number of customers increases the revenue impact of each customer’s decision to delay or defer purchases from us. Our expense levels in the future will be based, in large part, on our expectations regarding future revenue sources and, as a result, net income for any quarterly period in which material orders fail to occur, or are delayed or deferred could vary significantly.

Because of these and other factors, quarter-to-quarter comparisons of our results of operations may not be an indication of future performance. In future periods, results of operations may differ from the estimates of public market analysts and investors. Such a discrepancy could cause the market price of our common stock to decline.

We may incur additional significant restructuring charges that will adversely affect our results of operations.

Over the past five years, we have enacted a series of restructuring plans and cost reduction plans designed to reduce our manufacturing overhead and our operating expenses. In 2001, we reduced manufacturing overhead and our operating expenses in response to the initial decline in demand in the optics components industry. In connection with our acquisitions of Nortel Networks’ optical components business in November 2002 and New Focus in March 2004, we enacted restructuring plans related to the consolidation of our operations, which we expanded in September 2004 to include the transfer of our main corporate functions, including consolidated accounting, financial reporting, tax and treasury, from Abingdon, U.K. to our new U.S headquarters in San Jose, California.

In May and November of 2004, we adopted additional restructuring plans, which included the transfer of our assembly and test operations from Paignton, U.K. to Shenzhen, China, a process that commenced in the quarter ended October 2, 2004. This transition was substantially complete by the end of March 2006, except for a chip-on-carrier assembly process we added to the transition plan in November 2005, and which we expect to be completed by the end of December 2006. In May 2006, we announced our latest cost reduction plans, which included transitioning all remaining manufacturing support and supply chain management, along with pilot line production and production planning, from Paignton to Shenzhen, also by the end of December, 2006.

With respect to the transfer of the operations described in the previous paragraph, some of which are still in the process of being transferred, we have spent $22.6 million as of July 1, 2006, and we anticipate spending a total of approximately $30 million to $37 million, including $6.0 million to $7.0 million on the cost reduction plan announced in May 2006. The substantial portion of the remaining spending relates to personnel and personnel related costs. We expect the cost reduction plan announced in May 2006 to reduce our costs by between $5.5 million and $6.5 million a quarter, when compared to the expenses incurred in the quarter ended April 1, 2006, with the cost savings expected to be realized in the March 2007 quarter.

We may incur charges in excess of amounts currently estimated for these restructuring and cost reduction plans. We may incur additional charges in the future in connection with future restructurings and cost reduction plans. These charges, along with any other charges, have adversely affected, and will continue to adversely affect, our results of operations for the periods in which such charges have been, or will be, incurred.

Our results of operations may suffer if we do not effectively manage our inventory, and we may incur inventory-related charges.

We need to manage our inventory of component parts and finished goods effectively to meet changing customer requirements. The ability to accurately forecast customers’ product needs is difficult. Some of our products and supplies have in the past, and may in the future, become obsolete while in inventory due to rapidly changing customer specifications or a decrease in customer demand. If we are not able to manage our inventory effectively, we may need to write down the value of some of our existing inventory or write off unsaleable or obsolete inventory, which would adversely affect our results of operations. We have from time to time incurred significant inventory-related charges. During the year ended July 1, 2006, we incurred significant costs for inventory production variances associated with unanticipated shifts in the mix of our customers’ product orders. Any such charges we incur in future periods could significantly adversely affect our results of operations.

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Charges to earnings resulting from the application of the purchase method of accounting may adversely affect the market value of our common stock.

We account for our acquisitions, including the acquisition of New Focus, using the purchase method of accounting. In accordance with GAAP, we allocate the total estimated purchase price to the acquired company’s net tangible assets, amortizable intangible assets, and in-process research and development based on their fair values as of the date of announcement of the transaction, and record the excess of the purchase price over those fair values as goodwill. With respect to our acquisition of New Focus, we expensed the portion of the estimated purchase price allocated to in-process research and development in the third quarter of fiscal 2004. We will incur an increase in the amount of amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with the acquisition on an annual basis. To the extent the value of goodwill or intangible assets with indefinite lives becomes impaired, we may be required to incur material charges relating to the impairment of those assets. In the year ended July 2, 2005, following a triggering event in the third quarter and in accordance with our policy of evaluating long-lived assets for impairment in the fourth quarter, we recorded charges totaling $114.2 million related to the impairment of goodwill and purchased intangible assets. In addition, in the past, after the completion of a transaction, we have amended the provisional values of assets and liabilities we obtained as part of transactions, specifically the acquisition of the optical components business of Nortel Networks. This amendment resulted in the value of our inventory being increased by $20.2 million, current liabilities being increased by approximately $1.3 million, intangible assets being decreased by approximately $9.1 million and property, plant and equipment being increased by $9.8 million. In March 2006, we acquired Avalon Photonics AG, and recorded $2.5 million as the value of goodwill and $2.2 million as the value of purchased intangible assets, both of which will be subject to reviews for impairment of value in the future. We cannot assure you that we will not incur charges in the future as a result of any such transaction, which charges may have an adverse effect on our earnings.

Bookham Technology plc may not be able to utilize tax losses and other tax attributes against the receivables that arise as a result of its transaction with Deutsche Bank.

On August 10, 2005, Bookham Technology plc purchased all of the issued share capital of City Leasing (Creekside) Limited, a subsidiary of Deutsche Bank. Creekside is entitled to receivables of £73.8 million (approximately $135.8 million, based on an exchange rate of £1.00 to $1.8403, the noon buying rate on September 2, 2005 for cable transfers in foreign currencies as certified by the Federal Reserve Bank of New York) from Deutsche Bank in connection with certain aircraft subleases and will in turn apply those payments over a two-year term to obligations of £73.1 million (approximately $134.5 million based on an exchange rate of £1.00 to $1.8403) owed to Deutsche Bank. As a result of these transactions, Bookham Technology plc will have available through Creekside cash of approximately £6.63 million (approximately $12.2 million based on an exchange rate of £1.00 to $1.8405). We expect Bookham Technology plc to utilize certain expected tax losses and other tax attributes to reduce the taxes that might otherwise be due by Creekside as the receivables are paid. In the event that Bookham Technology plc is not able to utilize these tax losses and other tax attributes when U.K. tax returns are filed for the relevant periods (or these tax losses and other tax attributes do not arise), Creekside may have to pay taxes, reducing the cash available from Creekside. In the event there is a future change in applicable U.K. tax law, Creekside, and in turn Bookham Technology plc, would be responsible for any resulting tax liabilities, which amounts could be material to our financial condition or operating results.

Our products are complex, may take longer to develop than anticipated and we may not recognize revenues from new products until after long field testing and customer acceptance periods.

Many of our new products must be tailored to customer specifications. As a result, we are constantly developing new products and using new technologies in those products. For example, while we currently manufacture and sell “discrete gold box” technology, we expect that many of our sales of gold box technology will soon be replaced by pluggable modules. New products or modification to existing products often take many quarters to develop because of their complexity and because customer specifications sometimes change during the development cycle. We often incur substantial costs associated with the research and development and sales and marketing activities in connection with products that may be purchased long after we have incurred the costs associated with designing, creating and selling such products. In addition, due to the rapid technological changes in

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our market, a customer may cancel or modify a design project before we begin large-scale manufacture of the product and receive revenue from the customer. It is unlikely that we would be able to recover the expenses for cancelled or unutilized design projects. It is difficult to predict with any certainty, particularly in the present economic climate, the frequency with which customers will cancel or modify their projects, or the effect that any cancellation or modification would have on our results of operations.

If our customers do not qualify our manufacturing lines or the manufacturing lines of our subcontractors for volume shipments, our operating results could suffer.

Most of our customers do not purchase products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. Our existing manufacturing lines, as well as each new manufacturing line, must pass through varying levels of qualification with our customers. Our manufacturing lines have passed our qualification standards, as well as our technical standards. However, our customers may also require that we pass their specific qualification standards and that we, and any subcontractors that we may use, be registered under international quality standards. In addition, we have in the past, and may in the future, encounter quality control issues as a result of relocating our manufacturing lines or introducing new products to fill production. We may be unable to obtain customer qualification of our manufacturing lines or we may experience delays in obtaining customer qualification of our manufacturing lines. Such delays would harm our operating results and customer relationships.

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

We may experience delays, disruptions or quality control problems in our manufacturing operations or the manufacturing operations of our subcontractors. As a result, we could incur additional costs that would adversely affect gross margins, and product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively affect our revenues, competitive position and reputation. Furthermore, even if we are able to deliver products to our customers on a timely basis, we may be unable to recognize revenues at the time of delivery based on our revenue recognition policies.

We may experience low manufacturing yields.

Manufacturing yields depend on a number of factors, including the volume of production due to customer demand and the nature and extent of changes in specifications required by customers for which we perform design-in work. Higher volumes due to demand for a fixed, rather than continually changing, design generally result in higher manufacturing yields, whereas lower volume production generally results in lower yields. In addition, lower yields may result, and have in the past resulted, from commercial shipments of products prior to full manufacturing qualification to the applicable specifications. Changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new product lines have historically caused, and may in the future cause, significantly reduced manufacturing yields, resulting in low or negative margins on those products. Moreover, an increase in the rejection rate of products during the quality control process, either before, during or after manufacture, results in lower yields and margins. Finally, manufacturing yields and margins can also be lower if we receive or inadvertently use defective or contaminated materials from our suppliers.

We depend on a number of suppliers who could disrupt our business if they stopped, decreased or delayed shipments.

We depend on a number of suppliers of raw materials and equipment used to manufacture our products. Some of these suppliers are sole sources. We typically have not entered into long-term agreements with our suppliers and, therefore, these suppliers generally may stop supplying materials and equipment at any time. The reliance on a sole supplier or limited number of suppliers could result in delivery problems, reduced control over product pricing and quality, and an inability to identify and qualify another supplier in a timely manner. Any supply deficiencies relating to the quality or quantities of materials or equipment we use to manufacture our products could adversely affect our ability to fulfill customer orders or our financial results of operations.

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Our intellectual property rights may not be adequately protected.

Our future success will depend, in large part, upon our intellectual property rights, including patents, design rights, trade secrets, trademarks, know-how and continuing technological innovation. We maintain an active program of identifying technology appropriate for patent protection. Our practice is to require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individuals during their work for us and require that all proprietary information disclosed will remain confidential. Although such agreements may be binding, they may not be enforceable in all jurisdictions and any breach of a confidentiality obligation could have a very serious effect on our business and the remedy for such breach may be limited.

Our intellectual property portfolio is an important corporate asset. The steps we have taken and may take in the future to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. We cannot assure investors that our competitors will not successfully challenge the validity of our patents or design products that avoid infringement of our proprietary rights with respect to our technology. There can be no assurance that other companies are not investigating or developing other similar technologies, that any patents will be issued from any application pending or filed by us or that, if patents are issued, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, we cannot assure investors that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights under those patents will provide a competitive advantage to us. Further, the laws of certain regions in which our products are or may be developed, manufactured or sold, including Asia-Pacific, Southeast Asia and Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States, the U.K. and continental European countries. This is especially relevant as we transfer of our assembly and test operations and chip-on-carrier operations from our facilities in the U.K. to Shenzhen, China and as our competitors establish manufacturing operations in China to take advantage of comparatively low manufacturing costs.

Our products may infringe the intellectual property rights of others which could result in expensive litigation, require us to obtain a license to use the technology from third parties, or we may be prohibited from selling certain products in the future.

Companies in the industry in which we operate frequently receive claims of patent infringement or infringement of other intellectual property rights. In this regard, third parties may in the future assert claims against us concerning our existing products or with respect to future products under development. We have entered into and may in the future enter into indemnification obligations in favor of some customers that could be triggered upon an allegation or finding that we are infringing other parties’ proprietary rights. If we do infringe a third party’s rights, we may need to negotiate with holders of patents relevant to our business. We have from time to time received notices from third parties alleging infringement of their intellectual property and where appropriate have entered into license agreements with those third parties with respect to that intellectual property. We may not in all cases be able to resolve allegations of infringement through licensing arrangements, settlement, alternative designs or otherwise. We may take legal action to determine the validity and scope of the third-party rights or to defend against any allegations of infringement. In the course of pursuing any of these means or defending against any lawsuits filed against us, we could incur significant costs and diversion of our resources. Due to the competitive nature of our industry, it is unlikely that we could increase our prices to cover such costs. In addition, such claims could result in significant penalties or injunctions that could prevent us from selling some of our products in certain markets or result in settlements that require payment of significant royalties that could adversely affect our ability to price our products profitably.

If we fail to obtain the right to use the intellectual property rights of others necessary to operate our business, our ability to succeed will be adversely affected.

Certain companies in the telecommunications and optical components markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including academic institutions and our competitors. Optical component

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suppliers may seek to gain a competitive advantage or other third parties may seek an economic return on their intellectual property portfolios by making infringement claims against us. In the future, we may need to obtain license rights to patents or other intellectual property held by others to the extent necessary for our business. Unless we are able to obtain such licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products for our markets. Licenses granting us the right to use third-party technology may not be available on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our operating results. Our larger competitors may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive disadvantage.

The markets in which we operate are highly competitive, which could result in lost sales and lower revenues.

The market for fiber optic components is highly competitive and such competition could result in our existing customers moving their orders to competitors. Certain of our competitors may be able more quickly and effectively to:

•  respond to new technologies or technical standards;

•  react to changing customer requirements and expectations;

•  devote needed resources to the development, production, promotion and sale of products; and

•  deliver competitive products at lower prices.

Many of our current competitors, as well as a number of our potential competitors, have longer operating histories, greater name recognition, broader customer relationships and industry alliances and substantially greater financial, technical and marketing resources than we do. In addition, market leaders in industries such as semiconductor and data communications, who may also have significantly more resources than we do, may in the future enter our market with competing products. All of these risks may be increased if the market were to further consolidate through mergers or other business combinations between competitors.

We cannot assure investors that we will be able to compete successfully with our competitors or that aggressive competition in the market will not result in lower prices for our products or decreased gross profit margins. Any such development would have a material adverse effect on our business, financial condition and results of operations.

We generate a significant portion of our revenues internationally and therefore are subject to additional risks associated with the extent of our international operations.

For the year ended July 1, 2006, the year ended July 2, 2005, the six months ended July 3, 2004, and the year ended December 31, 2003, 21%, 28%, 26%, and 9% of our revenues, respectively, were derived in the United States and 79%, 72%, 74%, and 91%, respectively, were derived outside the United States. We are subject to additional risks related to operating in foreign countries, including:

•  currency fluctuations, which could result in increased operating expenses and reduced revenues;

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

•  difficulty in enforcing or adequately protecting our intellectual property;

•  foreign taxes;

•  political, legal and economic instability in foreign markets; and

•  foreign regulations.

Any of these risks, or any other risks related to our foreign operations, could materially adversely affect our business, financial condition and results of operations.

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Our business will be adversely affected if we cannot manage the significant changes in the number of our employees and the size of our operations.

We have significantly reduced the number of employees and scope of our operations because of declining demand for certain of our products and continue to reduce our headcount in connection with our on-going restructuring and cost reduction efforts. There is a risk that, during periods of growth or decline, management will not sufficiently coordinate the roles of individuals to ensure that all areas of our operations receive appropriate focus and attention. If we are unable to manage our headcount, manufacturing capacity and scope of operations effectively, the cost and quality of our products may suffer, we may be unable to attract and retain key personnel and we may be unable to market and develop new products. Further, the inability to successfully manage the substantially larger and geographically more diverse organization, or any significant delay in achieving successful management, could have a material adverse effect on us and, as a result, on the market price of our common stock.

We may be faced with product liability claims.

Despite quality assurance measures, there remains a risk that defects may occur in our products. The occurrence of any defects in our products could give rise to liability for damages caused by such defects and for consequential damages. They could, moreover, impair the market’s acceptance of our products. Both could have a material adverse effect on our business and financial condition. In addition, we may assume product warranty liabilities related to companies we acquire which could have a material adverse effect on our business and financial condition. In order to mitigate the risk of liability for damages, we carry product liability insurance with a $26 million aggregate annual limit and errors and omissions insurance with a $5 million annual limit. We cannot assure investors that this insurance could adequately cover our costs arising from defects in our products or otherwise.

If we fail to attract and retain key personnel, our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel. Competition for highly skilled technical people is extremely intense and we continue to face difficulty identifying and hiring qualified engineers in many areas of our business. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Our future also depends on the continued contributions of our executive management team and other key management and technical personnel, each of whom would be difficult to replace. The loss of services of these or other executive officers or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business.

Similar to other technology companies, we rely upon our ability to use stock options and other forms of equity-based compensation as key components of our executive and employee compensation structure. Historically, these components have been critical to our ability to retain important personnel and offer competitive compensation packages. Without these components, we would be required to significantly increase cash compensation levels (or develop alternative compensation structures) in order to retain our key employees. Accounting rules relating to the expensing of equity compensation may cause us to substantially reduce, modify, or even eliminate, all or portions of our equity compensation programs.

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

Our business and operating results are vulnerable to interruption by events outside of our control, such as earthquakes, fire, power loss, telecommunications failures, political instability, military conflict and uncertainties arising out of terrorist attacks, including a global economic slowdown, the economic consequences of additional military action or additional terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce.

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Risks Related to Regulatory Compliance and Litigation

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, which may cause stockholders to lose confidence in the accuracy of our financial statements.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our brand and operating results could be harmed. In addition, compliance with the internal control requirements, as well as other financial reporting standards applicable to a public company, including the Sarbanes-Oxley Act of 2002, has in the past and will in the future continue to involve substantial cost and investment of our management’s time.

Included in this Annual Report on Form 10-K is management’s report on our internal controls over our financial reporting (See Item 9A.b) and Ernst & Young LLP’s attestation audit report thereon (See Item 9A.c), both of which identify a material weakness in our internal controls over financial reporting as of July 1, 2006 related to the inconsistent classification of intercompany loan translation between two subsidiaries which led to an adjustment to translation gain/loss and to cumulative translation adjustment. As of July 2, 2005, we also reported on four additional material weaknesses in our systems of internal control over financial reporting. While we have implemented procedures to remediate these four material weaknesses, we are currently undertaking efforts to remediate the material weakness related to the inconsistent classification of the intercompany loan translation.

In fiscal 2007, and beyond, we will continue to spend significant time and incur significant costs to assess and report on the effectiveness of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. Discovering additional material weaknesses in the future could make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, which could harm our business. In addition, if we discover future material weaknesses, disclosure of that fact could reduce the market’s confidence in our financial statements, which could harm our stock price and our ability to raise capital.

Our business involves the use of hazardous materials, and environmental laws and regulations may expose us to liability and increase our costs.

We historically handled small amounts of hazardous materials as part of our manufacturing activities and now handle more and different hazardous materials as a result of the manufacturing processes related to New Focus, the optical components business acquired from Nortel Networks and the product lines we acquired from Marconi. Consequently, our operations are subject to environmental laws and regulations governing, among other things, the use and handling of hazardous substances and waste disposal. We may be required to incur environmental costs to comply with current or future environmental laws. As with other companies engaged in manufacturing activities that involve hazardous materials, a risk of environmental liability is inherent in our manufacturing activities, as is the risk that our facilities will be shut down in the event of a release of hazardous waste. The costs associated with environmental compliance or remediation efforts or other environmental liabilities could adversely affect our business. In addition, under applicable EU regulations, we, along with other electronics component manufacturers, are prohibited from using lead and certain other hazardous materials in our products. We have incurred unanticipated expenses in connection with the related reconfiguration of our products, and could lose business or face product returns if we failed to implement these requirements properly or on a timely basis.

Litigation regarding Bookham Technology plc’s initial public offering and follow-on offering and any other litigation in which we become involved, including as a result of acquisitions, may substantially increase our costs and harm our business.

On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and directors, or the New Focus 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

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consolidated. On April 19, 2002, plaintiffs filed an amended class action complaint, described below, naming as defendants the New Focus Individual Defendants and the Underwriter Defendants.

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 complaint, or the Amended Complaint. The Amended 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, or the Bookham Individual Defendants, each of whom was an officer and/or director at the time of the initial public offering.

The Amended Complaint asserts claims under certain provisions of the securities laws of the United States. It alleges, 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 Complaint seeks 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 New Focus Individual Defendants and the Bookham Individual Defendants were dismissed, without prejudice, from the action. In July 2002, all defendants filed motions to dismiss the Amended Complaint. The motion was 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.

Plaintiffs and most of the issuer defendants and their insurers have entered into a stipulation of settlement for the claims against the issuer defendants, including Bookham and New Focus. Under the stipulation of settlement, the plaintiffs will 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 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 court issued an order preliminarily approving the settlement and setting a public hearing on its fairness which took place on April 24, 2006. The judge has yet to issue a decision on this hearing.

Litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations and financial condition. Any litigation to which we are subject may be costly and, further, could require significant involvement of our senior management and may divert management’s attention from our business and operations.

A variety of factors could cause the trading price of our common stock to be volatile or decline.

The market price of our common stock has been, and is likely to continue to be, highly volatile due to causes in addition to publication of our business results, such as:

•  announcements by our competitors and customers of their historical results or technological innovations or new products;

•  developments with respect to patents or proprietary rights;

•  governmental regulatory action; and

•  general market conditions.

Since Bookham Technology plc’s initial public offering in April 2000, Bookham Technology plc’s ADSs and ordinary shares, our shares of common stock and the shares of our customers and competitors have experienced substantial price and volume fluctuations, in many cases without any direct relationship to the affected company’s

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operating performance. An outgrowth of this market volatility is the significant vulnerability of our stock price and the stock prices of our customers and competitors to any actual or perceived fluctuation in the strength of the markets we serve, regardless of the actual consequence of such fluctuations. As a result, the market prices for these companies are highly volatile. These broad market and industry factors caused the market price of Bookham Technology plc’s ADSs and ordinary shares, and our common stock to fluctuate, and may in the future cause the market price of our common stock to fluctuate, regardless of our actual operating performance or the operating performance of our customers.

The future sale of substantial amounts of our common stock could adversely affect the price of our common stock.

As of July 1, 2006, affiliates of Nortel Networks held 3,999,999 shares of our common stock. Other stockholders or groups of stockholders also hold significant percentages of our shares of common stock. In January and March 2006, pursuant to a series of transactions we issued an aggregate of 10,507,158 shares of common stock and warrants to purchase an aggregate of 1,086,001 shares of common stock in connection with the payment and subsequent cancellation of the promissory notes we issued to Nortel Networks and the conversion and subsequent cancellation of $25.5 million aggregate principle amount of convertible debentures. On September 1, 2006, we entered into an agreement to sell 8,696,000 shares of our common stock and warrants to purchase 2,174,00 shares of our common stock, in a private placement. In connection with that private placement certain institutional investors have the right to purchase, on or before September 19, 2006, up to an additional 2,898,667 shares of common stock and additional warrants to purchase up to 724,667 shares of common stock at the same purchase price sold to the initial purchasers in the private placement. Sales by Nortel Networks or other holders of substantial amounts of shares of our common stock in the public or private market could adversely affect the market price of our common stock by increasing the supply of shares available for sale compared to the demand in the public and private markets to buy our common stock. These sales may also make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate to meet our capital needs.

Some anti-takeover provisions contained in our charter and under Delaware laws could hinder a takeover attempt.

We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware prohibiting, under some circumstances, publicly-held Delaware corporations from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, even if such events could be beneficial, in the short-term, to the interests of the stockholders. In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions relating to the limitations of liability and indemnification of our directors and officers, dividing our board of directors into three classes of directors serving three-year terms and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders. These provisions also may have the effect of deterring hostile takeovers or delaying changes in control or management of us.

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

We lease our corporate headquarters in San Jose, California, which has approximately 52,000 square feet, and includes manufacturing, research and development and office space, under a lease agreement that will expire at the end of March, 2007. We also lease a facility of approximately 20,000 square feet in Abingdon, U.K., under a lease that will expire at the end of June 2007. We also lease our wafer fabricating facility in Zurich, Switzerland, which is approximately 124,000 square feet, under a lease that will expire in 2007. We lease a second facility in Zurich, which houses our Avalon subsidiary, and is approximately 17,000 square feet, under leases that will expire in

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December 2007 and September 2008. We lease a thin film manufacturing facility in Santa Rosa, California, which has approximately 33,000 square feet, under a lease that expires on December 31, 2011. We lease a 183,000 square foot facility in Caswell, U.K., which includes wafer fabricating, assembly and test capabilities, manufacturing support functions and research and development capabilities and office space, under a lease that expires in March 2026, with options to extend an additional 5 years immediately after 2026 and for 2 year increments indefinitely after 2031. We own our facility in Paignton, U.K., which is approximately 240,000 square feet, comprising manufacturing space including clean rooms, assembly and test capabilities and supporting laboratories, office and storage space. Having recently transitioned most of the manufacturing activities from Paignton to Shenzhen, we have begun efforts to sell this facility. We anticipate moving all remaining personnel who are currently at our Paignton facility, primarily research and development and support related employees, to a smaller leased site, as yet not identified, of approximately 25,000 to 35,000 square feet early in calendar 2007. We also own our facility in Shenzhen, China, which is approximately 247,000 square feet comprising manufacturing space, including clean rooms, assembly and test capabilities, packaging, storage and office space. All of these properties are used by our optics segment. Our corporate headquarters in San Jose, California, is also used by our research and industrial segment. We also lease a facility of approximately 20,000 square feet in Abingdon, U.K., under a lease that will expire in 2007. In addition, we lease approximately 275,000 square feet of facilities in San Jose and Ventura Country California, of which 130,000 square feet expires in 2007, and 145,000 square feet expires in April 2011, both of which we currently do not utilize.

Item 3.   Legal Proceedings

Settlement of Yue Litigation

On April 3, 2006, we entered into a definitive settlement agreement, or the Settlement Agreement, with Mr. Howard Yue, or the Plaintiff, relating to the lawsuit the Plaintiff filed against New Focus, Inc., which is one of our subsidiaries, and several of its officers and directors in Santa Clara County Superior Court. The lawsuit, which was originally filed on February 13, 2002, is captioned Howard Yue v. New Focus, Inc. et al, Case No. CV808031, or the Yue Litigation, and relates to events that occurred prior to our acquisition of New Focus, Inc.

The terms of the Settlement Agreement provided that we would issue to the Plaintiff a $7.5 million promissory note, or the Note, payable on or before April 10, 2006, of which $5.0 million could be satisfied by the issuance of shares of our common stock.

Pursuant to the Settlement Agreement, we issued the Note on April 3, 2006 and paid the Note in full by issuing to the Plaintiff 537,635 shares of common stock valued at $5.0 million and paying $2.5 million in cash. The Plaintiff filed dismissal papers in the Yue Litigation on April 6, 2006.

The defense fees for the Yue Litigation have been paid by the insurers under the applicable New Focus directors and officers insurance policy. In addition, we have demanded that the relevant insurers fully fund the amounts paid pursuant to this settlement within policy limits. At this time, certain of the insurers have not confirmed to us their definitive coverage position on this matter.

We recorded $5.0 million, net of insurance recoveries, in other operating expense in our results of operations during the year ended July 1, 2006 in connection with the Settlement Agreement. If and when additional insurers confirm their definitive coverage position, we will record the additional amounts paid by insurers as recoveries against operating expenses in the corresponding future periods. There can be no guarantee that these additional insurers will pay any such amounts.

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. We believe that such claims will not have a material adverse effect on our results of operations, cash flows or financial position.

Other Litigation

On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. 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

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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 April 19, 2002, plaintiffs filed an amended class action complaint, described below, naming as defendants the Individual Defendants and the Underwriter Defendants.

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 Complaint or, the Amended Complaint. The Amended 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.

The Amended Complaint asserts claims under certain provisions of the securities laws of the United States. It alleges, 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 Complaint seeks 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. In July 2002, all defendants filed motions to dismiss the Amended Complaint. The motion was 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.

Plaintiffs and most of the issuer defendants and their insurers have entered into a stipulation of settlement for the claims against the issuer defendants, including us. Under the stipulation of settlement, the plaintiffs will 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 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 court issued an order preliminarily approving the settlement and setting a public hearing on its fairness which took place on April 24, 2006. The judge has yet to enter a decision on this hearing. We believe that both Bookham Technology plc and New Focus have meritorious defenses to the claims made in the Amended Complaint and therefore believes that such claims will not have a material effect on our financial position, results of operations or cash flows.

Item 4.   Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders in the fourth quarter of fiscal 2006.

PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders

Our common stock began trading on the NASDAQ National Market under the symbol “BKHM” on September 10, 2004. Prior to that date, there was no established public trading market for our common stock. From April 11, 2000 through September 10, 2004, the date of the closing of the scheme of arrangement pursuant to which Bookham Technology plc became our wholly-owned subsidiary, Bookham Technology plc’s ordinary shares were quoted on the Official List of the United Kingdom Listing Authority under the symbol “BHM” and its

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American Depository Shares, or ADSs, were quoted on the NASDAQ National Market under the symbol “BKHM”. Each ADS represented one ordinary share. In connection with the scheme of arrangement, every ten ordinary shares, and every ten ADSs, of Bookham Technology plc were exchanged for one share of our common stock. The closing price of our common stock on September 1, 2006 was $3.09.

The following table sets forth the range of high and low sale prices of (i) Bookham Technology plc’s ordinary shares and ADSs for the periods indicated through September 9, 2004 and (ii) our common stock beginning on September 10, 2004 through the periods indicated (the sales prices for periods prior to September 10, 2004 have been adjusted to reflect the exchange ratio in the scheme of arrangement):

	Per Ordinary								Per Share of
	Share				Per ADS				Common Stock
	High		Low		High		Low		High		Low
	(£)		(£)		($)		($)		($)		($)
Quarter Ended
September 30, 2003		14.00		7.00		25.70		11.60		—		—
December 31, 2003		17.80		10.70		29.90		19.80		—		—
March 31, 2004		19.40		10.30		35.50		20.01		—		—
July 3, 2004		12.80		4.50		23.80		7.70		—		—
October 2, 2004		5.29		3.30		9.70		6.00		7.75		5.77
January 1, 2005		—		—		—		—		6.60		4.08
April 2, 2005		—		—		—		—		4.95		1.56
July 2, 2005		—		—		—		—		3.67		2.51
October 1, 2005		—		—		—		—		5.08		2.98
December 31, 2005		—		—		—		—		6.21		4.37
April 1, 2006		—		—		—		—		9.75		5.67
July 1, 2006		—		—		—		—		10.36		2.87

As of September 1, 2006, there were 44,620 holders of record of our common stock. This number does not include stockholders who hold their shares in “street name” or through broker or nominee accounts.

Dividends

We have never paid cash dividends on our common stock or ordinary shares. To the extent we generate earnings, we intend to retain them for use in our business and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Item 6.   Selected Financial Data

The selected financial data set forth below should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. Prior to June 2004, Bookham Technology plc reported on a December 31 fiscal year end basis. In June 2004, Bookham Technology plc approved a change in its fiscal year end from December 31 to the Saturday closest to June 30 which matches the fiscal year end of Bookham Inc. Pursuant to a scheme of arrangement under the laws of the United Kingdom, Bookham Inc. assumed the financial reporting history of Bookham Technology plc effective September 10, 2004. In addition, in connection with the scheme of arrangement, Bookham changed its corporate domicile from the United Kingdom to the United States and changed its reporting currency from the U.K. pound sterling to the U.S. dollar effective September 10, 2004. Subsequent to the scheme of arrangement, our common stock is traded only on the NASDAQ Global Market whereas, previously, our ordinary shares had been traded on the London Stock Exchange and our ADSs had been traded on the NASDAQ National Market, which is the former name of the NASDAQ Global Market.

The selected financial data set forth below at July 1, 2006 and July 2, 2005, and for the years ended July 1, 2006 and July 2, 2005, the twelve months ended July 3, 2004, and the year ended December 31, 2003 are derived from our consolidated financial statements included elsewhere in this report. The selected financial data at July 3, 2004, December 31, 2003 and 2002 and 2001 and for the years ended December 31, 2002 and 2001 are derived from our transitional report on Form 10-K, as amended, for the six months ended July 3, 2004. The selected financial data at

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December 31, 2001 are derived from our annual report on Form 20-F and have been translated into U.S. dollars using the historical exchange rate at each corresponding period end for balance sheet data and a corresponding simple average rate for statement of operations data.

Consolidated Statements of Operations Data

							Twelve Months
	Year Ended						Ended			Year Ended
	July 1,			July 2,			July 3,			December 31
	2006			2005			2004			2003			2002			2001
							(Unaudited)
	(In thousands, except for per share data)
Total revenues	$	231,649		$	200,256		$	158,198		$	146,197		$	51,905		$	31,566
Operating loss	$	(77,364	)	$	(243,987	)	$	(127,197	)	$	(131,095	)	$	(171,565	)	$	(179,932	)
Net loss	$	(87,497	)	$	(247,972	)	$	(125,078	)	$	(125,747	)	$	(164,938	)	$	(164,370	)
Net loss per share (basic and diluted)	$	(1.87	)	$	(7.43	)	$	(5.17	)	$	(6.03	)	$	(10.92	)	$	(12.79	)
Weighted average of shares of common stock outstanding		46,679			33,379			24,243			20,845			15,100			12,853

Consolidated Balance Sheet Data

	July 1,		July 2,		July 3,		December 31,
	2006		2005		2004		2003		2002		2001
	(In thousands)
Total assets	$	236,797	$	238,578	$	468,025	$	269,498	$	351,616	$	342,936
Total stockholders’ equity	$	135,141	$	91,068	$	330,590	$	164,395	$	248,608	$	316,424
Long-term obligations	$	5,337	$	76,925	$	64,507	$	68,255	$	55,832	$	—

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Risk Factors” appearing in Item 1A of this Annual Report on 10-K, “Selected Financial Data” appearing in Item 6 of this Annual Report on Form 10-K and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K, including Note 1 to such financial statements, in which we discuss our need for additional financing to continue as a going concern. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated by the forward-looking statements due to, among other things, our critical accounting estimates discussed below and important other factors set forth in this Annual Report on Form 10-K.

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. We principally sell our optical component products to optical systems vendors as well as to customers in the data communications, military, aerospace, industrial and manufacturing industries. Customers for our photonics and microwave product portfolio include semiconductor equipment manufacturers, academic and governmental research institutions that engage in advanced research and development activities. Our products typically have a long sales cycle. The period of time between our initial contact with a customer to 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.

We operate in two business segments: (i) optics and (ii) research and industrial. Optics relates to the design, development, manufacture, marketing and sale of optical solutions for telecommunications and industrial applications. Research and industrial relates to the design, manufacture, marketing and sale of photonics and microwave solutions.

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Effective September 10, 2004, we changed our corporate domicile from the United Kingdom to the United States and our reporting currency from U.K. pounds sterling to U.S. dollars. In contemplation of the scheme of arrangement, Bookham Technology plc changed its fiscal year end from December 31 to the Saturday closest to June 30, which matches the fiscal year end of Bookham, Inc. Accordingly, our financial statements have been prepared based on a fifty-two/fifty-three week cycles going forward, including for the years ended July 1, 2006 and July 2, 2005 and the six-month period ended July 3, 2004, which are included in this Form 10-K. Our consolidated financial statements for the periods up to and including December 31, 2003, were reported in U.K. pounds sterling prior to the scheme of arrangement, and have been translated to U.S. dollars using the historical exchange rate at each corresponding period end for balance sheet accounts and a corresponding simple average rate for statement of operations accounts.

In view of the change in our fiscal year, this Management’s Discussion and Analysis of Financial Condition and Results of Operations compares the financial position and results of operations as of and for the fiscal year ended July 1, 2006 with the fiscal year ended July 2, 2005, the financial position and results of operations as of and for the fiscal year ended July 2, 2005 with the unaudited twelve-month period ended July 3, 2004, and the results of operations for the unaudited twelve-month period ended July 3, 2004 with the results of operations for the fiscal year ended December 31, 2003. All data as of and for the twelve-month period ended July 3, 2004 have been derived from unaudited consolidated financial information disclosed in our consolidated financial statements, including Note 18 to our consolidated financial statements.

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

Over the past five years, we have enacted a series of restructuring plans and cost reduction plans designed to reduce our manufacturing overhead and our operating expenses. In 2001, we reduced manufacturing overhead and our operating expenses in response to the initial decline in demand in the optics components industry. In connection with our acquisitions of Nortel Networks’ optical components business in November 2002 and New Focus in March 2004, we enacted restructuring plans related to the consolidation of our operations, and which we expanded in September 2004 to include the transfer of our main corporate functions, including consolidated accounting, financial reporting, tax and treasury, from Abingdon, U.K. to our new U.S headquarters in San Jose, California.

In May and November of 2004, we adopted additional restructuring plans, which included the transfer of our assembly and test operations from Paignton, U.K. to Shenzhen, China, a process that commenced in the quarter ended October 2, 2004. This transition was substantially complete by the end of March 2006, except for a chip-on-carrier assembly process we added to the transition plan in November 2005, and which we expect to be completed by the end of December 2006. In May 2006, we announced our latest cost reduction plans, which included transitioning all remaining manufacturing support and supply chain management, along with pilot line production and production planning, from Paignton to Shenzhen, also by the end of December, 2006.

With respect to the transfer of the operations described in the previous paragraph, some of which are still in the process of being transferred, we have spent $22.6 million as of July 1, 2006, and we anticipate spending a total of approximately $30 million to $37 million, including $6 million to $7 million on the cost reduction plan announced in May 2006. The substantial portion of the remaining spending relates to personnel and personnel related costs. We expect the cost reduction plan announced in May 2006 to reduce our costs by between $5.5 million and $6.5 million a quarter, when compared to the expenses incurred in the quarter ended April 1, 2006, with the cost savings expected to be realized in the March 2007 quarter.

A substantial portion of our revenues are, and have been, denominated in U.S. dollars, while the majority of our costs have been incurred in U.K. pounds sterling, and we anticipate that a substantial portion of our cash will continue to be incurred in U.K. pounds sterling for the forseeable future. Declines in the value of the U.S. dollar in comparison with the U.K. pound sterling have resulted, and we expect will continue to result in, pressure on our cash flow, margins and operating results, even though moving assembly and testing to our facility in Shenzhen, China will help mitigate our exposure to these fluctuations, but may expose us, to a limited extent , to changes in

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value of the U.S. dollar in comparison with the Chinese Yuan. We also attempt to mitigate our currency exposure using foreign exchange contracts as we consider appropriate. Regardless, any weakness in the U.S. dollar versus the U.K. pounds sterling will make it more difficult for us to achieve improvements in our margins in the short term.

Recent Developments

Credit Facility

On August 2, 2006, we, with Bookham Technology plc, New Focus and Bookham (US) Inc., each a wholly-owned subsidiary, which we collectively refer to as the Borrowers, entered into a credit agreement, or Credit Agreement, with Wells Fargo Foothill, Inc. and other lenders regarding a three-year $25,000,000 senior secured revolving credit facility. Advances are available under the Credit Agreement based on a percentage of accounts receivable at the time the advance is requested.

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

Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage points or the 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 reborrowed anytime until maturity, which is August 2, 2009. A termination of the commitment line anytime prior to August 2, 2008 will subject the Borrowers to a prepayment premium of 1.0% of the maximum revolver amount.

The obligations of the Borrowers under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, a cross-default related to indebtedness in an aggregate amount of $1,000,000 or more, bankruptcy and insolvency related defaults, defaults relating to such matters as ERISA, judgments, and a change of control default. The Credit Agreement contains negative covenants applicable to the Borrowers and their subsidiaries, including financial covenants requiring the Borrowers to maintain a minimum level of EBITDA (if the Borrowers have not maintained specified levels of liquidity), 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.

In connection with the Credit Agreement, we agreed to pay a monthly servicing fee of $3,000 and an unused line fee equal to 0.375% 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 will pay to the administrative agent a letter of credit fee at a rate equal to 2.75% per annum.

Private Placement

On August 31, 2006, we entered into definitive agreement for a private placement pursuant to which we issued, on September 1, 2006, 8,696,000 shares of common stock, which we refer to as the Shares, and warrants to purchase up to 2,174,000 shares of common stock, which we refer to as the Warrants, with certain institutional accredited investors for gross proceeds of approximately $23.5 million. The Warrants are exercisable for a five year period beginning on March 2, 2007 at an exercise price of $4.00 per share. We have agreed to file a registration statement relating to the resale of the Shares and the shares of common stock issued upon the exercise of the Warrants. Up to an additional 2,898,667 shares of common stock and warrants to purchase 724,667 shares of common stock may be issued and sold to additional institutional accredited investors at a subsequent closing pursuant to a right of

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participation under the Exchange Agreement, dated January 13, 2006, by and among us, Bookham Technology plc and the investors.

Recent Accounting Pronouncements

In June 2005, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board, or APB, Opinion No. 20 (“APB 20”) and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle, whereas SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 is intended to enhance the consistency of financial information between periods. SFAS 154 is effective for fiscal years beginning after December 15, 2005, and we are required to adopt it in the first quarter of fiscal 2007.

In November 2005, the FASB issued FASB Staff Position, or FSP, Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. FSP Nos. FAS 115-1 and FAS 124-1 amend SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. This guidance nullifies certain requirements of Emerging Issues Task Force, or EITF, 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. FSP Nos. FAS 115-1 and FAS 124-1 include guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. FSP Nos. FAS 115-1 and FAS 124-1 also require other-than-temporary impaired debt securities to be written down to impaired value, which becomes the new cost basis. FSP Nos. FAS 115-1 and FAS 124-1 are effective for fiscal years beginning after December 15, 2005. We do not believe that adoption of FSP Nos. FAS 115-1 and FAS 124-1 on July 2, 2006 will have a material impact on our financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS 133 and SFAS 140. SFAS 155 permits hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation to irrevocably be accounted for at fair value, with changes in fair value recognized in the statement of income. The fair value election may be applied on an instrument-by-instrument basis. SFAS 155 also eliminates a restriction on the passive derivative instruments that a qualifying special purpose entity may hold. SFAS 155 is effective for those financial instruments acquired or issued after December 1, 2006. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument will be recognized as a cumulative-effect adjustment to beginning retained earnings. We are currently evaluating the potential impact of adopting SFAS 155.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. We will adopt FIN 48 in fiscal 2007 and are currently evaluating whether the adoption of FIN 48 will have a material effect on our consolidated financial position, results of operations or cash flows.

Application of Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments

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that affect our reported assets and liabilities, revenues and expenses and other financial information. Actual results may differ significantly from those based on our estimates or could be materially different if we used using different assumptions, estimates or conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard.

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

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

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

Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Not all of these significant accounting policies, however, require that we make estimates and assumptions that we believe are “critical accounting estimates.” We have discussed our accounting policies with the audit committee of our board of directors, and we believe that the policies described below involve critical accounting estimates.

Revenue Recognition and Sales Returns

Revenue represents the amounts, excluding sales taxes, derived from the provision of goods and services to third-party customers during a given period. Our revenue recognition policy follows Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition in Financial Statements”. Specifically, we recognize product revenue when persuasive evidence of an arrangement exists, the product has been shipped, title has transferred, collectibility is reasonably assured, fees are fixed or determinable and there are no uncertainties with respect to customer acceptance. For certain sales, we are required to determine, in particular, whether the delivery has occurred, whether items will be returned and whether we will be paid under normal commercial terms. For certain products sold to customers, we specify delivery terms in the agreement under which the sale was made and assess each shipment against those terms, and only recognize revenue when we are certain that the delivery terms have been met. For shipments to new customers and evaluation units, including initial shipments of new products, where the customer has the right of return through the end of the evaluation period, we recognize revenue on these shipments at the end of an evaluation period, if not returned, and when collection is reasonably assured. We record a provision for estimated sales returns in the same period as the related revenues are recorded which is netted against revenue. These estimates are based on historical sales returns, other known factors and our return policy. Before accepting a new customer, we review publicly available information and credit rating databases to provide ourselves with reasonable assurance that the new customer will pay all outstanding amounts in accordance with our standard terms. For existing customers, we monitor historic payment patterns to assess whether we can expect payment in accordance with the terms set forth in the agreement under which the sale was made.

We recognize royalty revenue when it is earned and collectibility is reasonably assured.

Inventory Valuation

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

During 2002, in connection with the acquisition of the optical components business of Nortel Networks, we recorded the fair value of the inventory that was acquired. In accordance with SFAS No. 141, or SFAS 141 “Business Combinations”, an adjustment was made in the 2003 accounts for amendments to those provisional

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values. During 2003, a larger amount of acquired inventory was sold than was expected at the time of the acquisition. As a consequence, we increased the value of our inventory by $20.2 million, increased current liabilities by approximately $1.3 million, decreased intangible assets by $9.1 million and increased property, plant and equipment by $9.8 million.

Accounting for Acquisitions and Goodwill

We account for acquisitions using the purchase accounting method in accordance with SFAS No. 142 or SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate they may be impaired. Circumstances which could trigger an impairment test include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes to the business climate or legal factors, current period cash flow or operating losses or a forecast of continuing losses associated with the use of the asset and a current expectation that the asset will more likely than not be sold or disposed of significantly below carrying value before the end of its estimated useful life. Under this method, the total consideration paid, excluding the contingent consideration that has not been earned, is allocated over the fair value of the net assets acquired, including in-process research and development, with any excess allocated to goodwill (defined as the excess of the purchase price over the fair value allocated to the net assets). Our judgments as to fair value of the assets will, therefore, affect the amount of goodwill that we record. These judgments include estimating the useful lives over which periods the fair values will be amortized to expense. For tangible assets acquired in any acquisition, such as plant and equipment, we estimate useful lives by considering comparable lives of similar assets, past history, the intended use of the assets and their condition. In estimating the useful life of the acquired intangible assets with definite lives, we consider the industry environment and unique factors relating to each product relative to our business strategy and the likelihood of technological obsolescence. Acquired intangible assets primarily include core and current technology, patents, supply agreements, capitalized licenses and customer contracts. We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from three to six years and, in the case of one specific customer contract, sixteen years.

Impairment of Goodwill and Other Intangible Assets

Under SFAS 142, goodwill is tested annually for impairment, in our case during the fourth quarter of each fiscal year, or more often if an event or circumstance suggests impairment has occurred. In addition, we review identifiable intangibles, excluding goodwill, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Circumstances which could trigger an impairment test include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes to the business climate or legal factors, current period cash flow or operating losses or a forecast of continuing losses associated with the use of the asset and a current expectation that the asset will more likely than not be sold or disposed of significantly below carrying value before the end of its estimated useful life.

SFAS 142 requires that the first phase of testing goodwill for impairment be based on a business unit’s “fair value,” which is generally determined through market prices. In certain cases, due to the absence of market prices for a particular element of our business, and as permitted by SFAS 142, we have elected to base our testing on discounted future expected cash flows. Although the discount rates and other input variables may differ, the model we use in this process is the same model we use to evaluate the fair value of acquisition candidates and the fairness of offers to purchase businesses that we are considering for divestiture. The forecasted cash flows we use are derived from the annual long-range planning process that we perform and present to our board of directors. In this process, each business unit is required to develop reasonable sales, earnings and cash flow forecasts for the next three to seven years based on current and forecasted economic conditions. For purposes of testing for impairment, the cash flow forecasts are adjusted as needed to reflect information that becomes available concerning changes in business levels and general economic trends. The discount rates used for determining discounted future cash flows are generally based on our weighted average cost of capital and are then adjusted for “plan risk” (the risk that a business will fail to achieve its forecasted results) and “country risk” (the risk that economic or political instability in the countries in which we operate will cause a business unit’s projections to be inaccurate). Finally, a growth factor beyond the three to seven-year period for which cash flows are planned is selected based on expectations of future

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economic conditions. Virtually all of the assumptions used in our models are susceptible to change due to global and regional economic conditions as well as competitive factors in the industry in which we operate. In recent years, many of our cash flow forecasts have not been achieved due in large part to the unexpected length and depth of the downturn in our industry. Unanticipated changes in discount rates from one year to the next can also have a significant effect on the results of the calculations. While we believe the estimates and assumptions we use are reasonable in these circumstances, various economic factors could cause the results of our goodwill testing to vary significantly.

In the year ended July 1, 2006, our annual impairment review of goodwill and other intangible assets led to the recording of an impairment charge of $760,000 due to the impairment of intangible assets of Ignis Optics. This charge was entirely related to the optics segment.

In the year ended July 2, 2005, a continued decline in our share price, and therefore market capitalization, combined with continuing net losses and a history of not meeting revenue and profitability targets, suggested that the goodwill related to certain of our acquisitions may have been impaired as of the third quarter of that fiscal year. As a result of these triggering events, we performed a preliminary evaluation of the related goodwill balances at that time. In the fourth quarter, we finalized this evaluation during our annual evaluation of goodwill, and also performed our annual evaluation of acquired intangible assets. In total, in the year ended July 2, 2005, we recorded impairment charges of approximately $114,226,000, approximately $113,592,000 related to goodwill associated with New Focus, Ignis and Onetta, and approximately $634,000 related to intangibles of New Focus, including patents and other technology, for the year ended July 2, 2005. Approximately, $83,326,000 of these charges related to the research and industrial segment, and approximately $30,900,000 related to the optics segment.

Accounting for Acquired In-Process Research and Development

In the year ended July 1, 2006, in connection with the acquisition of Avalon Photonics AG, or Avalon, we recorded a charge of $118,000 for in-process research and development. In the six-month period ended July 3, 2004, in connection with the acquisition of New Focus, we recorded a charge of $5.9 million for in-process research and development. In the year ended December 31, 2003, in connection with the acquisition of Ignis Optics, we recorded a charge of $1.9 million for in-process research and development. In the year ended December 31, 2002, in connection with the acquisition of the optical components businesses of Marconi and Nortel Networks, we recorded charges of $5.9 million and $7.3 million, respectively, for in-process research and development. There were no charges for in-process research and development related to the Cierra Photonics and Onetta acquisitions. During the year ended December 31, 2003, following the required review of the purchase price allocation for the acquisition of the optical components business of Nortel Networks, a credit of $1.7 million was made related to the in-process research and development expensed as part of an overall reallocation of the purchase price. Management is responsible for estimating the fair values of in-process research and development.

As of the dates of each in-process research and development valuation, the projects assessed had not yet demonstrated technological or commercial feasibility, and the technology did not have an alternative future use. Therefore, the fair values were expensed at the relevant date of acquisition. Expenses related to development projects which, when using the technology contribution approach, are deemed to have positive net present value, are assigned a fair value, capitalized and amortized over the expected useful lives.

For each acquisition, allocations of consideration were based on the estimated fair values derived from calculating the discounted cash flows required to develop each incomplete research and development project into a commercially viable product, taking into account the anticipated future revenues and the remaining costs of completion. Consideration was also given to the direct expenses incurred, contribution from other assets, the implications of various jurisdictions of corporate tax, the degrees of completion and the relative risks attributable to each project. All forecasted future operating cash flows were discounted at appropriate rates. The revenue estimates assumed that the development and marketing of the projects would be successful, and that their commercialization would correlate to management’s forecasts as of the date of the analysis, and that forecasted sales would decline over each product’s expected economic life as new versions were introduced either by us or competitors.

In identifying the research and development programs to be valued, we distinguish between two main areas of research and development. Pure research of a given technology application is referred to as technology research, or

36

TR. New product introduction, or NPI, follows from this stage, and is the development of a known technology from initial identification of an application with a market opportunity, through design and testing, to implementation and delivery of products to a customer.

Acquisition of the Optical Components Business of Marconi Optical Components Limited

In connection with the acquisition of the optical components business of Marconi in February 2002, $5.9 million of the $29.9 million total consideration was allocated to in-process research and development projects.

At the time of the acquisition the remaining projects under development at the acquisition date were expected to result in a portfolio addressing tunability, bandwidth, integration, amplification, and managed optical networks.

At the time of the acquisition, the expected dates of release of these projects ranged from seven to seventeen months from the date of acquisition. We acquired three main programs in the NPI stage of development. All estimated costs to complete were to be funded from our current cash reserves. The current status of each category is given below:

•  Fast tuning, wide coverage, tunable lasers:  We initially suspended development of these products post-acquisition in favor of alternative technologies. We did, however, continue to work to eliminate many of the fundamental limitations of the chip, and we recommenced a development program of a laser and module product which is now available, and which we expect to ramp to commercial production levels through the second half of 2006.

•  10 gigabyte transmitters:  We rephased this program as a result of wafer fabrication and assembly and test facility transfers. We have completed an integrated narrow band tunable transmitter and began shipping this product in 2003. We discontinued the wide band transmitter in 2003.

•  40 gigabyte transmitters and receivers:  Following the acquisition, we suspended the program as the market conditions for acceptance of this product had changed, and there was overlap with products being developed/marketed by the optical components business acquired from Nortel Networks. While we continue to believe that this market will develop in the future, we do not plan to continue with this program.

Acquisition of the Optical Components Business of Nortel Networks

Of the total $119.0 million consideration for the optical components business of Nortel Networks in November 2002, the initial allocation to acquired in-process research and development was $7.3 million. This initial allocation was subsequently adjusted following the required review of the purchase price allocation during the second half of 2003, resulting in a reduction of the allocated in-process research and development by $1.7 million, which was recognized as a credit in 2003.

At the time of the acquisition the projects remaining under development at the acquisition date were expected to result in a portfolio addressing tunability, bandwidth, integration, amplification, and managed optical networks. These projects were split into two distinct categories: NPI and TR. The TR projects, which met the criteria for recognition as in-process research and development, were assessed as requiring between one and one and a half years before attaining NPI status. All estimated costs to complete were to be funded from our current cash reserves. The current status of each category is given below.

NPI

•  Amplifiers:  The MiNi and Barolo platform products were successfully released in 2003 and continue to be shipped to customers.

•  Pumps:  The next generation of pumps incorporating the G07 higher power chip were successfully launched in 2003.

•  Transmitters/Receivers:  The majority of the transmitters and receivers in the NPI stage at acquisition have now been released to the market and are available to customers. These include the 10 G/bs 8x50 GaAs laser, the 100mW UHP laser, the Compact MZ laser, MSA receiver, a 10G uncooled DFB directly modulated laser

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and hot pluggable transponder modules. A couple of programs, mainly comprised of modules including tunable lasers, have been rephased due to slower market demand for the new technology.

TR

•  Amplifiers:  Activity on these projects has slowed significantly due to weakening market demand and pricing pressure. Since the date of acquisition, substantially all of the technology work-in-progress has been completed or absorbed into products.

•  Pumps:  Since the date of acquisition, substantially all of the technology work-in-progress has been completed or absorbed into products.

•  Transmitter/Receivers:  Since the date of acquisition, substantially all of the technology work-in-progress has been completed or absorbed into products.

Acquisition of Ignis Optics

In connection with the acquisition of Ignis Optics in October 2003, $1.9 million of the $18 million total consideration was allocated to in-process research and development projects. The NPI projects under development at the acquisition date were expected to result in small form factor pluggable optical transceivers or component elements to these products and address quality and reliability requirements. Commercial shipments of the products began during the second half of fiscal 2005, and to a large degree were discontinued in fiscal 2006. There were no TR projects at the time of acquisition.

Acquisition of New Focus

In connection with the acquisition of New Focus in March 2004, $5.9 million of the $211.0 million of total consideration was allocated to in-process research and development projects. The NPI projects at the acquisition date were expected to result in the development of products to support the New Focus OEM and catalog business. Catalog related programs were focused on increasing the wavelength spectrum over which modulator products can operate and developing detectors to operate at higher frequency with lower noise over a broader wavelength, with their first incorporation in shipments in December 2004. Of the OEM related products, two have been completed, namely a super luminous diode light source for use in subsystems and a laser for use in high precision/high stability labs. The final program for development of a small form factor laser for use in fiber sensing applications continues but has been slowed due to lower than expected emergence of market opportunities. There were no TR programs at the time of acquisition.

Acquisition of Avalon

In connection with the acquisition of Avalon in March 2006, $118,000 of the $6.7 million total consideration was allocated to in-process research and development projects.

Accounting for Share-Based Payments

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, or SFAS 123R, which requires companies to recognize in their statement of operations all share-based payments to employees, including grants of employee stock options, based on their fair values. We adopted SFAS 123R on July 3, 2005, using the modified-prospective-transition method. Accounting for share-based compensation transactions using the intrinsic method supplemented by pro forma disclosures in the financial statement footnotes is no longer permissible. The application of SFAS 123R involves significant amounts of judgment in the determination of inputs into the Black-Scholes-Merton valuation model which we use to determine the fair value of share-based awards. These inputs are based upon highly subjective assumptions as to the volatility of the underlying stock, risk free interest rates and the expected life of the options. As a result of adopting SFAS 123R, our income before income taxes and net income for the year ended July 1, 2006 are $8.2 million lower and basic and diluted earnings per share are $0.17 per share lower than they would have been had we not adopted SFAS 123R. Judgement is also required in estimating the number of share based awards that are expected to be forfeited. If actual results or future changes in

38

estimates differ significantly from our current estimates, stock-based compensation expense and our consolidated results of operations could be materially impacted. During the year ended July 1, 2006, we recognized $8.2 million of stock compensation expense, of which $1.7 million relates to certain performance based options for which the related performance targets were met and recognized in the three months ended October 2, 2005.

Results of Operations

Revenues

										Twelve					Twelve
	Year							Year		Months					Months		Year
	Ended							Ended		Ended					Ended		Ended
	July 1,		July 2,		Percentage			July 2,		July 3,		Percentage			July 3,		December 31,		Percentage
	2006		2005		Change			2005		2004		Change			2004		2003		Change
										(Unaudited)					(Unaudited)
	($ Millions)
Total Revenues	$	231.6	$	200.3		16	%	$	200.3	$	158.2		27	%	$	158.2	$	146.2		8	%

Year ended July 1, 2006 versus year ended July 2, 2005

Revenues for the year ended July 1, 2006 increased by $31.3 million, or 16%, compared to the year ended July 2, 2005. $21.0 million of this increase is due to revenues from Nortel Networks, which increased to $110.5 million in the year ended July 1, 2006 from $89.5 million in the year ended July 2, 2005. This increase in revenues from Nortel Networks was due to the amended terms of our supply agreement with Nortel Networks. The second addendum to the supply agreement, which we entered into in May 2005, provided for, among other things, Nortel Networks’ obligation to purchase certain products from us, an increase in the price of those products above those previously charged to Nortel Networks, our grant to Nortel Networks of a security interest on certain of our assets, and a waiver of certain prepayment conditions. Under the second addendum, Nortel Networks agreed to purchase approximately $100 million of products from us, equally divided into two categories of products: “last-time buy” products, and products that we will continue to manufacture. The third addendum to the supply agreement, among other things, (i) extends the term of the supply agreement to the end of calendar 2006, and (ii) requires Nortel Networks to purchase approximately $72 million of products from us. Remaining obligations of approximately $30 million under the supply agreement, as amended, are expected to be fulfilled by the end of the December 2006 quarter. As of July 1, 2006, substantially all of Nortel Network’s “last-time buy” obligations have been fulfilled. Non-“last-time buy” purchases will be transacted at the then current market prices and not at the increased prices which were agreed to in the second addendum to the supply agreement. Our revenues from Nortel Networks decreased in the quarter ended March 31, 2006 from the quarter ended December 31, 2005, and decreased again in the quarter ended July 1, 2006 from the quarter ended March 31, 2006. We expect our revenues from Nortel Networks may continue to decrease through the first two quarters of our year ended June 30, 2007, and to potentially decline further in future quarters, although we do expect Nortel Networks to continue as a major customer for the foreseeable future beyond that time.

Overall the revenues from our optics segment, which designs, manufactures, markets and sells optical solutions for telecommunications and industrial applications, increased by $29.6 million, or by 17%, to $206.1 million in the year ended July 1, 2006 from $176.5 million in the year ended July 2, 2005. The increase in revenues, excluding amounts related to Nortel Networks, was spread across a large number of customers, none of which exceeded 10% of total revenues in either year. From a products point of view, the increases in optics segment revenues in the year ended July 1, 2006 from the year ended July 2, 2005 was derived from most major product categories, except for TOA/ROA which were generally sold to Nortel Networks as part of the “last-time buy” products and which decreased by $10.0 million.

Our research and industrial segment, which designs, manufactures, markets and sells photonic and microwave solutions, primarily comprises the products and services of New Focus. Revenues from the research and industrial segment increased to $25.6 million in the year ended July 1, 2006 from $23.7 million in the year ended July 2, 2005 as a result of increased sales during the period.

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Year ended July 2, 2005 versus twelve months ended July 3, 2004

Revenues for the year ended July 2, 2005 increased by $42.1 million, or 27%, as compared to the twelve months ended July 3, 2004. The increase was primarily due to the inclusion of a full year of revenue from New Focus and Onetta, which we acquired during the twelve months ended July 3, 2004. Revenues from products and services acquired as part of these acquisitions were $30.4 million for the year ended July 2, 2005 compared to $8.7 million in revenues for the twelve months ended July 3, 2004, which included only approximately three months of revenues from New Focus and one month of revenues from Onetta. In addition, sales of products and services to customers other than Nortel Networks and Marconi increased to $88.9 million in fiscal 2005 from $52.2 million in the twelve months ended July 3, 2004.

Revenues from our optics segment increased to $176.6 million in fiscal 2005 from $147.8 million in the twelve months ended July 3, 2004, primarily as a result of increased sales of products and services. Revenues from the research and industrial segment increased to $23.7 million in fiscal 2005 from $10.4 million in the twelve months ended July 3, 2004, primarily as a result of these products and services contributing sales for the entire year as a result of a full year of revenue from New Focus.

Our largest customer for the year ended July 2, 2005 and the twelve months ended July 3, 2004 was Nortel Networks. Sales of products and services to Nortel Networks were $89.5 million in fiscal 2005 compared to $81.4 million in the twelve months ended July 3, 2004, representing 45% and 52% of our revenues in the respective years. The increase in revenue from the twelve months ended July 3, 2004 to fiscal 2005 was due to revisions to our supply agreement with Nortel Networks in March 2005. Pursuant to the terms of the supply agreement with Nortel Networks, Nortel Networks issued non-cancelable purchase orders and “last-time buys” totaling approximately $100 million, based on revised pricing terms, to be delivered through March 2006. Through July 2, 2005, we delivered products pursuant to these purchase orders having an aggregate price of approximately $34 million.

Twelve months ended July 3, 2004 versus year ended December 31, 2003

Revenues for the twelve months ended July 3, 2004 increased by $12.0 million, to $158.2 million from $146.2 million in the year ended December 31, 2003. Revenues from New Focus, which we acquired in March 2004, accounted for $10.4 million of this increase. The remaining increase was the result of increased sales across our customer base, consistent with our strategy of expanding revenues across a broader customer base, offsetting reductions under supply agreements with Nortel Networks, for which revenues decreased to $81.4 million from $85.5 million in the twelve months ended July 3, 2004 as compared to the year ended December 31, 2003, respectively, and Marconi, for which revenues decreased to $16.6 million from $18.1 million in the twelve months ended July 3, 2004 compared to the year ended December 31, 2003, respectively.

Cost of Revenues

										Twelve					Twelve
	Year		Year					Year		Months					Months		Year
	Ended		Ended					Ended		Ended					Ended		Ended
	July 1,		July 2,		Percentage			July 2,		July 3,		Percentage			July 3,		December 31,		Percentage
	2006		2005		Change			2005		2004		Change			2004		2003		Change
										(Unaudited)					(Unaudited)
	($ Millions)
Cost of Revenues	$	190.1	$	193.6		2	%	$	193.6	$	159.5		21	%	$	159.5	$	156.0		2	%

Our cost of revenues consists of the costs associated with manufacturing our products, and includes the purchase of raw materials, labor costs and related overhead, including stock compensation expenses. It also includes the costs associated with under-utilized production facilities and resources, as well as the charges for the write-down of impaired manufacturing assets or restructuring related costs, which are categorized as “Net Charges.” Charges for inventory obsolescence, the cost of product returns and warranty costs are also included in cost of revenues. Costs and expenses related to our manufacturing resources, which relate to the development of new products, are included in research and development.

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Year ended July 1, 2006 versus year ended July 2, 2005

Our cost of revenues for the year ended July 1, 2006 decreased compared to the year ended July 2, 2005 primarily due to the transition of our assembly and test facilities from Paignton, U.K. to Shenzhen, China, which has a lower cost base. The substantial portion of this transition was completed by the end of March 2006. We expect to transfer the one remaining assembly process before the end of December 2006, along all of the manufacturing planning, supply chain management and related activities. In addition, headcount reductions that were implemented at our Paignton facility during the quarters ended March 31, 2006 and July 1, 2006 were also responsible for the overall decrease in cost of revenues. In May 2006, we announced our latest cost reduction plan to reduce our total costs and expenses by $5.5 million to $6.5 million a quarter, compared to the quarter ended April 1, 2006, largely related to the transition of the remaining Paignton manufacturing activities to Shenzhen, along with cost reductions in our Caswell U.K. wafer fabrication facility, which in total are expected to result in cost of revenues reductions of approximately $4.0 million per quarter, which we expect to begin fully realizing in the March 2007 quarter.

During the year ended July 1, 2006, the reductions in our cost of revenues were partially offset by $1.9 million of stock based compensation expense recorded under SFAS 123R, which we adopted on July 3, 2005. The year ended July 2, 2005 included $14,000 of stock based compensation expense recorded under previous accounting pronouncements.

Year ended July 2, 2005 versus twelve months ended July 3, 2004

Our cost of revenues for the year ended July 2, 2005 increased compared to the prior year primarily due to the inclusion of a full year of manufacturing costs associated with the products of the New Focus and Onetta businesses which we acquired in March and June of 2004, respectively.

Our cost of revenues for the year ended July 2, 2005 also increased because cost of revenues for the year ended July 3, 2004 included the impact of adverse movements in foreign exchange rates. A substantial portion of our cost of revenues during the period were incurred in U.K. pounds sterling due to the manufacturing expenses associated with our facilities in the United Kingdom. Relative to U.K. pounds sterling, the U.S. dollar declined significantly during the year ended July 2, 2005, with the rates moving from an average rate of 1.736 dollars per U.K. pound sterling for the twelve months ended July 3, 2004 to 1.856 dollars per U.K. pound sterling for the year ended July 2, 2005, reaching a peak of 1.926 dollars per U.K. pound sterling on December 31, 2004, and ending at a rate of 1.792 dollars per U.K. pound sterling on July 2, 2005.

Our cost of revenues also increased during the period due to the costs of ramping up our manufacturing facility in Shenzhen, China while transferring most of our assembly and test operations from Paignton, U.K. to this facility in order to take advantage of lower costs of production. Although we began shipping products out of our Shenzhen facility during the quarter ended October 2, 2004, we continued to operate both the Paignton and Shenzhen facilities during the ramp up of Shenzhen, and also to fulfill purchase orders and “last-time buys” required pursuant to the Nortel Networks supply agreement, as amended.

Twelve months ended July 3, 2004 versus year ended December 31, 2003

Our cost of revenues for the twelve months ended July 3, 2004 as compared to the year ended December 31, 2003 increased by $3.5 million. As part of the acquisition of the optical components business of Nortel Networks, we undertook a comprehensive restructuring plan, which involved closing facilities, consolidating manufacturing operations and workforce reductions. This plan began immediately after the acquisition was completed on November 8, 2002 and was substantially complete by the end of 2003. As a result of this restructuring plan, following the acquisition, fixed overhead was substantially lower for the twelve month period ended July 3, 2004 compared with the year ended December 31, 2003. However, cost of revenues increased in the twelve month period ended July 3, 2004 compared with the year ended December 31, 2003 principally because of higher variable production costs, including direct material and labor costs related to increased revenues, which more than offset the lower fixed manufacturing overhead.

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Gross Margin/(Loss)

													Twelve						Twelve
	Year			Year						Year			Months						Months			Year
	Ended			Ended						Ended			Ended						Ended			Ended
	July 1,			July 2,			Percentage			July 2,			July 3,			Percentage			July 3,			December 31,			Percentage
	2006			2005			Change			2005			2004			Change			2004			2003			Change
													(Unaudited)						(Unaudited)
	($ Millions)
Gross Profit/(Loss)	$	41.6		$	6.6			530	%	$	6.6		$	(1.3	)		608	%	$	(1.3	)	$	(9.8	)		87	%
Gross Margin/(Loss)		18	%		3	%					3	%		(1	)%					(1	)%		(7	)%

Gross profit/(loss) is calculated as revenues less cost of revenues. Gross margin/(loss) rate is gross profit/(loss) reflected as a percentage of revenue.

Year ended July 1, 2006 versus year ended July 2, 2005

For the year ended July 1, 2006, our gross margins improved because of the positive impact of higher revenues spread across our fixed costs, the lower cost base of our Shenzhen facility compared to our Paignton U.K. facility, and favorable pricing terms under the second amendment to our supply agreement with Nortel Networks. We expect our gross margins for the year ended June 30, 2007 to benefit from the additional cost reductions and related cost savings under the cost reduction plan announced in May 2006, which are expected to be fully realized in the third quarter of fiscal 2007.

During the year ended July 1, 2006, we had revenues of $9.5 million related to, and recognized profits on, inventory that had been carried on our books at zero value. The inventory had originally been acquired in connection with our purchase of the optical components business of Nortel Networks. While this inventory is on our books at zero value, and its sale generates higher margins than most of our new products, we incur additional costs to complete the manufacturing of these products prior to sale. We believe revenues from this zero value inventory will be negligible in the year ended June 30, 2007.

During the year ended July 1, 2006, the improvements in our gross margins were partially offset by $1.9 million of stock based compensation expense recorded to cost of revenues under SFAS 123R, which we adopted on July 2, 2005. Only $14,000 of stock based compensation expense was recorded to cost of revenues in the year ended July 2, 2005, under previous accounting pronouncements.

Year ended July 2, 2005 versus twelve months ended July 3, 2004

Our gross margin rate improved in fiscal 2005 compared to the twelve months ended July 3, 2004 primarily because of the positive impact of higher revenues spread across our fixed costs, despite the fact that we experienced a difficult competitive environment which was exacerbated in fiscal 2005 by the negative impact of currency fluctuations, and certain costs of maintaining assembly and test facilities in both Paignton and Shenzhen during the transition of these operations to Shenzhen.

During fiscal 2005, we had revenues of $19.5 million related to our zero value inventory. While this inventory is on our books at zero value, and its sale generated higher margins than most of our new products during the period, we incurred additional costs to complete the manufacturing of these products prior to sale.

Twelve months ended July 3, 2004 versus year ended December 31, 2003

The improved gross loss and gross loss rate improvement for the twelve month period ended July 3, 2004 compared with the year ended December 31, 2003 was principally the result of the lower fixed overhead costs in the twelve month period ended July 3, 2004 and, to a lesser degree, the higher revenue during the same twelve month period when compared to the year ended December 31, 2003.

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Research and Development Expenses

													Twelve						Twelve
	Year			Year						Year			Months						Months			Year
	Ended			Ended						Ended			Ended						Ended			Ended
	July 1,			July 2,			Percentage			July 2,			July 3,			Percentage			July 3,			December 31,			Percentage
	2006			2005			Change			2005			2004			Change			2004			2003			Change
													(Unaudited)						(Unaudited)
	($ Millions)
R&D Expenses	$	42.6		$	44.8			(5	)%	$	44.8		$	50.8			(12	)%	$	50.8		$	50.4			1	%
% of Revenues		18	%		22	%					22	%		32	%					32	%		34	%

Research and development expense consists primarily of salaries and related costs of employees engaged in research and design activities, including stock compensation charges related to those employees, costs of design tools and computer hardware, and costs related to prototyping.

Year ended July 1, 2006 versus year ended July 2, 2005

Research and development expense decreased in the year ended July 1, 2006 compared to the year ended July 2, 2005 primarily due to the cost savings efforts implemented in fiscal 2005, under our 2004 restructuring plan, being in effect for the full year. In May 2006, we announced a cost reduction plan, which we expect will be fully implemented by the March 2007 quarter, that we expect will further reduce quarterly research and development expenditures.

In the year ended July 1, 2006 decreases in research and development expense were partially offset by $1.9 million of stock based compensation expense recorded under SFAS 123R, which we adopted on July 2, 2005. $8,000 of stock based compensation expense was recorded in the year ended July 2, 2005, as a research and development expense under previous accounting pronouncements.

Year ended July 2, 2005 versus twelve months ended July 3, 2004

Research and development expenses decreased in fiscal 2005 compared to the twelve months ended July 3, 2004 as a result of the significant reductions made in connection with our 2004 restructuring plan, offsetting the increase in research and development spending that resulted from acquiring New Focus and Onetta and the negative effects of the weakness in the U.S. dollar relative to the U.K. pound sterling and other currencies in which we operate.

Twelve months ended July 3, 2004 versus year ended December 31, 2003

Research and development expenses rose by 1% in the twelve months ended July 3, 2004 compared to the year ended December 31, 2003 due to increased spending of approximately $7.2 million that resulted from our acquisition of New Focus and Ignis Optics, which was partially offset by cost-cutting measures implemented in 2003 that included the discontinuance of our research and development of the ASOC product line.

Selling, General and Administrative Expenses

													Twelve						Twelve
	Year			Year						Year			Months						Months			Year
	Ended			Ended						Ended			Ended						Ended			Ended
	July 1,			July 2,			Percentage			July 2,			July 3,			Percentage			July 3,			December 31,			Percentage
	2006			2005			Change			2005			2004			Change			2004			2003			Change
													(Unaudited)						(Unaudited)
	($ Millions)
SG&A Expenses	$	52.2		$	60.3			(13	)%	$	60.3		$	44.6			35	%	$	44.6		$	33.8			32	%
% of Revenues		23	%		30	%					30	%		28	%					28	%		23	%

Selling, general and administrative expenses consist primarily of personnel-related expenses, including stock 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.

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Year ended July 1, 2006 versus year ended July 2, 2005

Our selling, general and administrative expenses decreased in fiscal 2006 compared to fiscal 2005, primarily due to cost reductions implemented in fiscal 2005, which were in effect for the full year ended July 1, 2006, reductions in the costs associated with our compliance with the Sarbanes-Oxley Act of 2002, no replication of costs incurred in connection with our moving administrative activities to a newly established corporate headquarters in San Jose, California which were incurred during fiscal 2005, and reductions in certain insurance premiums.

In the year ended July 1, 2006 decreases in our selling, general and administrative expenses were partially offset by $4.4 million of stock based compensation expense recorded under SFAS 123R, which we adopted on July 2, 2005. $742,000 of stock based compensation expense was recorded as a selling, general and administrative expense in the year ended July 2, 2005, under previous accounting pronouncements.

Year ended July 2, 2005 versus twelve months ended July 3, 2004

Selling, general and administrative expenses increased by $15.7 million in fiscal 2005 compared to the twelve months ended July 3, 2004. The increase was due to higher selling costs to support revenue growth, the inclusion of the operations of New Focus and Onetta for an entire year, the negative impact of the weakness in the U.S. dollar relative to the U.K. pound sterling, costs associated with compliance with the Sarbanes-Oxley Act of 2002 and costs associated with moving administrative activities to the newly established U.S. headquarters in San Jose, California in the second quarter of fiscal 2005. In total, these costs more than offset the cost reductions attained in connection with the 2004 restructuring plan.

Twelve months ended July 3, 2004 versus year ended December 31, 2003

The increase of $10.8 million in selling, general and administrative expense in the twelve month period ended July 3, 2004 compared with the year ended December 31, 2003 resulted from the inclusion of the operations of New Focus for only three months in the twelve month period ended July 3, 2004 and, to a lesser extent, the inclusion of the business acquired from Cierra Photonics, combined with higher legal and professional fees relating to various corporate development activities.

Restructuring

					Twelve
	Year		Year		Months		Year
	Ended		Ended		Ended		Ended
	July 1,		July 2,		July 3,		December 31,
	2006		2005		2004		2003
					(Unaudited)
	($ Millions)
Lease cancellation and commitments	$	1.9	$	4.8	$	4.9	$	6.7
Termination payments to employees and related costs		9.3		15.7		15.6		20.9
Write-off on disposal of assets and related costs		—		0.4		2.6		3.8
	$	11.2	$	20.9	$	23.1	$	31.4

Over the past five years, we have enacted a series of restructuring plans and cost reduction plans designed to reduce our manufacturing overhead and our operating expenses. In 2001, we reduced manufacturing overhead and our operating expenses in response to the initial decline in demand in the optics components industry. In connection with our acquisitions of Nortel Networks’ optical components business in November 2002 and New Focus in March 2004, we enacted restructuring plans related to the consolidation of our operations, and which we expanded in September 2004 to include the transfer of our main corporate functions, including consolidated accounting, financial reporting, tax and treasury, from Abingdon, U.K. to our new U.S headquarters in San Jose, California.

In May and November of 2004, we adopted additional restructuring plans, which included the transfer of our assembly and test operations from Paignton, U.K. to Shenzhen, China, a process that commenced in the quarter ended October 2, 2004. This transition was substantially complete by the end of March 2006, except for a chip-on-carrier assembly process we added to the transition plan in November 2005, and which we expect to be

44

completed by the end of December 2006. In May 2006, we announced our latest cost reduction plans, which included transitioning all remaining manufacturing support and supply chain management, along with pilot line production and production planning, from Paignton to Shenzhen, also by the end of December, 2006.

With respect to the transfer of the operations described in the previous paragraph, some of which are still in the process of being transferred, we have spent $22.6 million as of July 1, 2006, and we anticipate spending a total of approximately $30 million to $37 million, including $6 million to $7 million on the cost reduction plan announced in May 2006. The substantial portion of the remaining spending relates to personnel and personnel related costs. We expect the cost reduction plan announced in May 2006 to reduce our costs by between $5.5 million and $6.5 million a quarter, when compared to the expenses incurred in the quarter ended April 1, 2006, with the cost savings expected to be realized in the March 2007 quarter.

Year ended July 1, 2006

The restructuring charges of $11.2 million in the year ended July 1, 2006 were primarily associated with those employees in our assembly and test operations in Paignton identified for termination and retained until the completion of the transfer of the operations from Paignton, U.K. to Shenzhen, China. Costs of their severance and retention were accrued over their remaining service period. Restructuring charges in fiscal 2006 also included $1.9 million of additional accruals related to revised assumptions as to subleases and final costs associated with lease facilities exited. $1.5 million of these addition lease accruals were incurred in our research and industrial segment and all other restructuring charges in fiscal 2006 were incurred in our optics sector.

Year ended July 2, 2005

The restructuring charges in the year ended July 2, 2005 were primarily associated with manufacturing, research and development, and selling, general and administrative employees identified for termination under the restructuring plans referred to above, including the consolidation of operations, the transfer of our main corporate functions to the U.S. and the initial stages of the Paignton to Shenzhen transition. Costs of the employee’s severance and retention were accrued over their remaining service period. Restructuring charges in fiscal 2005 also include $2.6 million for costs associated with lease facilities exited, and $2.2 million of additional accruals related to revised assumptions as to subleases and final costs associated with lease facilities exited.

Twelve months ended July 3, 2004

The restructuring charges in the twelve months ended July 3, 2004 were primarily associated with employees identified for termination under plans that included the closure of a semiconductor fabrication facility in Ottawa, Canada and the transfer of related fabrication capabilities to Caswell, U.K. We also closed a few smaller manufacturing-related sites in Milton, U.K., Harlow, U.K. and Poughkeepsie, New York, and consolidated certain production processes into new locations. The transfer was completed in August 2003. In connection with this transfer, certain products and research projects were discontinued. Subsequent to its completion, we achieved annualized cost savings in excess of $25 million related to this plan. During the twelve months ended July 3, 2004, we also assumed $16.8 million of restructuring charges related to facility commitments previously entered into by companies we acquired during that period, the substantial portion of which represents lease commitments in the research and industrial segment.

Year ended December 31, 2003

In the year ended December 31, 2003, we recorded restructuring charges primarily related to the closure of a semiconductor fabrication facility in Ottawa, Canada and the transfer of related fabrication capabilities to Caswell, U.K. We also closed a few smaller manufacturing-related sites in Milton, U.K., Harlow, U.K. and Poughkeepsie, New York, and consolidated certain production processes into new locations. The transfer was completed in August 2003. In connection with this transfer, certain products and research projects were discontinued. All charges recorded in the year ended December 31, 2003 related to the optics segment.

45

Amortization of Other Intangible Assets

										Twelve					Twelve
	Year		Year					Year		Months					Months		Year
	Ended		Ended					Ended		Ended					Ended		Ended
	July 1,		July 2,		Percentage			July 2,		July 3,		Percentage			July 3,		December 31,		Percentage
	2006		2005		Change			2005		2004		Change			2004		2003		Change
										(Unaudited)					(Unaudited)
	($ Millions)
Amortization	$	10.0	$	11.1		(10	)%	$	11.1	$	9.4		18	%	$	9.4	$	8.5		11	%

Since 2001, we have acquired six optical components companies and businesses, and one photonics and microwave company, and amortization tends to increase in connection with the addition of intangible assets purchased in connection with these acquisitions. In the year ended December 31, 2002, we acquired the optical components businesses of Nortel Networks and Marconi. In the year ended December 31, 2003, amortization of purchased intangible assets increased when compared to the prior year due to the effect of including the results of the optical components businesses of Nortel Networks and Marconi for the full year, and of our acquisition of Ignis Optics and the business of Cierra Photonics during the year. Amortization of purchased intangible assets increased in the twelve months ended June 3, 2004 compared to the year ended December 31, 2003, due to our acquisition of New Focus in March 2004 and Onetta in June 2004, and increased again in the year ended July 2, 2005 as compared to the twelve months ended July 3, 2004 due to the effect of amortizing the purchased intangible assets of New Focus and Onetta for the full year. In the year ended July 1, 2006, amortization of purchased intangible assets decreased because purchased intangible assets associated with our earliest acquisitions became fully amortized, and because the additional amortization related to our March 2006 acquisition of Avalon was not significant enough to offset these reductions.

Impairment of Goodwill and Other Intangible Assets

SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually, or sooner whenever events or changes in circumstances indicate that they may be impaired. In the fourth quarter of the year ended July 1, 2006, in connection with our annual review for impairment, we recorded $760,000 of impairment charges related to purchased intangible assets associated with our acquisition of Ignis Optics. In the third quarter of the year ended July 2, 2005, the decline in our stock price, and therefore market capitalization, combined with continuing net losses and a history of not meeting revenue and profitability targets, suggested that the goodwill related to certain of our acquisitions may have been impaired at such time. As a result of these triggering events, we performed a preliminary evaluation of the related goodwill balances. In the fourth quarter of fiscal 2005, we finalized this evaluation during our annual evaluation of goodwill, and also performed our annual evaluation of acquired intangible assets. As a result, for the year ended July 2, 2005, we recorded charges of $114.2 million, primarily related to the impairment of goodwill related to the acquisitions of New Focus, Ignis Optics and Onetta, including $0.6 million related to the impairment of certain intangible assets related to the acquisition of New Focus. We recorded no charges for the impairment of goodwill or intangible assets during any of the other periods presented herein.

Impairment/(Recovery) of Other Long-Lived Assets

In September 2005, we sold a parcel of land in Swindon, U.K., which had previously been accounted for as held for sale, and for which the recorded book value had previously been written down as impaired. The proceeds from the sale of this parcel of land were $15.5 million, resulting in a recovery of previous impairment of $1.3 million, net of transaction costs. In the fourth quarter of fiscal 2006, in connection with a review of our long-lived assets for impairment, we recorded $433,000 of impairment charges, which offset the recovery related to this land sale.

Legal Settlement

On April 3, 2006, we entered into a settlement agreement with Mr. Howard Yue relating to the lawsuit Mr. Yue filed against New Focus, Inc., one of our subsidiaries, and several of its officers and directors in Santa Clara County Superior Court. This lawsuit was filed by Mr. Yue prior to our acquisition of New Focus. The terms of the settlement provided that we would issue to Mr. Yue a $7.5 million promissory note, payable on or before April 10, 2006, of

46

which $5.0 million could be satisfied at our option through the issuance of shares of common stock. In connection with this settlement, we recorded $7.2 million ($7.5 million, net of insurance recoveries expected as of that time) as an other operating expense. In the fourth quarter of fiscal 2006, we settled the promissory note for $2.5 million in cash and $5.0 million of common stock valued on the date of the payment. We also received $2.2 million from certain insurance carriers in connection with this settlement, which reduced our net expense for this settlement to $5.0 million. If and when additional insurers confirm their definitive coverage position, we may record the amounts of this coverage as recoveries against operating expenses in the corresponding future periods.

Loss on Conversion and Early Extinguishment of Debt

On January 13, 2006, we entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of these convertible debentures we issued approximately 10.5 million shares of common stock, warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash, and recorded a charge of $18.8 million in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt. See Note 17 - Debt to our consolidated financial statements appearing elsewhere herein for additional disclosures regarding the conversion of the convertible debentures and early extinguishment of debt.

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

							Twelve
	Year			Year			Months			Year
	Ended			Ended			Ended			Ended
	July 1,			July 2,			July 3,			December 31,
	2006			2005			2004			2003
							(Unaudited)
	($ Millions)
Other income/(expense), net	$	0.3		$	1.4		$	—		$	—
Interest income		0.3			1.1			6.0			9.4
Interest expense		(4.3	)		(5.4	)		(0.2	)		(3.2	)
Gain/(Loss) on foreign exchange		0.7			(1.0	)		7.3			(4.4	)

Other income/(expense), net in the year ended July 2, 2005 included a one-time gain of $1.1 million arising from the release of an acquisition provision related to the closure of the Bookham (Switzerland) AG pension arrangement.

Interest income decreased in the year ended July 1, 2006 from the year ended July 2, 2005 by $800,000, in the year ended July 2, 2005 from the twelve months ended July 3, 2004 by $4.9 million, and in the twelve months ended July 3, 2004 from the year ended December 31, 2003 interest expense decreased by $3.4 million, due to corresponding reductions in balances of cash and short-term investments across those periods.

Interest expense in the years ended July 1, 2006 and July 2, 2005 included interest on notes payable to Nortel Networks and the amortization of interest costs related to the issuance of $25.5 million of convertible notes in December 2004. Interest expense decreased in fiscal 2006 from fiscal 2005 by $1.1 million due to the conversion and extinguishment of the convertible notes and payment of the promissory notes issued to Nortel Networks pursuant to a series of agreements entered into in January 2006. Interest expense in the twelve months ended July 3, 2004 and in the year ended December 31, 2003 was primarily related to the promissory notes payable to Nortel Networks.

Gain/(loss) on foreign exchange includes the net impact of translation of intercompany balances, translation of U.S. dollar denominated monetary accounts in non-U.S. dollar functional currency subsidiaries, realized gains or losses on foreign currency contracts designated as hedges, and realized and unrealized gains or losses on foreign currency contracts not designated as hedges. The net results are largely a function of exchange rate changes between the U.S dollar and the U.K. pound sterling. The $7.3 million gain and $4.4 million loss on foreign exchange in the twelve months ended July 3, 2004 and in the year ended 2003, respectively, were primarily due to translation of these balances and results which had been previously reported in U.K. pounds sterling, restated for comparative

47

period disclosure in U.S. dollars subsequent to our September 2004 redomicile in the U.S., as described more fully in the introduction to Item 6. Selected Financial Data.

Income Tax Benefit/(Provision)

					Twelve
	Year		Year		Months		Year
	Ended		Ended		Ended		Ended
	July 1,		July 2,		July 3,		December 31,
	2006		2005		2004		2003
					(Unaudited)
	($ Millions)
Income tax benefit/(provision)	$	11.7	$	—	$	3.6	$	3.4

We have incurred substantial losses to date and expect to incur additional losses in the future. Based upon the weight of available evidence, which includes our historical operating performance and the recorded cumulative net losses in all prior fiscal periods, we have provided a full valuation allowance against our net deferred tax assets of $316.4 million at July 1, 2006 and $330.4 million at July 2, 2005.

During fiscal 2006, in connection with our acquisition of Creekside in August 2005, we recorded a one time tax gain of $11.8 million related to our anticipated use of tax attributes to offset deferred tax liabilities assumed. In the twelve month period ended July 3, 2004, and in the year ended December 31, 2003, we recognized a credit of $3.7 million related to a payment received in 2002 from the U.K. Inland Revenue as compensation for certain research and development expenditures. As our business develops globally, we may incur local tax charges which we will not be able to offset.

Liquidity, Capital Resources and Contractual Obligations

Liquidity and Capital Resources

Operating activities

							Six
	Year			Year			Months			Year
	Ended			Ended			Ended			Ended
	July 1,			July 2,			July 3,			December 31,
	2006			2005			2004			2003
							(Unaudited)
	($ Millions)
Net loss	$	(87.5	)	$	(248.0	)	$	(67.4	)	$	(125.8	)
Non-cash accounting charges:
Depreciation and amortization		30.2			32.2			13.5			21.3
Impairments/(Recoveries) of long lived assets, goodwill and other intangible assets		(0.1	)		114.2			—			—
Acquired IPR&D		0.1			—			5.9			0.2
Tax credits		(11.8	)		—			—			(3.7	)
Stock-based compensation expense and expenses related to warrants		10.3			1.5			—			—
Loss on conversion and early extinguishment of debt		18.8			—			—			—
Legal settlement		5.0			—			—			—
Gains on sale of property and equipment		(2.1	)		(0.7	)		(5.3	)		(3.1	)
Write back of acquisition expenses		—			1.8			—			—
Unrealized foreign currency (gains)/losses		(0.6	)		2.3			—			—
Total non-cash accounting charges		49.8			151.3			14.2			14.7
Decrease/(increase) in working capital		(17.9	)		(2.1	)		3.0			13.1
Net cash used in operating activities	$	(55.6	)	$	(98.8	)	$	(50.2	)	$	(98.0	)

48

In the past five years, we have funded our operations from several sources, including through public and private offerings of equity, issuance of debt and convertible debentures, sale of assets and net cash obtained in connection with recent acquisitions. As of July 1, 2006, we held $43.3 million in cash and cash equivalents (including restricted cash of $5.5 million). On August 3, 2006, we entered into a three year senior secured revolving credit facility for $25 million with advances available based on a percentage of accounts receivable at the time the advance is requested. On September 1, 2006, we entered into an agreement for the private placement of 8,696,000 shares of common stock at $2.70 per share, and warrants to purchase 2,174,000 shares of common stock, with selected institutional investors, for gross proceeds of approximately $23.5 million. The warrants, which have a term of five years and will become exercisable after March 1, 2007, have an exercise price of $4.00 per share. Certain additional institutional investors will have the right to purchase, on or before September 19, 2006, up to 2,898,667 shares of common stock and warrants to purchase up to 724,667 shares of common stock at the same purchase price as the initial institutional investors.

Based on our cash balances, and given our continuing and expected losses for the foreseeable future, if we fail to meet management’s current cash flow forecasts, or we are unable to draw sufficient amounts under the three year $25 million senior secured revolving credit agreement with Wells Fargo Foothill, Inc. and other lenders, which was entered into in August 2006, for any reason, we will need to raise additional funding of at least $10 million to $20 million through external sources prior to July 2007 in order to maintain sufficient financial resources in order to operate as a going concern through the end of fiscal 2007. If necessary we will attempt to raise additional funds by any one or a combination of the following: (i) completing the sale of certain assets; (ii) issuing equity, debt or convertible debt; (iii) selling certain non core businesses. There can be no assurance of our ability to raise sufficient capital through the above, or any other efforts.

Year ended July 1, 2006

Net cash used in operating activities for the year ended July 1, 2006 was $55.6 million, primarily resulting from the net loss of $87.5 million, offset by non-cash accounting charges of $49.8 million, primarily consisting of an $18.8 million loss on conversion and early retirement of debt, $8.2 million of expense related to stock based compensation, $5.0 million of common stock issued to settle a legal claim brought by Howard Yue, and $30.2 million related to depreciation and amortization of certain assets, net of an $11.8 million tax gain. Increases in working capital of $17.9 million also contributed to the use of cash, primarily due to decreases in accounts payables and accrued expenses and other liabilities and an increase in accounts receivable offset by a decrease in prepaid expenses and other assets.

Year ended July 2, 2005

Net cash used in operating activities for the year ended July 2, 2005 was $98.8 million, primarily resulting from the net loss of $248.0 million, offset by non-cash accounting charges of $151.3 million, which includes $114.2 million for the impairment of goodwill and certain intangibles recorded in connection with past acquisitions, primarily New Focus, and $32.2 million related to the depreciation and amortization of certain assets. The increase in working capital also resulted in a reduction in cash in the amount of $2.1 million, primarily related to higher levels of inventory required to support our increasing level of sales through the period, and our expected sales in the first quarter of fiscal 2006.

Six months ended July 3, 2004

Net cash used in operating activities for the six-month period ended July 3, 2004 was $50.2 million, primarily resulting from the net loss of $67.4 million, offset by non-cash accounting charges of $14.2 million, mainly related to depreciation and amortization and a $3.0 million decrease in working capital. The decrease in working capital was the result of a reduction in inventory, primarily through the sale of inventory purchased as part of the acquisition of the optical components business from Nortel Networks.

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Year ended December 31, 2003

Net cash used in operating activities in 2003 was $98.0 million, primarily resulting from the net loss of $125.8 million, offset by non-cash accounting charges of $14.7 million primarily for depreciation and amortization and an $18.9 million decrease in working capital. The decrease in working capital was the result of a reduction in inventory, primarily through the sale of inventory purchased as part of the acquisition of the optical components business from Nortel Networks.

Return/(Loss) on Investments

Return/(loss) on investments represents net interest, which is the difference between interest received on our cash and interest paid on our debts. Loss on investments were $4.0 million in the year ended July 1, 2006, $4.3 million in the year ended July 2, 2005, $5.8 million in the twelve months ended July 3, 2004, and $6.3 million in the year ended December 31, 2003. From the year ended December 31, 2003 to the twelve months ended July 3, 2004, and from the twelve months ended July 3, 2004 to the year ended July 2, 2005, decreasing returns on investment and the loss on investment have been due to lower interest income earned on declining cash balances, interest on balances outstanding from the $50 million of notes issued to Nortel Networks in November 2002 and the amortization of interest, costs and warrants associated with our issuance of $25.5 million of convertible debt in December 2004, prior to converting such convertible debt into common stock in January and March 2006. The reduction in loss on investment in the year ended July 1, 2006 compared to the year ended July 2, 2005 is due to the payment and retirements of notes issued to Nortel Networks and the conversion of $25.5 million of convertible debt into common stock both pursuant to a series of agreements entered into on January 13, 2006.

Investing Activities

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

In the year ended July 2, 2005, we used $2.3 million of cash in investing activities, primarily relating to $16.0 million of capital expenditures, along with a $1.7 million transfer of funds to restricted cash, partially offset by proceeds of $7.0 million from the sale of marketable securities, proceeds of $5.7 million from the disposal of certain of our subsidiaries, net of costs, proceeds of $1.4 million from the sale of property and equipment, and proceeds of $1.2 million received from the settlement of a loan note issued by a former New Focus executive officer. A substantial portion of the capital spending during this period was incurred in connection with the ramp up of our Shenzhen assembly and test operations.

In the six months ended July 3, 2004, we generated $87.4 million of cash, primarily consisting of $88.6 million assumed in connection with our acquisitions of New Focus and Onetta, along with $5.2 million in proceeds from the sale of property and equipment, partially offset by purchases of property and equipment of $6.6 million.

In the year ended December 31, 2003, we used $12.0 million of cash in financing activities, primarily the result of purchasing $19.2 million of property and equipment, partially offset by $7.1 million received in connection with the sale of property and equipment. The principal area of capital spending in 2003 was to upgrade the Caswell, U.K. wafer fabrication site to a capability required to produce products transferred from Ottawa, Canada.

Caswell Sale-Leaseback

On March 10, 2006, Bookham Technology plc, our wholly-owned subsidiary, entered into multiple agreements with a subsidiary of Scarborough Development, which we refer to as Scarborough, for the sale and leaseback of the land and facilities located at our Caswell, United Kingdom, manufacturing site. The sale transaction, which closed on March 30, 2006, resulted in proceeds to Bookham Technology plc of £13.75 million (approximately

50

U.S. $24.0 million using an exchange rate of £1.00 to $1.7455). Under these agreements, Bookham Technology plc leases back the Caswell site for an initial term of 20 years, with options is renew the lease term for 5 years following the initial term and for rolling 2 year terms thereafter. Annual rent is £1.1 million during the first 5 years of the lease, approximately £1.2 million during the next 5 years of the lease, approximately £1.4 million during the next 5 years of the lease and approximately £1.6 million during the next 5 years of the lease. Rent during the renewal terms will be determined according to the then market rent for the site. We have guaranteed the obligations of Bookham Technology plc under these agreements. In addition, Scarborough, Bookham Technology plc and Bookham, Inc. entered into a pre-emption agreement under which Bookham Technology plc, within the next 20 years, has a right to purchase of the Caswell site in whole or in part on terms acceptable to Scarborough if Scarborough agrees to terms with or receives an offer from a third party to purchase the Caswell facility.

Acquisition of Creekside

On August 10, 2005, Bookham Technology plc, our wholly owned subsidiary, entered into a share purchase agreement pursuant to which Bookham Technology plc purchased all of the issued share capital of City Leasing (Creekside) Limited, a subsidiary of Deutsche Bank, for consideration of £1.00, plus professional fees of approximately £455,000 (approximately $837,000, based on an exchange rate of £1 to $1.8403). The parties to the share purchase agreement are Bookham Technology plc, Deutsche Bank and London Industrial Leasing Limited, a subsidiary of Deutsche Bank, which we refer to as London Industrial. Creekside was utilized by Deutsche Bank in connection with the leasing of four aircraft to a third party. The leasing arrangement is structured as follows: Phoebus Leasing Limited, a subsidiary of Deutsche Bank, which we refer to as Phoebus, leases the four aircraft to Creekside under the primary leases and Creekside in turn sub-leases the aircraft to a third party. Under the sub-lease arrangement, the third party lessee who utilizes the aircraft, whom we refer to as the Sub-Lessee, makes sublease payments to Creekside, who in turn must make lease payments to Phoebus under the primary leases. To insulate Creekside from any risk that the Sub-Lessee will fail to make payments under the sub-lease arrangement, prior to the execution of the share purchase agreement, Creekside assigned its interest in the Sub-Lessee payments to Deutsche Bank in return for predetermined deferred consideration amounts, which we refer to as Deferred Consideration, which are paid directly from Deutsche Bank. Additionally, on closing the transaction, Deutsche Bank loaned Creekside funds to (i) pay substantially all of the rentals under the primary lease with Phoebus, excluding an amount equal to £400,000 (approximately $736,000), and (ii) repay an existing loan made by another wholly owned subsidiary of Deutsche Bank to Creekside. The obligation of Creekside to repay the Deutsche Bank loans may be fully offset against the obligation of Deutsche Bank to pay the Deferred Consideration to Creekside.

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

At the closing of this transaction, Creekside had receivables (including services and interest charges) of £73.8 million (approximately $135.8 million) due from Deutsche Bank in connection with certain aircraft subleases of Creekside and cash of £4.7 million (approximately $8.6 million), of which £4.2 million was immediately available. The assignment was made in exchange for the receivables, which are to be paid by Deutsche Bank to Creekside in three installments, with the last payment being made on July 16, 2007. We have recorded these receivables and payables as net assets on our balance sheet as of July 1, 2006, which is included elsewhere in this Annual Report on Form 10-K.

Creekside and Deutsche Bank entered into two facility agreements relating to a loan in the principal amount of £18.3 million (approximately $33.7 million) and a loan in the principal amount of £42.5 million including interest (approximately $78.2 million), which together will accrue approximately £3.6 million (approximately $6.6 million) in interest during the term of these loans. At the closing, Creekside used the loans to repay amounts outstanding under a loan dated April 12, 2005 between Creekside, as borrower, and City Leasing (Donside) Limited, a subsidiary of Deutsche Bank, as lender, and to pay part of Creekside’s rental obligations under the lease agreements.

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

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

The loans issued by Deutsche Bank may be prepaid in whole at any time with 30 days’ prior written notice to Deutsche Bank. The loan for £18.3 million plus interest was repaid by Creekside on October 14, 2005, and the loan for £42.5 million is repayable by Creekside in installments: the first installment of £23.5 million (approximately $43.2 million) was paid on July 14, 2006; and the second installment of £22.5 million (approximately $41.4 million) is payable on July 16, 2007. The remaining loan accrues interest a rate of 5.68% per year. Events of default under the loan includes failure by Creekside to pay amounts under the loans when due, material breach by Creekside of the terms of the lease agreements and related documentation, a judgment or order made against Creekside that is not stayed or complied with within seven days or an attachment by creditors that is not discharged within seven days, insolvency of Creekside or failure by Creekside to make payments with respect to all or any class of its debts, presentation of a petition for the winding up of Creekside, and appointment of any administrative or other receiver with respect to Creekside or any material part of Creekside’s assets. While Deutsche Bank may accelerate repayment under the facility agreements upon an event of default, the loan will be fully offset against the receivables, as described above.

Pursuant to the terms of the agreements governing this transaction, we believe that we have not assumed any material credit risk in connection with these arrangements. The material cash flow obligations associated with Creekside are directly related to Deutsche Bank’s obligations to pay Creekside the Deferred Consideration, and Creekside’s obligation to repay the loans to Deutsche Bank. The obligations of Creekside to repay the Deutsche Bank loan can be fully offset against Deutsche Bank’s obligation to pay the Deferred Consideration. Any Sub-Lessee default has no impact on Deutsche Bank’s obligation to pay Creekside the Deferred Consideration. Regarding the primary leases between Phoebus and Creekside, all but £400,000 has been paid. For these reasons, we believe we do not bear a material risk and have no substantial continuing payments or obligations.

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

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

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

Sale of Real Property

In September 2005, our Bookham Technology plc subsidiary entered into a contract with Abbeymeads LLP to sell a parcel of land in Swindon, U.K., which had previously been accounted for as held for sale, and for which the recorded book value had previously been written down as impaired. Net proceeds from the sale were $14.7 million, and we recorded a recovery of previous impairment of $1.3 million in the first quarter of fiscal 2006.

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Financing Activities

In the year ended July 1, 2006, we generated $25.2 million of cash from financing activities, primarily consisting of $49.3 million of net proceeds from a public offering of our common stock in October 2005, as described below, offset by $24.3 million used in connection with the early retirement of two promissory notes originally issued to Nortel Networks in connection with our acquisition of their optical components business and the payment of certain amounts in connection with the conversion of our convertible debentures which were issued in December 2004.

In the year ended July 2, 2005, we generated $14.9 million of cash from financing activities. This primarily consisted of net proceeds of $24.2 million from the issuance of convertible debentures and warrants to purchase common stock, offset by the repayment of $4.2 million due to Nortel Networks under a promissory note and payments of $5.1 million related to capital lease obligations assumed primarily in connection with the Onetta acquisition.

In the six months ended July 3, 2004 and in the year ended December 31, 2003, we generated $1.7 million and $1.1 million, respectively, from financing activities, primarily resulting from the issuance of common stock.

On January 13, 2006, we entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of these convertible debentures we issued approximately 10.5 million shares of common stock, warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash, and recorded a charge of $18.8 million in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt. See Note 17 - Debt to our consolidated financial statements appearing elsewhere herein for additional disclosures regarding the conversion of the convertible debentures and early extinguishment of debt.

On October 17, 2005, we completed a public offering of our common stock, issuing a total of 11,250,000 shares at a price per share to the public of $4.75, resulting in proceeds of $53.4 million, of which we received $49.3 million net of commissions to the underwriters and the payment of offering costs and expenses.

Sources of Cash

In the past five years, we have funded our operations from several sources, including through public offerings of equity, issuance of debt and convertible debt, sale of assets and net cash from acquisitions. As of July 1, 2006, we held $43.3 million in cash and cash equivalents (including restricted cash of $5.5 million). On August 3, 2006, we entered into a $25 million revolving credit line facility with availability based on 80% of our accounts receivable. On September 1, 2006, we entered into a definitive agreement for the private placement of 8,696,000 shares of common stock at $2.70 per share, and warrants to purchase 2,174,000 shares of common stock, with selected institutional investors, for proceeds of approximately $23.5 million. The warrants, which have a term of five years and will become exercisable after March 1, 2007, have an exercise price of $4.00 per share. Certain additional institutional investors will have the right to purchase, on or before September 19, 2006, up to 2,898,667 shares of common stock and warrants to purchase up to 724,667 shares of common stock at the same purchase price as the initial investors.

Future Cash Requirements

Based on our cash balances, and given our continuing and expected losses for the foreseeable future, if we fail to meet management’s current cash flow forecasts, or we are unable to draw sufficient funds under the three year $25 million senior secured revolving credit agreement with Wells Fargo Foothill, Inc. and other lenders, which was entered into in August 2006, for any reason, we will need to raise additional funding of at least $10 million to $20 million through external sources prior to July 2007 in order to maintain sufficient financial resources in order to operate as a going concern through the end of fiscal 2007. If necessary we will attempt to raise additional funds by any one or combination of the following: (i) completing the sale of certain assets; (ii) issuing equity, debt or convertible debt; (iii) selling certain non core businesses. There can be no assurance of our ability to raise sufficient capital through the above, or any other efforts.

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

Risk Management — Foreign Currency Risk

We are exposed to fluctuations in foreign currency exchange rates and interest rates. As our business has grown and become increasing multinational in scope, we have become increasingly subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. Despite our change in domicile from the United Kingdom to the United States, in the future we expect that a substantial portion of our revenues will be denominated in U.S. dollars, while a substantial portion of our expenses will continue to be denominated in U.K. pounds sterling. Fluctuations in the exchange rate between the U.S. dollar and the U.K. pound sterling and, to a lesser extent, other currencies in which we collect revenues and pay expenses, could affect our operating results. This includes the Chinese Yuan, now that our Shenzhen, China facility is fully operational, in which we pay local expenses. To the extent the exchange rate between the U.S. dollar and the Chinese Yuan were to begin to fluctuate more significantly than experienced to date, our exposure would increase. We enter into foreign currency forward exchange contracts in an effort to mitigate our exposure to such fluctuations between the U.S. dollar and the U.K. pound, and we may be required to convert currencies to meet our obligations. Under certain circumstances, foreign currency forward exchange contracts can have an adverse effect on our financial condition. As of July 1, 2006, we held nine foreign currency forward exchange contracts with a nominal value of $19.5 million which include put and call options which expire, or expired, at various dates from August 2006 to June 2007. During the year ended July 1, 2006, we recorded a net gain of $0.8 million in our statement of operations in connection with foreign exchange contracts. As of July 1, 2006, the fair value of our outstanding foreign currency forward exchange contracts was an asset of $0.6 million and we recorded the unrealized gain of $0.6 million to other comprehensive income in connection with marking these contracts to fair value.

Contractual Obligations

Our contractual obligations at July 1, 2006, by nature of the obligation and amount due over certain periods of time, are set out in the table below:

	Payments Due by Period
			Less Than						More Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
	(In thousands)
Long-term debt obligations	$	349	$	49	$	99	$	99	$	102
Operating lease obligations		65,500		12,646		8,087		6,215		38,552
Purchase obligations		26,986		26,986		—		—		—
Total contractual obligations	$	92,835	$	39,681	$	8,186	$	6,314	$	38,654

Operating leases are future annual commitments under non-cancelable operating leases, including rents payable for land and buildings. The purchase obligations consist of our total outstanding purchase order commitments as at July 1, 2006.

Contractual obligations related to our acquisition of Creekside are described above, under “Investing Activities”.

Off-Balance Sheet Arrangements

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

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Intel Corporation, New Focus has indemnified Intel against losses for certain intellectual property claims. This indemnification expires in May 2008 and has a maximum liability of $7.0 million. We do not expect to pay out any amounts in respect of these indemnifications, therefore no accrual has been made.

We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors. We have not recorded a liability associated with these indemnification arrangements as we historically have not incurred any costs associated with such indemnifications and does not expect to in the future. Costs associated with such indemnifications may be mitigated by insurance coverage that we maintain.

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

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

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

Interest rates

We finance our operations through a mixture of shareholders’ funds, finance leases and working capital. We supplemented these sources after July 1, 2006 by entering into the Credit Agreement, which is a three year $25.0 million senior secured revolving credit facility, on August 3, 2006 and by issuing, in an August 31, 2006 private placement, 8,696,000 shares of common stock at a price of $2.70 per share, and warrants to purchase 2,174,000 shares of common stock, with selected institutional investors, for gross proceeds of approximately $23.5 million. Both of these transactions are described in more detailed under “Sources of Cash”, above. Our only exposure to interest rate fluctuations is on our cash deposits and for amounts borrowed under the Credit Agreement.

We monitor our interest rate risk on cash balances primarily through cash flow forecasting. Cash that is surplus to immediate requirements is invested in short-term deposits with banks accessible with one day’s notice and invested in overnight money market accounts. We believe our interest rate risk is immaterial.

Foreign currency

Due to our multinational operations, we are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenue and pay expenses. Our expenses are not necessarily incurred in the currency in which revenue is generated, and, as a result, we may from time to time have to exchange currency to meet our obligations. These currency conversions are subject to exchange rate fluctuations, in particular, changes in the value of the U.K. pound sterling compared to the U.S. dollar. In an effort to mitigate exposure to those fluctuations, we enter into foreign currency forward exchange contracts with respect to portions of our forecasted expenses denominated in U.K. pound sterling. At July 1, 2006, we held nine foreign currency forward exchange contracts, including put and call options, to purchase U.K. pound sterling with a nominal value of $19.5 million and a fair value of $20.1 million at July 1, 2006, including our recording of an unrealized gain of $0.6 million at that date. These contracts include put and call options which expire, or expired, on dates ranging from August 2006 to June 2007. It is estimated that a 10% fluctuation in the dollar between July 1, 2006 and the maturity dates of the put and call instruments underlying the contracts would lead to a profit of $2.6 million (dollar weakening), or loss of $2.3 million (dollar strengthening) on our outstanding foreign currency forward exchange contracts, should they be held to maturity.

Item 8.   Financial Statements and Supplementary Data

The information required by this item may be found on pages F-1 through F-58 of this Annual Report on Form 10-K.

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Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.   Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures

As of July 1, 2006, our management carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As described below under Management’s Report on Internal Control over Financial Reporting, our Chief Executive Officer and Chief Financial Officer have identified and reported to our Audit Committee and Ernst &Young LLP, our independent registered public accounting firm, a material weakness in our internal control over financial reporting. As a result, our Chief Executive Officer and Chief Financial Officer have concluded that, as of July 1, 2006, our disclosure controls and procedures were not effective based on the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

(b)   Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

As of July 1, 2006, our management has assessed the effectiveness of our internal control over financial reporting. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. A material weakness is a significant deficiency (as defined in PCAOB Auditing Standard No. 2), or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified a material weakness in internal control over financial reporting as it relates to the inconsistent treatment of translation/transaction gains and losses in respect to intercompany loan balances. The lack of communication to certain subsidiaries of the Corporate policy regarding the translation of intercompany balances as well as the lack of a worldwide oversight control did not reduce the likelihood that a material misstatement of certain accounts in the financial statements would be prevented or detected in a timely manner. This material weakness resulted in adjustments to the company’s gain/loss on foreign exchange and accumulated other comprehensive income accounts.

As a result, our Chief Executive Officer and Chief Financial Officer have concluded that, as of July 1, 2006, our system of internal control over financial reporting was not effective based on the criteria in COSO’s Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on our assessment of our internal control over financial reporting. This report appears below.

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(c)   Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Bookham, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Bookham, Inc. did not maintain effective internal control over financial reporting as of July 1, 2006, because of the effect of the lack of communication to certain subsidiaries of the Corporate policy regarding the translation of intercompany balances as well as a lack of a worldwide oversight control, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO control criteria”). Bookham Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been included in the management’s assessment. Management has identified a material weakness in internal control over financial reporting as it relates to the inconsistent treatment of translation/transaction gains and losses in respect to intercompany loan balances. The lack of communication to certain subsidiaries of the Corporate policy regarding the translation of intercompany balances as well as the lack of a worldwide oversight control did not reduce the likelihood that a material misstatement of certain accounts in the financial statements would be prevented or detected in a timely manner. This material weakness resulted in adjustments to the company’s gain/loss on foreign exchange and accumulated other comprehensive income accounts. This material weakness was considered in determining the nature, timing, and extent of the audit tests applied in our audit of Bookham, Inc.’s 2006 financial statements, and this report does not affect our report dated September 11, 2006 on those financial statements.

In our opinion, management’s assessment that Bookham, Inc. did not maintain effective internal control over financial reporting as of July 1, 2006, is fairly stated, in all material respects, based on the COSO control criteria.

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Also, in our opinion, because of the effect of the material weakness described above on achievement of the objectives of the control criteria, Bookham, Inc. has not maintained effective internal control over financial reporting as of July 1, 2006, based on the COSO control criteria.

ERNST & YOUNG LLP

San Jose, California

September 11, 2006

(d)   Remediation Efforts to Address Material Weakness

We have implemented a consistent and appropriate intercompany loan translation methodology at all subsidiaries, and will implement a centralized review of the reconciliation and classification of related translation adjustments on a quarterly basis.

(e)   Changes in Internal Control over Financial Reporting

In our prior year Annual Report on Form 10-K for the year ended July 2, 2005, we identified four material weaknesses related to: 1) shortage of, and turnover in, qualified financial reporting personnel to ensure complete application of GAAP; 2) insufficient management review of analyses and reconciliations; 3) inaccurate updating of accounting inputs for estimates of complex non-routine transactions; and 4) accounting for foreign currency exchange transactions. During the current fiscal year ended July 1, 2006, we implemented processes, procedures and personnel changes that we believe sufficiently remediated these weaknesses.

There have been no changes in our internal controls over financial reporting during the quarter ended July 1, 2006, other than as discussed herein, that have materially affected, or are reasonably likely to affect, internal controls over financial reporting. See Item 9A(d) for a discussion of remediation activities in connection with the material weakness in internal control over financial reporting identified above.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Bookham, Inc. have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks.

Item 9B.  Other Information

Not applicable.

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PART III

Item 10.   Directors and Executive Officers of the Registrant

Information required by this Item is incorporated by reference to the information under the headings “Proposal I — Election of Class II Director” and “Executive Officers” contained in Bookham’s definitive Proxy Statement for its 2006 annual meeting of stockholders.

Item 11.   Executive Compensation

Information required by this Item is incorporated by reference to the information under the headings “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Employment and Other Agreements” contained in Bookham’s definitive Proxy Statement for its 2006 annual meeting of stockholders.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this Item is incorporated by reference to the information under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in Bookham’s definitive Proxy Statement for its 2006 annual meeting of stockholders.

Item 13.   Certain Relationships and Related Transactions

Information required by this Item is incorporated by reference to the information under the headings “Certain Relationships and Related Transactions” and “Employment, Change of Control and Severance Arrangements” contained in Bookham’s definitive Proxy Statement for its 2006 annual meeting of stockholders.

Item 14.   Principal Accountant Fees and Services

Information required by this Item is incorporated by reference under the heading “Principal Accountant Fees and Services” and “Pre-Approval Policies and Procedures” contained in Bookham’s definitive Proxy Statement for its 2006 annual meeting of stockholders.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of or are included in this Form 10-K:

1. Financial Statements

See Index to Consolidated Financial Statements

2. Financial Statement Schedules

Financial statement schedule II: Valuation and Qualifying Accounts that follows the Notes to Consolidated Financial Statements is filed as part of this Form 10-K. Other financial statement schedules have been omitted since they are either not required or the information is otherwise included.

3. List of Exhibits

The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. Documents listed on such Exhibit Index, except for documents identified by footnotes, are being filed as exhibits herewith. Documents identified by footnotes are not being filed herewith and, pursuant to Rule 12b-32 under the Exchange Act, reference is made to such documents as previously filed as exhibits with the Securities and Exchange Commission. Bookham’s file number under the Exchange Act is 000-30684.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BOOKHAM, INC.

By:  /s/  Giorgio Anania

Name: Giorgio Anania

Title:  Chief Executive Officer and President

September 14, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/  Giorgio Anania Giorgio Anania	Chief Executive Officer, President and Director (Principal Executive Officer)	September 14, 2006
/s/  Stephen Abely Stephen Abely	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	September 14, 2006
/s/  David Simpson David Simpson	Director	September 14, 2006
/s/  Lori Holland Lori Holland	Director	September 14, 2006
/s/  W. Arthur Porter W. Arthur Porter	Director	September 14, 2006
/s/  Joseph Cook Joseph Cook	Director	September 14, 2006
/s/  Peter Bordui Peter Bordui	Director	September 14, 2006

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BOOKHAM, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms	F-2
Consolidated Balance Sheets	F-4
Consolidated Statements of Operations	F-5
Consolidated Statements of Cash Flows	F-6
Consolidated Statements of Stockholders’ Equity	F-7
Notes to Consolidated Financial Statements	F-11

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Bookham, Inc.

We have audited the accompanying consolidated balance sheet of Bookham, Inc. as of July 1, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedule for the 2006 year listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bookham, Inc. at July 1, 2006, and the consolidated results of its operations and its cash flows for the year ended July 1, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that Bookham, Inc. will continue as a going concern. As more fully described in Note 1, the entity has recurring operating losses. Management’s plans in regard to raising sufficient funds are also described in Note 1. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

As discussed in Note 1 to the Notes to Consolidated Financial Statements, under the heading Stock Based Compensation, in fiscal 2006 Bookham, Inc. changed its method of accounting for stock based compensation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Bookham, Inc.’s internal control over financial reporting as of July 1, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 11, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting.

ERNST & YOUNG LLP

San Jose, California

September 11, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Bookham, Inc.

We have audited the accompanying consolidated balance sheets of Bookham, Inc. as of July 2, 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended July 2, 2005, the six-month period ended July 3, 2004, and the year ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bookham, Inc. at July 2, 2005 and the consolidated results of its operations and its consolidated cash flows for the year ended July 2, 2005, the six-month period ended July 3, 2004 and the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that Bookham, Inc. will continue as a going concern. As more fully described in Note 1, the Company will need to raise additional funding through external sources prior to December 2005 in order to maintain sufficient financial resources to continue to operate its business. In addition, depending on the amount of additional funding secured prior to December 2005, the Company will also need to raise sufficient funds before June 2006 in order to maintain a cash balance of at least $25 million in order to comply with the loan note covenants described in Note 1. Management are taking actions to raise additional equity capital and considering the disposal of selected assets or businesses. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Ernst & Young LLP

Reading, England

September 8, 2005

F-3

BOOKHAM, INC.

CONSOLIDATED BALANCE SHEETS

	July 1,			July 2,
	2006			2005
	(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	37,750		$	24,934
Restricted cash		1,428			3,260
Accounts receivable (net of allowances of $991 and $726, respectively)		26,280			20,257
Receivables from related party, net		7,499			7,262
Inventories		53,860			53,192
Current deferred tax asset		348			692
Prepaid expenses and other current assets		11,436			11,190
Assets held for resale		—			13,694
Total current assets		138,601			134,481
Long-term restricted cash		4,119			4,119
Goodwill		8,881			6,260
Other intangible assets, net		19,667			28,010
Property and equipment, net		52,163			64,156
Non-current deferred tax asset		12,911			—
Investments and other long-term assets		455			1,552
Total assets	$	236,797		$	238,578
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,143		$	31,334
Liabilities to related party		4,250			722
Current deferred tax liability		12,911			—
Accrued expenses and other liabilities		33,087			38,529
Total current liabilities		76,391			70,585
Deferred gain on sale-leaseback		19,928			—
Notes payable to related party		—			45,861
Convertible debentures		—			19,140
Non-current deferred tax liability		348			692
Other long-term liabilities		4,989			11,232
Total liabilities		101,656			147,510
Commitments and contingencies (Note 6)
Stockholders’ equity:
Common stock:
$0.01 par value; 175,000,000 authorized; 57,978,908 and 33,805,437 issued and outstanding at July 1, 2006 and July 2, 2005, respectively		580			338
Additional paid-in capital		1,053,626			925,677
Deferred compensation		—			(808	)
Accumulated other comprehensive income		35,460			32,889
Accumulated deficit		(954,525	)		(867,028	)
Total stockholders’ equity		135,141			91,068
Total liabilities and stockholders’ equity	$	236,797		$	238,578

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

F-4

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended			Year Ended			Six Months Ended						Year Ended
	July 1,			July 2,			July 3,			June 29,			December 31,
	2006			2005			2004			2003			2003
	(In thousands, except share and per share amounts)
										(Unaudited)
Revenues	$	121,138		$	110,751		$	35,846		$	18,346		$	42,457
Revenues from related parties		110,511			89,505			43,917			49,416			103,740
Total revenues		231,649			200,256			79,763			67,762			146,197
Cost of revenues		190,085			193,647			84,415			80,915			156,008
Gross profit/(loss)		41,564			6,609			(4,652	)		(13,153	)		(9,811	)
Operating expenses:
Research and development		42,587			44,833			26,915			26,469			50,371
Selling, general and administrative		52,167			60,250			29,660			18,795			33,849
Amortization of intangible assets		10,004			11,107			5,677			4,746			8,487
Restructuring charges/(recoveries)		11,197			20,888			(664	)		7,631			31,392
Acquired in-process research and development		118			—			5,890			—			245
Impairment of goodwill and other intangible assets		760			114,226			—			—			—
Impairment/(Recovery) of other long-lived assets		(832	)		—			—			—			—
Gain on sale of property and equipment		(2,070	)		(708	)		(5,254	)		—			(3,060	)
Legal settlement		4,997			—			—			—			—
Total operating expenses		118,928			250,596			62,224			57,641			121,284
Operating loss		(77,364	)		(243,987	)		(66,876	)		(70,794	)		(131,095	)
Other income/(expense), net
Loss on conversion and early extinguishment of debt		(18,842	)		—			—			—			—
Other income/(expense), net		298			1,382			126			185			32
Interest income		264			1,107			1,871			5,334			9,484
Interest expense		(4,279	)		(5,439	)		(1,651	)		(4,579	)		(3,162	)
Gain/(Loss) on foreign exchange		677			(1,020	)		(1,050	)		1,814			(4,445	)
Total other income/(expense), net		(21,882	)		(3,970	)		(704	)		2,754			1,909
Loss before income taxes		(99,246	)		(247,957	)		(67,580	)		(68,040	)		(129,186	)
Income tax (provision)/benefit		11,749			(15	)		209			—			3,439
Net loss	$	(87,497	)	$	(247,972	)	$	(67,371	)	$	(68,040	)	$	(125,747	)
Net loss per share (basic and diluted)	$	(1.87	)	$	(7.43	)	$	(2.48	)	$	(3.32	)	$	(6.03	)
Weighted average shares of common stock outstanding		46,678,696			33,379,453			27,198,838			20,495,259			20,844,793

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

F-5

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

							Six Months
	Year Ended			Year Ended			Ended			Year Ended
	July 1,			July 2,			July 3,			December 31,
	2006			2005			2004			2003
	(In thousands)
Cash flows used in operating activities:
Net loss	$	(87,497	)	$	(247,972	)	$	(67,371	)	$	(125,747	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expenses		8,863			750			122			—
Depreciation and amortization		30,231			32,208			13,455			21,312
Impairment/(Recovery) of long-lived assets		(832	)		—			—			—
Impairment of goodwill and other intangible assets		760			114,226			—			—
One time tax gain		(11,785	)		—			—			—
Acquired in-process research and development		118			—			5,890			245
Tax credit recognized for research and development activities		—			—			—			(3,719	)
Write off of investments		—			—			44			—
Legal settlement		4,997			—			—			—
Unrealized gain on marketable securities		—			(4	)		—			—
Amortization of interest expense for warrants and beneficial conversion feature		1,292			673			—			—
Unrealized (gain)/loss on foreign currency contracts		(573	)		1,687			—			—
Loss on conversion and early extinguishment of debt		18,842			—			—			—
Foreign currency re-measurement of notes payable		—			638			—			—
Gain on sale of property and equipment		(2,070	)		(650	)		(5,254	)		(3,060	)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		(5,834	)		622			2,406			4,087
Inventories		383			(5,813	)		2,790			19,674
Prepaid expenses and other current assets		9,546			6,256			752			(2,208	)
Accounts payable		(6,487	)		2,416			6,199			(274	)
Accrued expenses and other liabilities		(15,863	)		(3,813	)		(8,135	)		(2,517	)
Deferred rent		278			—			—			—
Unrealized foreign exchange adjustments		—			—			(1,071	)		(5,768	)
Net cash used in operating activities		(55,631	)		(98,776	)		(50,173	)		(97,975	)
Cash flows provided by/(used in) investing activities:
Purchase of intangible assets		—			—			(98	)		—
Purchase of property and equipment		(10,113	)		(16,008	)		(6,648	)		(19,186	)
Proceeds from sale of property and equipment		2,396			1,429			5,254			7,105
Acquisitions, net of cash acquired		9,575			—			88,598			65
Proceeds from long-term investments		—			—			(751	)		—
Proceeds from sale-leaseback of Caswell facility		23,444			—			—			—
Proceeds from sale of land held for resale		14,734			—			—			—
Proceeds from notes receivable		—			—			1,233			—
Settlement of Westrick note		—			1,200			—			—
Proceeds from disposal of subsidiaries, net of costs		—			5,736			—			—
Proceeds from sales and maturities of available for sale investments		—			6,978			—			—
Transfers to restricted cash, net		2,656			(1,671	)		(197	)		—
Net cash provided by/(used in) investing activities		42,692			(2,336	)		87,391			(12,016	)
Cash flows provided by financing activities:
Proceeds from issuance of common stock		49,548			3			2,152			1,369
Repayment of capital lease obligations		—			(5,132	)		(417	)		(227	)
Proceeds from issuance of convertible debentures and warrants to purchase common stock, net of issuance costs		—			24,230			—			—
Cash paid in connection with conversion of convertible debentures		(3,282	)		—			—			—
Cash paid in connection with early extinguishment of debt		(21,000	)		—			—			—
Repayment of loans		(49	)		(4,175	)		(57	)		(49	)
Net cash provided by financing activities		25,217			14,926			1,678			1,093
Effect of exchange rate on cash		538			1,438			1,446			8,515
Net increase/(decrease) in cash and cash equivalents		12,816			(84,748	)		40,342			(100,383	)
Cash and cash equivalents at beginning of period		24,934			109,682			69,340			169,723
Cash and cash equivalents at end of period	$	37,750		$	24,934		$	109,682		$	69,340
Supplemental cash flow disclosures
Income taxes paid	$	22		$	56		$	11		$	280
Cash paid for interest	$	7,481		$	4,196		$	1,658		$	3,131
Supplemental disclosure of non-cash transactions
Warrants issued in connection with debt and extinguishment of debt	$	4,385		$	5,354		$	229		$	21

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

F-6

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

												Accumulated
					Additional		Notes					Other
	Common Stock				Paid-In		Receivable		Deferred			Comprehensive		Accumulated			Comprehensive
	Shares		Amount		Capital		Stock-holders		Compensation			Income/(Loss)		Deficit			Income/(Loss)			Total
	(In thousands, except share amounts)
Balance at December 31, 2002		20,495,087	$	205	$	662,670	$	—	$	(28	)	$	11,699	$	(425,938	)				$	248,608
Conversion of shares in respect of Measurement Microsystems A-Z, Inc.		873		—		—		—		—			—		—			—			—
Issuance of shares on the acquisition of the Cierra Photonics business		307,148		3		3,666		—		—			—		—			—			3,669
Issuance of shares on the acquisition of Ignis Optics, Inc.		802,082		8		17,740		—		—			—		—			—			17,748
Issuance of shares upon exercise of common stock options		63,429		1		1,134		—		—			—		—			—			1,135
Exercise of common stock warrants		12,282		—		234		—		—			—		—			—			234
Comprehensive loss:
Unrealized gain on currency transactions		—		—		—		—		—			274		—			274			274
Currency translation adjustment		—		—		—		—		—			18,474		—			18,474			18,474
Net loss for the year		—		—		—		—		—			—		(125,747	)		(125,747	)		(125,747	)
Total comprehensive loss		—		—		—		—		—			—		—		$	(106,999	)
Balance at December 31, 2003		21,680,901	$	217	$	685,444	$	—	$	(28	)	$	30,447	$	(551,685	)				$	164,395

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

F-7

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

														Accumulated
					Additional			Notes						Other
	Common Stock				Paid-In			Receivable			Deferred			Comprehensive			Accumulated			Comprehensive
	Shares		Amount		Capital			Stock-holders			Compensation			Income/(Loss)			Deficit			Income/(Loss)			Total
	(In thousands, except share amounts)
Balance at December 31, 2003		21,680,901	$	217	$	685,444		$	—		$	(28	)	$	30,447		$	(551,685	)	$			$	164,395
Conversion of shares in respect of Measurement Microsystems A-Z, Inc.		1,081		—		—			—			—			—			—			—			—
Issuance of shares on the acquisition of New Focus, Inc.		7,866,600		78		197,632			—			—			—			—			—			197,710
Issuance of shares on the acquisition of Onetta, Inc.		2,764,030		28		24,680			—			—			—			—			—			24,708
Issuance of shares upon exercise of common stock options		299,943		3		2,149			—			—			—			—			—			2,152
Issuance of fully vested stock on the acquisition of New Focus, Inc.		—		—		6,286			—			—			—			—			—			6,286
Assumption of stockholder’s notes receivable from acquisition of New Focus, Inc.		—		—		—			(1,233	)		—			—			—			—			(1,233	)
Assumption of unvested stock options on the acquisition of New Focus, Inc.		—		—		1,464			—			(1,464	)		—			—			—			—
Payments received on stockholder’s notes receivable		—		—		—			1,233			—			—			—			—			1,233
Amortization of deferred stock compensation, net of cancellations		—		—		(16	)		—			138			—			—			—			122
Comprehensive loss:
Unrealized loss on marketable securities		—		—		—			—			—			(16	)		—			(16	)		(16	)
Unrealized loss on currency contract transactions		—		—		—			—			—			(122	)		—			(122	)		(122	)
Currency translation adjustment		—		—		—			—			—			2,726			—			2,726			2,726
Net loss for the period		—		—		—			—			—			—			(67,371	)		(67,371	)		(67,371	)
Total comprehensive loss		—		—		—			—			—			—			—		$	(64,783	)
Balance at July 3, 2004		32,612,555	$	326	$	917,639		$	—		$	(1,354	)	$	33,035		$	(619,056	)				$	330,590

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

F-8

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

													Accumulated
					Additional			Notes					Other
	Common Stock				Paid-In			Receivable		Deferred			Comprehensive			Accumulated			Comprehensive
	Shares		Amount		Capital			Stock-holders		Compensation			Income/(Loss)			Deficit			Income/(Loss)			Total
	(In thousands, except share amounts)
Balance at July 3, 2004		32,612,555	$	326	$	917,639		$	—	$	(1,354	)	$	33,035		$	(619,056	)				$	330,590
Exercise of common stock warrants by Nortel Networks		900,000		9		46			—		—			—			—		$	—			55
Issuance of restricted stock		249,859		3		779			—		(478	)		—			—			—			304
Issuance of shares upon exercise of common stock options		811		—		4			—		—			—			—			—			4
Issuance of shares to CP Santa Rosa Enterprises Corp.		38,810		—		—			—		—			—			—			—			—
Conversion of shares in respect of Measurement Microsystems A-Z Inc.		3,402		—		250			—		—			—			—			—			250
Beneficial conversion feature associated with convertible redeemable notes		—		—		1,969			—		—			—			—			—			1,969
Issuance of warrants in connection with convertible redeemable notes		—		—		5,354			—		—			—			—			—			5,354
Amortization of deferred stock compensation, net of cancellations		—		—		(364	)		—		1,024			—			—			—			660
Comprehensive loss:
Currency translation adjustment		—		—		—			—		—			7			—			7			7
Unrealized loss on financial instruments		—		—		—			—		—			(153	)		—			(153	)		(153	)
Net loss for the period		—		—		—			—		—			—			(247,972	)		(247,972	)		(247,972	)
Total comprehensive loss		—		—		—			—		—			—			—		$	(248,118	)
Balance at July 2,
2005		33,805,437	$	338	$	925,677		$	—	$	(808	)	$	32,889		$	(867,028	)				$	91,068

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

F-9

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

										Accumulated
					Additional					Other								Total
	Common Stock				Paid-In		Deferred			Comprehensive		Accumulated			Comprehensive			Shareholders
	Shares		Amount		Capital		Compensation			Income		Deficit			Income			Equity
Balance at July 2, 2005		33,805,437	$	338	$	925,677	$	(808	)	$	32,889	$	(867,028	)				$	91,068
Issuance of shares upon the exercise of common stock options		58,627		—		303		—			—		—			—			303
Issuance of restricted stock		1,050,000		11		—		—			—		—			—			11
Issuance of shares to CP Santa Rosa Enterprises Corp.		5,100		—		24		—			—		—			—			24
Common stock issued in connection with the settlement of Yue lawsuit		537,635		5		4,995		—			—		—			—			5,000
Common stock issued in public offering		11,250,000		113		49,121		—			—		—			—			49,234
Common stock issued upon conversion of convertible debt		5,386,365		54		25,156		—			—		—			—			25,210
Common stock issued in connection with debt equity exchange		5,120,793		51		33,802		—			—		—			—			33,853
Stock-based compensation expense		—		—		8,056		808			—		—			—			8,864
Common stock issued in connection with Avalon acquisition		764,951		8		6,492		—			—		—			—			6,500
Comprehensive loss:
Unrealized gain on hedging transactions		—		—		—		—			573		—			573			573
Currency translation adjustment		—		—		—		—			1,998		—			1,998			1,998
Net loss for the period		—		—		—		—			—		(87,497	)		(87,497	)		(87,497	)
Total comprehensive loss		—		—		—		—			—		—			(84,926	)
Balance at July 1, 2006		57,978,908	$	580	$	1,053,626	$	0		$	35,460	$	(954,525	)				$	135,141

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

F-10

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Summary of Significant Accounting Policies

Description of Business

Bookham Technology plc was incorporated under the laws of England and Wales on September 22, 1988. On September 10, 2004, pursuant to a scheme of arrangement under the laws of the United Kingdom, Bookham Technology plc became a wholly-owned subsidiary of Bookham, Inc., a Delaware corporation (“Bookham, Inc.”). Bookham, Inc. principally designs, manufactures and markets optical components, modules and subsystems for the telecommunications industry. Bookham, Inc. also manufactures high-speed electronic components for the telecommunications, defense and aerospace industries. References to the “Company” mean Bookham, Inc. and its subsidiaries consolidated business activities since September 10, 2004 and Bookham Technology plc’s consolidated business activities prior to September 10, 2004.

Basis of Presentation

The Company assumed Bookham Technology plc’s financial reporting history effective September 10, 2004. As a result, management deems Bookham Technology plc’s consolidated business activities prior to September 10, 2004 to represent the Company’s consolidated business activities as if the Company and Bookham Technology plc historically had been the same entity. The consolidated financial statements include Bookham, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. The Company has included the results of operations of its acquired entities from the date of acquisition.

Prior to July 3, 2004, Bookham Technology plc’s fiscal year ended on December 31. Effective June 30, 2004, Bookham Technology plc changed its fiscal year end from December 31 to the Saturday closest to June 30, which matches the fiscal year end of the Company. Accordingly, financial statements will be prepared for fifty-two/fifty-three week cycles going forward.

In connection with the scheme of arrangement, the Company changed its domicile from the United Kingdom to the United States. In addition, effective September 10, 2004, the Company changed its reporting currency from pounds sterling to the United States dollar. During the year ended July 3, 2004, the Company purchased four companies with primary operations in the United States. As a result of these acquisitions, the Company increased both its revenues from U.S. customers, as well as its operations and expenses denominated in U.S. dollars. Because of the continuing shift toward business denominated in U.S. dollars, the Company also changed its headquarters to San Jose, California in September 2004.

On August 2, 2006, the Company, as parent, with Bookham Technology plc, New Focus, Inc. and Bookham (US) Inc., each a wholly-owned subsidiary of the Company, (collectively, the “Borrowers”), entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc. and other lenders regarding a three-year $25,000,000 senior secured revolving credit facility. Advances are available under the Credit Agreement based on a percentage of accounts receivable at the time the advance is requested. See Note 19 — Subsequent Events, for additional information regarding this credit agreement.

On August 31, 2006, the Company entered into definitive agreement for a private placement pursuant to which it issued, on September 1, 2006, 8,696,000 shares of common stock, and warrants to purchase up to 2,174,000 shares of common stock, with certain institutional accredited investors for gross proceeds of approximately $23.5 million. The warrants are exercisable beginning on March 2, 2007 during the next five years at an exercise price of $4.00 per share. Up to an additional 2,898,667 shares of common stock and warrants to purchase 724,667 shares of common stock may be issued and sold to additional institutional accredited investors at a subsequent closing pursuant to a right of participation under an exchange agreement between the Company and those additional accredited institutional investors. See Note 19 — Subsequent Events, for additional information regarding this private placement.

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Given the Company’s recurring operating losses through July 1, 2006, if the Company fails to meet management’s current cash flow forecasts, or is unable to draw sufficient amounts under the three year $25 million senior secured revolving credit agreement with Wells Fargo Foothill, Inc. and other lenders, which was entered into in August 2006, for any reason, it will need to raise additional funding of at least $10 million to $20 million through external sources prior to July 2007 in order to maintain sufficient financial resources in order to operate as a going concern through the end of fiscal 2007. If necessary it will attempt to raise additional funds by any one or combination of the following: (i) completing the sale of certain assets; (ii) issuing equity, debt or convertible debt; (iii) selling certain non core businesses. There can be no assurance of the Company’s ability to raise sufficient capital through the above, or any other efforts.

In the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005, the Company disclosed that based upon management’s September 2005 cash flow forecasts, the Company needed to raise additional funding through external sources prior to December 2005 in order to maintain sufficient financial resources to continue to operate its business. In addition, depending on the amount of additional funding secured prior to December 2005, the Company may also have needed to raise further funding before June 2006 in order to maintain a cash balance of at least $25 million as required by the terms of the notes payable to Nortel Networks U.K. Limited.

More specifically, the Company believed it needed to raise between $20 million and $30 million by December 31, 2005 in order to maintain its planned level of operations, and between $50 million and $60 million on a cumulative basis by August 2006 in order to comply with certain minimum cash requirements contained in the promissory notes issued by Nortel Networks.

Between the date the Company filed its Annual Report on Form 10-K for the year ended July 2, 2005 and July 1, 2006, the Company has raised a total of $101 million (net of estimated fees, and including $3.7 million in proceeds payable and received in July 2006) from the sale of common stock in an October 2005 public offering described in Note 10 — Stockholders’ Equity, the sale of land in the U.K., the acquisition of Creekside described in Note 13 — Acquisition of Creekside, and the sale-leaseback of its Caswell manufacturing facility described in Note 6 — Commitments and Contingencies.

Foreign Currency Transactions and Translation Gains and Losses

The assets and liabilities of foreign operations are translated from their respective functional currencies into U.S. dollars at the rates in effect at the consolidated balance sheet date, and revenue and expense amounts are translated at the average rate during the applicable periods reflected on the consolidated statements of operations. Foreign currency translation adjustments are recorded as other comprehensive income, except for the translation adjustment of short-term intercompany loans which are recorded as other income or expense. Gains and losses from foreign currency transactions, realized and unrealized in the event of foreign currency transactions not designated as hedges, and those transactions denominated in currencies other than the Company’s functional currency, are recorded in the consolidated statements of operations. See Note 1 — Derivative Financial Instruments.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but are not limited to, the allowances for doubtful accounts; accruals for product returns; inventory write-offs and warranty accruals; the useful lives of fixed assets; impairment charges on long-lived assets, goodwill and other intangible assets; losses on facility leases and other charges; and accrued liabilities and other reserves. Actual results could differ from these estimates and such differences may be material to the financial statements.

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reclassifications

Certain reclassifications have been made to the balances as of and for the periods end July 2, 2005 to conform to the July 1, 2006 presentation. These reclassifications were not material and had no impact on the Company’s loss from operations or net loss.

Cash and Cash Equivalents

Cash and cash equivalents are recorded at market value. The Company considers all liquid investment securities with an original maturity date of three months or less to be cash equivalents. Any realized gains and losses on liquid investment securities are included in other income/(expense), net in the consolidated statements of operations.

Restricted Cash

The Company has provided irrevocable letters of credit totaling $4.1 million as collateral for the performance of its obligations under certain facility lease agreements. The letters of credit expire at various dates through fiscal 2008, and they are reflected in long-term restricted cash as of July 1, 2006. The Company also has $1.4 million of other letters of credit and bank accounts otherwise restricted, which are reflected as restricted cash within current assets.

Inventories

Inventories are stated at the lower of cost (determined using the first in, first out method) or market value (determined using the estimated net realizable value). The Company plans production based on orders received and forecasted demand and maintains a stock of certain items. The Company must order components and build inventories in advance of product shipments. These production estimates are dependent on the Company’s assessment of current and expected orders from its customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment.

Property and Equipment

The Company records its property and equipment at cost less accumulated depreciation. Depreciation is recorded when assets are placed into service and is computed using the straight-line method over the estimated useful lives of the assets as follows:

Buildings	Twenty years
Plant and machinery	Three to five years
Fixtures, fittings and equipment	Three to five years
Computer equipment	Three years

Assets Held For Resale

Assets are classified as held for resale when the Company has a plan for disposal of certain assets and those assets meet the held for sale criteria of Statement of Financial Accounting Standards (“SFAS”) No. 144 (“SFAS 144”), “Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. At July 2, 2005, the Company had classified land which was being actively marketed for sale as held for resale. The Company evaluated the fair value of the land based on per acre sales data for recent property transactions in the region. On September 11, 2005, the Company sold the parcel of land for net proceeds of $14.7 million, resulting in a recovery of $1.3 million of previously impaired carrying value, net of related costs.

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets

The Company reviews property and equipment and certain identifiable intangibles, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable on an annual basis. Recoverability of these assets is measured by comparison of its carrying amounts to market prices or future discounted cash flows the assets are expected to generate. If property and equipment and certain identifiable intangibles are considered to be impaired, the impairment to be recognized would equal the amount by which the carrying value of the asset exceeds its fair market value based on market prices or future discounted cash flows.

The Company has adopted SFAS No. 142 (SFAS 142), “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired.

SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable in accordance with SFAS 144. The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 3 to 6 years, and 16 years as to one specific customer contract.

In the year ended July 1, 2006, the Company’s annual review of goodwill and intangible assets led to the recording of an impairment charge of $760,000, all of which related to intangibles in the optics segment. A concurrent review of other long-lived assets led to an additional impairment charge of $433,000.

In the year ended July 2, 2005, the Company recorded impairment charges of $114,226,000, of which $113,592,000 related to goodwill and $634,000 related to intangibles. Of these charges, $83,326,000 related to the research and industrial segment, and $30,900,000 related to the optics segment. See Note 15 — Goodwill and Other Intangible Assets, for additional information regarding these impairment charges.

Derivative Financial Instruments

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

For derivative instruments that are designated and qualify as a cash flow hedge, the purpose of which is to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income/(loss) on the consolidated statements of operations and reclassified into operating results in the same period or periods during which the hedged transaction affects operating results. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current operating results on the consolidated statements of operations during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized as other income/(expense) during the period of change. The amounts recognized due to the anticipated transactions failing to occur or ineffective hedges were not material for all periods presented.

The Company is exposed to fluctuations in foreign currency exchange rates. As the business has grown and become multinational in scope, the Company has become subject to fluctuations based upon changes in the exchange rates between the currencies in which the Company collects revenue and pays expenses. The Company engages in currency hedging transactions in an effort to minimize the effects of fluctuations in exchange rates and

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Company may be required to convert currencies to meet its obligations. In the majority of these contracts the Company agrees under certain circumstances to sell U.S. dollars in exchange for U.K. pound sterling.

At the end of each accounting period, the Company marks-to-market all foreign currency forward exchange contracts that have been designated as cash flow hedges and changes in fair value are recorded in comprehensive income until the underlying cash flow is settled and the contract is recognized in operating results. As of July 1, 2006, there were nine outstanding foreign currency forward exchange contracts amounting to an aggregate nominal value of approximately $19.5 million of put and call options expiring from August 2006 to June 2007. 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 July 1, 2006 will generally be reclassified into earnings within the next 12 months. For the year ended July 1, 2006, the Company recorded an unrealized gain of $573,000 to other comprehensive income relating to the fair value of the nine foreign currency forward exchange contracts designated as hedges for accounting purposes. For the year ended July 2, 2005, the Company recorded an unrealized loss of $1.7 million to other expenses, relating to two contracts not designated as hedges for accounting purposes that were outstanding as of July 2, 2005.

Advertising Expenses

The cost of advertising is expensed as incurred. The Company’s advertising costs for the year ended July 1, 2006, the year ended July 2, 2005, the six months ended July 3, 2004 and the fiscal year ended December 31, 2003 were $302,000, $473,000, $138,000 and $0, respectively.

Revenue Recognition

Revenue represents the amounts (excluding sales taxes) derived from the provision of goods and services to third-party customers during the period. The Company’s revenue recognition policy follows Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements”. Specifically, the Company recognizes product revenue when persuasive evidence of an arrangement exists, the product has been shipped, title has transferred, collectibility is reasonably assured, fees are fixed or determinable and there are no uncertainties with respect to customer acceptance. For shipments to new customers and evaluation units, including initial shipments of new products, where the customer has the right of return through the end of the evaluation period, the Company recognizes revenue on these shipments at the end of an evaluation period, if not returned, and when collection is reasonably assured. The Company records a provision for estimated sales returns in the same period as the related revenues are recorded which is netted against revenue. These estimates are based on historical sales returns, other known factors and the Company’s return policy.

The Company recognizes royalty revenue when it is earned and collectibility is reasonably assured.

The Company applies the same revenue recognition policy to both of its operating segments.

Shipping and handling costs are included in costs of net revenues.

Research and Development

Company-sponsored research and development costs are expensed as incurred.

Income Taxes

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

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation

At July 1, 2006, the Company had five active stock-based employee compensation plans, which are described more fully in Note 10 — Stockholders’ Equity. Prior to July 3, 2005, the Company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opinion (“APB”) No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, and related Interpretations, as permitted by FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”. Effective July 3, 2005, the Company adopted the fair value recognition provisions of FASB Statement No. 123R (“SFAS 123R”), “Share-Based Payment”, using the modified prospective transition method and accordingly, the Company has not restated the consolidated results of operations from prior fiscal years. Under that transition method, Stock-based compensation cost recognized during the year ended July 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of July 3, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to July 3, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Stock options generally vest over a four to five year service period, and restricted stock awards generally vest over a one to four year period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by the Board of Directors.

As a result of adopting SFAS 123R on July 3, 2005, the Company’s income before income taxes and net income for the year ended July 1, 2006 are $8.2 million lower than if it had continued to account for share-based compensation under APB 25. Basic and diluted loss per share for the year ended July 1, 2006 were $0.17 per share higher than they would have been had the Company not adopted SFAS 123R. The Company had no capitalized stock-based compensation costs at July 2, 2005. The Company has capitalized into inventory $650,000 of stock-based compensation costs at July 1, 2006. Deferred stock-based compensation of $808,000 as of July 2, 2005, which was accounted for under APB 25 has been, reclassified into additional paid-in-capital.

Prior to July 3, 2005 and under the intrinsic value method, in accordance with APB 25, and as permitted by SFAS 123, the Company had only recorded stock-based employee compensation resulting from stock options granted at below fair market value. Stock-based compensation expense reflected in the as reported net loss includes expenses for compensation expense related to the amortization of certain acquisition related deferred compensation expense. No tax benefits were attributed to the stock-based employee compensation expense and restricted stock awards with exercise prices set below market prices on the date of grant, during the periods presented because valuation allowances were maintained on substantially all of the Company’s net deferred tax assets.

F-16

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table illustrates the pro forma effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to share-based awards granted under the Company’s equity plans in all periods presented. For purposes of this pro forma disclosure, the value of the share-based awards was estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the applicable vesting periods and forfeitures were accounted for upon occurrence:

				Six Months
	Year Ended			Ended			Year Ended
	July 2,			July 3,			December 31,
	2005			2004			2003
	(In thousands except per share data)
Net loss — as reported	$	(247,972	)	$	(67,371	)	$	(125,747	)
Add: Stock-based employee compensation expense, included in the determination of net loss as reported		750			122			—
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards		(6,826	)		(6,751	)		(3,710	)
Pro forma net loss	$	(254,048	)	$	(74,000	)	$	(129,457	)
Loss per share:
Basic and diluted — as reported	$	(7.43	)	$	(2.48	)	$	(6.03	)
Basic and diluted — pro forma	$	(7.61	)	$	(2.72	)	$	(6.21	)

In the course of adopting SFAS 123R, the Company evaluated the Black-Scholes-Merton pricing model inputs previously applied to valuing its stock options and determined that certain volatility assumptions and amortization methods had been inappropriately applied to certain of its stock option grants in determining pro forma employee stock-based compensation expense for the pro forma disclosures previously required under the SFAS 123, as amended by SFAS 148, disclosure only alternative. The Company has determined that for the year ended July 2, 2005, pro forma stock-based compensation expense previously reported as $9.1 million should have been $6.8 million, that pro forma net loss previously reported as $256.3 million should have been $254.0 million, and that pro forma net loss per share (basic and diluted) previously reported as $7.68 should have been $7.61. The previously reported pro forma data was for footnote disclosure purposes only, and had no impact on the Company’s previously reported results of operations, financial position or cash flows.

The weighted average fair value of stock options granted at fair market value during the years ended July 1, 2006 and July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003 was $4.97, $6.15, $11.38, and $20.80, respectively. The weighted-average fair value for stock options granted was calculated using the Black-Scholes-Merton option-pricing model based on the following assumptions:

							Six Months
	Year Ended			Year Ended			Ended			Year Ended
	July 1,			July 2,			July 3,			December 31,
	2006			2005			2004			2003
Volatility		87	%		89	%		194	%		147	%
Weighted-average estimated life		4.0 years			4.0 years			4.1 years			3.8 years
Weighted-average risk-free interest rate		4.5	%		2.9	%		2.9	%		3.4	%
Dividend yield		—			—			—			—

Consistent with our valuation method for the disclosure-only provisions of SFAS 123, we are using the Black-Scholes-Merton option-pricing model to value the compensation expense associated with our stock-based awards under SFAS 123(R). In addition, we estimate forfeitures when recognizing compensation expense, and we will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

Comprehensive Income

For the years ended July 1, 2006, July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003, the Company’s comprehensive income is comprised of its net loss, unrealized gains/(losses) on foreign currency forward exchange contracts designated as hedges, foreign currency translation adjustments and unrealized gains/(losses) on short-term investments.

The components of accumulated other comprehensive income are as follows:

	July 1,		July 2,		July 3,			December 31,
	2006		2005		2004			2003
	(In thousands)
Unrealized gains on currency instruments	$	573	$	—	$	153		$	274
Currency translation adjustment		34,887		32,889		32,898			30,173
Unrealized loss on marketable securities		—		—		(16	)		—
Accumulated other comprehensive income	$	35,460	$	32,889	$	33,035		$	30,447

Scheme of Arrangement

On August 16, 2004, at an extraordinary general meeting, the Company’s shareholders approved the scheme of arrangement pursuant to which, effective September 10, 2004, Bookham Technology plc became a wholly owned subsidiary of Bookham, Inc. Pursuant to the scheme of arrangement, Bookham Technology plc ordinary shares were exchanged for shares of common stock of Bookham, Inc. on a ten for one basis. All references in the consolidated financial statements and notes thereto with respect to the number of shares, per share amounts and market prices have been restated to reflect the scheme of arrangement.

Recent Accounting Developments

In June 2005, FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error corrections” (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20 (“APB 20”) and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements” SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle whereas SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 enhances the consistency of financial information between periods. SFAS 154 is effective for fiscal years beginning after December 15, 2005, and is required to be adopted by the Company in the first quarter of the fiscal year ended June 30, 2007.

In November 2005, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. FSP Nos. FAS 115-1 and FAS 124-1 amend SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This guidance nullifies certain requirements of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. FSP Nos. FAS 115-1 and FAS 124-1 include guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. FSP Nos. FAS 115-1 and FAS 124-1 also require other-than-temporary impaired debt securities to be written down to its impaired value, which becomes the new cost basis. FSP Nos. FAS 115-1 and FAS 124-1 are effective for fiscal years beginning after December 15, 2005. The Company does not

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

believe that adoption of FSP Nos. FAS 115-1 and FAS 124-1 on July 2, 2006 will have a material impact on its financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS 133 and SFAS 140. SFAS 155 permits hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation to irrevocably be accounted for at fair value, with changes in fair value recognized in the statement of income. The fair value election may be applied on an instrument-by-instrument basis. SFAS 155 also eliminates a restriction on the passive derivative instruments that a qualifying special purpose entity may hold. SFAS 155 is effective for those financial instruments acquired or issued after December 1, 2006. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument will be recognized as a cumulative-effect adjustment to beginning retained earnings. The Company is currently evaluating the potential impact of adopting SFAS 155.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, Interpretation 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company will adopt FIN 48 in fiscal 2007 and is currently evaluating whether the adoption of FIN 48 will have a material effect on its consolidated financial position, results of operations or cash flows.

2.   Concentration of Revenues and Credit and Other Risks

The Company places its cash and cash equivalents with and in the custody of financial institutions with high credit standing and, by policy, limits the amounts invested with any one institution, type of security and issuer.

Nortel Networks accounted for 48% of our revenue in the year ended July 1, 2006, 45% in the year ended July 2, 2005, 46% in the six-month period ended July 3, 2004, and 59% in the year ended December 31, 2003, respectively. Marconi accounted for 13% of our revenue in the year ended December 31, 2003. Revenues from both customers were generated in the Company’s optics segment. For the years ended July 1, 2006 and July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003, no other customer accounted for more than 10% of the Company’s total revenues.

At July 1, 2006 and July 2, 2005, Nortel Networks accounted for 22% and 26% of the Company’s net accounts receivable balance, respectively. At July 1, 2006 and July 2, 2005, Cisco Systems accounted for 9% and 16% of the Company’s gross accounts receivable balance, respectively. At July 1, 2006 and July 2, 2005, Huawei accounted for 13% and 8% of the Company’s gross accounts receivable balance, respectively.

Trade receivables are recorded at the invoiced value. Allowances for uncollectible trade receivables are based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with specific problem accounts. The Company performs ongoing credit evaluations of its customers and does not typically require collateral or guarantees.

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.   Inventories

Inventories consist of the following:

	July 1,		July 2,
	2006		2005
	(In thousands)
Raw materials	$	17,006	$	11,236
Work-in-progress		20,823		26,862
Finished goods		16,031		15,094
	$	53,860	$	53,192

Inventory is valued at the lower of the cost to acquire or manufacture the product or market value. The manufacturing cost will include the cost of the components purchased to produce products, the related labor and overhead. On a monthly basis, inventory is reviewed to determine if it is believed to be saleable. Products may be unsaleable because they are technically obsolete, due to substitute products or specification changes or because the Company holds an excessive amount of inventory relative to customer forecasts. Inventory is currently valued using methods that take these factors into account. In addition, if it is determined that cost is greater than selling price then inventory is written down to the selling price less costs to complete and sell the product.

During the year ended July 1, 2006, the Company had revenues of $9.5 million related to, and recognized $3.5 million of profits on, inventory that had been carried on our books at zero value. In the year ended July 2, 2005, the Company recognized profits of $16.0 million on revenues of $19.5 million related to inventory that had been carried on the books at zero value. These inventories were originally acquired in connection with the purchase of the optical components business of Nortel Networks. While this inventory is carried on our books at zero value, and its sale generates higher margins than most of the new products, the Company incurs additional costs to complete the manufacturing of these products prior to sale. Revenues from this inventory is expected to be insignificant in the future.

4.   Property, Plant and Equipment

Property, plant and equipment consists of the following:

	July 1,			July 2,
	2006			2005
	(In thousands)
Land	$	5,996		$	7,371
Buildings		22,409			22,691
Plant and machinery		64,357			61,453
Fixtures, fittings and equipment		228			1,596
Computer equipment		12,181			12,479
		105,171			105,590
Less accumulated depreciation		(53,008	)		(41,434	)
	$	52,163		$	64,156

Depreciation expense was $20,227,000, $20,572,000, $7,755,000 and $9,222,000 for the year ended July 1, 2006, July 2, 2005, the six months ended July 3, 2004, and the year ended December 31, 2003, respectively.

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BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.   Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consist of the following:

	July 1,		July 2,
	2006		2005
	(In thousands)
Accounts payable accruals	$	4,497	$	6,387
Compensation and benefits related accruals		5,465		6,408
Other accruals		6,763		7,007
Warranty accrual		3,429		3,782
Current portion of restructuring accrual		12,933		14,945
	$	33,087	$	38,529

Other long-term liabilities consist of the following:

	July 1,		July 2,
	2006		2005
	(In thousands)
Long-term portion of restructuring accrual	$	3,196	$	9,888
Environmental liabilities		1,140		1,004
Other long-term liabilities		653		340
	$	4,989	$	11,232

Warranty accrual

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

F-21

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Movements in provisions for warranty are as follows:

	Provision for
	Warranties
	(In thousands)
At January 1, 2003	$	1,752
Change in liability for pre-existing warranties, including expiration		—
Fair value adjustment		1,968
Warranties issued		846
Arising on acquisition		65
Foreign exchange movements		430
Repairs and replacements		—
At December 31, 2003		5,061
Change in liability for pre-existing warranties, including expiration		(1,096	)
Arising on acquisition		569
Fair value adjustment		—
Foreign exchange movements		155
Repairs and replacements		(83	)
At July 3, 2004		4,606
Change in liability for pre-existing warranties, including expiration		(327	)
Warranties issued		838
Foreign exchange movements		(35	)
Repairs and replacements		(1,300	)
At July 2, 2005		3,782
Change in liability for pre-existing warranties, including expiration		(610	)
Warranties issued		259
Foreign exchange movements		53
Repairs and replacements		(55	)
At July 1, 2006	$	3,429

Environmental Liabilities

The Company has provided for potential environmental liabilities at sites where the Company could be required to remove asbestos from its facilities following a change in U.K. legislation. The Company has an undiscounted provision relating to potential costs of future remediation works of $1,140,000 at July 1, 2006. The provision is expected to be utilized in fiscal years 2007 and 2008.

6.   Commitments and Contingencies

Operating Leases

The Company leases certain of its facilities under non-cancelable operating lease agreements that expire at various dates from fiscal 2007 through 2026. Rent expense for these leases was $2,372,000, $8,856,000, $1,998,000, and $5,565,000 during the years ended July 1, 2006, July 2, 2005, the six months ended July 3, 2004 and the fiscal year ended December 31, 2003, respectively.

F-22

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Caswell Sale-Leaseback

On March 10, 2006, the Company’s Bookham Technology plc subsidiary entered into multiple agreements with a subsidiary of Scarborough Development (“Scarborough”) for the sale and leaseback of the land and facilities located at its Caswell, United Kingdom, manufacturing site. The sale transaction, which closed on March 30, 2006, resulted in immediate proceeds to Bookham Technology plc of £13.75 million (approximately U.S. $24 million). Under these agreements, Bookham Technology plc leases back the Caswell site for an initial term of 20 years, with options to renew the lease term for 5 years following the initial term and for rolling 2 year terms thereafter. Annual rent is £1.1 million during the first 5 years of the lease, £1.2 million during the next 5 years of the lease, £1.4 million during the next 5 years of the lease and £1.6 million during the next 5 years of the lease. Rent during the renewal terms will be determined according to the then market rent for the site. The obligations of Bookham Technology plc under these agreements are guaranteed by the Company. In addition, Scarborough, Bookham Technology plc and the Company entered into a pre-emption agreement with the buyer under which Bookham Technology plc, within the next 20 years, has a right to purchase of the Caswell site in whole or in part on terms acceptable to Scarborough if Scarborough agrees to terms with or receives an offer from a third party to purchase the Caswell facility. Under the provisions of SFAS 13, “Accounting for Leases”, the Company has deferred a related gain of $20.4 million, which will be amortized ratably against rent expense over the initial 20 year term of the lease. As of July 1, 2006, the unamortized balance of this deferred gain is $21.0 million. The Company is recognizing the rent expense related to payments over the term of the lease.

The Company’s future minimum lease payments under non-cancelable operating leases, including the sale-leaseback of the Caswell facility and $9.2 million related to unoccupied facilities as a result of the Company’s restructuring activities, are as follows (in thousands):

For fiscal year ending on or about June 30,
2007	$	11,394
2008		4,746
2009		3,240
2010		3,226
2011		2,989
Thereafter		9,216
Total	$	34,811

Guarantees

The Company adopted the provisions of FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34”, effective December 31, 2002. The Company has the following financial guarantees:

•  In connection with the sale by New Focus, Inc. of its passive component line to Finisar, Inc., New Focus agreed to indemnify Finisar for claims related to the intellectual property sold to Finisar. This

F-23

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

indemnification expires in May 2009 and has no maximum liability. In connection with the sale by New Focus of its tunable laser technology to Intel Corporation, New Focus has indemnified Intel against losses for certain intellectual property claims. This indemnification expires in May 2008 and has a maximum liability of $7.0 million. The Company does not expect to pay out any amounts in respect of these indemnifications, therefore no accrual has been made.

•  The Company indemnifies its directors and certain employees as permitted by law, and has entered into indemnification agreements with its directors. The Company has not recorded a liability associated with these indemnification arrangements as the Company historically has not incurred any costs associated with such indemnifications and does not expect to in the future. Costs associated with such indemnifications may be mitigated by insurance coverage that the Company maintains.

•  The Company also has indemnification clauses in various contracts that it enters into in the normal course of business, such as those issued by its bankers in favor of several of its suppliers or indemnification in favor of customers in respect of liabilities they may incur as a result of purchasing the Company’s products should such products infringe the intellectual property rights of a third party. The Company has not historically paid out any amounts related to these indemnifications and does not expect to in the future, therefore no accrual has been made for these indemnifications.

Litigation

Settlement of Yue Litigation

On April 3, 2006, the Company entered into a definitive settlement agreement, or the Settlement Agreement, with Mr. Howard Yue, or the Plaintiff, relating to the lawsuit the Plaintiff filed against New Focus, Inc., a subsidiary of the Company, and several of its officers and directors in Santa Clara County Superior Court. The lawsuit, which was originally filed on February 13, 2002, is captioned Howard Yue v. New Focus, Inc. et al, Case No. CV808031, or the Yue Litigation, and relates to events that occurred prior to the Company’s acquisition of New Focus, Inc.

The terms of the Settlement Agreement provided that the Company would issue to the Plaintiff a $7.5 million promissory note, or the Note, payable on or before April 10, 2006, of which $5.0 million could be satisfied by the Company, at its option, through the issuance of shares of common stock.

Pursuant to the Settlement Agreement, the Company issued the Note on April 3, 2006 and satisfied the terms of the Note in full by issuing to the Plaintiff 537,635 shares of common stock valued at $5.0 million on April 4, 2006 and paying $2.5 million in cash on April 5, 2006. The Plaintiff filed dismissal papers in this litigation on April 6, 2006.

The defense fees for this litigation have been paid by the insurers under the applicable New Focus directors and officers insurance policy. The Company and New Focus, Inc. have demanded that the relevant insurers fully fund this settlement within policy limits. At the time of the settlement, certain of the insurers had not confirmed to the Company their definitive coverage position on this matter. As the terms of this settlement had been reached prior to April 1, 2006, the Company recorded $7.2 million ($7.5 million, net of insurance recoveries expected as of that time) as an other operating expense in the Company’s results of operations for the three months and nine months ended April 1, 2006. During the quarter ended July 1, 2006, the Company received $2.2 million in insurance settlements. Net of these recoveries, the expense for the year ended July 1, 2006 related to this litigation settlement was $5.0 million. If and when additional insurers confirm their definitive coverage position, the Company will record the amounts of this coverage as recoveries against operating expenses in the corresponding future periods.

Other Litigation

On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and directors, or the Individual

F-24

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 April 19, 2002, plaintiffs filed an amended class action complaint, described below, naming as defendants the Individual Defendants and the Underwriter Defendants.

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 complaint, or the Amended Complaint. The Amended 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.

The Amended Complaint asserts claims under certain provisions of the securities laws of the United States. It alleges, 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 Complaint seeks unspecified damages (or in the alternative rescission for those class members who no longer hold shares of the Company’s common stock), costs, attorneys’ fees, experts’ fees, interest and other expenses. In October 2002, the individual defendants were dismissed, without prejudice, from the action. In July 2002, all defendants filed motions to dismiss the Amended Complaint. The motion was 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.

Plaintiffs and most of the issuer defendants and their insurers have entered into a stipulation of settlement for the claims against the issuer defendants, including the Company. Under the stipulation of settlement, the plaintiffs will 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 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 court issued an order preliminarily approving the settlement and setting a public hearing on its fairness which took place on April 24, 2006. The judge has yet to enter a decision on this hearing. The Company believes that both Bookham Technology plc and New Focus have meritorious defenses to the claims made in the Amended Complaint and therefore believes that such claims will not have a material effect on its financial position, results of operations or cash flows.

The Company does not believe that the results of these pending legal matters will have a material impact on its financial position, results of operations or cash flows, although it will incur legal fees in their defense.

7.   Restructuring

In May 2004, the Company announced a plan of restructuring, primarily related to the transfer of the Company’s assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in research and development and selling, general and administrative expenses. In September 2004, the Company announced the inclusion in the plan of the transfer of the Company’s main corporate functions, including consolidated accounting, financial reporting, tax and treasury, from Abingdon, U.K. to the Company’s U.S. headquarters in San Jose. In December 2004, the Company announced cost reduction measures designed to expand the savings under the plan to

F-25

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

within a range of $16 million to $20 million per quarter, primarily affecting the manufacturing, and also the research and development and selling, general and administrative lines in the Company’s statement of operations. In the third and fourth fiscal quarters of 2005, the Company recorded additional restructuring charges, primarily personnel and other costs needed to operate the Paignton assembly and test facility for approximately six months longer than originally intended, into the third quarter of fiscal 2006, in order to fulfill the level of product demand under the Second Addendum to the Supply Agreement with Nortel Networks. In the fourth fiscal quarter of 2005, the Company also incurred charges related to revising certain assumptions on its accrual for lease commitments. In November 2005, the Company announced an extension of this plan to include the transfer of its chip-on-carrier assembly from Paignton to Shenzhen. This extended the plan, which otherwise would have been substantially complete during the quarter ended July 1, 2006, into at least the quarter ended December 31, 2006, in regards to the additional personnel identified for termination in connection with the transfer of chip-on-carrier. As of July 1, 2006, the Company has spent $22.4 million on the plan overall, and in total anticipates spending approximately $24 million to $30 million (approximately 90% related to personnel and 10% related to lease commitments).

In addition, on May 4, 2006, the Company announced an extension of this cost reduction plan to include more extensive reductions in personnel and the transfer of additional functions, primarily manufacturing and supply chain related, from its Paignton U.K facility to its Shenzhen China facility. The Company expects the implementation of this plan extension to result in the recognition of approximately $6.0 million to $7.0 million in additional restructuring costs, of which $2.8 million was recorded in the quarter ended July 1, 2006, with the remainder expected to be paid over the next two fiscal quarters, the substantial portion being cash for personnel related charges. The Company expects the plan to reduce the Company’s costs by between $5.5 million and $6.5 million a quarter, with the cost savings expected to be realized in the March 2007 fiscal quarter.

Prior to May 2004, the Company engaged in other restructuring plans. In the year ended December 31, 2003, the Company recorded charges for a separate major restructuring program, the main element of which was the closure of a semiconductor fabrication facility in Ottawa, Canada and the transfer of related fabrication capabilities to Caswell, UK. In the six months ended July 3, 2004, the Company recorded restructuring credits related to the completion of the closure of its Ottawa, Canada facility at less cost than anticipated. The transfer was completed in August 2003. In connection with this transfer, certain products and research projects were discontinued. The Company achieved annualized cost savings in excess of $25 million related to this plan, primarily related to the manufacturing and research and development lines in the Company’s income statement. In the year ended December 31, 2003, the Company achieved additional annualized savings in excess of $20 million as a result of the final decommissioning of the ASOC product line; a decision made in connection with the year ended 2002, and for which charges were recorded in 2002. Substantially all cash expenditures related to the 2003 restructuring plan had been incurred prior to July 3, 2004.

Related to this restructuring plan, the Company also assumed $16.8 million of restructuring charges primarily related to facilities commitments previously entered into by companies acquired by the Company, the substantial portion of which represents lease commitments in the research and industrial segment. The related operating lease commitments outstanding as of July 1, 2006 are reflected in the disclosures in Note 6 — Commitments and Contingencies to these financial statements.

For all periods presented, separation payments 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.

F-26

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the activity related to the restructuring liability for the year ended July 1, 2006:

	Accrued											Accrued
	Restructuring			Amounts								Restructuring
	Costs at			Charged to					Amounts			Costs at
	July 2,			Restructuring					Paid or			July 1,
	2005			Accrual		Adjustments			Written Off			2006
	(In thousands)
Lease cancellations and commitments	$	18,533		$	1,997	$	(62	)	$	(9,030	)	$	11,438
Termination payments to employees and related costs		6,300			9,157		(60	)		(10,706	)		4,691
Write-off on disposal of assets and related costs		—			43		—			(43	)		—
Total restructuring accrual and other		24,833		$	11,197	$	(122	)	$	(19,779	)		16,129
Less non-current accrued restructuring charges		(9,888	)										(3,196	)
Accrued restructuring charges included within other accrued liabilities	$	14,945										$	12,933

The amount charged to restructuring in the statement of operations for the year ended July 1, 2006 is $11,197,000. Charges for termination payments are primarily in connection with the transfer of assembly and test and related operations from Paignton to Shenzhen. Charges for lease cancellations and commitments are primarily related to changing assumptions as to sub-lease assumptions regarding previously exited buildings. Adjustments primarily relate to accruals previously recorded for anticipated costs of selling the Company’s Swindon U.K. land, reclassified to be applied to the gain on the sale which transpired during the year ended July 1, 2006, and which is reflected as a recovery of previous asset impairment.

F-27

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the activity related to the restructuring liability for the year ended July 2, 2005:

	Accrued											Accrued
	Restructuring			Amounts								Restructuring
	Costs at			Charged to					Amounts			Costs at
	July 3,			Restructuring					Paid or			July 2,
	2004			Accrual		Adjustments			Written Off			2005
	(In thousands)
Lease cancellations and commitments	$	19,579		$	7,462	$	(1,008	)	$	(7,500	)	$	18,533
Termination payments to employees and related costs		1,127			16,256		(535	)		(10,548	)		6,300
Write-off on disposal of assets and related costs		—			449		—			(449	)		—
Total restructuring accrual and other		20,706		$	24,167	$	(1,543	)	$	(18,497	)		24,833
Less non-current accrued restructuring charges		(12,221	)										(9,888	)
Accrued restructuring charges included within other accrued liabilities	$	8,485										$	14,945

The ending restructuring accrual as of July 2, 2005, and the amounts in restructuring costs for the year ended July 2, 2005, include $1,738,000 related to a revision of accruals for building leases commitments assumed on acquisition, resulting in a purchase price adjustment directly to goodwill. Excluding this amount, the net restructuring charge to the statement of operations for the year ended July 2, 2005 was $20,888,000 (charges of $24,167,000 less the purchase price adjustment of $1,738,000 less the adjustments of $1,543,000). The adjustments principally relate to the closure of the Milton, U.K. site at costs less than initially anticipated. Amounts paid or written off in the year ended July 2, 2005 includes $5,330,000 paid on lease accruals assumed on acquisition and $449,000 of assets written off, with the remainder of $12,718,000 being the cash paid under one of the Company’s restructuring plans.

F-28

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the activity related to the restructuring liability for the six month period ended July 3, 2004:

	Accrued												Accrued
	Restructuring				Amounts								Restructuring
	Costs at		Amounts		Charged to								Costs at
	January 1,		Assumed on		Restructuring					Amounts			July 3,
	2004		Acquisition		Accrual		Adjustments			Paid			2004
	(In thousands)
Lease cancellations and commitments	$	5,030	$	16,815	$	—	$	(1,953	)	$	(313	)	$	19,579
Termination payments to employees and related costs		3,222		24		1,411		(122	)		(3,408	)		1,127
Total restructuring accrual and other		8,252	$	16,839	$	1,411	$	(2,075	)	$	(3,721	)		20,706
Less non-current accrued restructuring charges		—												(12,221	)
Accrued restructuring charges included within other accrued liabilities	$	8,252											$	8,485

The amount charged to restructuring in the statement of operations for the six month period ended July 3, 2004 is a credit of $664,000, which represent charges of $1,411,000 less adjustments of $2,075,000.

The following table summaries the activity related to the restructuring liability for the year ended December 31, 2003:

	Accrued								Accrued
	Restructuring			Amounts					Restructuring
	Costs at			Charged to		Amounts			Costs at
	January 1,			Restructuring		Paid or			December 31,
	2003			Accrual		Written Off			2003
	(In thousands)
Lease cancellations and commitments	$	2,898		$	6,703	$	(4,571	)	$	5,030
Termination payments to employees and related costs		1,127			20,888		(18,793	)		3,222
Write-off on disposal of assets and related costs		4,830			3,801		(8,631	)		—
Total restructuring accrual and other		8,855		$	31,392	$	(31,995	)		8,252
Less non-current accrued restructuring charges		(8,855	)							—
Accrued restructuring charges included within other accrued liabilities	$	—							$	8,252

Lease cancellations and commitments

In the year ended July 1, 2006, the Company charged $1,997,000 of additional restructuring costs relating to facilities, primarily in regards to revised assumptions as to sublease expectations regarding closed facilities in the

F-29

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

United States. In the year ended July 2, 2005, additional restructuring accruals of $7,462,000 also related to revised assumptions regarding subleasing facilities. Of this total, $1,738,000 of this related to a New Focus facility and was accounted for as a purchase price adjustment to goodwill recorded at the time of the acquisition, rather than as additional restructuring expense. In the six months ended July 3, 2004, the Company assumed $16,815,000 of lease commitments upon its acquisition of New Focus related to facilities it was not going to use. In the same period the Company also reversed approximately $1,953,000 of amounts previously accrued for its Ottawa site, based on the closure costs coming through at less than originally accounted for. In the year ended December 31, 2003, the Company accrued for closure costs of $6,703,000 related to facilities in Canada, the United States and the United Kingdom.

Termination payments to employees and related costs

The Company incurred restructuring charges for separation pay of approximately $9,157,000, $15,721,000, $1,289,000, and $20,888,000 for the years ended July 1, 2006 and July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003, respectively. The separation payments were accrued and charged to restructuring expense in the period that both the benefit amounts were determined and such amounts were communicated to the affected employees. The employee reductions occurred in substantially all areas of the Company’s operations. Each of the employees to be terminated had been notified prior to the recording of the related charges. As of July 1, 2006, the majority of personnel related restructuring activity is related to completing the transfer of the Company’s assembly and test operations from Paignton to Shenzhen, including extensions of the related plan to include the transfer of its chip-on-carrier assembly and substantially all manufacturing and supply chain management activities from Paignton to Shenzhen. This extends such plan, which otherwise would have been substantially complete during the year ended July 1, 2006, into at least the quarter ended December 31, 2006.

Write-off on disposal of assets and related costs

The Company incurred restructuring charges of $43,000, $449,000, $0, and $3,801,000 for the years ended July 1, 2006 and July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003, respectively, related to the carrying values of equipment abandoned at the Milton U.K. facility in connection with one of the Company’s restructuring plans. Included in the assets disposed of and charged to restructuring costs are office equipment and manufacturing equipment.

8.   Employee Benefit Plan

In the United States, the Company sponsors a 401(k) plan that allows voluntary contributions by eligible employees, who may elect to contribute up to the maximum allowed under the U.S. Internal Revenue Service regulations. The Company generally makes 25% matching contributions (up to a maximum of $2,000 per eligible employee per year) and it recorded related expenses of $491,000, $642,000, $140,000, and $101,000 in the years ended July 1, 2006, July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003, respectively.

The Company also contributes to a United Kingdom based defined contribution pension scheme for directors and employees, and an additional defined contribution plan for the benefit of one director. Contributions, and the related expenses, under these plans were $2.7 million, $859,000, $696,000 and $989,000 in respect for the years ended July 1, 2006 and July 2, 2005, the six month period ended July 3, 2004, and the year ended December 31, 2003, respectively.

In March 2006, in connection with the acquisition of Avalon Photonics AG (“Avalon”), the Company assumed the Avalon pension plan. The following disclosures as of July 1, 2006, in accordance with SFAS No 87, “Employers’ Accounting for Pensions”, related to this plan.

F-30

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The actuarial basis for the obligations were based on the following assumptions:

Actuarial method	The calculated cost shown in the report are computed using the projected unit credit cost method.
Discount rate	An annual discount rate of 3.5% has been applied.
Expected return on plan assets	Expected net return of 4.6% across all investments.
Salary increase	2.0% per annum.
Pension increase	Currently estimated at 0%.
Mortality and disability	As per Swiss Federal Pension Fund tables.

Balance Sheet

	July 1,
	2006
	(In thousands)
Market value of plan assets	$	2,542
Projected benefit obligation		(2,668	)
Fund status		(126	)
Unrecognized actuarial loss		171
Net asset	$	45
Accumulated benefit obligation	$	2,422

9.   Income Taxes

For financial reporting purposes, the Company’s pre-tax loss from continuing operations includes the following:

	Year Ended			Year Ended			Six Months Ended			Year Ended
	July 1,			July 2,			July 3,			December 31,
	2006			2005			2004			2003
	(In thousands)
Current
Domestic	$	(43,817	)	$	(66,981	)	$	(18,335	)	$	(7,929	)
Foreign		(55,428	)		(180,976	)		(49,245	)		(121,257	)
	$	(99,245	)	$	(247,957	)	$	(67,580	)	$	(129,186	)

F-31

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of the provision for income taxes are as follows:

						Six Months
	Year Ended			Year Ended		Ended			Year Ended
	July 1,			July 2,		July 3,			December 31,
	2006			2005		2004			2003
	(In thousands)
Current
Federal	$	—		$	—	$	—		$	—
State		—			4		—			—
Foreign		23			11		(209	)		(3,439	)
		23			15		(209	)		(3,439	)
Deferred
Federal		—			—		—			—
State		—			—		—			—
Foreign		(11,772	)		—		—			—
		(11,772	)		—		—			—
Total	$	(11,749	)	$	15	$	(209	)	$	(3,439	)

Reconciliations of the income tax provision at the statutory rate to the Company’s provision for income tax are as follows:

							Six Months
	Year Ended			Year Ended			Ended			Year Ended
	July 1,			July 2,			July 3,			December 31,
	2006			2005			2004			2003
	(In thousands)
Tax benefit at federal statutory rate	$	(34,736	)	$	(86,784	)	$	(22,977	)	$	(43,923	)
Unbenefitted domestic losses and credits		12,131			13,996			2,891			—
Unbenefitted foreign losses and credits		10,856			72,803			20,086			43,923
Benefitted foreign research and development credits		—			—			(209	)		(3,720	)
Foreign capital taxes		—			—			—			281
Provision for (benefit from) income taxes	$	(11,749	)	$	15		$	(209	)	$	(3,439	)

F-32

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred taxation

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:

	July 1,			July 2,
	2006			2005
	(In thousands)
Deferred tax assets:
Net operating loss carry forwards	$	260,042		$	252,018
Depreciation, capital losses, and other		72,308			66,863
Inventory valuation		2,025			2,968
Accruals and reserves		3,926			5,233
Capitalized research and development		3,650			4,470
Tax credit carry forwards		9,261			10,180
Stock-based compensation		1,320			0
Total deferred tax assets		352,532			341,732
Valuation allowance		(316,392	)		(330,433	)
Net deferred tax assets		36,140			11,299
Deferred tax liabilities:
Investment in foreign subsidiaries		(36,140	)		(11,299	)
Total deferred tax liabilities		(36,140	)		(11,299	)
Net deferred tax assets	$	—		$	—

The Company’s valuation allowance decreased by $14,041,000 and increased by $47,572,000 for the years ended July 1, 2006 and July 2, 2005, respectively.

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its net deferred tax assets.

As of July 1, 2006, the Company had foreign net operating loss carry forwards of approximately $540,411,000, $50,608,000, $34,995,000 and $12,980,000 in the U.K., Switzerland, China, and Canada, respectively. The U.K. and Canada net operating losses do not expire, the Switzerland net operating loss will expire in various years through 2013 if unused, and the China net operating loss will expire in various years through 2009 if unused. The Company also has U.S. federal and state net operating losses of approximately $207,333,000 and $179,158,000 respectively, which will expire in various years through 2026 if unused.

As of July 1, 2006, the Company has U.S. federal, state, and foreign research and investment tax credit carry forwards of approximately $173,000, $10,772,000 and $2,086,000 respectively. The federal credit will expire in various years through 2026 if unused. The state research and development credits can be carried forward indefinitely. The foreign credits will expire in various years through 2016 if unused.

Utilization of net operating loss carry forwards and credit carry forwards are subject to substantial annual limitations due to ownership changes as provided in the Internal Revenue Code of 1986, as amended, as well as similar state and foreign tax laws.

F-33

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company has not provided for U.S. federal income and state income taxes on all of the non-U.S. subsidiaries’ undistributed earnings as of July 1, 2006 because such earnings are intended to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to applicable U.S. federal and state income taxes.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosures. It will be effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. The provisions of this Interpretation apply to all tax positions upon initial adoption of this Interpretation. Only tax positions that meet the recognition threshold criteria at the effective date may be recognized or continue to be recognized upon adoption of this Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year, presented separately. The Company is currently evaluating the accounting and disclosure requirements of this Interpretation and expects to adopt it as required at the beginning of its fiscal year 2007.

10.   Stockholders’ Equity

On April 3, 2006, the Company entered into the Settlement Agreement with Mr. Howard Yue relating to a lawsuit Mr. Yue filed against New Focus, Inc., a subsidiary of the Company, and several of its officers and directors in Santa Clara County Superior Court. The lawsuit, which was originally filed on February 13, 2002, relates to events that occurred prior to the Company’s acquisition of New Focus, Inc. The terms of the Settlement Agreement provided that the Company would issue to Mr. Yue a $7.5 million promissory note however, $5.0 million of this promissory note could be satisfied by the Company, at its option, through the issuance of its common stock. Pursuant to the Settlement Agreement, on April 4, 2006, the Company issued 537,635 shares of its common stock to Mr. Yue with a then current market value of $5.0 million and, on April 5, 2006, the Company paid the remaining $2.5 million due under the promissory note in cash.

On March 22, 2006, the Company acquired all of the outstanding share capital of Avalon Photonics AG for 764,951 shares of its common stock. Subject to the achievement of certain future integration and revenue milestones, the Avalon shareholders and their designees will be entitled to receive up to 347,705 additional shares of common stock. See Note 14 — Business Combinations, for additional disclosures regarding this acquisition.

On January 13, 2006, the Company entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of convertible debentures the Company issued approximately 10.5 million shares of common stock, warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash, and recorded a charge of $18.8 million in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt. See Note 17 — Debt. The issuance of 1,285,466 of these shares of common stock and warrants to purchase 95,461 of these shares had been subject to stockholder approval which was received on March 22, 2006.

In November 2005, the Company granted options to purchase 4,762,500 shares of common stock and issued 1,100,000 shares of restricted stock (including 50,000 restricted stock units) under existing plans. The options have an exercise price of $4.91, a term of ten years and they vest ratably over 48 months with the first 12 months of vesting deferred until the one year anniversary of the grant. The restricted stock grants vest as to 50% ratably over

F-34

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

48 months, as to 25% when the Company achieves earnings before interest, taxes, depreciation and amortization, excluding restructuring charges, one-time items and charges for stock-based compensation cumulatively greater than zero for two successive quarters, and as to 25% when the Company achieves earnings before interest, taxes, depreciation and amortization, excluding restructuring charges, one-time items and charges for stock-based compensation cumulatively greater than 8% of revenues for two successive quarters.

On October 27, 2005, at the Company’s annual meeting of stockholders, the stockholders of the Company approved the 2004 stock incentive plan and authorization of 4,000,000 shares of common stock for issuance under that plan, the 2004 employee stock option plan and the 2004 share save scheme and the authorization of 500,000 shares of common stock for issuance under each of those plans, and the authorization of an additional 5,000,000 shares of common stock for issuance under the 2004 stock incentive plan.

On October 17, 2005, the Company completed a public offering of its common stock, issuing a total of 11,250,000 shares at a price per share of $4.75, raising $53.4 million and receiving $49.3 million net of commissions to the underwriters and the payment of offering costs and expenses.

On February 9, 2005, the Company granted an aggregate of 249,859 shares of restricted common stock to the Chief Executive Officer and the Chief Financial Officer (“the Participants”) under the Company’s 2004 Stock Incentive Plan. In connection with the grant, the Participants surrendered outstanding options for an aggregate of 853,406 shares of common stock. Pursuant to the terms of the award, the shares vested in their entirety and became free from transfer restrictions on the one year anniversary of the grant date based on the achievement of the following criteria: (A) the Participant had been continuously employed by the Company during the period, (B) on or before the anniversary, the Company had filed on a timely basis any report required pursuant to Item 308 of Regulation S-K of the Securities Act of 1933, as amended and (C) on the anniversary date, the Company did not have any material weakness that had not been remedied to the satisfaction of the Audit Committee of the Company’s board of directors. Prior to the Company’s adopting of SFAS 123(R), the Company recorded deferred compensation of approximately $782,000 representing the fair market value of the restricted shares on the date of the grant. The deferred compensation was amortized over the term of the agreement as a charge to compensation expense, with the grants revalued at each reporting period, with the deferred compensation adjusted accordingly. During the fiscal year ended July 2, 2005, prior to the Company’s adoption of SFAS 123R, the Company recorded an expense of $307,000 related to these shares. During the fiscal year ended July 1, 2006, the Company applied the provisions of SFAS 123R to these shares, and recorded an expense of $447,000 during that period related to these shares. On February 9, 2006, these shares of restricted common stock vested.

On September 22, 2004, options to purchase 1,730,950 shares of common stock of the Company were granted to employees at an exercise price of $6.73 per share. One half of the options vest on a time based schedule (twenty-five percent vests one year from the grant date, with the remaining seventy-five percent vesting monthly over the next three years) and the remaining half vest on a performance based schedule. The performance based schedule options vest as follows: (i) fifty percent of the performance based shares vest when the Company achieves cash flow break-even (which is defined as the point when the Company generates earnings before interest, taxes, depreciation and amortization (excluding one-time items) that are greater than zero in any fiscal quarter) and (ii) the remaining fifty percent of these performance based shares vest upon the Company achieving profitability (which is defined as the point at which the Company generates a profit before interest and taxes (excluding one-time items) that is greater than zero in any fiscal quarter). As of July 1, 2006, 380,288 of these options which are still outstanding have vested. Any unvested performance based options shall vest in full on September 22, 2009, regardless of the achievement of the underlying performance targets.

New Focus Stock Option Plans

In March 2004, the Company granted New Focus employees options to purchase 605,797 shares of its common stock upon the assumption of outstanding options granted under the 1999 and 2000 New Focus Stock Plans. In connection with the issuance of these options, the Company determined an intrinsic value related to future services

F-35

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of $1,463,000 and recorded this amount as deferred stock compensation to be expensed over the vesting periods, $122,000 of which was recorded as stock compensation expense in the six months ended July 3, 2004 and $443,000 of which was recorded as stock compensation expense in the year ended July 2, 2005. Upon the Company’s adoption of SFAS 123R in the first quarter of the fiscal year ended July 1, 2006, the remaining deferred compensation balance related to these options of $340,000 was netted against additional paid-in capital. During the year ended July 1, 2006, 24,729 of these options were exercised. At July 1, 2006, there were outstanding options to purchase 77,621 shares of Company common stock under the 1999 and 2000 New Focus Stock Plans. The Company does not intend to grant additional options under these plans.

In addition to the significant stock option grants described above, the following summarizes all stock option activity for the periods provided below:

	Options			Weighted Average
	Outstanding			Exercise Price
Outstanding at December 31, 2002		2,187,918		$	33.85
Granted		993,363			21.11
Exercised		(63,429	)		19.84
Cancelled		(576,930	)		51.14
Outstanding at December 31, 2003		2,540,922			26.57
Granted		640,195			11.56
Assumed on acquisition of New Focus		605,797			2.90
Exercised		(299,943	)		9.41
Cancelled		(280,359	)		27.05
Outstanding at July 3, 2004		3,206,612			15.21
Granted		2,002,178			6.70
Exercised		(811	)		4.74
Cancelled		(1,960,727	)		13.90
Outstanding at July 2, 2005		3,247,252			13.87
Granted		5,130,660			4.97
Exercised		(58,627	)		5.15
Cancelled		(997,591	)		12.70
Outstanding at July 1, 2006		7,321,694			7.79

F-36

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following summarizes option information relating to options outstanding under the Company’s stock option plans as of July 1, 2006. Because the Company tracks options issued under plans established while a U.K. domicile company separately from those issued under plans established with a U.S. domicile company, the following information in presented in two separate sets of exercise price ranges (in U.S. dollars):

	Options Outstanding
			Weighted Average		Weighted		Options Exercisable
	Number		Remaining		Average		Number		Weighted Average
Range of Exercise Prices	Outstanding		Contractual Life		Exercise Price		Exercisable		Exercisable Price
U.S. Plans
$ 2.06-  4.70		81,141		9.26	$	3.48		12,335	$	3.04
4.91-  4.91		4,628,200		9.40		4.91		64,890		4.91
4.99-  6.65		204,154		9.34		5.95		24,238		5.00
6.73-  6.73		1,076,344		8.26		6.73		380,325		6.73
6.96- 57.67		670,056		6.30		16.15		498,909		17.14
88.72-510.28		1,527		4.61		177.40		1,527		177.40
2.06-510.28		6,661,422		8.90		6.39		982,224		12.08
U.K. Plans
8.99-  9.81		34,100		8.06		9.09		15,924		9.10
10.63- 10.63		206,282		7.92		10.63		103,270		10.63
12.71- 14.17		196,347		6.36		14.06		178,482		14.05
14.17- 24.57		188,018		6.54		22.46		155,606		22.31
24.57-181.63		24,375		5.01		57.80		23,125		59.54
181.63-295.87		10,290		4.37		294.71		10,290		294.71
295.87-654.77		800		4.12		654.77		800		654.77
$  8.99-654.77		660,272		6.90		21.89		487,497		24.93
Total		7,321,694			$	7.79		1,469,721	$	16.34

Warrants and Other Stock Rights Issued to Non-Employees

On March 22, 2006, the Company acquired all of the outstanding share capital of Avalon for 764,951 shares of its common stock. Subject to the achievement of certain future integration and revenue milestones, the Avalon shareholders and their designees will be entitled to receive up to 347,705 additional shares of common stock, the value of which would be recorded as additional goodwill.

On January 13, 2006, the Company entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of the convertible debentures, the Company issued approximately 10.5 million shares of common stock, warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash, and recorded a charge of $18.8 million in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt. See Note 17 — Debt. The issuance of 1,285,466 of these shares of common stock and warrants to purchase 95,461 of these shares had been subject to stockholder approval which was received on March 22, 2006.

In December 2004, in connection with the 7% convertible note private placement as described in Note 16- Related Party Transactions, the Company issued warrants to purchase 2,001,963 shares of its common stock. These warrants are exercisable, they have an exercise price of $6.00 per share and expire on December 20, 2009.

F-37

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2003, the Company assumed warrants to purchase 4,881 shares of common stock as part of the terms of acquisition of Ignis Optics. The warrants, which have an exercise price of $40.00 per share, were exercisable immediately and expire beginning in April 2008. As of July 1, 2006, all of these warrants remained outstanding.

In 2002, the Company issued a warrant to purchase 900,000 shares of common stock to Nortel Networks as part of the purchase price for the acquisition of the optical components business of Nortel Networks. The Company valued the warrants at $6,685,000 based on the fair market value of the Company’s common stock as of the announcement date of the acquisition. The warrant was exercised in full on September 7, 2004 at the exercise price of approximately $0.06 per share.

Common Stock Reserved

Common stock is reserved for future issuance as follows:

	July 1,
	2006
Stock option plan:
Outstanding options		7,321,694
Warrants		3,087,963
Reserved for contingent purchase consideration		347,705
Reserved for future option grants		11,946,401
Total		22,703,763

11.   Earnings per Share

If the Company had reported net income, as opposed to a net loss, the calculation of diluted earnings per share would have included an additional 11,509,657, 10,140,319, 4,145,000, and 2,275,000 common equivalent shares related to outstanding share options and warrants (determined using the treasury stock method) for the years ended July 1, 2006, July 2, 2005, the six months ended July 3, 2004 and for the year ended December 31, 2003, respectively.

12.   Segments of an Enterprise and Related Information

The Company is currently organized and operates as two operating segments: (i) optics and (ii) research and industrial. The optics segment designs, develops, manufactures, markets and sells optical solutions for telecommunications and industrial applications. The research and industrial segment designs, manufactures, markets and sells photonic and microwave solutions. The Company evaluates the performance of its segments and allocates resources based on consolidated revenues and overall profitability.

Segment and geographic information for the years ended July 1, 2006 and July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003 is presented below. Revenues are attributed to countries based on the location of customers.

F-38

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information on reportable segments is as follows:

							Six Months
	Year Ended			Year Ended			Ended			Year Ended
	July 1,			July 2,			July 3,			December 31,
	2006			2005			2004			2003
	(In thousands)
Total revenues:
Optics	$	206,019		$	176,598		$	69,315		$	146,197
Research and industrial		25,630			23,658			10,448			—
Consolidated total revenues	$	231,649		$	200,256		$	79,763		$	146,197
Net loss:
Optics	$	(82,760	)	$	(159,154	)	$	(59,321	)	$	(125,747	)
Research and industrial		(4,737	)		(88,818	)		(8,050	)		—
Consolidated net loss	$	(87,497	)	$	(247,972	)	$	(67,371	)	$	(125,747	)
Depreciation and amortization of tangible assets:
Optics	$	20,072		$	20,532		$	11,941		$	17,709
Research and industrial		155			221			1,491			—
Consolidated depreciation and amortization	$	20,227		$	20,753		$	13,432		$	17,709
Total expenditures for long-lived assets:
Optics	$	9,920		$	15,913		$	6,592		$	19,186
Research and industrial		193			95			56			—
Consolidated total expenditures for long-lived assets	$	10,113		$	16,008		$	6,648		$	19,186

Information regarding the Company’s operations by geographic area is as follows:

					Six Months
	Year Ended		Year Ended		Ended		Year Ended
	July 1,		July 2,		July 3,		December 31,
	2006		2005		2004		2003
	(In thousands)
Canada	$	107,445	$	85,006	$	35,529	$	78,373
United States		47,762		54,660		20,446		13,584
China		27,781		19,420		9,426		14,155
Europe other than United Kingdom		18,896		19,274		8,797		13,356
Asia other than China		15,655		5,019		1,449		840
United Kingdom		9,857		15,727		4,023		25,069
Rest of the World		4,253		1,150		93		820
Consolidated total revenues	$	231,649	$	200,256	$	79,763	$	146,197

F-39

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	July 1,		July 2,
	2006		2005
United Kingdom	$	30,319	$	40,813
China		14,529		14,905
Europe other than United Kingdom		4,806		5,312
United States		1,893		2,229
Canada		616		897
Total long-lived tangible assets	$	52,163	$	64,156

For the year ended July 3, 2004, JCA Technology, Inc.’s results consolidated in the research and industrial segment amounted to $2,400,000 of revenue and a loss of $500,000 and, at July 3, 2004, net assets of $1,600,000. The Company sold JCA Technology to Endwave Corporation in July 2004 and its results from July 3, 2004 to the date of sale were immaterial.

13.   Acquisition of Creekside

On August 10, 2005, the Company’s Bookham Technology plc subsidiary acquired all of the share capital of City Leasing (Creekside) Limited (“Creekside”) for consideration of approximately £1, plus transaction costs. The following is the purchase price allocation related to this business combination (in thousands):

	Purchase
	Price
	Allocation
Purchase price:
Cash	$	—
Transaction costs		685
	$	685
Allocation of purchase price:
Cash, including restricted cash	$	8,378
Net monetary assets		4,092
Deferred tax liabilities		(11,785	)
	$	685

The net monetary assets acquired primarily represent lease receivables and loans payable to and from parties related to the entity from which Bookham Technology plc acquired Creekside. Bookham Technology plc has the right to offset these balances, and in accordance with FIN 39, “Offsetting of Amounts Related to Certain Contracts” is reflecting these amounts net on its balance sheet. The contracts underlying the receivables and loans are denominated in United Kingdom pounds sterling. These loans, in principal amounts of $32 million and $75 million based on the October 1, 2005 exchange rate of 1.76 U.S. dollars per UK pound sterling, accrue interest at annual rates of 5.54% and 5.68%, respectively. The first loan was paid in full on October 14, 2005 and the second loan is due in equal installments on July 14, 2006 and October 16, 2007, with the lease receivables substantially concurrent with this schedule as to timing and exceeding the amounts due in magnitude. The Company anticipates applying capital allowances of Bookham Technology plc to reduce tax liabilities assumed from Creekside. Accordingly, as a result of the acquisition of Creekside, in the year ended July 1, 2006 the Company has recognized a one time tax gain of $11.8 million related to the expected realization of these tax assets. No results of Creekside have been

F-40

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

included in the Company’s results of operations for periods prior to August 10, 2005, after which point Creekside is included in the Company’s consolidated results of operations.

14.   Business Combinations

During the years ended July 1, 2006 and July 2, 2005, the six months ended July 3, 2004 and the year ended December 31, 2003, the Company completed a total of seven strategic acquisitions. The Company also completed the acquisition of Creekside on August 10, 2005, in a transaction which was primarily financing in nature. The Creekside acquisition is described separately in Note 13 — Acquisition of Creekside, to these consolidated financial statements. Each of the remaining strategic acquisitions was accounted for under the purchase method of accounting. The allocation of the purchase price to the assets acquired and liabilities assumed, as determined by the Company, was conducted at the date of acquisition, with the assistance of third-party valuation experts, except for the acquisitions of the business of C.P. Santa Rosa Enterprises Corp., or Cierra Photonics, and Onetta, Inc. The methodologies used to value intangible assets acquired were consistently applied to each of the acquisitions.

To determine the value of the developed technology, the expected future cash flow attributed to all existing technology was discounted, taking into account risks related to the characteristics and application of the technology, existing and future markets and assessments of the lifecycle stage of the technology.

The value of in-process research and development, or IPR&D, was determined based on the expected cash flow attributed to in-process projects, taking into account revenue that is attributable to previously developed technology, the level of effort to date in the IPR&D, the percentage of completion of the project and the level of risk associated with the in-process technology. The projects identified as in-process are those that were underway at each of the acquired companies at the time of the acquisition and that required additional efforts in order to establish technological feasibility. The value of IPR&D was included in the Company’s results of operations during the period of the acquisition.

The value of the acquired patent portfolio was determined based on the income approach, as it most accurately reflected the fair value associated with unique assets such as a patent. Specifically, the relief from royalty method was utilized to arrive at an estimate of fair value. This methodology estimates the amount of hypothetical royalty income that could be generated if the patents were licensed by an independent, third-party owner to the business currently using the patents in an arm’s-length transaction. Conversely, this is the royalty savings enjoyed by the owners of the patent portfolio in that the owner is not required to pay a royalty for the use of the patents.

The value of supply contracts was determined based on discounted cash flows. The discounted cash flow method was considered to be the most appropriate methodology, as it reflects the present value of the operating cash flows generated by the contracts over their returns.

Avalon Photonics, AG

Avalon is a producer of multimode and single mode short wavelength VCSEL or VCSEL-arrays. On March 22, 2006, the Company acquired all of the outstanding share capital of Avalon, a company organized under the laws of Switzerland, under an agreement pursuant to which it issued 764,951 shares of common stock to the Avalon shareholders and their designees, valued at $5,500,000 as of the date of acquisition. In addition, subject to the achievement of certain future integration and revenue milestones, the Avalon shareholders and their designees will be entitled to receive up to 347,705 additional shares of common stock. As 139,082 shares related to the integration milestones are fixed as to number, the value of the shares, $1,000,000 as of the date of acquisition, is being included as part of the consideration in the allocation of the purchase price. The issuance of the remaining 208,623 shares are contingent based upon Avalon achieving certain revenue criteria over a two-year period. Any additional contingent consideration resulting from the achievement of the revenue criteria will be accounted for as additional goodwill. $118,000 of the proceeds was allocated to IPR&D projects. The pro forma results of operations of Avalon prior to March 22, 2006 were immaterial to the Company.

F-41

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Onetta, Inc.

Onetta, Inc., or Onetta, designs and manufacturers optical amplifier modules and subsystems for communications networks. Their Erbium Doped Fiber Amplifiers (EDFA) incorporate advanced optics, control electronics and firmware for current and next-generation optical communication networks. On June 10, 2004, under the terms of the purchase agreement, the Company acquired the entire issued share capital of Onetta. The consideration for the acquisition was 2,764,030 shares of common stock valued at $24,708,000 at the time of the acquisition. As part of the agreement, the Onetta stockholders agreed to settle liabilities of Onetta in the amount of $6,083,000. In connection with the acquisition, there was no value allocated to IPR&D projects.

New Focus, Inc.

New Focus, Inc., or New Focus, provides photonics and microwave solutions to non-telecom diversified markets, including the semiconductor, defense, research, industrial, biotech/medical and telecom test and measurement industries. On March 8, 2004, under the terms of the merger agreement, the Company acquired New Focus by a merger of a wholly-owned subsidiary with and into New Focus, with New Focus surviving as the Company’s wholly-owned subsidiary. Pursuant to the merger agreement, immediately prior to the merger, each New Focus stockholder received a cash distribution from New Focus in the amount of $2.19 per share of New Focus common stock held on that date. The consideration paid by the Company for New Focus consisted of 7,866,600 shares of common stock, valued at $197,710,000 at the time of the acquisition, and the assumption of options with a value of $6,286,000 at the time of the acquisition. Each of the assumed options became an option to purchase a unit consisting of 1.2015 shares of common stock. New Focus made a cash distribution of $2.19 for each share of New Focus common stock immediately prior to the merger. The exercise price of the assumed options was adjusted to reflect the cash distribution.

In connection with the acquisition of New Focus, $5.9 million of the $211.0 million total consideration was allocated to IPR&D projects. The new product introduction (“NPI”) projects at the acquisition date were expected to result in the development of products to support the New Focus OEM and Catalog business. Catalog-related programs were focused on increasing the wavelength spectrum over which modulator products can operate and the development of detectors to operate at higher frequency with lower noise over a broader wavelength. Their first incorporation in shipments was in December 2004. Of the OEM related products: two have been completed, namely the development of a super luminous diode light source for use in subsystems and a laser development for use high precision/high stability labs, and the final program for development of a small form factor laser for use in fiber sensing applications continues but has been slowed down due to lower than expected market opportunities emerging. There were no technology research (“TR”) programs at the time of acquisition.

Ignis Optics, Inc.

Ignis Optics, Inc., or Ignis, designs and manufactures small form-factor, pluggable, single-mode optical transceivers for current and next generation optical datacom and telecom networks. On October 6, 2003, the Company acquired the entire share capital of Ignis in exchange for 802,081 shares of common stock and the assumption of warrants to purchase 4,880 shares of common stock, valued at $17,748,000 at the time of the acquisition. In addition, subject to certain performance criteria, 78,084 additional shares of common stock were issuable in fiscal 2005. However, the performance criteria were not met and no additional shares were issued. In connection with the acquisition of Ignis, $1.9 million of the $18.0 million total consideration was allocated to IPR&D projects. The NPI projects under development at the acquisition date were expected to result in small form factor pluggable optical transceivers or component elements to these products and address quality and reliability requirements. Commercial shipments of the products began shipping during the second half of fiscal 2005. There were no TR projects at the time of acquisition.

F-42

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cierra Photonics, Inc.

Cierra Photonics, Inc., or Cierra, designs and manufactures thin-film filters and other components for the fiber optic telecommunications industry. Cierra Photonics Advanced Energetic Deposition (AED) technology is a specialized process for wafer-scale deposition of extremely well-controlled films that results in thin-film components that have lower costs, high yields and advanced optical performance. On July 4, 2003, the Company acquired substantially all of the assets and certain liabilities of Cierra. The consideration for the acquisition consisted of 307,148 shares of common stock valued at $3,669,000 at the time of the acquisition. In addition, and subject to the satisfactory achievement of specific sales milestones over the next two years, 420,000 additional shares of common stock could be issued to Cierra in 2004 and 2005. In the year ended July 1, 2006, 5,100 shares of such common stock, and in the year ended July 2, 2005, 38,810 shares of such common stock were issued. In connection with the acquisition, there was no value allocated to IPR&D projects.

A summary of the purchase price allocations pertaining to the above acquisitions and the amortization periods of the intangible assets acquired is as follows:

	Avalon			Onetta			New Focus			Ignis			Cierra
	(In thousands)
Purchase price:
Ordinary stock issued	$	6,500		$	24,708		$	197,710		$	17,748		$	3,669
Stock options assumed		—			—			6,286			—			—
Cash		—			—			—			—			—
		6,500			24,708			203,996			17,748			3,669
Transaction and other direct acquisition costs		200			274			7,261			300			249
	$	6,700		$	24,982		$	211,257		$	18,048		$	3,918
Allocation of purchase price:
Cash	$	1,858		$	1,238		$	111,325		$	3,139		$	—
Accounts receivable		125			1,004			2,588			75			560
Inventory		117			1,897			3,871			648			102
Fixed Assets		375			847			15,645			1,883			1,673
Other assets		295			9,180			9,896			127			60
Accounts payable and other liabilities		(966	)		(10,386	)		(37,138	)		(1,417	)		(1,634	)
Net tangible assets acquired		1,804			3,780			106,187			4,455			761
Supply contracts and customer relationships		539			—			606			—			—
Customer database		—			—			135			—			—
Patent portfolio		—			—			2,317			913			216
Core and current technology		1,695			—			6,597			775			2,941
In-process research and development		118			—			5,890			1,878			—
Goodwill		2,544			21,202			89,525			10,027			—
Total net assets acquired	$	6,700		$	24,982		$	211,257		$	18,048		$	3,918
Amortization period (in years):
Supply contracts/customer relationships		7			—			3			—			—
Customer database		—			—			5			—			—
Patent portfolio		—			—			6-10			5			6
Core & current technology		4-6			—			3-6			5			5

F-43

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of July 1, 2006, the weighted average amortization period for intangibles is 7.3 years, including 16 years for supply contracts, 5 years for customer database, 6.4 years for patents and 5.9 for core and current technologies.

On November 8, 2002, the Company acquired the trade and assets of the optical components business of Nortel Networks (“NNOC”), the net assets of which were initially valued in 2002. In accordance with SFAS No. 141 (“SFAS 141”), “Business Combinations”, an adjustment was made in 2003 for adjustments to those initial values.

During 2003, a larger amount of inventory was sold than was expected at the time the acquisition of NNOC was completed in 2003. As a consequence, the Company increased the value of the inventory by $20,227,000, reduced intangible assets by $9,134,000 and decreased other net assets by $11,093,000 as part of the allocation fair value of the remaining assets as summarized below.

The warranty provision recognized on acquisition was increased by $1,968,000 following a review of the level of expected warranty costs in 2003. In addition, the initial value recognized for historic employee-related costs was reduced by $590,000 as a result of a revised valuation and settlement of the pension scheme in Switzerland.

In accordance with SFAS 141, Business Combinations, the Company revises the value of acquired net assets when the initial assigned valuation is provisional. The final revision of the purchase price allocation related to the acquisition of NNOC led to the following changes in the year ended December 31, 2003:

	Original Purchase		Purchase Price			Revised Purchase
	Price Allocation		Adjustments			Price Allocation
	(In thousands)
Purchase price	$	111,201	$	—		$	111,201
Transaction and other direct acquisition costs		7,800		—			7,800
	$	119,001	$	—		$	119,001
Allocation of purchase price:
Net tangible assets acquired	$	76,827	$	9,134		$	85,961
Intangible assets acquired:
Supply contracts		8,862		(1,984	)		6,878
Patent portfolio		9,988		(2,082	)		7,906
Core and current technology		16,034		(3,435	)		12,599
In-process research and development		7,290		(1,633	)		5,657
	$	119,001	$	—		$	119,001

F-44

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The final revision of the purchase price allocation of proceeds related to the acquisition of New Focus led to the following changes in the year ended July 2, 2005:

	Original Purchase		Purchase Price			Revised Purchase
	Price Allocation		Adjustments			Price Allocation
	(In thousands)
Purchase price	$	203,996	$	—		$	203,996
Transaction and other direct acquisition costs		6,969		292			7,261
	$	210,965	$	292		$	211,257
Allocation of purchase price:
Historical net tangible assets acquired	$	101,665	$	4,522		$	106,187
Intangible assets acquired:
Supply contracts		625		(19	)		606
Customer database		606		(471	)		135
Patent portfolio		2,317		—			2,317
Core and current technology		10,563		(3,966	)		6,597
In-process research and development		5,890		—			5,890
Goodwill		89,299		226			89,525
	$	210,965	$	292		$	211,257

During the year ended July 2, 2005, the Company finalized the allocation of the proceeds of the acquisition of New Focus prior to the Company’s evaluation of goodwill for impairment. The adjustments to the purchase price allocation, as summarized above, arose from two principal areas; namely, the completion of the anticipated sale of JCA; and the finalization of certain judgments as to the realization of other acquired assets and liabilities.

The JCA sale impacted the purchase price allocation as follows: Net tangible assets acquired were increased through the receipt of cash of $5.9 million; intangible assets were decreased through the sale of $4.6 million of supply contracts, customer database and the patent portfolio; and a resultant decrease in goodwill of $1.3 million.

The finalization of certain judgments as to the realization of other acquired assets and liabilities included: an increase of $0.4 million of refunds due from the lessor of certain of the Company’s leased premises; a $1.7 million increase in building lease liabilities relating to acquired premises; a $0.9 million saving in expected acquisition related tax expenses; a $0.6 million reduction in the expected settlement of a note due from a former New Focus officer; and a reduction of $0.4 million in the carrying value of an investment acquired in connection with acquiring New Focus. These adjustments impacted the purchase price allocation as follows: net tangible assets acquired were decreased by $5.9 million; and goodwill was increased by $1.5 million.

F-45

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15.   Goodwill and Other Intangible Assets

The following is a summary of the goodwill and other intangible assets:

	Goodwill			Intangibles
	(In thousands)
Cost
January 1, 2003	$	—		$	48,923
Fair value adjustment to NNOC		—			(7,501	)
Acquired		10,027			4,845
Disposals		—			(605	)
Exchange rate adjustment		647			4,380
December 31, 2003		10,674			50,042
Acquired		110,501			14,209
Exchange rate adjustment		(1,222	)		1,078
July 3, 2004		119,953			65,329
Acquired		226			—
Disposals		—			(6,568	)
Impairment		(113,592	)		(634	)
Exchange rate adjustment		(327	)		(579	)
July 2, 2005		6,260			57,548
Acquired		2,621			2,234
Disposals		—			(929	)
Impairment		—			(760	)
Exchange rate adjustment		—			739
July 1, 2006	$	8,881		$	58,832
Accumulated Amortization
January 1, 2003					6,382
Fair value adjustment					(190	)
Charged					8,487
Disposals					(518	)
Exchange rate adjustment					1,325
December 31, 2003					15,486
Charged					5,677
Exchange rate adjustment					317
July 3, 2004					21,480
Charged					11,107
Disposals					(2,413	)
Exchange rate adjustment					(636	)
July 2, 2005					29,538
Charged					10,004
Disposals					(929	)
Exchange rate adjustment					552
July 1, 2006				$	39,165

F-46

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Goodwill		Intangibles
	(In thousands)
Net Book Value
December 31, 2003	$	10,674	$	34,556
July 3, 2004	$	119,953	$	43,849
July 2, 2005	$	6,260	$	28,010
July 1, 2006	$	8,881	$	19,667

Intangible assets consist of the following:

	Balance at												Translation			Balance at
	July 2, 2005			Impairment			Disposals			Additions			Adjustment			July 1, 2006
	(In thousands)
Supply agreements	$	4,157		$	—		$	—		$	—		$	56		$	4,213
Customer relationships		487			—			—			539			25			1,051
Customer databases		132			—			—			—			—			132
Core and current technology		34,750			(760	)		(929	)		1,695			373			35,129
Patent portfolio		14,377			—			—			—			235			14,612
Customer contracts		3,645			—			—			—			50			3,695
		57,548			(760	)		(929	)		2,234			739			58,832
Less accumulated amortization		(29,538	)		—			929			(10,004	)		(552	)		(39,165	)
Intangible assets, net	$	28,010		$	(760	)	$	—		$	(7,770	)	$	187		$	19,667

				Disposal of
	Balance at			Subsidiary												Translation			Balance at
	July 3, 2004			(JCA)			Impairment			Disposals			Additions			Adjustment			July 2, 2005
	(In thousands)
Supply agreements	$	5,482		$	—		$	—		$	(1,242	)	$	—		$	(83	)	$	4,157
Customer relationships		617			(10	)		(120	)		—			—			—			487
Customer databases		599			(467	)		—			—			—			—			132
Core and current technology		36,660			(620	)		(156	)		(870	)		—			(264	)		34,750
Patent portfolio		14,951			(41	)		(358	)		—			—			(175	)		14,377
Capitalized licenses		3,318			(3,318	)		—			—			—			—			—
Customer contracts		3,702			—			—			—			—			(57	)		3,645
		65,329			(4,456	)		(634	)		(2,112	)		—			(579	)		57,548
Less accumulated amortization		(21,480	)		—			—			2,413			(11,107	)		636			(29,538	)
Intangible assets, net	$	43,849		$	(4,456	)	$	(634	)	$	301		$	(11,107	)	$	57		$	28,010

F-47

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Balance at
	January 1,								Translation			Balance at
	2004			Additions			Acquisitions		Adjustment			July 3, 2004
	(In thousands)
Supply agreements	$	5,361		$	—		$	—	$	121		$	5,482
Customer relationships		—			—			625		(8	)		617
Customer databases		—			—			606		(7	)		599
Core and current technology		25,569			—			10,563		528			36,660
Patent portfolio		12,342			—			2,317		292			14,951
Capitalized licenses		3,148			98			—		72			3,318
Customer contracts		3,622			—			—		80			3,702
		50,042			98			14,111		1,078			65,329
Less accumulated amortization		(15,486	)		(5,677	)		—		(317	)		(21,480	)
Intangible assets, net	$	34,556		$	(5,579	)	$	14,111	$	761		$	43,849

	Balance at																	Balance at
	January 1,								Fair Value			Reclassifications			Translation			December 31,
	2003			Additions			Acquisitions		Adjustment			and Disposals			Adjustment			2003
							(In thousands)
Supply agreements	$	5,926		$	—		$	—	$	(1,057	)	$	—		$	492		$	5,361
Core and current technology		23,086			—			3,716		(3,435	)		—			2,202			25,569
Patent portfolio		12,249			—			1,129		(2,082	)		—			1,046			12,342
Capitalized licenses		2,848			—			—		—			—			300			3,148
Customer contracts		4,220			—			—		(927	)		—			329			3,622
Capitalized professional fees		594			—			—		—			(605	)		11			—
		48,923			—			4,845		(7,501	)		(605	)		4,380			50,042
Less accumulated amortization		(6,382	)		(8,487	)		—		190			518			(1,325	)		(15,486	)
Intangible assets, net	$	42,541		$	(8,487	)	$	4,845	$	(7,311	)	$	(87	)	$	3,055		$	34,556

Goodwill

On March 22, 2006, Bookham acquired Avalon for total consideration valued at $5.7 million, plus contingent consideration valued at $1,000,000 (Note 14 — Business Combinations). The goodwill arising from this combination was $2,544,000.

On June 10, 2004, Bookham acquired Onetta for a total consideration valued at $24,982,000 (Note 14 — Business Combinations). The goodwill arising from this combination was $21,202,000.

On March 8, 2004, Bookham acquired New Focus for a total consideration valued at $211,257,000 (Note 14 — Business Combinations). The goodwill arising from the acquisition was $89,525,000.

On October 6, 2003, Bookham acquired Ignis for a total consideration valued at $18,048,000 (Note 14 — Business Combinations). The goodwill arising from this combination was $10,027,000.

No other acquisitions by the Company resulted in recognition of goodwill in the years ended July 1, 2006 and July 2, 2005, or the six month period ended July 3, 2004 or the year ended December 31, 2003.

F-48

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill recorded as part of the New Focus acquisition was recorded to the research and industrial segment and the goodwill from all other acquisitions was recorded in the optics segment.

Intangible Assets

Intangible assets have primarily been acquired through business combinations and are being amortized on a straight line basis over the estimated useful life of the related asset, generally three to six years, except for sixteen years as to a specific customer contract.

The expected future annual amortization expense of the other intangible assets is as follows (in thousands):

For the fiscal year ending on or about June 30,
2007	$	6,547
2008		3,465
2009		1,495
2010		1,263
2011		822
Thereafter		2,879
Total expected future amortization	$	16,471

Impairment of Goodwill and Other Intangible Assets

The Company has adopted SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. SFAS 142 generally requires these impairment tests to be based on a business unit’s “fair value,” which is generally determined through market prices, although in certain cases, in the event of an absence of market prices for particular elements of the relevant business, SFAS 142 also permits the use of discounted future expected cash flows as a basis for testing. The Company has applied both approaches, as appropriate.

In the year ended July 1, 2006, the Company’s annual impairment review of goodwill and other intangibles led to the recording of an impairment charge of $760,000 due to the impairment of intangibles related to Ignis. This charge was entirely related to the optics segment.

In the year ended July 2, 2005, a continued decline in the Company’s share price, and therefore market capitalization, combined with continuing net losses and a history of not meeting revenue and profitability targets, suggested that the goodwill related to certain of its acquisitions may have been impaired as of the third quarter. As a result of these triggering events, the Company performed a preliminary evaluation of the related goodwill balances at that time. In the fourth quarter, the Company finalized this evaluation during its annual evaluation of goodwill, and also performed its annual evaluation of acquired intangible assets. In total, in the year ended July 2, 2005, the Company recorded impairment charges of approximately $114,226,000, approximately $113,592,000 related to goodwill associated with New Focus, Ignis and Onetta, and approximately $634,000 related to intangibles of New Focus, including patents and other technology, for the year ended July 2, 2005. Approximately, $83,326,000 of these charges related to the research and industrial segment, and approximately $30,900,000 related to the optics segment.

Other

During the year ended July 2, 2005, the Company finalized the allocation of the proceeds of the acquisition of New Focus, which involved removing the net assets of JCA from the allocation due to JCA being sold as previously contemplated, increasing accruals and goodwill by $1,738,000 related to revised assumptions on a building lease

F-49

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assumed from New Focus, and increased the purchase price to be allocated by $292,000 for additional professional fees.

During 2003, the Company conducted a Purchase Price Allocation review of its acquisition of NNOC, and identified the need to adjust the original fair value of the fixed assets and inventory. This resulted in an adjustment of the values of all the remaining assets and consequential adjustments of the amortization and depreciation thereof. This adjustment reduced the value of the intangible assets by $7,501,000 and created a reversal of depreciation of $207,000 (Note 14 — Business Combinations).

16.   Related Party Transactions

At July 1, 2006 and July 2, 2005, Nortel Networks owned 6.9% and 11.8% of the outstanding shares of common stock, respectively, in the Company.

Prior to January 13, 2006, Nortel Networks, and subsidiaries of Nortel Networks, also held promissory notes with an aggregate principal amount of $45.9 million. In connection with a series of transactions entered into on January 13, 2006, the promissory notes were settled in full on January 13, 2006 (See Note 17 — Debt).

On January 13, 2006, the Company entered into a third addendum to the Optical Components Supply Agreement dated November 8, 2002 with Nortel Networks Limited (the “Supply Agreement”). The latest addendum obligates Nortel Networks to purchase $72 million of the Company’s product during the 2006 calendar year. The addendum also eliminated provisions requiring the Company to grant a license for the assembly, test, post-processing and test intellectual property (excluding wafer technology) of certain critical products to Nortel Networks Limited and to any designated alternative supplier if the Company’s cash balance was less than $25 million, as well as the provisions giving Nortel Networks Limited the right to buy all Nortel Networks Limited inventory then held by the Company and requiring the Company to grant a license to Nortel Networks Limited or any alternative supplier for the manufacture of all products covered by the first addendum to the Supply Agreement if the Company’s cash balance was less than $10 million.

These January 13, 2006 transactions were the culmination of a series of transactions since the Company’s acquisition of Nortel Networks Optical Components in 2002 under which obligations to Nortel Networks Limited were created and amended, and a supply agreement similarly was entered into and amended. The following describes this series of transactions:

•  At the time of the Company’s acquisition of NNOC in November 2002, a subsidiary of the Company issued a $30 million secured loan note due November 8, 2005 (the “$30m Note”) and a $20 million unsecured loan note due November 8, 2007 (the “Original $20m Note”) to affiliates of Nortel Networks. In connection with the issuance of these notes, the Company and Nortel Networks entered into security agreements with respect to certain assets of the Company. In September 2004, the Original $20m Note was exchanged for a $20 million note convertible into shares of the Company’s common stock (the “New $20m Note”);

•  On December 2, 2004, (i) the $30m Note was amended and restated to, among other things, extend the final maturity date by one year from November 8, 2005 to November 8, 2006 and (ii) the New $20m Note was amended and restated to, among other things, provide that it will not convert into the Company’s common stock (collectively, the “Amended and Restated Notes”). The Amended and Restated Notes were each secured by the assets that secured the $30m Note, as well as certain additional property, plant and equipment of the Company. The Amended and Restated Notes also contained certain limitations, including restrictions on asset sales and a requirement that the Company maintain a cash balance of at least $25 million;

•  On February 7, 2005, the Company, Bookham Technology plc and certain of the Company’s other subsidiaries entered into a Notes Amendment and Waiver Agreement with Nortel Networks Corporation and Nortel Networks UK Limited, relating to the $25 million cash balance covenant set forth in the

F-50

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Amended and Restated Notes. Under the waiver, the obligation to maintain this cash balance was waived until August 7, 2006; and

•  On February 7, 2005, the Company also entered into an addendum (the “The First Addendum”) to the Supply Agreement. The First Addendum effected the following changes to the Supply Agreement:

•  The term of the Supply Agreement was extended by one year to November 2006, provided that Nortel Networks’ obligation to purchase a percentage of certain optical components from the Company was to expire in accordance with the terms of the Supply Agreement in November 2005;

•  Nortel Networks provided the Company with a purchase commitment for last time buys, or certain of the Company’s discontinued products, which Nortel Networks was obligated to purchase as these products were manufactured and delivered. If the Company failed meet milestones set out in an agreed upon delivery schedule for “last-time buy” products by more than 10% in aggregate revenue for three consecutive weeks, and did not rectify the failure within 30 days, those products would have been deemed critical products, subject to the relevant provisions of the Supply Agreement described below;

•  At Nortel Networks’ request, the Company agreed to increase its manufacturing would critical product wafer in-feeds against a Nortel Networks agreed upon manufacturing schedule. Upon manufacture and placement into inventory, Nortel Networks agreed to pay a holding and inventory fee pending Nortel Network’s outright purchase of such wafers. In addition, Nortel Networks could at its election supply any capital equipment required in connection with the requisite inventory buildup or extend the time period for meeting its demand if its demand required the Company to increase its capital equipment to meet the demand in the required time period;

•  If at any time the Company (a) had a cash balance of less than $25 million; (b) was unable to manufacture critical products in any material respect, and that inability continued uncured for a period of six weeks, or (c) was subject to an insolvency event, such as a petition or assignment in bankruptcy, appointment of a trustee, custodian or receiver, or entrance into an arrangement for the general benefit of creditors, then the Company would have to grant a license for the assembly, post-processing and test intellectual property (but excluding wafer technology) of certain critical products to Nortel Networks and to any designated alternative supplier;

•  If the Company’s cash balance were less than $10 million or there were an insolvency event, Nortel Networks Limited would have had the right to buy all Nortel Networks inventory held by the Company, and the Company would have had to grant a license to Nortel Networks Limited or any alternative supplier for the manufacture of all products covered by the First Addendum;

•  The Company’s licensing and related obligations would terminate on February 7, 2007, unless the license had been exercised, in which case they would terminate 24 months from the date the license was exercised, provided that at that time, among other things, the Company had a cash balance of $25 million and had been able to meet Nortel Network’s demand for the subject products; and

•  Pursuant to the First Addendum, the Company was obligated to make prepayments under the $30 million note and the $20 million note issued to Nortel Networks UK Limited on a pro rata basis in the following amounts upon the occasion of any one of the events described below:

•  $1.0 million if the Company failed to deposit intellectual property relating to all covered products in escrow and its cash balance was below $10 million;

•  $1.0 million in each case if (a) the Company failed to deliver 90% of scheduled last time buys through April 2005, subject to cure provisions (b) the Company failed to meet 90% of scheduled critical component wafer manufacturing through August 2005, subject to cure provisions, or (c) the Company

F-51

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

failed to use commercially reasonable efforts to provide for an alternative supplier of two identified product lines when obligated to do so under the agreement; and

•  $2.0 million in each case if (a) the Company failed to deliver 75% of scheduled last time buys through August 2005, subject to cure provisions, or (b) the Company failed to meet 75% of scheduled critical product deliveries through November 2005, subject to cure provisions.

•  On March 28, 2005, the Company entered into a letter agreement (the “Letter Agreement”) with Nortel Networks pursuant to which the Company and Nortel Networks agreed to enter into definitive documentation further amending certain terms of the supply agreement, the Amended and Restated Notes and documentation related to the Amended and Restated Notes, including the security agreements entered into in connection with the Amended and Restated Notes;

•  On May 2, 2005, the Company and Nortel Networks entered into definitive agreements formally documenting the arrangements contemplated by the Letter Agreement. The terms of the definitive agreements were effective April 1, 2005 and include, among other agreements including a security agreement, a further Addendum (the “Second Addendum”) to the supply agreement and a Second Notes Amendment and Waiver Agreement between the Company and Nortel Networks relating to the Amended and Restated Notes (the “Notes Agreement”);

•  The Second Addendum, which amended the terms and provisions of the Supply Agreement as amended by the First Addendum, increased the prices and adjusted the payment terms of certain products shipped to Nortel Networks under the Supply Agreement. The increased prices and adjusted payment terms continued for one year beginning April 1, 2005. Such prices and payment terms were subject to termination if an event of default occurred and continued under the Amended and Restated Notes or if a change in control or bankruptcy event occurred;

•  Pursuant to the Second Addendum, Nortel Networks confirmed the arrangements in the Letter Agreement to issue non-cancelable purchase orders for “last-time buys” for certain products and other “non last-time buy” products. The products were to be delivered to Nortel Networks Limited over the next 12 months beginning on April 1, 2005. This resulted in the issuance of a non-cancelable purchase order for such products valued at approximately $100 million with approximately $50 million of “last-time buy” products and $50 million for other non “last-time buy” products. A specific delivery schedule was agreed for the “last-time buy” products, however, the delivery schedule and composition of the “non last-time buy” products was subject to change as agreed between the parties. The Addendum also formally confirmed increases in the prices and adjustments in the payment terms of certain products shipped to Nortel Networks under the Supply Agreement. Pursuant to the Notes Agreement, Nortel Networks UK Limited waived through May 2, 2006 the terms of the Amended and Restated Notes requiring prepayment in the event the Company raised additional capital. This waiver applied to net proceeds of up to $75 million in the aggregate, provided that the Company used such proceeds for working capital purposes in the ordinary course of business. The waiver would have terminated prior to May 2, 2006 if an event of default had occurred and were continuing under the Amended and Restated Notes or if a change in control or bankruptcy event occurred; and

•  The Notes Agreement further amended the Amended and Restated Notes to provide that an event of default under the Supply Agreement would constitute an event of default under the Amended and Restated Notes. An event of default would occur under the Supply Agreement (and therefore the Amended and Restated Notes) upon:

•  the Company’s intentional cessation of shipment of products to Nortel Networks against an agreed delivery schedule;

F-52

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•  the Company’s failure to deliver products pursuant to the Supply Agreement to the extent that Nortel Networks would be entitled to cancel all or part of an order, provided that Nortel Networks provided written notice of such default;

•  the Company’s failure to meet a milestone for a last time buy product, provided that Nortel Networks provided written notice of such default;

•  the Company’s breach of or default under any one of its material obligations under the Supply Agreement which continued for more than 10 calendar days;

•  Any other default by the Company which would entitle Nortel Networks to terminate the Supply Agreement; or

•  Any event of default under the Amended and Restated Notes.

•  Pursuant to the Notes Agreement, the Company and certain of its subsidiaries entered into security agreements securing the obligations of the Company and its subsidiaries under the Amended and Restated Notes and the Supply Agreement. These obligations were secured by the assets already securing the obligations of the Company and its subsidiaries under the Amended and Restated Notes as of December 2, 2004, as well as by Nortel Networks’ specific inventory and accounts receivable under the Supply Agreement and the Company’s real property located in Swindon, United Kingdom. However, the Company was permitted to sell the Swindon property provided that no event of default had occurred and was continuing under the Amended and Restated Notes, and provided that the Company used the proceeds of such sale for working capital purposes in the ordinary course of business.

In the ordinary course of business, the Company has entered into the following transactions with Nortel Networks for the years ended July 1, 2006 and July 2, 2005, for the six months ended July 3, 2004, and for the year ended December 31, 2003, and had the following trading balances outstanding at July 1, 2006, July 2, 2005, July 3, 2004 and December 31, 2003:

	Sales to
	Related		Purchases from		Receivables from		Liabilities to
	Party		Related Party		Related Party		Related Party
			(In thousands)
Related party
Nortel Networks
July 1, 2006	$	110,511	$	—	$	7,499	$	4,250
July 2, 2005		89,505		508		7,271		722
July 3, 2004		36,532		818		11,553		628
December 31, 2003	$	85,593	$	9,499	$	15,133	$	739

Other Related Parties

During the quarter ended January 1, 2005, the Company settled a $5.9 million promissory note due from a former Officer and Director of New Focus, which the former Officer and Director had entered into with New Focus in connection with a separation agreement in July 2002. The note, including accrued interest of $0.6 million was settled for a cash payment of $1.2 million. At the time of the acquisition of New Focus, the note had been assumed and recorded on the Company’s books at a value of $1.75 million, and in the quarter ended January 1, 2005 the Company recorded the $0.55 million difference between book value and the payment amount as a purchase price adjustment increasing the goodwill recorded in connection with the New Focus acquisition.

F-53

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17.   Debt

On January 13, 2006, the Company entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of these convertible debentures, the Company issued approximately 10.5 million shares of common stock, warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt.

The transactions were accounted for under the provisions of APB 26, “Early Extinguishments of Debt”, except for the conversion of the convertible debentures, which have been accounted for in accordance with SFAS 84, “Induced Conversions of Convertible Debt — an amendment of APB Opinion No. 26”. In accordance with these transactions, the Company has recorded in other expense a loss of $18.8 million in the year ended July 1, 2006.

•  On January 13, 2006, the Company paid Nortel Networks (UK) Limited (“NNUKL”) all $20 million outstanding principal of, plus all accrued interest on, the Amended and Restated Series A-2 Senior Secured Note Due 2007 issued by the Company to NNUKL (the “Series A Note”), and the Series A Note was retired and cancelled. The Registrant also paid NNUKL all of the accrued interest on the Amended and Restated Series B-1 Senior Secured Note Due 2006 issued by Bookham Technology plc to NNUKL, the payment of which and performance of all obligations under which had been fully and unconditionally guaranteed by the Registrant (the “Series B Note”).

•  On January 13, 2006, the Company, Bookham Technology plc and certain subsidiaries of Bookham Technology plc entered into a Release Agreement (the “Release Agreement”) with Nortel Networks, NNKUL, and certain of their affiliates (collectively, “Nortel”). Pursuant to the Release Agreement, Nortel released its security interests in the collateral securing the obligations of the Company and Bookham Technology plc under the Series A Note, the Series B Note and the Optical Components Supply Agreement dated November 8, 2002 (the “Supply Agreement”) between Bookham Technology plc and Nortel Networks Limited (“NNL”).

•  On January 13, 2006, certain accredited institutional investors entered into separate purchase agreements to purchase portions of the Series B Note (the “Note Purchasers”) from NNUKL. Pursuant to the terms of an Exchange Agreement, dated as of January 13, 2006 (the “Exchange Agreement”), by and among the Company, Bookham Technology plc and the Note Purchasers, the Company issued an aggregate of 5,120,793 shares of common stock and warrants to purchase an aggregate of up to 686,000 shares of common stock (the “Note Exchange Warrants”) to the Note Purchasers in exchange for the Series B Note, which was retired and cancelled. The Note Exchange Warrants are exercisable from July 13, 2006 to January 13, 2011 at an exercise price per share of $7.00.

•  Pursuant to the terms of a Securities Exchange Agreement, dated as of January 13, 2006 (the “Securities Exchange Agreement”), by and among the Company and the investors named therein (the “Debenture Holders”), each of the Debenture Holders exercised its rights to convert a portion of the Company’s 7.0% Senior Unsecured Convertible Debentures held by such Debenture Holder (the “Debentures”) into shares of common stock, resulting in the issuance of an aggregate of 3,529,887 shares of common stock. Also pursuant to the Securities Exchange Agreement, the Company paid the Debenture Holders an aggregate of $1,717,663.16 in cash and issued to the Debenture Holders an aggregate of 571,011 additional shares of common stock and warrants (the “Initial Warrants”) to purchase up to 304,359 shares of common stock. The Initial Warrants are exercisable from July 13, 2006 to January 13, 2011 at an exercise price per share of $7.00. Subject to the approval of the Company’s stockholders pursuant to the rules of the NASDAQ Stock Market and the terms of the Securities Exchange Agreement, each of the Debenture Holders agreed to exercise its rights to convert the remaining portion of the Debentures, which would result in the issuance of an aggregate of 178,989 additional shares of common stock. Also pursuant to the Securities Exchange

F-54

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Agreement, at the time of such subsequent conversion, the Company agreed to pay the Debenture Holders an aggregate of $538,408,51 in cash and issue to the Debenture Holders an aggregate of 1,106,477 shares of common stock to the Debenture Holders and warrants to purchase an aggregate of up to 95,461 shares of common stock, which would be exercisable on the same terms as the Initial Warrants. The requisite stockholder approval was received on March 22, 2006 and the transactions described in the preceding two sentences were consummated on March 23, 2006.

•  In connection with these transactions, the Company paid $1.8 million in fees to a third party broker.

In determining the accounting loss from these transactions, the Company applied the fair value of the consideration paid, which in the case of the warrants to purchase shares of the Company’s common stock, was based on applying the Black-Scholes-Merton model assuming variables of 84% volatility, zero dividend yield, an expected life of 5 years, and a risk free interest rate of 4.34%.

The original terms of the Nortel Networks promissory notes are described in Note 16 — Related Party Transactions.

The terms and accounting for the Debentures, prior to the January 13, 2006 were as follows:

•  On December 20, 2004, the Company closed a private placement of $25.5 million of 7.0% senior unsecured convertible debentures and warrants to purchase common stock which resulted in net proceeds of $21.5 million. The Company forwarded $4.2 million of the proceeds to Nortel Networks, paying a portion of the Series B Note owed as part of the acquisition of NNOC. The Debentures were convertible into shares of common stock at the option of the holder prior to the maturity of the Debentures on December 20, 2007. The initial conversion price of the debentures was $5.50, which represented a premium of approximately 16% over the closing price of our common stock on December 20, 2004. The holder also had a right of mandatory redemption of unpaid principle and accrued and unpaid interest in the event of a change in control or default, including penalties in the event of a change in control ranging from ten percent to twenty percent of the unpaid principle, as determined based on the timing of the triggering event. The Company had a right to convert the Debentures into shares of common stock under certain circumstances. The warrants provided holders thereof the right to purchase up to 2,001,963 shares of common stock and were exercisable during the five years from the date of grant at an initial exercise price of $6.00 per share, which represents a premium of approximately 26% over the closing price of common stock on December 20, 2004.

•  The valuation of the financial instruments issued in connection with this private placement involved judgment affected the carrying value of each instrument on the balance sheet and the periodic interest expense recorded. In order to determine the valuation of these instruments the Company applied the guidance in Emerging Issues Task Force, “EITF” Issue 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue 00-27, “Application of Issue 98-5 to Certain Convertible Instruments” to value the Debentures, the accompanying warrants and the value of the convertibility element of the Debentures. The Company first determined the fair value of the warrant and its value relative to the Debenture. The Company chose to use the Black-Scholes-Merton model to determine the value of the warrant which requires the determination of the Company’s stock’s volatility and the life of the instrument, among other factors. The Company determined that its stock’s historic volatility of 97% was representative of its stock’s future volatility and used the contractual term of five years for the life of the instrument and a risk free interest rate of 2.89%. The valuation independently derived from the Black-Scholes-Merton model for the warrant was then compared to the face value of the Debenture and a relative value of $5.4 million was assigned to the warrant. The value of the conversion element of the Debenture was determined based on the difference between the relative value of the Debenture per share of $4.35 of the 4.6 million shares, which the Debenture could have converted into, compared to the fair market value per share of $4.77 per share of the Company’s common stock on the date on which the Debentures were entered into. The value of the conversion feature of the

F-55

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Debenture was thereby determined to be $2.0 million. The value of the warrants and the conversion feature were recorded as a discount to the debt liability on the balance sheet and were amortized to interest expense based on the life of the convertible debenture of three years. In addition, the Company capitalized $1.9 million related to issuance costs associated with the debentures and warrants, which was being amortized as part of interest expense for the term of the debentures, prior to the January 13, 2006 settlement of the debt, as described above.

The warrants issued to the holders of the Debentures on December 20, 2004 are still outstanding.

Other Debt

As of July 1, 2006, the Company has an unsecured loan payable to Scheappi Grundst’ke Verwaltungen KG for $296,000 which is repayable in equal monthly installments until December 2013. This loan bears interest at 5% per annum, which is payable monthly in arrears.

18.   Quarter Summaries (unaudited)

	Three Months Ended
	July 1,			April 1,			Dec. 31,			Oct. 1			July 2,			April 2,			Jan. 1,			Oct. 2,
	2006			2006			2005			2005			2005			2005			2005			2004
							(In thousands, except per share data)
Revenues	$	54,993		$	53,360		$	60,726		$	62,571		$	61,002		$	49,939		$	45,751		$	43,564
Cost of revenues		50,281			47,561			44,049			48,196			49,295			49,392			49,298			45,662
Gross profit/(loss)		4,712			5,799			16,677			14,375			11,707			547			(3,547	)		(2,098	)
Operating expenses:
Research and development		11,264			10,914			10,007			10,401			9,754			10,648			12,046			12,377
Selling, general and administrative		12,858			13,204			12,949			13,156			13,913			13,957			14,195			17,443
Amortization of intangible assets		2,494			2,326			2,491			2,693			2,789			2,855			2,837			2,626
IPR&D		—			118			—			—			—			—			—			—
Restructuring charges		5,188			2,441			1,763			1,805			4,860			3,777			7,938			4,313
Legal settlement/(recovery)		(2,153	)		7,150			—			—			—			—			—			—
Gain on sale of fixed assets		(124	)		(313	)		(685	)		(947	)		—			—			—			(644	)
Impairment/(Recovery) of goodwill, other intangible and long-lived assets		1,192			—			—			(1,263	)		16,090			98,136			—			—
Total operating expenses		30,719			35,840			26,525			25,845			47,565			129,662			37,132			36,237
Operating loss		(26,007	)		(30,041	)		(9,848	)		(11,470	)		(35,858	)		(129,115	)		(40,679	)		(38,335	)
Loss on conversion and early extinguishment of debt		(250	)		(18,592	)		—			—			—			—			—			—
Interest and other income/(expense), net		(729	)		621			(2,079	)		(850	)		(3,171	)		(460	)		(429	)		90
Loss before income taxes		(26,986	)		(48,012	)		(11,927	)		(12,320	)		(39,029	)		(129,575	)		(41,108	)		(38,245	)
Income tax benefit/(provision)		3			(36	)		(2	)		11,785			—			—			1			(16	)
Net loss	$	(26,983	)	$	(48,048	)	$	(11,929	)	$	(535	)	$	(39,029	)	$	(129,575	)	$	(41,107	)	$	(38,261	)
Basic and diluted net loss per share	$	(0.47	)	$	(0.90	)	$	(0.28	)	$	(0.02	)	$	(1.16	)	$	(3.86	)	$	(1.23	)	$	(1.16	)
Shares used to compute basic net loss per share		56,917			53,246			42,836			33,805			33,555			33,555			33,535			32,867

F-56

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19.   Subsequent Events

Credit Agreement

On August 2, 2006, the Company, with Bookham Technology plc, New Focus, Inc. and Bookham (US) Inc., each a wholly-owned subsidiary of the Company, (collectively, the “Borrowers”), entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc. and other lenders regarding a three-year $25,000,000 senior secured revolving credit facility. Advances are available under the Credit Agreement based on a percentage of accounts receivable at the time the advance is requested.

The obligations of the Borrowers under the Credit Agreement are guaranteed by the Company, Onetta, Inc., Focused Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham (Canada) Inc., Bookham Nominees Limited and Bookham International Ltd., each a wholly-owned subsidiary of the Company (together, the “Guarantors” and together with the Borrowers, the “Obligors”), and are secured pursuant to a security agreement (the “Security Agreement”) by the assets of the Obligors, including a pledge of the capital stock holdings of the Obligors in some of their direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a guaranty agreement in substantially the same form and join in the Security Agreement.

Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage points or the 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 borrowed again anytime until maturity, which is August 2, 2009. A termination of the commitment line anytime prior to August 2, 2008 will subject the Borrowers to a prepayment premium of 1.0% of the maximum revolver amount.

The obligations of the Borrowers under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, a cross-default related to indebtedness in an aggregate amount of $1,000,000 or more, bankruptcy and insolvency related defaults, defaults relating to such matters as ERISA, judgments, and a change of control default. The Credit Agreement contains negative covenants applicable to the Company, the Borrowers and their subsidiaries, including financial covenants requiring the Borrowers to maintain a minimum level of EBITDA (if the Borrowers have not maintained specified levels of liquidity), as well as restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business, and transactions with affiliates.

Private Placement

On August 31, 2006, the Company entered into definitive agreement for a private placement pursuant to which it issued, on September 1, 2006, 8,696,000 shares of common stock, and warrants to purchase up to 2,174,000 shares of common stock, with certain institutional accredited investors for gross proceeds of approximately $23.5 million. The warrants are exercisable beginning on March 2, 2007 during the next five years at an exercise price of $4.00 per share. The Company has agreed to file a registration statement relating to the resale of the shares of common stock and the shares of common stock issued upon the exercise of the warrants. Up to an additional 2,898,667 shares of common stock and warrants to purchase 724,667 shares of common stock may be issued and sold to additional institutional accredited investors at a subsequent closing pursuant to a right of participation under the Exchange Agreement, dated January 13, 2006, by and among us, Bookham Technology plc and the parties listed on Exhibit A thereto.

F-57

Schedule II: Valuation and Qualifying Accounts

Years Ended July 1, 2006, July 2, 2005, Six Months Ended July 3, 2004 and

Year Ended December 31, 2003

						Additions
	Balance of		Exchange			Charged to
	Beginning of		Rate			Costs and		Deductions			Balance at
Description	Year		Movements			Expenses		Write Offs			End of Year
	(In thousands)
Year Ended July 1, 2006
Allowance for doubtful accounts	$	445	$	—		$	386	$	(239	)	$	592
Product returns		281		—			289		(171	)		398
Year Ended July 2, 2005
Allowance for doubtful accounts		858		(2	)		113		(524	)		445
Product returns		402		—			212		(333	)		281
Six Months Ended July 3, 2004
Allowance for doubtful accounts		396		9			548		(95	)		858
Product returns		191		4			886		(679	)		402
Year Ended December 31, 2003
Allowance for doubtful accounts		322		38			36		—			396
Product returns	$	641	$	27		$	—	$	(477	)	$	191

F-58

EXHIBIT INDEX

Exhibit
Number			Description of Exhibit
	3	.1	Amended and Restated Bylaws of Bookham, Inc. (previously filed as Exhibit 3.2 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	3	.2	Restated Certificate of Incorporation of Bookham, Inc. (previously filed as Exhibit 3.1 to Current Report on Form 8-K (file no. 000-30684) dated September 10, 2004, and incorporated herein by reference).
	10	.1	Agreement and Plan of Merger, dated September 21, 2003, by and among Bookham Technology plc, Budapest Acquisition Corp. and New Focus, Inc. (previously filed as Appendix A to Registration Statement on Form F-4, as amended (file no. 333-109904) dated February 3, 2004, and incorporated herein by reference).
	10	.2	Acquisition Agreement dated as of October 7, 2002 between Nortel Networks Corporation and Bookham Technology plc (previously filed as Exhibit 1 to Schedule 13D filed by Nortel Networks Corporation on October 17, 2002, and incorporated herein by reference).
	10	.3*	Letter Agreement dated November 8, 2002 between Nortel Networks Corporation and Bookham Technology plc amending the Acquisition Agreement referred to in Exhibit 10.2 (previously filed as Exhibit 4.2 to Amendment No. 2 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2002, and incorporated herein by reference).
	10	.4*	Optical Components Supply Agreement dated November 8, 2002, by and between Nortel Networks Limited and Bookham Technology plc (previously filed as Exhibit 4.3 to Amendment No. 1 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2002, and incorporated herein by reference).
	10	.5	Relationship Deed dated November 8, 2002 between Nortel Networks Corporation and Bookham Technology plc (previously filed as Exhibit 4.4 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2002, and incorporated herein by reference).
	10	.6	Registration Rights Agreement dated as of November 8, 2002 among Nortel Networks Corporation, the Nortel Subsidiaries listed on the signature pages and Bookham Technology plc (previously filed as Exhibit 4.5 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2002, and incorporated herein by reference).
	10	.7	Agreement relating to the Sale and Purchase of the Business of Marconi Optical Components Limited, dated December 17, 2001, among Bookham Technology plc, Marconi Optical Components Limited and Marconi Corporation plc (previously filed as Exhibit 4.1 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2001, and incorporated herein by reference).
	10	.8	Supplemental Agreement to the Agreement relating to the Sale and Purchase of the Business of Marconi Optical Components Limited, dated January 31, 2002, among Bookham Technology plc, Marconi Optical Components Limited and Marconi Corporation plc (previously filed as Exhibit 4.2 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2001, and incorporated herein by reference).
	10	.9(1)	Service Agreement dated July 23, 2001 between Bookham Technology plc and Giorgio Anania (previously filed as Exhibit 4.5 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2001, and incorporated herein by reference).
	10	.10	Lease dated May 21, 1997, between Bookham Technology plc and Landsdown Estates Group Limited, with respect to 90 Milton Park, Abingdon, England (previously filed as Exhibit 10.1 to Registration Statement on Form F-1, as amended (file no. 333-11698) dated April 11, 2000, and incorporated herein by reference).
	10	.11	Lease dated December 23, 1999 by and between Silicon Valley Properties, LLC and New Focus, Inc., with respect to 2580 Junction Avenue, San Jose, California (previously filed as Exhibit 10.32 to Amendment No. 1 to Transition Report on Form 10-K (file no. 000-30684) for the for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	10	.12(1)	2004 Employee Stock Purchase Plan (previously filed as Exhibit 10.18 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	10	.13(1)	2004 Sharesave Scheme (previously filed as Exhibit 10.20 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).

Exhibit
Number			Description of Exhibit
	10	.14(1)	Director’s Fee Agreement dated as of August 1, 2002, between Bookham Technology plc and Lori Holland (previously filed as Exhibit 4.23 to Annual Report on Form 20-F (file no. 000-30684) for the year ended December 31, 2003, and incorporated herein by reference).
	10	.15(1)	Bonus Scheme dated July 20, 2004 between Bookham Technology plc and Giorgio Anania (previously filed as Exhibit 10.23 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	10	.16(1)	Bonus Scheme dated July 20, 2004 between Bookham Technology plc and Stephen Abely (previously filed as Exhibit 10.25 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	10	.17(1)	Bonus Scheme dated July 20, 2004 between Bookham Technology plc and Stephen Turley (previously filed as Exhibit 10.26 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	10	.18(1)	Principal Statement of Terms and Conditions dated September 13, 2001 between Bookham Technology plc and Stephen Abely, as amended on July 1, 2003 (previously filed as Exhibit 10.29 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	10	.19(1)	Principal Statement of Terms and Conditions dated August 15, 2001 between Bookham Technology plc and Stephen Turley (previously filed as Exhibit 10.30 to Transition Report on Form 10-K (file no. 000-30684) for the transition period from January 1, 2004 to July 3, 2004, and incorporated herein by reference).
	10	.20	Securities Purchase Agreement, dated as of December 20, 2004, by and between Bookham, Inc. and the Investors (as such term is defined therein) (previously filed as Exhibit 99.1 to Current Report on Form 8-K (file no. 000-30684) dated December 10, 2004, and incorporated herein by reference).
	10	.21	Registration Rights Agreement, dated as of December 20, 2004, by and between Bookham, Inc. and the Investors (as such term is defined therein) (previously filed as Exhibit 99.2 to Current Report on Form 8-K (file no. 000-30684) dated December 10, 2004, and incorporated herein by reference).
	10	.22	Form of Warrant (previously filed as Exhibit 99.4 to Current Report on Form 8-K (file no. 000-30684) dated December 10, 2004, and incorporated herein by reference).
	10	.23*	Addendum to Optical Components Supply Agreement, dated as of February 7, 2005, by and between Bookham Technology plc and Nortel Networks Limited (previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, and incorporated herein by reference).
	10	.24(1)	UK Subplan to the 2004 Stock Incentive Plan (previously filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, and incorporated herein by reference).
	10	.25(1)	Restricted Stock Agreement dated February 9, 2005 between Bookham, Inc. and Giorgio Anania (previously filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, and incorporated herein by reference).
	10	.26(1)	Restricted Stock Agreement dated February 9, 2005 between Bookham, Inc. and Stephen Abely (previously filed as Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, and incorporated herein by reference).
	10	.27(1)	Bonus Agreement dated February 9, 2005 between Bookham, Inc. and Giorgio Anania (previously filed as Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, and incorporated herein by reference).
	10	.28(1)	Bonus Agreement dated February 9, 2005 between Bookham, Inc. and Stephen Abely (previously filed as Exhibit 10.8 to Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, and incorporated herein by reference).
	10	.29*	Addendum to Optical Components Supply Agreement, dated as of April 1, 2005, by and between Bookham Technology plc and Nortel Networks Limited (previously filed as Exhibit 10.36 to Annual Report on Form 10-K for the year ended July 2, 2005, and incorporated herein by reference).
	10	.30(1)	Contract of Employment between Bookham Technology plc and Jim Haynes (previously filed as Exhibit 10.38 to Annual Report on Form 10-K for the year ended July 2, 2005, and incorporated herein by reference).

Exhibit
Number			Description of Exhibit
	10	.31	Share Purchase Agreement dated August 10, 2005 among London Industrial Leasing Limited, Deutsche Bank AG (acting through its London Branch) and Bookham Technology plc (previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended October 1, 2005, and incorporated herein by reference).
	10	.32	Loan Facility Agreement dated August 10, 2005 between City Leasing (Creekside) Limited and Deutsche Bank AG, Limited, for a facility of up to £18,348,132.33 (previously filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended October 1, 2005, and incorporated herein by reference).
	10	.33	Loan Facility Agreement dated August 10, 2005 between City Leasing (Creekside) Limited and Deutsche Bank AG, Limited for a facility of up to £42,500,000.00 (previously filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended October 1, 2005, and incorporated herein by reference).
	10	.34	2004 Stock Incentive Plan, as amended, including forms of stock option agreement for incentive and nonstatutory stock options, forms of restricted stock unit agreement and forms of restricted stock agreement (previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.35(1)	Restricted Stock Agreement dated November 11, 2005 between Bookham, Inc. and Giorgio Anania (previously filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.36(1)	Restricted Stock Agreement dated November 11, 2005 between Bookham, Inc. and Stephen Abely (previously filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.37(1)	Restricted Stock Agreement dated November 11, 2005 between Bookham, Inc. and Stephen Turley (previously filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.38(1)	Restricted Stock Agreement dated November 11, 2005 between Bookham, Inc. and Jim Haynes (previously filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.39(1)	Restricted Stock Agreement dated November 11, 2005 between Bookham, Inc. and Stephen Turley (previously filed as Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.40(1)	Bookham, Inc. Cash Bonus Program (previously filed as Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.41(1)	Summary of Director Compensation (previously filed as Exhibit 10.8 to Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
	10	.42(1)	Form of Indemnification Agreement, dated October 26, 2005, between Bookham, Inc. and each of Giorgio Anania, Peter Bordui, Joseph Cook, Lori Holland, Liam Nagle, W. Arthur Porter and David Simpson (previously filed as Exhibit 99.1 to Current Report on Form 8-K filed on November 1, 2005, and incorporated herein by reference).
	10	.43*	Addendum and Amendment to Optical Components Supply Agreement, dated January 13, 2006, between Nortel Networks Limited and Bookham Technology plc (previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended April 1, 2006, and incorporated herein by reference).
	10	.44	Registration and Lock-Up Agreement, dated as of January 13, 2006, among Bookham Technology plc, Bookham, Inc. and Nortel Networks Corporation (previously filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended April 1, 2006, and incorporated herein by reference).
	10	.45	Agreement for Sale and Leaseback dated as of March 10, 2006, by and among Bookham Technology plc, Coleridge (No. 24) Limited and Bookham, Inc. (previously filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended April 1, 2006, and incorporated herein by reference).
	10	.46	Pre-emption Agreement dated as of March 10, 2006, by and among Bookham Technology plc, Coleridge (No. 24) Limited and Bookham, Inc. (previously filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended April 1, 2006, and incorporated herein by reference).
	10	.47	Lease dated as of March 10, 2006, by and among Bookham Technology plc, Coleridge (No. 24) Limited and Bookham, Inc. (previously filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended April 1, 2006, and incorporated herein by reference).

Exhibit
Number			Description of Exhibit
	10	.48	Exchange Agreement, dated as of January 13, 2006, by and among Bookham, Inc., Bookham Technology plc and the Investors (as defined therein) (previously filed as exhibit 99.1 to Current Report on Form 8-K filed on January 17, 2006, and incorporated herein by reference)
	10	.49	Form of Warrant (previously filed as exhibit 99.2 to Current Report on Form 8-K filed on January 17, 2006, and incorporated herein by reference)
	10	.50	Securities Exchange Agreement, dated as of January 13, 2006, by and between Bookham, Inc. and the Investors (as such term is defined therein) (previously filed as exhibit 99.3 to Current Report on Form 8-K filed on January 17, 2006, and incorporated herein by reference)
	10	.51	Registration Rights Agreement, dated as of January 13, 2006, by and between Bookham, Inc. and the Investors (as such term is defined therein) (previously filed as exhibit 99.4 to Current Report on Form 8-K filed on January 17, 2006, and incorporated herein by reference)
	10	.52	Form of Warrant (previously filed as exhibit 99.5 to Current Report on Form 8-K filed on January 17, 2006, and incorporated herein by reference)
	10	.53	Credit Agreement, dated as of August 2, 2006, among Bookham, Inc., Bookham Technology plc, New Focus, Inc. and Bookham (US), Inc., Wells Fargo Foothill, Inc. and other lenders party thereto
	10	.54	Security Agreement, dated as of August 2, 2006, among Bookham, Inc., Onetta, Inc., Focused Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham (Canada) Inc., Bookham Nominees Limited and Bookham International Ltd., Wells Fargo Foothill, Inc. and other secured parties party thereto.
	21	.1	List of Bookham, Inc. subsidiaries.
	23	.1	Consent of Independent Registered Public Accounting Firm.
	23	.2	Consent of Independent Registered Public Accounting Firm.
	31	.1	Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.
	31	.2	Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer.
	32	.1	Section 1350 Certification of Chief Executive Officer.
	32	.2	Section 1350 Certification of Chief Financial Officer.

*	Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Commission.
**	The exhibits and schedules to this agreement were omitted by Bookham, Inc. Bookham, Inc. agrees to furnish any exhibit or schedule to this agreement supplementally to the Securities and Exchange Commission upon written request.
(1)	Management contract or compensatory plan or arrangement.

EX-10.53

Exhibit 10.53

CREDIT AGREEMENT

by and among

BOOKHAM, INC.,

as Parent,

and

EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES HERETO

as Borrowers,

THE LENDERS THAT ARE SIGNATORIES HERETO

as the Lenders,

and

WELLS FARGO FOOTHILL, INC.

as the Arranger and Administrative Agent

Dated as of August 2, 2006

TABLE OF CONTENTS

			Page
1.	DEFINITIONS AND CONSTRUCTION.			1
	1.1	Definitions		1
	1.2	Accounting Terms		1
	1.3	Code		1
	1.4	Construction		1
	1.5	Schedules and Exhibits		2
2.	LOAN AND TERMS OF PAYMENT.			2
	2.1	Revolver Advances		2
	2.2	Intentionally Deleted		2
	2.3	Borrowing Procedures and Settlements		2
	2.4	Payments		7
	2.5	Overadvances		8
	2.6	Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations		9
	2.7	Cash Management		10
	2.8	Crediting Payments		10
	2.9	Designated Account		11
	2.10	Maintenance of Loan Account; Statements of Obligations		11
	2.11	Fees		11
	2.12	Letters of Credit		11
	2.13	LIBOR Option		14
	2.14	Capital Requirements		16
	2.15	Joint and Several Liability of Borrowers		16
3.	CONDITIONS; TERM OF AGREEMENT.			18
	3.1	Conditions Precedent to the Initial Extension of Credit		18
	3.2	Conditions Precedent to all Extensions of Credit		18
	3.3	Term		18
	3.4	Effect of Termination		18
	3.5	Early Termination by Borrowers		19
4.	REPRESENTATIONS AND WARRANTIES.			19
	4.1	No Encumbrances		19
	4.2	Eligible Accounts		19
	4.3	Inventory		20
	4.4	Equipment		20
	4.5	Location of Inventory and Equipment		20
	4.6	Inventory Records		20
	4.7	Jurisdiction of Organization; Location of Chief Executive Office; Organizational Identification Number; Commercial Tort Claims		20
	4.8	Due Organization and Qualification; Subsidiaries		20
	4.9	Due Authorization; No Conflict		21
	4.10	Litigation		22
	4.11	No Material Adverse Change		22
	4.12	Fraudulent Transfer		22
	4.13	Employee Benefits		22
	4.14	Environmental Condition		22
	4.15	Intellectual Property		22

TABLE OF CONTENTS
(continued)

			Page
	4.16	Leases		23
	4.17	Deposit Accounts and Securities Accounts		23
	4.18	Complete Disclosure		23
	4.19	Indebtedness		23
	4.20	Inactive Obligors		23
5.	AFFIRMATIVE COVENANTS.			23
	5.1	Accounting System		23
	5.2	Collateral Reporting		24
	5.3	Financial Statements, Reports, Certificates		24
	5.4	Guarantor Reports		24
	5.5	Inspection		24
	5.6	Maintenance of Properties		24
	5.7	Taxes		24
	5.8	Insurance		24
	5.9	Location of Inventory and Equipment		25
	5.10	Compliance with Laws		25
	5.11	Leases		25
	5.12	Existence		25
	5.13	Environmental		26
	5.14	Disclosure Updates		26
	5.15	Control Agreements		26
	5.16	Formation of Subsidiaries		26
	5.17	Further Assurances		26
	5.19	UK Mortgage Documents		27
	5.20	Post-Closing Covenants		27
6.	NEGATIVE COVENANTS.			27
	6.1	Indebtedness		27
	6.2	Liens		28
	6.3	Restrictions on Fundamental Changes		28
	6.4	Disposal of Assets		28
	6.5	Change Name		28
	6.6	Nature of Business		28
	6.7	Prepayments and Amendments		28
	6.8	Change of Control		29
	6.9	Consignments		29
	6.10	Distributions		29
	6.11	Accounting Methods		29
	6.12	Investments		30
	6.13	Transactions with Affiliates		30
	6.14	Use of Proceeds		30
	6.15	Inventory and Equipment with Bailees		31
	6.16	Financial Covenants		31
7.	EVENTS OF DEFAULT.			32
8.	THE LENDER GROUP’S RIGHTS AND REMEDIES			33
	8.1	Rights and Remedies		33

TABLE OF CONTENTS
(continued)

			Page
	8.2	Remedies Cumulative		34
9.	TAXES AND EXPENSES.			34
10.	WAIVERS; INDEMNIFICATION.			35
	10.1	Demand; Protest; etc		35
	10.2	The Lender Group's Liability for Collateral		35
	10.3	Indemnification		35
11.	NOTICES.			35
12.	CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.			36
13.	ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.			37
	13.1	Assignments and Participations.		37
	13.2	Successors		39
14.	AMENDMENTS; WAIVERS.			39
	14.1	Amendments and Waivers		39
	14.2	Replacement of Holdout Lender		40
	14.3	No Waivers; Cumulative Remedies		41
15.	AGENT; THE LENDER GROUP.			41
	15.1	Appointment and Authorization of Agent		41
	15.2	Delegation of Duties		41
	15.3	Liability of Agent		42
	15.4	Reliance by Agent		42
	15.5	Notice of Default or Event of Default		42
	15.6	Credit Decision		42
	15.7	Costs and Expenses; Indemnification		43
	15.8	Agent in Individual Capacity		43
	15.9	Successor Agent		44
	15.10	Lender in Individual Capacity		44
	15.11	Withholding Taxes		44
	15.12	Collateral Matters		46
	15.13	Restrictions on Actions by Lenders; Sharing of Payments		47
	15.14	Agency for Perfection		48
	15.15	Payments by Agent to the Lenders		48
	15.16	Concerning the Collateral and Related Loan Documents		48
	15.17	Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information		48
	15.18	Several Obligations; No Liability		49
	15.19	Bank Product Providers		49
16.	GENERAL PROVISIONS.			49
	16.1	Effectiveness		49
	16.2	Section Headings		49
	16.3	Interpretation		49
	16.4	Severability of Provisions		50
	16.5	Counterparts; Electronic Execution		50

TABLE OF CONTENTS
(continued)

		Page
16.6	Revival and Reinstatement of Obligations		50
16.7	Confidentiality		50
16.8	Lender Group Expenses		51
16.9	USA PATRIOT Act		51
16.10	Integration		51
16.11	Bookham UK as Agent for Borrowers		51
16.12	Judgment Currency		51

EXHIBITS AND SCHEDULES

Exhibit A-1	Form of Assignment and Acceptance
Exhibit B-1	Form of Borrowing Base Certificate
Exhibit C-1	Form of Compliance Certificate
Exhibit L-1	Form of LIBOR Notice
Schedule A-1	Agent’s Account
Schedule C-1	Commitments
Schedule D-1	Designated Account
Schedule F-1	Foreign Security Documents
Schedule P-1	Permitted Intercompany Transactions
Schedule P-2	Permitted Liens
Schedule 1.1	Definitions
Schedule 2.7(a)	Cash Management Banks
Schedule 3.1	Conditions Precedent
Schedule 4.5	Locations of Inventory and Equipment
Schedule 4.7(a)	States of Organization
Schedule 4.7(b)	Chief Executive Offices
Schedule 4.7(c)	Organizational Identification Numbers
Schedule 4.7(d)	Commercial Tort Claims
Schedule 4.8(b)	Capitalization of Parent
Schedule 4.8(c)	Capitalization of Parent’s Subsidiaries
Schedule 4.10	Litigation
Schedule 4.14	Environmental Matters
Schedule 4.15	Intellectual Property
Schedule 4.17	Deposit Accounts and Securities Accounts
Schedule 4.19	Permitted Indebtedness
Schedule 5.2	Collateral Reporting
Schedule 5.3	Financial Statements, Reports, Certificates
Schedule 5.20	Post-Closing Covenants

CREDIT AGREEMENT

     THIS CREDIT AGREEMENT (this “Agreement”), is entered into as of August 2, 2006, by and among the lenders identified on the signature pages hereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “Lender” and collectively as the “Lenders”), WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “Agent”), BOOKHAM, INC., a Delaware corporation (“Parent”), and each of Parent’s Subsidiaries identified as borrower on the signature pages hereof (such Subsidiaries are referred to hereinafter each individually as a “Borrower”, and individually and collectively, jointly and severally, as the “Borrowers”).

     The parties agree as follows:

1. DEFINITIONS AND CONSTRUCTION.

     1.1 Definitions. Capitalized terms used in this Agreement shall have the meanings specified therefor on Schedule 1.1.

     1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term “financial statements” shall include the notes and schedules thereto. Whenever the term “Borrowers” or the term “Parent” is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrowers and their Subsidiaries or Parent and its Subsidiaries, as applicable, on a consolidated basis, unless the context clearly requires otherwise.

     1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein; provided, however, that to the extent that the Code is used to define any term herein and such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 of the Code shall govern.

     1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the terms “includes” and “including” are not limiting, and the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in any other Loan Document to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein or in any other Loan Document to the satisfaction or repayment in full of the Obligations shall mean the repayment in full in cash (or cash collateralization in accordance with the terms hereof) of all Obligations other than unasserted contingent indemnification Obligations and other than any Bank Product Obligations that, at such time, are allowed by the applicable Bank Product Provider to remain outstanding and that are not required by the provisions of this Agreement to be repaid or cash collateralized. Any reference herein to any Person shall be construed to include such Person’s successors and assigns. Any requirement of a writing contained herein or in any other Loan Document shall be satisfied by the transmission of a Record and any Record so transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein.

1

     1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference.

2. LOAN AND TERMS OF PAYMENT.

     2.1 Revolver Advances.

          (a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver Commitment agrees (severally, not jointly or jointly and severally) to make advances (“Advances”) to Borrowers in an amount at any one time outstanding not to exceed such Lender’s Pro Rata Share of an amount equal to the lesser of (i) the Maximum Revolver Amount less the Letter of Credit Usage at such time, and (ii) the Borrowing Base at such time less the Letter of Credit Usage at such time.

          (b) Anything to the contrary in this Section 2.1 notwithstanding, Agent shall have the right to establish reserves against the Borrowing Base in such amounts, and with respect to such matters, as Agent in its Permitted Discretion shall deem necessary or appropriate, including reserves with respect to (i) sums that Borrowers or their Subsidiaries are required to pay under any Section of this Agreement or any other Loan Document (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and have failed to pay, and (ii) amounts owing by Parent and its Subsidiaries to any Person to the extent secured by a Lien on, or trust over, or preferential claim by operation of law over, or claim of retention of title to, any of the Collateral (other than a Permitted Lien), which Lien or trust, in the Permitted Discretion of Agent likely would have a priority superior to the Agent’s Liens (such as Liens, preferred claims, claims of retention of title, or trusts in favor of employees, creditors, landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral.

          (c) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. The outstanding principal amount of the Advances, together with interest accrued thereon, shall be due and payable on the Maturity Date or, if earlier, on the date on which they are declared due and payable pursuant to the terms of this Agreement.

     2.2 Intentionally Deleted.

     2.3 Borrowing Procedures and Settlements.

          (a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent. Unless Swing Lender is not obligated to make a Swing Loan pursuant to Section 2.3(b), such notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day; provided, however, that if Swing Lender is not obligated to make a Swing Loan as to a requested Borrowing, such notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day prior to the date that is the requested Funding Date. At Agent’s election, in lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time. In such circumstances, Borrowers agree that any such telephonic notice will be confirmed in writing within 24 hours of the giving of such telephonic notice, but the failure to provide such written confirmation shall not affect the validity of the request.

          (b) Making of Swing Loans. In the case of a request for an Advance and so long as either (i) the aggregate amount of Swing Loans made since the last Settlement Date plus the amount of the requested Advance does not exceed $2,500,000, or (ii) Swing Lender, in its sole discretion, shall agree to make

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a Swing Loan notwithstanding the foregoing limitation, Swing Lender shall make an Advance in the amount of such Borrowing (any such Advance made solely by Swing Lender pursuant to this Section 2.3(b) being referred to as a “Swing Loan” and such Advances being referred to collectively as “Swing Loans”) available to Borrowers on the Funding Date applicable thereto by transferring immediately available funds to Borrowers’ Designated Account. Each Swing Loan shall be deemed to be an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that all payments on any Swing Loan shall be payable to Swing Lender solely for its own account. Subject to the provisions of Section 2.3(d)(ii), Swing Lender shall not make and shall not be obligated to make any Swing Loan if Swing Lender has actual knowledge that (i) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing, or (ii) the requested Borrowing would exceed the Availability on such Funding Date. Swing Lender shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 3 have been satisfied on the Funding Date applicable thereto prior to making any Swing Loan. The Swing Loans shall be secured by the Agent’s Liens, constitute Obligations hereunder, and bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. Notwithstanding anything in this Section 2.3(b) to the contrary, at any time that there is only one Lender, the Swing Lender shall not be obligated to make a Swing Loan, requested Borrowings shall be made pursuant to Section 2.3(c), and, subject to the other terms and provisions contained herein, Borrowers may request Advances to be made directly as LIBOR Rate Loans.

          (c) Making of Loans.

               (i) In the event that Swing Lender is not obligated to make a Swing Loan, then promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, not later than 1:00 p.m. (California time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender’s Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent’s Account, not later than 10:00 a.m. (California time) on the Funding Date applicable thereto. After Agent’s receipt of the proceeds of such Advances, Agent shall make the proceeds thereof available to Administrative Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Administrative Borrower’s Designated Account; provided, however, that, subject to the provisions of Section 2.3(d)(ii), Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date.

               (ii) Unless Agent receives notice from a Lender prior to 9:00 a.m. (California time) on the date of a Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrowers the amount of that Lender’s Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrowers on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrowers such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lender Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender’s Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Administrative Borrower of such failure to fund and, upon demand by Agent, Borrowers shall pay such amount to Agent for Agent’s account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing

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such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date.

               (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrowers to Agent for the Defaulting Lender’s benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender’s Advance was funded by the other members of the Lender Group) or, if so directed by Administrative Borrower and if no Default or Event of Default has occurred and is continuing (and to the extent such Defaulting Lender’s Advance was not funded by the Lender Group), retain same to be re-advanced to Borrowers as if such Defaulting Lender had made Advances to Borrowers. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrowers for the account of such Defaulting Lender the amount of all such payments received and retained by Agent for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a “Lender” and such Lender’s Commitment shall be deemed to be zero. This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and Administrative Borrower shall have waived such Defaulting Lender’s default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Advance and pays to Agent all amounts owing by Defaulting Lender in respect thereof. The operation of this Section shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrowers of their duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Administrative Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations (other than Bank Product Obligations, but including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever; provided however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups’ or Borrowers’ rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund.

          (d) Protective Advances and Optional Overadvances.

               (i) Agent hereby is authorized by Borrowers and the Lenders, from time to time in Agent’s sole discretion, (A) after the occurrence and during the continuance of a Default or an Event of Default, or (B) at any time that any of the other applicable conditions precedent set forth in Section 3 are not satisfied, to make Advances to Borrowers on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (1) to preserve or protect the Collateral, or any portion thereof, (2) to enhance the likelihood of repayment of the Obligations (other than the Bank Product Obligations), or (3) to pay any other amount chargeable to Borrowers pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 9 (any of the Advances described in this Section 2.3(d)(i) shall be referred to as “Protective Advances”).

               (ii) Any contrary provision of this Agreement notwithstanding, the Lenders hereby authorize Agent or Swing Lender, as applicable, and either Agent or Swing Lender, as applicable, may,

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but is not obligated to, knowingly and intentionally, continue to make Advances (including Swing Loans) to Borrowers notwithstanding that an Overadvance exists or thereby would be created, so long as (A) after giving effect to such Advances, the outstanding Revolver Usage does not exceed the Borrowing Base by more than $2,500,000, and (B) after giving effect to such Advances, the outstanding Revolver Usage (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) does not exceed the Maximum Revolver Amount. In the event Agent obtains actual knowledge that the Revolver Usage exceeds the amounts permitted by the immediately foregoing provisions, regardless of the amount of, or reason for, such excess, Agent shall notify the Lenders as soon as practicable (and prior to making any (or any additional) intentional Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) unless Agent determines that prior notice would result in imminent harm to the Collateral or its value), and the Lenders with Revolver Commitments thereupon shall, together with Agent, jointly determine the terms of arrangements that shall be implemented with Borrowers intended to reduce, within a reasonable time, the outstanding principal amount of the Advances to Borrowers to an amount permitted by the preceding paragraph. In such circumstances, if any Lender with a Revolver Commitment objects to the proposed terms of reduction or repayment of any Overadvance, the terms of reduction or repayment thereof shall be implemented according to the determination of the Required Lenders. Each Lender with a Revolver Commitment shall be obligated to settle with Agent as provided in Section 2.3(e) for the amount of such Lender’s Pro Rata Share of any unintentional Overadvances by Agent reported to such Lender, any intentional Overadvances made as permitted under this Section 2.3(d)(ii), and any Overadvances resulting from the charging to the Loan Account of interest, fees, or Lender Group Expenses.

               (iii) Each Protective Advance and each Overadvance shall be deemed to be an Advance hereunder, except that no Protective Advance or Overadvance shall be eligible to be a LIBOR Rate Loan and all payments on the Protective Advances shall be payable to Agent solely for its own account. The Protective Advances and Overadvances shall be repayable on demand, secured by the Agent’s Liens, constitute Obligations hereunder, and bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. The provisions of this Section 2.3(d) are for the exclusive benefit of Agent, Swing Lender, and the Lenders and are not intended to benefit any Borrower in any way.

          (e) Settlement. It is agreed that each Lender’s funded portion of the Advances is intended by the Lenders to equal, at all times, such Lender’s Pro Rata Share of the outstanding Advances. Such agreement notwithstanding, Agent, Swing Lender, and the other Lenders agree (which agreement shall not be for the benefit of any Borrower) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among the Lenders as to the Advances, the Swing Loans, and the Protective Advances shall take place on a periodic basis in accordance with the following provisions:

               (i) Agent shall request settlement (“Settlement”) with the Lenders on a weekly basis, or on a more frequent basis if so determined by Agent (1) on behalf of Swing Lender, with respect to the outstanding Swing Loans, (2) for itself, with respect to the outstanding Protective Advances, and (3) with respect to Borrowers’ or their Subsidiaries’ Collections received, as to each by notifying the Lenders by telecopy, telephone, or other similar form of transmission, of such requested Settlement, no later than 2:00 p.m. (California time) on the Business Day immediately prior to the date of such requested Settlement (the date of such requested Settlement being the “Settlement Date”). Such notice of a Settlement Date shall include a summary statement of the amount of outstanding Advances, Swing Loans, and Protective Advances for the period since the prior Settlement Date. Subject to the terms and conditions contained herein (including Section 2.3(c)(iii)): (y) if a Lender’s balance of the Advances (including Swing Loans and Protective Advances) exceeds such Lender’s Pro Rata Share of the Advances (including Swing Loans and Protective Advances) as of a Settlement Date, then Agent shall, by no later than 12:00 p.m. (California time) on the Settlement Date, transfer in immediately available funds to a Deposit Account of such Lender (as such Lender may designate), an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances (including Swing Loans and Protective Advances), and (z) if a Lender’s balance of the Advances (including Swing Loans and Protective Advances) is less than such

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Lender’s Pro Rata Share of the Advances (including Swing Loans and Protective Advances) as of a Settlement Date, such Lender shall no later than 12:00 p.m. (California time) on the Settlement Date transfer in immediately available funds to the Agent’s Account, an amount such that each such Lender shall, upon transfer of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances (including Swing Loans and Protective Advances). Such amounts made available to Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable Swing Loans or Protective Advances and, together with the portion of such Swing Loans or Protective Advances representing Swing Lender’s Pro Rata Share thereof, shall constitute Advances of such Lenders. If any such amount is not made available to Agent by any Lender on the Settlement Date applicable thereto to the extent required by the terms hereof, Agent shall be entitled to recover for its account such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate.

               (ii) In determining whether a Lender’s balance of the Advances, Swing Loans, and Protective Advances is less than, equal to, or greater than such Lender’s Pro Rata Share of the Advances, Swing Loans, and Protective Advances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received in good funds by Agent with respect to principal, interest, fees payable by Borrowers and allocable to the Lenders hereunder, and proceeds of Collateral. To the extent that a net amount is owed to any such Lender after such application, such net amount shall be distributed by Agent to that Lender as part of such next Settlement.

               (iii) Between Settlement Dates, Agent, to the extent no Protective Advances or Swing Loans are outstanding, may pay over to Swing Lender any payments received by Agent, that in accordance with the terms of this Agreement would be applied to the reduction of the Advances, for application to Swing Lender’s Pro Rata Share of the Advances. If, as of any Settlement Date, Collections of Borrowers or their Subsidiaries received since the then immediately preceding Settlement Date have been applied to Swing Lender’s Pro Rata Share of the Advances other than to Swing Loans, as provided for in the previous sentence, Swing Lender shall pay to Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances. During the period between Settlement Dates, Swing Lender with respect to Swing Loans, Agent with respect to Protective Advances, and each Lender (subject to the effect of agreements between Agent and individual Lenders) with respect to the Advances other than Swing Loans and Protective Advances, shall be entitled to interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by Swing Lender, Agent, or the Lenders, as applicable.

          (f) Notation. Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Swing Loans owing to Swing Lender, and Protective Advances owing to Agent, and the interests therein of each Lender, from time to time and such records shall, absent manifest error, conclusively be presumed to be correct and accurate.

          (g) Lenders’ Failure to Perform. All Advances (other than Swing Loans and Protective Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder.

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     2.4 Payments.

          (a) Payments by Borrowers.

               (i) Except as otherwise expressly provided herein, all payments by Borrowers shall be made to Agent’s Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day.

               (ii) Unless Agent receives notice from Administrative Borrower prior to the date on which any payment is due to the Lenders that Borrowers will not make such payment in full as and when required, Agent may assume that Borrowers have made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrowers do not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid.

          (b) Apportionment and Application.

               (i) So long as no Event of Default has occurred and is continuing and except as otherwise provided with respect to Defaulting Lenders, all principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender) and all payments of fees and expenses (other than fees or expenses that are for Agent’s separate account) shall be apportioned ratably among the Lenders having a Pro Rata Share of the type of Commitment or Obligation to which a particular fee or expense relates. All payments to be made hereunder by Borrowers shall be remitted to Agent and all (subject to Section 2.4(b)(iv)) such payments, and all Collections which have been received by Agent pursuant to Section 2.7, shall be applied, so long as no Event of Default has occurred and is continuing, to reduce the balance of the Advances outstanding and, thereafter, to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law.

               (ii) At any time that an Event of Default has occurred and is continuing and except as otherwise provided with respect to Defaulting Lenders, all payments remitted to Agent and all proceeds of Collateral received by Agent shall be applied as follows:

                    (A) first, to pay any Lender Group Expenses (including cost or expense reimbursements) or indemnities then due to Agent under the Loan Documents, until paid in full,

                    (B) second, to pay any fees or premiums then due to Agent under the Loan Documents until paid in full,

                    (C) third, to pay interest due in respect of all Protective Advances until paid in full,

                    (D) fourth, to pay the principal of all Protective Advances until paid in full,

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                    (E) fifth, ratably to pay any Lender Group Expenses (including cost or expense reimbursements) or indemnities then due to any of the Lenders under the Loan Documents, until paid in full,

                    (F) sixth, ratably to pay any fees or premiums then due to any of the Lenders under the Loan Documents until paid in full,

                    (G) seventh, ratably to pay interest due in respect of the Advances (other than Protective Advances) and the Swing Loans, until paid in full,

                    (H) eighth, ratably (i) to pay the principal of all Swing Loans until paid in full, (ii) to pay the principal of all Advances until paid in full, (iii) to Agent, to be held by Agent, for the ratable benefit of Issuing Lender and those Lenders having a Revolver Commitment, as cash collateral in an amount up to 105% of the Letter of Credit Usage, and (iv) to Agent, to be held by Agent, for the benefit of the Bank Product Providers, as cash collateral in an amount up to the amount of the Bank Product Reserve established prior to the occurrence of, and not in contemplation of, the subject Event of Default,

                    (I) ninth, to pay any other Obligations (including the provision of amounts to Agent, to be held by Agent, for the benefit of the Bank Product Providers, as cash collateral in an amount up to the amount determined by Agent in its Permitted Discretion as the amount necessary to secure Borrowers’ and their Subsidiaries’ obligations in respect of Bank Products), and

                    (J) tenth, to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law.

               (iii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provided in Section 2.3(e).

               (iv) In each instance, so long as no Event of Default has occurred and is continuing, Section 2.4(b)(i) shall not apply to any payment made by Borrowers to Agent and specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement.

               (v) For purposes of Section 2.4(b)(ii), “paid in full” means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not any of the foregoing would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding.

               (vi) In the event of a direct conflict between the priority provisions of this Section 2.4 and any other provision contained in any other Loan Document, it is the intention of the parties hereto that such provisions be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern.

     2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrowers to the Lender Group pursuant to Section 2.1 or Section 2.12 is greater than any of the limitations set forth in Section 2.1 or Section 2.12, as applicable (an “Overadvance”), Borrowers immediately (or, with respect to any intentional Overadvances made by Agent pursuant to Section 2.3(d)(ii), on such other terms as shall be imposed by Agent and Lenders) shall pay to Agent, in cash, the amount of such excess, which amount

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shall be used by Agent to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b). Borrowers promise to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full on the Maturity Date or, if earlier, on the date on which the Obligations are declared due and payable pursuant to the terms of this Agreement.

     2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations.

          (a) Interest Rates. Except as provided in Section 2.6(c), all Obligations (except for undrawn Letters of Credit and except for Bank Product Obligations) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows: (i) if the relevant Obligation is an Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin, and (ii) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin.

          (b) Letter of Credit Fee. Borrowers shall pay Agent (for the ratable benefit of the Lenders with a Revolver Commitment, subject to any agreements between Agent and individual Lenders), a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.12(e)) which shall accrue at a rate equal to 2.75% per annum times the Daily Balance of the undrawn amount of all outstanding Letters of Credit.

          (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders),

               (i) all Obligations (except for undrawn Letters of Credit and except for Bank Product Obligations) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 2 percentage points above the per annum rate otherwise applicable hereunder, and

               (ii) the Letter of Credit fee provided for in Section 2.6(b) shall be increased to 2 percentage points above the per annum rate otherwise applicable hereunder.

          (d) Payment. Except as provided to the contrary in Section 2.11 or Section 2.13(a), interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month at any time that Obligations or Commitments are outstanding. Borrowers hereby authorize Agent, from time to time, without prior notice to Borrowers, to charge all interest and fees (when due and payable), all Lender Group Expenses (as and when incurred), all charges, commissions, fees, and costs provided for in Section 2.12(e) (as and when accrued or incurred), all fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document (including any amounts due and payable to the Bank Product Providers in respect of Bank Products up to the amount of the Bank Product Reserve) to Borrowers’ Loan Account, which amounts thereafter shall constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans. Any interest not paid when due shall be compounded by being charged to the Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans.

          (e) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate.

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          (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrowers and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess.

     2.7 Cash Management.

          (a) Parent shall and shall cause each of the Obligors to (i) establish and maintain cash management services of a type and on terms satisfactory to Agent at one or more of the banks set forth on Schedule 2.7(a) (each a “Cash Management Bank”), and shall request in writing and otherwise take such reasonable steps to ensure that all of their and their Subsidiaries’ Account Debtors forward payment of the amounts owed by them directly to such Cash Management Bank, and (ii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all of their Collections (including those sent directly by their Account Debtors to Borrowers or their Subsidiaries) into a bank account in Agent’s name (a “Cash Management Account”) at one of the Cash Management Banks.

          (b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Agent and the applicable Obligor. Each such Cash Management Agreement shall provide, among other things, that (i) the Cash Management Bank will comply with any instructions originated by Agent directing the disposition of the funds in such Cash Management Account without further consent by Parent or any of its Subsidiaries, as applicable, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account, other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) it will forward, by daily sweep, all amounts in the applicable Cash Management Account to the Agent’s Account.

          (c) So long as no Default or Event of Default has occurred and is continuing, Administrative Borrower may amend Schedule 2.7(a) to add or replace a Cash Management Bank or Cash Management Account; provided, however, that (i) such prospective Cash Management Bank shall be reasonably satisfactory to Agent, and (ii) prior to the time of the opening of such Cash Management Account, the applicable Obligor and such prospective Cash Management Bank shall have executed and delivered to Agent a Cash Management Agreement. The applicable Obligor shall close any of its Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of notice from Agent that the creditworthiness of any Cash Management Bank is no longer acceptable in Agent’s reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Agent that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Agent’s liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Agent’s reasonable judgment.

          (d) Each Cash Management Account shall be a cash collateral account subject to a Control Agreement.

     2.8 Crediting Payments. The receipt of any payment item by Agent (whether from transfers to Agent by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available

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federal funds made to the Agent’s Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into the Agent’s Account on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into the Agent’s Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day.

     2.9 Designated Account. Agent is authorized to make the Advances, and Issuing Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person or, without instructions, if pursuant to Section 2.6(d). Administrative Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrowers and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Administrative Borrower, any Advance, Protective Advance, or Swing Loan requested by Borrowers and made by Agent or the Lenders hereunder shall be made to the Designated Account.

     2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrowers (the “Loan Account”) on which Borrowers will be charged with all Advances (including Protective Advances and Swing Loans) made by Agent, Swing Lender, or the Lenders to Borrowers or for Borrowers’ account, the Letters of Credit issued by Issuing Lender for Borrowers’ account, and with all other payment Obligations hereunder or under the other Loan Documents (except for Bank Product Obligations), including, accrued interest, fees and expenses, and Lender Group Expenses. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrowers or for Borrowers’ account, including all amounts received in the Agent’s Account from any Cash Management Bank. Agent shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, and fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements, absent manifest error, shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and the Lender Group unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements.

     2.11 Fees. Borrowers shall pay to Agent, as and when due and payable under the terms of the Fee Letter, the fees set forth in the Fee Letter.

     2.12 Letters of Credit.

          (a) Subject to the terms and conditions of this Agreement, the Issuing Lender agrees to issue letters of credit for the account of Borrowers (each, an “L/C”) or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an “L/C Undertaking”) with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of Borrowers. Each request for the issuance of a Letter of Credit or the amendment, renewal, or extension of any outstanding Letter of Credit, shall be made in writing by an Authorized Person and delivered to the Issuing Lender and Agent via hand delivery, telefacsimile, or other electronic method of transmission reasonably in advance of the requested date of issuance, amendment, renewal, or extension. Each such request shall be in form and substance satisfactory to the Issuing Lender in its Permitted Discretion and shall specify (i) the amount of such Letter of Credit, (ii) the date of issuance, amendment, renewal, or extension of such Letter of Credit, (iii) the expiration date of such Letter of Credit, (iv) the name and address of the beneficiary thereof (or the beneficiary of the Underlying Letter of Credit, as applicable), and (v) such other information (including, in the case of an amendment, renewal, or extension, identification of the outstanding Letter of Credit to be so amended, renewed, or extended) as shall be necessary

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to prepare, amend, renew, or extend such Letter of Credit. If requested by the Issuing Lender, Borrowers also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. The Issuing Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the issuance of such requested Letter of Credit:

               (i) the Letter of Credit Usage would exceed the Borrowing Base less the outstanding amount of Advances, or

               (ii) the Letter of Credit Usage would exceed $5,000,000, or

               (iii) the Letter of Credit Usage would exceed the Maximum Revolver Amount less the outstanding amount of Advances less the Bank Product Reserve, and less the aggregate amount of reserves, if any, established by Agent under Section 2.1(b).

     Borrowers and the Lender Group acknowledge and agree that certain Underlying Letters of Credit may be issued to support letters of credit that already are outstanding as of the Closing Date. Each Letter of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to the Issuing Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. If Issuing Lender is obligated to advance funds under a Letter of Credit, Borrowers immediately shall reimburse such L/C Disbursement to Issuing Lender by paying to Agent an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Administrative Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Administrative Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on the Business Day that Administrative Borrower receives such notice, if such notice is received prior to 10:00 a.m., California time, on the date of receipt, or by 11:00 a.m., California time, on the Business Day after notice is received if such receipt is on or after 10:00 a.m. California time, on such date, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, initially, shall bear interest at the rate then applicable to Advances that are Base Rate Loans. To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrowers’ obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. Promptly following receipt by Agent of any payment from Borrowers pursuant to this paragraph, Agent shall distribute such payment to the Issuing Lender or, to the extent that Lenders have made payments pursuant to Section 2.12(b) to reimburse the Issuing Lender, then to such Lenders and the Issuing Lender as their interests may appear.

          (b) Promptly following receipt of a notice of L/C Disbursement pursuant to Section 2.12(a), each Lender with a Revolver Commitment agrees to fund its Pro Rata Share of any Advance deemed made pursuant to the foregoing subsection on the same terms and conditions as if Borrowers had requested such Advance and Agent shall promptly pay to Issuing Lender the amounts so received by it from the Lenders. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Lender or the Lenders with Revolver Commitments, the Issuing Lender shall be deemed to have granted to each Lender with a Revolver Commitment, and each Lender with a Revolver Commitment shall be deemed to have purchased, a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit, and each such Lender agrees to pay to Agent, for the account of the Issuing Lender, such Lender’s Pro Rata Share of any payments made by the Issuing Lender under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender with a Revolver Commitment hereby absolutely and unconditionally agrees to pay to Agent, for the account of the Issuing Lender, such Lender’s Pro Rata Share of each L/C Disbursement made by the Issuing Lender and not reimbursed by Borrowers on the date due as provided in Section 2.12(a), or of any reimbursement payment required to be refunded to Borrowers for any reason. Each Lender with a Revolver Commitment acknowledges and agrees that its obligation to deliver to Agent, for the account of the Issuing Lender, an amount equal to its respective Pro Rata

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Share of each L/C Disbursement made by the Issuing Lender pursuant to this Section 2.12(b) shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3. If any such Lender fails to make available to Agent the amount of such Lender’s Pro Rata Share of each L/C Disbursement made by the Issuing Lender in respect of such Letter of Credit as provided in this Section, such Lender shall be deemed to be a Defaulting Lender and Agent (for the account of the Issuing Lender) shall be entitled to recover such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate until paid in full.

          (c) Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by the Lender Group arising out of or in connection with any Letter of Credit; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability to the extent that it is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Each Borrower agrees to be bound by the Underlying Issuer’s regulations and interpretations of any Underlying Letter of Credit or by Issuing Lender’s interpretations of any L/C issued by Issuing Lender to or for such Borrower’s account, even though this interpretation may be different from such Borrower’s own, and each Borrower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrowers’ instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Each Borrower understands that the L/C Undertakings may require Issuing Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrowers against such Underlying Issuer. Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by the Lender Group under any L/C Undertaking as a result of the Lender Group’s indemnification of any Underlying Issuer; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability to the extent that it is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Each Borrower hereby acknowledges and agrees that neither the Lender Group nor the Issuing Lender shall be responsible for delays, errors, or omissions resulting from the malfunction of equipment in connection with any Letter of Credit.

          (d) Each Borrower hereby authorizes and directs any Underlying Issuer to deliver to the Issuing Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon the Issuing Lender’s instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application.

          (e) Any and all issuance charges, commissions, fees, and costs incurred by the Issuing Lender relating to Underlying Letters of Credit shall be Lender Group Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrowers to Agent for the account of the Issuing Lender; it being acknowledged and agreed by each Borrower that, as of the Closing Date, the issuance charge imposed by the prospective Underlying Issuer is .825% per annum times the undrawn amount of each Underlying Letter of Credit, that such issuance charge may be changed from time to time, and that the Underlying Issuer also imposes a schedule of charges for amendments, extensions, drawings, and renewals.

          (f) If by reason of (i) any change after the Closing Date in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or the Lender Group with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto):

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               (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or

               (ii) there shall be imposed on the Underlying Issuer or the Lender Group any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto;

and the result of the foregoing is to increase, directly or indirectly, the cost to the Lender Group of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender Group, then, and in any such case, Agent may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Administrative Borrower, and Borrowers shall pay on demand such amounts as Agent may specify to be necessary to compensate the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Agent of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto.

     2.13 LIBOR Option.

          (a) Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Base Rate, Borrowers shall have the option (the “LIBOR Option”) to have interest on all or a portion of the Advances be charged (whether at the time when made (unless otherwise provided herein), upon conversion from a Base Rate Loan to a LIBOR Rate Loan, or upon continuation of a LIBOR Rate Loan as a LIBOR Rate Loan) at a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the date on which all or any portion of the Obligations are accelerated pursuant to the terms hereof, or (iii) the date on which this Agreement is terminated pursuant to the terms hereof. On the last day of each applicable Interest Period, unless Administrative Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrowers no longer shall have the option to request that Advances bear interest at a rate based upon the LIBOR Rate and Agent shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder.

          (b) LIBOR Election.

               (i) Administrative Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Agent prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the “LIBOR Deadline”). Notice of Administrative Borrower’s election of the LIBOR Option for a permitted portion of the Advances and an Interest Period pursuant to this Section shall be made by delivery to Agent of a LIBOR Notice received by Agent before the LIBOR Deadline, or by telephonic notice received by Agent before the LIBOR Deadline (to be confirmed by delivery to Agent of a LIBOR Notice received by Agent prior to 5:00 p.m. (California time) on the same day). Promptly upon its receipt of each such LIBOR Notice, Agent shall provide a copy thereof to each of the affected Lenders.

               (ii) Each LIBOR Notice shall be irrevocable and binding on Borrowers. In connection with each LIBOR Rate Loan, each Borrower shall indemnify, defend, and hold Agent and the Lenders harmless against any loss, cost, or expense incurred by Agent or any Lender as a result of (A) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (B) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (C) the failure to borrow, convert, continue or

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prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, or expenses, “Funding Losses”). Funding Losses shall, with respect to Agent or any Lender, be deemed to equal the amount determined by Agent or such Lender to be the excess, if any, of (1) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert, or continue, for the period that would have been the Interest Period therefor), minus (2) the amount of interest that would accrue on such principal amount for such period at the interest rate which Agent or such Lender would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Agent or a Lender delivered to Administrative Borrower setting forth any amount or amounts that Agent or such Lender is entitled to receive pursuant to this Section 2.13 shall be conclusive absent manifest error. In the event that Borrowers obtain any LIBOR Rate Loans during the Tax Clearance Waiting Period, Agent and Lenders agree not to charge the Borrowers for any Funding Losses under Section 2.13 (b)(ii)(A), if and to the extent that such Funding Losses arise out of the automatic application of Collections to repay such LIBOR Rate Loans under Section 2.4(b)(i) other than as a result of an Event of Default. For purposes of the preceding sentence, “Tax Clearance Waiting Period” means the period commencing on the Closing Date and continuing until the earlier to occur of (x) Agent’s receipt of confirmation from the relevant Governmental Authorities that the Lenders party to the Agreement on the Closing Date are exempt from withholding tax under the laws of the United Kingdom, or (y) the occurrence of a Default or an Event of Default.

               (iii) Borrowers shall have not more than 5 LIBOR Rate Loans in effect at any given time. Borrowers only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof.

          (c) Conversion. Borrowers may convert LIBOR Rate Loans to Base Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are converted or prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Agent of proceeds of Parent’s and its Subsidiaries’ Collections in accordance with Section 2.4(b) or for any other reason, including early termination of the term of this Agreement or acceleration of all or any portion of the Obligations pursuant to the terms hereof, each Borrower shall indemnify, defend, and hold Agent and the Lenders and their Participants harmless against any and all Funding Losses in accordance with Section 2.13 (b)(ii) above.

          (d) Special Provisions Applicable to LIBOR Rate.

               (i) The LIBOR Rate may be adjusted by Agent with respect to any Lender on a prospective basis to take into account any additional or increased costs to such Lender of maintaining or obtaining any eurodollar deposits or increased costs, in each case, due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except (a) changes of general applicability in corporate income tax laws and (b) changes in the rate of tax on the overall income of the Lender) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding or maintaining loans bearing interest at the LIBOR Rate. In any such event, the affected Lender shall give Administrative Borrower and Agent notice of such a determination and adjustment and Agent promptly shall transmit the notice to each other Lender and, upon its receipt of the notice from the affected Lender, Administrative Borrower may, by notice to such affected Lender (y) require such Lender to furnish to Administrative Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under Section 2.13(b)(ii)).

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               (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of any Lender, make it unlawful or impractical for such Lender to fund or maintain LIBOR Rate Loans or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, such Lender shall give notice of such changed circumstances to Agent and Administrative Borrower and Agent promptly shall transmit the notice to each other Lender and (y) in the case of any LIBOR Rate Loans of such Lender that are outstanding, the date specified in such Lender’s notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of such Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrowers shall not be entitled to elect the LIBOR Option until such Lender determines that it would no longer be unlawful or impractical to do so.

          (e) No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, neither Agent, nor any Lender, nor any of their Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if each Lender or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans.

     2.14 Capital Requirements. If, after the date hereof, any Lender determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on such Lender’s or such holding company’s capital as a consequence of such Lender’s Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender’s or such holding company’s then existing policies with respect to capital adequacy and assuming the full utilization of such entity’s capital) by any amount deemed by such Lender to be material, then such Lender may notify Administrative Borrower and Agent thereof. Following receipt of such notice, Borrowers agree to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender’s calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error); provided, however, that Borrowers shall not be required to compensate any Lender pursuant to this Section 2.14 for such reduction of rate of return on capital incurred more than 90 days prior to the date that such Lender delivers such statement. In determining such amount, such Lender may use any reasonable averaging and attribution methods.

     2.15 Joint and Several Liability of Borrowers.

          (a) Each Borrower is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by the Lender Group under this Agreement, for the mutual benefit, directly and indirectly, of each Borrower and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations.

          (b) Each Borrower, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.15), it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Borrower without preferences or distinction among them.

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          (c) If and to the extent that any Borrower shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligation.

          (d) The Obligations of each Borrower under the provisions of this Section 2.15 constitute the absolute and unconditional, full recourse Obligations of each Borrower enforceable against each Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever.

          (e) Except as otherwise expressly provided in this Agreement, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of any Advances or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by Agent or Lenders under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except as otherwise provided in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Agent or Lenders at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by Agent or Lenders in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or failure to act on the part of any Agent or Lender with respect to the failure by any Borrower to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.15 afford grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of its Obligations under this Section 2.15, it being the intention of each Borrower that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of each Borrower under this Section 2.15 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Borrower under this Section 2.15 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or any Agent or Lender.

          (f) Each Borrower represents and warrants to Agent and Lenders that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower further represents and warrants to Agent and Lenders that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower hereby covenants that such Borrower will continue to keep informed of Borrowers’ financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations.

          (g) The provisions of this Section 2.15 are made for the benefit of Agent, Lenders and their respective successors and assigns, and may be enforced by it or them from time to time against any or all Borrowers as often as occasion therefor may arise and without requirement on the part of Agent, Lender, successor or assign first to marshal any of its or their claims or to exercise any of its or their rights against any Borrower or to exhaust any remedies available to it or them against any Borrower or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.15 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the

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Obligations, is rescinded or must otherwise be restored or returned by Agent or any Lender upon the insolvency, bankruptcy or reorganization of any Borrower, or otherwise, the provisions of this Section 2.15 will forthwith be reinstated in effect, as though such payment had not been made.

          (h) Each Borrower hereby agrees that it will not enforce any of its rights of contribution or subrogation against any other Borrower with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to Agent or Lenders with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash. Any claim which any Borrower may have against any other Borrower with respect to any payments to any Agent or Lender hereunder or under any other Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor.

3. CONDITIONS; TERM OF AGREEMENT.

     3.1 Conditions Precedent to the Initial Extension of Credit. The obligation of each Lender to make its initial extension of credit provided for hereunder, is subject to the fulfillment, to the satisfaction of Agent and each Lender of each of the conditions precedent set forth on Schedule 3.1 (the making of such initial extension of credit by a Lender being conclusively deemed to be its satisfaction or waiver of the conditions precedent).

     3.2 Conditions Precedent to all Extensions of Credit. The obligation of the Lender Group (or any member thereof) to make any Advances hereunder (or to extend any other credit hereunder) at any time shall be subject to the following conditions precedent:

          (a) the representations and warranties contained in this Agreement or in the other Loan Documents shall be true and correct in all material respects (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof) on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date);

          (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof;

          (c) no injunction, writ, restraining order, or other order of any nature restricting or prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against any Borrower, Agent, or any Lender; and

          (d) no Material Adverse Change shall have occurred since May 27, 2006.

     3.3 Term. This Agreement shall continue in full force and effect for a term ending on August 1, 2009 (the “Maturity Date”). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default.

     3.4 Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrowers with respect to outstanding Letters of Credit and including all Bank Product Obligations) immediately shall become due and payable without notice or

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demand (including (a) either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender, and (b) providing cash collateral (in an amount determined by Agent as sufficient to satisfy the reasonably estimated credit exposure) to be held by Agent for the benefit of the Bank Product Providers with respect to the Bank Product Obligations). No termination of this Agreement, however, shall relieve or discharge Parent or its Subsidiaries of their duties, Obligations, or covenants hereunder or under any other Loan Document and the Agent’s Liens in the Collateral shall remain in effect until all Obligations have been paid in full and the Lender Group’s obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been paid in full and the Lender Group’s obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrowers’ sole expense, execute and deliver any termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Agent’s Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations.

     3.5 Early Termination by Borrowers. Borrowers have the option, at any time upon 30 days prior written notice by Administrative Borrower to Agent, to terminate this Agreement and terminate the Commitments hereunder by paying to Agent, in cash, the Obligations (including (a) either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender, and (b) providing cash collateral (in an amount determined by Agent as sufficient to satisfy the reasonably estimated credit exposure) to be held by Agent for the benefit of the Bank Product Providers with respect to the Bank Product Obligations), in full. If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Commitments shall terminate and Borrowers shall be obligated to repay the Obligations (including (a) either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender, and (b) providing cash collateral (in an amount determined by Agent as sufficient to satisfy the reasonably estimated credit exposure) to be held by Agent for the benefit of the Bank Product Providers with respect to the Bank Product Obligations), in full, on the date set forth as the date of termination of this Agreement in such notice.

4. REPRESENTATIONS AND WARRANTIES.

     In order to induce the Lender Group to enter into this Agreement, Parent and each Borrower, jointly and severally, make the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement:

     4.1 No Encumbrances. Parent and each of its Subsidiaries has good and indefeasible title to, or a valid leasehold interest in, its personal property assets and good and marketable title to, or a valid leasehold interest in, their Real Property, in each case, free and clear of Liens except for Permitted Liens.

     4.2 Eligible Accounts. As to each Account that is identified by a Borrower as an Eligible Account in a borrowing base report submitted to Agent, such Account is (a) a bona fide existing payment obligation of the applicable Account Debtor created by the sale and delivery of Inventory or the rendition of services to such Account Debtor in the ordinary course of such Person’s business, (b) at the time so identified, and thereafter except as disclosed to Agent, owed to such Person without any known defenses, disputes, offsets, counterclaims, or rights of return or cancellation, and (c) at the time so identified, and thereafter except

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as disclosed to Agent, not excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Accounts.

     4.3 Inventory. The Inventory of Active Obligors is, in all material respects, of good and merchantable quality, free from known defects.

     4.4 Equipment. Each material item of Equipment of Active Obligors is used or held for use in their business and is, in all material respects, in good working order, ordinary wear and tear and damage by casualty excepted.

     4.5 Location of Inventory and Equipment. Except as disclosed on Schedule 4.5, the Inventory and Equipment (other than vehicles or Equipment out for repair) of Active Obligors with an aggregate fair market value in excess of $100,000 at any one location or $250,000 in the aggregate for all such locations are not stored with a bailee, warehouseman, or similar party and are located only at, or in-transit between, the locations identified on Schedule 4.5 (as such Schedule may be updated pursuant to Section 5.9).

     4.6 Inventory Records. Each Active Obligor keeps correct and accurate records itemizing and describing the type, quality, and quantity of its and its Subsidiaries’ Inventory and the book value thereof.

     4.7 Jurisdiction of Organization; Location of Chief Executive Office; Organizational Identification Number; Commercial Tort Claims.

          (a) The name of (within the meaning of Section 9-503 of the Code) and jurisdiction of organization of Parent and each of its Subsidiaries is set forth on Schedule 4.7(a) (as such Schedule may be updated from time to time to reflect changes permitted to be made under Section 6.5).

          (b) The chief executive office of Parent and each of its Subsidiaries is located at the address indicated on Schedule 4.7(b) (as such Schedule may be updated from time to time to reflect changes permitted to be made under Section 5.9).

          (c) Parent’s and each of its Subsidiaries’ tax identification numbers and organizational identification numbers, if any, are identified on Schedule 4.7(c) (as such Schedule may be updated from time to time to reflect changes permitted to be made under Section 6.5).

          (d) As of the Closing Date, neither Parent nor any of its Subsidiaries holds any commercial tort claims, except as set forth on Schedule 4.7(d).

     4.8 Due Organization and Qualification; Subsidiaries.

          (a) Parent and each of its Subsidiaries is duly organized or incorporated and existing and in good standing under the laws of the jurisdiction of its organization or incorporation and qualified to do business in any state where the failure to be so qualified reasonably could be expected to result in a Material Adverse Change.

          (b) Set forth on Schedule 4.8(b) (as such Schedule may be updated from time to time to reflect changes permitted to be made under Section 5.16, or changes to Parent’s capital structure that are not otherwise prohibited under the Loan Documents), is a complete and accurate description of the authorized capital Stock of Parent, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 4.8(b), there are no subscriptions, options, warrants, or calls relating to any shares of Parent’s capital Stock, including any right of conversion or exchange under any outstanding security or other instrument, except for the issuance of Series B Preferred Stock, or options, warrants, and restricted stock granted to employees, management, and directors in

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the ordinary course of Parent’s business as in effect on the Closing Date so long as the granting of such options, warrants or restricted stock (x) does not result in a Change of Control and (y) is not otherwise prohibited hereunder. Parent is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock.

          (c) Set forth on Schedule 4.8(c) (as such Schedule may be updated from time to time to reflect changes permitted to be made under Section 5.16), is a complete and accurate list of Parent’s direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries, and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Parent. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable.

          (d) Except as set forth on Schedule 4.8(c), there are no subscriptions, options, warrants, or calls relating to any shares of any Parent’s Subsidiaries’ capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Neither Parent nor any of its respective Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of any Parent’s Subsidiaries’ capital Stock or any security convertible into or exchangeable for any such capital Stock.

     4.9 Due Authorization; No Conflict.

          (a) The execution, delivery, and performance by Parent and its Subsidiaries of this Agreement and the Loan Documents to which each, individually or collectively, is a party have been duly authorized by all necessary action on the part of such Person.

          (b) The execution, delivery, and performance by Parent and its Subsidiaries of this Agreement and the other Loan Documents to which each, individually or collectively, is a party do not and will not (i) violate any provision of any foreign or domestic federal, state, or local law or regulation applicable to such Person, the Governing Documents of such Person, or any order, judgment, or decree of any court or other Governmental Authority binding on such Person, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of such Person, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets such Person, other than Permitted Liens, or (iv) require any approval of such Person’s interestholders or any approval or consent of any Person under any material contractual obligation of such Person, other than consents or approvals that have been obtained and that are still in force and effect.

          (c) Other than the filing of financing statements and other filings or actions necessary to perfect Liens granted to Agent in the Collateral, the execution, delivery, and performance by Parent and its Subsidiaries of this Agreement and the other Loan Documents to which each, individually or collectively, is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect.

          (d) This Agreement and the other Loan Documents to which Parent and its Subsidiaries, individually or collectively, is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Person will be the legally valid and binding obligations of such Person, enforceable against such Person in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally.

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          (e) The Agent’s Liens are validly created, perfected (other than (i) in respect of motor vehicles, (ii) the UK Real Property Collateral, and (iii) any Deposit Accounts and Securities Accounts not subject to a Control Agreement as permitted by Section 6.12, and subject only to the filing of financing statements and other foreign perfection filings), and first priority Liens, subject only to Permitted Liens.

     4.10 Litigation. Other than those matters disclosed on Schedule 4.10 and other than matters arising after the Closing Date that reasonably could not be expected to result in a Material Adverse Change, there are no actions, suits, or proceedings pending or, to the best knowledge of each Obligor party hereto, threatened against Parent or any of its Subsidiaries.

     4.11 No Material Adverse Change. All financial statements relating to Parent and its Subsidiaries that have been delivered by any such Persons to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, the applicable Person’s or Persons’ financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrowers and their Subsidiaries since May 27, 2006.

     4.12 Fraudulent Transfer.

          (a) Parent and its Subsidiaries, on a consolidated basis, are Solvent.

          (b) No transfer of property is being made by Parent or its Subsidiaries and no obligation is being incurred by Parent or its Subsidiaries in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Parent or any of its Subsidiaries.

     4.13 Employee Benefits. None of Parent, any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan.

     4.14 Environmental Condition. Except as set forth on Schedule 4.14, (a) to the knowledge of each Obligor party hereto, none of Parent’s or any of its Subsidiaries’ properties or assets has ever been used by Parent, its Subsidiaries, or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such use, production, storage, handling, treatment, release or transport was in violation, in any material respect, of any applicable Environmental Law and expected to involve liabilities in an aggregate amount in excess of $1,000,000, (b) to the knowledge of each Obligor party hereto, neither Parent’s nor any of its Subsidiaries’ properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site which designation or identification could be expected to result in liabilities in an aggregate amount in excess of $1,000,000, (c) neither Parent nor any of its Subsidiaries has received notice that a Lien arising under any Environmental Law involving an aggregate amount in excess of $1,000,000 has attached to any revenues or to any Real Property owned or operated by Parent or its Subsidiaries, and (d) neither Parent nor any of its Subsidiaries have received a summons, citation, notice, or directive which could reasonably be expected to involve liabilities in an aggregate amount in excess of $1,000,000 from the United States Environmental Protection Agency or any other foreign or domestic federal, state, or local governmental agency concerning any action or omission by Parent or any Subsidiary of Parent resulting in the releasing or disposing of Hazardous Materials into the environment.

     4.15 Intellectual Property. Parent and its Subsidiaries own, or hold licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of their business as currently conducted, and attached hereto as Schedule 4.15 (as updated from time to time) is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which Parent or one of its Subsidiaries is the owner or is an

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exclusive licensee; provided, however, that the Obligors party hereto may amend Schedule 4.15 to add additional property so long as such amendment occurs by written notice to Agent not less than 10 days after the date on which Parent or any Subsidiary of Parent acquires any such property after the Closing Date.

     4.16 Leases. Parent and its Subsidiaries enjoy peaceful and undisturbed possession under all leases material to their business and to which they are parties or under which they are operating and all of such material leases are valid and subsisting and no material default by Parent or its Subsidiaries exists under any of them.

     4.17 Deposit Accounts and Securities Accounts. Set forth on Schedule 4.17 is a listing of all of Parent’s and its Subsidiaries’ Deposit Accounts and Securities Accounts, including, with respect to each bank or securities intermediary (a) the name and address of such Person, and (b) the account numbers of the Deposit Accounts or Securities Accounts maintained with such Person.

     4.18 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Parent and its Subsidiaries in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents, or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Parent and its Subsidiaries in writing to Agent or any Lender will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Parent’s good faith estimate of its and its Subsidiaries’ future performance for the periods covered thereby based upon assumptions believed by Parent to be reasonable at the time of the delivery thereof to Agent (it being understood that such projections and forecasts are subject to uncertainties and contingencies, many of which are beyond the control of Parent and its Subsidiaries and no assurances can be given that such projections or forecasts will be realized).

     4.19 Indebtedness. Set forth on Schedule 4.19 is a true and complete list of all Indebtedness of Parent and its Subsidiaries outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately sets forth the aggregate principal amount of such Indebtedness and the principal terms thereof.

     4.20 Inactive Obligors. Each of the Inactive Obligors is inactive and does not conduct any business operations, except as may be related to the dissolution of such Inactive Obligor or the consolidation or merger of such Inactive Obligor with one or more Active Obligors as permitted under the terms of this Agreement.

5. AFFIRMATIVE COVENANTS.

     Parent and each Borrower, joint and severally, covenants and agrees that, until termination of all of the Commitments and payment in full of the Obligations, each such Person shall and shall cause each of its respective Subsidiaries to do all of the following:

     5.1 Accounting System. Maintain a system of accounting that enables Parent and each Subsidiary to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Active Obligors also shall keep a reporting system that shows all additions, sales, claims, returns, and allowances with respect to their and their Subsidiaries’ sales.

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     5.2 Collateral Reporting. Provide Agent (and if so requested by Agent, with copies for each Lender) with each of the reports set forth on Schedule 5.2 at the times specified therein. In addition, Parent and each Borrower agrees to cooperate fully with Agent to facilitate and implement a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above.

     5.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender, each of the financial statements, reports, or other items set forth on Schedule 5.3 at the times specified therein. In addition, Parent agrees that no Subsidiary of Parent will have a fiscal year different from that of Parent.

     5.4 Guarantor Reports. Cause each Guarantor to deliver its annual financial statements at the time when Parent provides its audited financial statements to Agent, but only to the extent such Guarantor’s financial statements are not consolidated with Parent’s financial statements.

     5.5 Inspection. Permit Agent, each Lender, and each of their duly authorized representatives or agents to visit any of its properties and inspect any of its assets or books and records, to examine and make copies of its books and records, and to discuss its affairs, finances, and accounts with, and to be advised as to the same by, its officers and employees at such reasonable times and intervals as Agent or any such Lender may designate and, so long as no Default or Event of Default exists, with reasonable prior notice to Administrative Borrower.

     5.6 Maintenance of Properties. Maintain and preserve all of its properties which are necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear, tear, and casualty excepted (and except where the failure to do so could not be expected to result in a Material Adverse Change), and comply at all times with the provisions of all material leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder.

     5.7 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Parent, its Subsidiaries, or any of their respective assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Parent will and will cause its Subsidiaries to make timely payment or deposit of all tax payments and withholding taxes required of them by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that the applicable Person has made such payments or deposits.

     5.8 Insurance.

          (a) At Borrowers’ expense, maintain insurance respecting Parent’s and its Subsidiaries’ assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Parent and its Subsidiaries also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Administrative Borrower shall deliver copies of all such policies of Obligors to Agent with an endorsement naming Agent as the sole loss payee (under a satisfactory lender’s loss payable endorsement) or additional insured, as appropriate. Each such policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever.

          (b) Administrative Borrower shall give Agent prompt notice of any loss exceeding $250,000 covered by such insurance of Parent or any of its Subsidiaries. So long as no Event of Default has occurred and is continuing, Parent and its Subsidiaries, as the case may be, shall have the exclusive right to

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adjust any losses payable under any such insurance policies of Subsidiaries that are not Obligors and under any insurance policies of Obligors which are less than $1,000,000. Following the occurrence and during the continuation of an Event of Default, or in the case of any losses exceeding $1,000,000 payable under such insurance covering Collateral, Agent shall have the exclusive right to adjust any losses payable under any such insurance policies covering Collateral, without any liability to Parent and its Subsidiaries whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies or casualty policies respecting assets that are not Collateral) or as payment of any award or compensation for condemnation or taking by eminent domain with respect to Collateral, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations (provided that any such prepayment shall not result in a permanent reduction of the Commitments) or to be disbursed to Administrative Borrower under staged payment terms reasonably satisfactory to the Required Lenders for application to the cost of repairs, replacements, or restorations; provided, however, that, with respect to any such monies in an aggregate amount during any 12 consecutive month period not in excess of $1,000,000, so long as (A) no Default or Event of Default shall have occurred and is continuing, (B) Administrative Borrower shall have given Agent prior written notice of Parent’s or its respective Subsidiaries’ intention to apply such monies to the cost of repair, replacement, or restoration of the property which is the subject of the loss, destruction, or taking by condemnation, (C) the monies are held in a Borrower’s Deposit Account subject to a Control Agreement, and (D) Parent or its Subsidiaries complete such repairs, replacements, or restorations within 180 days after the initial receipt of such monies, Parent or such Subsidiaries shall have the option to apply such monies to the cost of repair, replacement, or restoration of the property which is the subject of the loss, destruction, or taking by condemnation unless and to the extent that such applicable period shall have expired or an Event of Default shall have occurred without such repair, replacement, or restoration being made, in which case, any amounts remaining in the cash collateral account shall be applied to the Obligations in accordance with Section 2.4(b)(ii).

     5.9 Location of Inventory and Equipment. Keep Active Obligors’ Inventory and Equipment (other than vehicles and Equipment out for repair) only at the locations identified on Schedule 4.5 and keep each Obligor’s chief executive offices only at the locations identified on Schedule 4.7(b); provided, however, that Administrative Borrower may amend Schedule 4.5 or Schedule 4.7 so long as such amendment occurs by written notice to Agent not less than 30 days prior to the date on which such Inventory or Equipment is moved to such new location or such chief executive office is relocated, so long as such new location is within the continental United States, Canada, or the United Kingdom, and so long as (x) at the time of such written notification, the applicable Obligor provides Agent a Collateral Access Agreement with respect to such locations at which Inventory or Equipment with an aggregate fair market value in excess of $100,000 at any one location or $250,000 for all such locations is located (it being understood that in the event an Obligor is unable to obtain any such Collateral Access Agreement, Agent may establish such reserves against Availability as it deems necessary in its Permitted Discretion with respect to such Inventory or Equipment), and (y) except as otherwise expressly permitted hereunder, at the time any such Inventory or Equipment is moved or transferred, Agent’s Liens on such Inventory and Equipment are not adversely affected.

     5.10 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change.

     5.11 Leases. Pay when due all rents and other amounts payable under any material leases to which Parent or any Subsidiary of Parent is a party or by which Parent’s or any of its Subsidiaries’ properties and assets are bound, unless such payments are the subject of a Permitted Protest.

     5.12 Existence. Except in connection with a Permitted Restructuring Transaction, at all times preserve and keep in full force and effect Parent’s and each of its Subsidiaries’ valid existence and good

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standing and, except as could not reasonably be expected to result in a Material Adverse Change, any rights, franchises, permits, licenses, accreditations, authorizations, or other approvals material to their businesses.

     5.13 Environmental. (a) Keep any property either owned or operated by Parent or any Subsidiary of Parent free of any Environmental Liens involving an aggregate amount in excess of $1,000,000 or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, where the failure to comply could be expected to involve potential liabilities in excess of $1,000,000 in the aggregate, (c) promptly notify Agent of any release of a Hazardous Material in any reportable quantity from or onto property owned or operated by Parent or any Subsidiary of Parent and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Laws in each case, where the failure to comply could be expected to involve potential liabilities in excess of $1,000,000 in the aggregate, and (d) promptly, but in any event within 5 days of its receipt thereof, provide Agent with written notice of any of the following: (i) notice that an Environmental Lien involving an aggregate amount in excess of $1,000,000 has been filed against any of the real or personal property of Parent or any Subsidiary of Parent, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against Parent or any Subsidiary of Parent which could reasonably be expected to involve potential liabilities in excess of $1,000,000 in the aggregate, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change.

     5.14 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, notify Agent if any written information, exhibit, or report furnished to the Lender Group contained, at the time it was furnished, any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made. The foregoing to the contrary notwithstanding, any notification pursuant to the foregoing provision will not cure or remedy the effect of the prior untrue statement of a material fact or omission of any material fact nor shall any such notification have the effect of amending or modifying this Agreement or any of the Schedules hereto.

     5.15 Control Agreements. Take all reasonable steps in order for Agent to obtain control in accordance with Sections 8-106, 9-104, 9-105, 9-106, and 9-107 of the Code with respect to (subject to the proviso contained in Section 6.12) all of Obligors’ Securities Accounts, Deposit Accounts, electronic chattel paper, investment property, and letter-of-credit rights.

     5.16 Formation of Subsidiaries. At the time that any Obligor forms any direct Subsidiary or acquires any direct Subsidiary after the Closing Date, such Obligor shall (a) cause such new Subsidiary to provide to Agent a joinder to the Guaranty and the Security Agreement, together with such other security documents (including mortgages with respect to any Real Property of such new Subsidiary), as well as appropriate financing statements (and with respect to all property subject to a mortgage, fixture filings), all in form and substance satisfactory to Agent (including being sufficient to grant Agent a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Subsidiary), (b) provide to Agent a pledge agreement and appropriate certificates and powers or financing statements, hypothecating all of the direct or beneficial ownership interest in such new Subsidiary, in form and substance satisfactory to Agent, and (c) provide to Agent all other documentation, including one or more opinions of counsel satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above (including policies of title insurance or other documentation with respect to all property subject to a mortgage). Any document, agreement, or instrument executed or issued pursuant to this Section 5.16 shall be a Loan Document.

     5.17 Further Assurances. Subject to the provisions regarding the UK Real Property Collateral set forth in Section 5.19, at any time upon the request of Agent, Parent and Borrowers shall execute or deliver

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to Agent, and shall cause their Subsidiaries to execute or deliver to Agent, any and all financing statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, mortgages, deeds of trust, opinions of counsel, and all other documents (collectively, the “Additional Documents”) that Agent may request in form and substance reasonably satisfactory to Agent, to create, perfect, and continue perfected or to better perfect the Agent’s Liens in all of the properties and assets of Parent and the Subsidiaries of Parent that are Obligors (whether now owned or hereafter arising or acquired, tangible or intangible, real or personal), to create and perfect Liens in favor of Agent in any Real Property acquired by Parent and the Subsidiaries of Parent that are Obligors after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, Parent and Borrowers authorize Agent to execute any such Additional Documents in Parent’s, Borrowers’ or their Subsidiaries’ names, as applicable, and authorizes Agent to file such executed Additional Documents in any appropriate filing office.

     5.18 Intentionally Omitted.

     5.19 UK Mortgage Documents. In the event the UK Real Property Collateral is not sold within 120 days of the Closing Date, or at any other time, upon Agent’s request, following an Event of Default, the Parent, Borrowers, and the applicable Obligor shall execute and deliver any and all additional security documents requested by Agent with respect to the UK Real Property Collateral, each such document to be in form and substance satisfactory to Agent, together with all other documentation requested by Agent in connection therewith, including, without limitation, (x) one or more opinions of counsel satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above, and (y) a policy of title insurance or other documentation with respect to the UK Real Property Collateral.

     5.20 Post-Closing Covenants. The continuing obligation of the Lender Group (or any member thereof) to make any Advances hereunder at any time (or to extend any other credit hereunder) shall be subject to the fulfillment, to the satisfaction of Agent and each Lender (or waiver thereby), of each of the post-closing covenants set forth on Schedule 5.20 within the prescribed time periods set forth on such Schedule. Except as otherwise specifically provided in such Schedule, the failure by Borrowers to satisfy the post-closing covenants set forth on Schedule 5.20 within the prescribed time periods shall constitute an Event of Default.

6. NEGATIVE COVENANTS.

     Parent and each Borrower, jointly and severally, covenants and agrees that, until termination of all of the Commitments and payment in full of the Obligations, such Person will not and will not permit any of its respective Subsidiaries to do any of the following:

     6.1 Indebtedness. Create, incur, assume, suffer to exist, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except:

          (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit,

          (b) Indebtedness set forth on Schedule 4.19 and any Refinancing Indebtedness in respect of such Indebtedness,

          (c) Permitted Purchase Money Indebtedness and any Refinancing Indebtedness in respect of such Indebtedness,

          (d) endorsement of instruments or other payment items for deposit,

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          (e) Indebtedness comprising Permitted Investments;

          (f) Indebtedness evidenced by Permitted Intercompany Advances; and

          (g) other unsecured Indebtedness of the Parent and its Subsidiaries which is subordinated to the Obligations on terms and conditions (including all economic and subordination terms and the absence of covenants) acceptable to Lenders and does not exceed in the aggregate $5,000,000 at any time outstanding, and any Refinancing Indebtedness in respect of such Indebtedness.

     6.2 Liens. Create, incur, assume, or suffer to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens.

     6.3 Restrictions on Fundamental Changes. Except with respect to a Permitted Restructuring Transaction.

          (a) Enter into any merger, consolidation, reorganization, or, except with respect to the issuance of the Series B Preferred Stock, any recapitalization or reclassification its Stock,

          (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution),

          (c) Suspend or go out of a substantial portion of its or their business.

     6.4 Disposal of Assets. Other than Permitted Dispositions, Permitted Investments, Permitted Intercompany Advances, or a Permitted Restructuring Transaction, convey, sell, lease, license, assign, transfer, or otherwise dispose of (or enter into an agreement to convey, sell, lease, license assign, transfer, or otherwise dispose of) any of the assets of any Parent or any Subsidiary of Parent.

     6.5 Change Name. Change Parent’s or any of its Subsidiaries’ name, organizational identification number, state of organization or organizational identity; provided, however, that Parent or a Subsidiary of Parent may change its name upon at least 15 days prior written notice by Administrative Borrower to Agent of such change and so long as, at the time of such written notification, such Person provides any financing statements necessary to perfect and continue perfected the Agent’s Liens.

     6.6 Nature of Business. Make any change in the nature of its business or acquire any properties or assets that are not reasonably related to the conduct of such business activities.

     6.7 Prepayments and Amendments. Except in connection with Refinancing Indebtedness permitted by Section 6.1,

          (a) optionally prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of Parent or any Subsidiary of Parent, other than (i) the Obligations in accordance with this Agreement, or (ii) Permitted Intercompany Advances so long as any such prepayment, redemption, defeasance, or purchase is permitted under the terms of the Intercompany Subordination Agreement,

          (b) make any payment on account of Indebtedness that has been contractually subordinated in right of payment if such payment is not permitted at such time under the subordination terms and conditions,

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          (c) directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Section 6.1(b) or (c), or

          (d) directly or indirectly, amend, modify, alter, increase or change any of the payment or other material terms or conditions of the Series B Preferred Stock following issuance thereof.

     6.8 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control.

     6.9 Consignments. Solely with respect to Obligors, consign any of their Inventory or sell any of their Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale.

     6.10 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, or retire any of any of Parent or any of its Subsidiaries’ Stock, of any class, whether now or hereafter outstanding, except that:

          (a) a Borrower may make cash distributions or declare and make dividend payments to Parent or another Borrower, and a non-Obligor Subsidiary or a Guarantor may make cash distributions or declare and make dividend payments to any Active Obligor;

          (b) Parent and its Subsidiaries may declare and make dividend payments and other distributions payable solely in its equity interests, so long as Agent’s Liens, if any, in the equity of the issuer are not adversely affected; and

          (c) (i) Parent may make scheduled payments of cash dividends on the Series B Preferred Stock, consistent with the terms thereof on the date such Stock is issued, provided, that any dividends (whether paid or accrued) for the initial 12 months after issuance of such Stock will be payable only in additional shares of Stock of Parent, and no payment of cash dividends shall be made prior to the 18 month anniversary of the issuance of such Stock or at any time that an Event of Default exists or would result therefrom; (ii) Parent may make optional redemptions of the Series B Preferred Stock, consistent with the terms thereof on the date such Stock is issued, provided, that at the time of any such redemption (x) no Event of Default exists or would result therefrom, (y) the Daily Balance on such date, taking any such redemption into account would be $0, and (z) at least 24 months shall have passed from the issuance of such Stock being redeemed; (iii) Parent may make mandatory redemptions of the Series B Preferred Stock as a result of Permitted Dispositions of the stock or assets of Bookham (Switzerland) or the thin film filter operations of Bookham (US), consistent with the terms thereof on the date such Stock is issued, provided, that at the time of any such redemption (x) no Event of Default exists or would result therefrom, and (y) after taking such redemption into account, no Overadvance would exist and the Borrowers would have Excess Availability plus Qualified Cash of not less than $25,000,000; and (iv) in the event Parent fails to register a form S-3 Registration Statement in connection with the issuance of such Stock, Parent may make payments due to the holders of such Stock as a result of such failure, consistent with the terms thereof on the date such Stock is issued, provided, that at the time of any such payment (x) no Event of Default exists or would result therefrom, and (y) the Borrowers would have Excess Availability plus Qualified Cash of not less than $25,000,000 after taking any such payment into account.

     6.11 Accounting Methods. Modify or change its fiscal year or its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Parent’s and its Subsidiaries’ accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding Parent’s and its Subsidiaries’ financial condition.

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     6.12 Investments. Except for Permitted Investments, directly or indirectly, make or acquire any Investment or incur any liabilities (including contingent obligations) for or in connection with any Investment; provided, however, that (i) Parent and its Subsidiaries that are Obligors shall not have Permitted Investments (other than in the Cash Management Accounts) in Deposit Accounts or Securities Accounts for the first 30 days immediately following the Closing Date in an aggregate amount in excess of $100,000 at any one time, and thereafter, $25,000, at any one time, unless such Person and the applicable securities intermediary or bank have entered into Control Agreements governing such Permitted Investments in order to perfect (and further establish) the Agent’s Liens in such Permitted Investments, (ii) unless and until Bookham China consummates the Bookham China Sale and Leaseback, Bookham China shall not have cash and Cash Equivalents in an aggregate amount in excess of $5,500,000 at any one time, and upon and during the 2 months after the consummation of the Bookham China Sale and Leaseback, in an aggregate amount in excess of $14,000,000 at any one time, (iii) Bookham Switzerland shall not have cash and Cash Equivalents in an aggregate amount in excess of $3,500,000 at any one time, (iv) Forthaven Ltd., a company organized under the laws of England and Wales (“Forthaven”), shall not have cash and Cash Equivalents in an aggregate amount in excess of £135,000 (UK pounds sterling) at any one time, and (v) Parent’s Subsidiaries that are not Obligors (other than Bookham China, Bookham Switzerland, and Forthaven) shall not have cash and Cash Equivalents in an aggregate amount in excess of $300,000 at any one time. Subject to the Investments permitted by the foregoing proviso, Parent shall not and shall not permit its Subsidiaries that are Obligors to establish or maintain any Deposit Account or Securities Account unless Agent shall have received a Control Agreement in respect of such Deposit Account or Securities Account.

     6.13 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any transaction with any Affiliate of Parent or any Subsidiary of Parent except for:

          (a) Permitted Intercompany Transactions;

          (b) the payment of reasonable fees, compensation, or employee benefit arrangements to, and any indemnity provided for the benefit of, outside directors of Parent in the ordinary course of business and consistent with industry practice;

          (c) distributions described in and permitted under Section 6.10; and

          (d) Permitted Intercompany Advances, Permitted Dispositions, and Permitted Investments.

Notwithstanding the foregoing, in no event may an Active Obligor make payments, sell or make any other transfers of assets to an Inactive Obligor.

     6.14 Use of Proceeds.

          (a) Use the proceeds of the Advances for any purpose other than (i) on the Closing Date, to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes.

          (b) Transfer, directly or indirectly any proceeds of the Advances to any Inactive Obligor.

          (c) With respect to Inactive Obligors, request or receive, directly or indirectly any proceeds of the Advances from the Agent, Lenders, an Active Obligor, or otherwise.

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     6.15 Inventory and Equipment with Bailees. Except as set forth on Schedule 4.5 and as permitted by Section 5.9, store the inventory or Equipment of Parent or its Subsidiaries that are Obligors at any time now or hereafter with a bailee, warehouseman, or similar party unless such bailee, warehouseman, or similar party has first provided Agent with a Collateral Access Agreement.

     6.16 Financial Covenants.

          (a) Minimum EBITDA. Fail to achieve EBITDA, measured on a quarter-end basis, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto:

Applicable Amount	Applicable Period
($11,505,000)	For the 1 quarter period ending September 30, 2006
($14,433,000)	For the 2 quarter period ending December 31, 2006
($15,763,000)	For the 3 quarter period ending March 31, 2007
($16,205,000)	For the 4 quarter period ending June 30, 2007
$2,184,000	For the 4 quarter period ending September 30, 2007
$7,321,000	For the 4 quarter period ending December 31, 2007
$7,810,000	For the 4 quarter period ending March 31, 2008 and each quarter end thereafter

; provided, however, that Borrowers shall only be required to satisfy the foregoing financial covenant in the event that they do not achieve Minimum Liquidity. For purposes of the preceding sentence, Agent will test Minimum Liquidity on the last day of each month during the term of this Agreement. Such test for any month will be based upon an average of the weekly Excess Availability and weekly Qualified Cash amounts for weeks ending during such month, which amounts will be based upon availability and cash balance reports delivered to Agent in accordance with the terms of this Agreement. In the event that Borrowers fail to achieve Minimum Liquidity as of any such monthly test, or fail to timely deliver the reports necessary to make such determination, or if a Default or Event of Default has occurred and is continuing, then Borrowers will be required to satisfy the foregoing financial covenant for the most recently completed Applicable Period in the foregoing table. For purposes of this Section 6.16(a), Minimum Liquidity means that the sum of Excess Availability plus Qualified Cash is at least $30,000,000.

          (b) Capital Expenditures. Make Capital Expenditures in any fiscal year in excess of the amount set forth in the following table for the applicable period:

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Closing Date
through the end of
Fiscal Year 2006	Fiscal Year 2007	Fiscal Year 2008	Fiscal Year 2009
$4,000,000	$8,000,000 plus the lesser of (a) $4,000,000 minus the aggregate amount of Capital Expenditures made from the Closing Date through the end of Fiscal Year 2006, and (b) $2,000,000	$8,000,000 plus the lesser of (a) $8,000,000 minus the aggregate amount of Capital Expenditures made during the Fiscal Year 2007, and (b) $4,000,000	$8,000,000 plus the lesser of (a) $8,000,000 minus the aggregate amount of Capital Expenditures made during the Fiscal Year 2008, and (b) $4,000,000

7. EVENTS OF DEFAULT.

     Any one or more of the following events shall constitute an event of default (each, an “Event of Default”) under this Agreement:

     7.1 If any Obligor fails to pay when due and payable, or when declared due and payable, (a) all or any portion of the Obligations consisting of interest, fees, or charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts (other than any portion thereof constituting principal) constituting Obligations (including any portion thereof that accrues after the commencement of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any such Insolvency Proceeding), and such failure continues for a period of 3 Business Days, or (b) all or any portion of the principal of the Obligations;

     7.2 If Parent or any Subsidiary of Parent:

          (a) fails to perform or observe any covenant or other agreement contained in any of Sections 2.7, 5.2, 5.3, 5.4, 5.5, 5.8, 5.12, 5.14, 5.16, 5.17 and 6.1 through 6.16 of this Agreement or Section 6 of the Security Agreement;

          (b) fails to perform or observe any covenant or other agreement contained in any of Sections 5.6, 5.7, 5.9, 5.10, 5.11 and 5.15 of this Agreement and such failure continues for a period of 10 days after the earlier of (i) the date on which such failure shall first become known to any officer of any Obligor or (ii) written notice thereof is given to Administrative Borrower by Agent; or

          (c) fails to perform or observe any covenant or other agreement contained in this Agreement, or in any of the other Loan Documents, in each case, other than any such covenant or agreement that is the subject of another provision of this Section 7 (in which event such other provision of this Section 7 shall govern), and such failure continues for a period of 20 days after the earlier of (i) the date on which such failure shall first become known to any officer of any Obligor or (ii) written notice thereof is given to Administrative Borrower by Agent;

     7.3 If any material portion of Parent’s or any of its Subsidiaries’ assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person and the same is not discharged before the earlier of 30 days after the date it first arises or 5 days prior to the date on which such property or asset is subject to forfeiture by such Person;

     7.4 If an Insolvency Proceeding is commenced by Parent or any Subsidiary of Parent;

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     7.5 If an Insolvency Proceeding is commenced against Parent or any Subsidiary of Parent, and any of the following events occur: (a) the applicable Person consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Parent or any Subsidiary of Parent, or (e) an order for relief shall have been issued or entered therein;

     7.6 If Parent, any Obligor, Bookham China, or Bookham Switzerland is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs;

     7.7 If one or more judgments, orders, or awards involving an aggregate amount of $1,000,000, or more (except to the extent fully covered by insurance pursuant to which the insurer has accepted liability therefor in writing) shall be entered or filed against Parent or any Subsidiary of Parent or with respect to any of their respective assets, and the same is not released, discharged, bonded against, or stayed pending appeal before the earlier of 30 days after the date it first arises or 5 days prior to the date on which such asset is subject to being forfeited by the applicable Person;

     7.8 If (a) there is a default in one or more agreements to which Parent or any Subsidiary of Parent is a party with one or more third Persons relative to Indebtedness of such Person involving an aggregate amount of $1,000,000 or more, and such default (i) occurs at the final maturity of the obligations thereunder, or (ii) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Parent’s Subsidiary’s (as applicable) obligations thereunder; or (b) there shall occur any event which would result in the mandatory redemption or other payment in respect of the Series B Preferred Stock in a manner not specifically permitted under the terms of this Agreement;

     7.9 If any warranty, representation, statement, or Record made herein or in any other Loan Document or delivered to Agent or any Lender in connection with this Agreement or any other Loan Document proves to be untrue in any material respect (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof) as of the date of issuance or making or deemed making thereof;

     7.10 If the obligation of any Guarantor under its respective Guaranty is limited or terminated by operation of law or by such Guarantor, or any such Guarantor becomes the subject of an Insolvency Proceeding;

     7.11 If the Security Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby, except as a result of a disposition of the applicable Collateral in a transaction permitted under this Agreement; or

     7.12 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Parent or any Subsidiary of Parent, or a proceeding shall be commenced by Parent or any Subsidiary of Parent, or by any Governmental Authority having jurisdiction over Parent or any Subsidiary of Parent, seeking to establish the invalidity or unenforceability thereof, or Parent or any Subsidiary of Parent shall deny that it has any liability or obligation purported to be created under any Loan Document.

8. THE LENDER GROUP’S RIGHTS AND REMEDIES

     8.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may

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authorize and instruct Agent to do any one or more of the following on behalf- of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Parent and Borrowers:

          (a) Declare all or any portion of the Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable;

          (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and the Lender Group;

          (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent’s Liens in the Collateral and without affecting the Obligations; and

          (d) The Lender Group shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document.

The foregoing to the contrary notwithstanding, upon the occurrence of any Event of Default described in Section 7.4 or Section 7.5, in addition to the remedies set forth above, without any notice to Borrowers or any other Person or any act by the Lender Group, the Commitments shall automatically terminate and the Obligations then outstanding, together with all accrued and unpaid interest thereon and all fees and all other amounts due under this Agreement and the other Loan Documents, shall automatically and immediately become due and payable, without presentment, demand, protest, or notice of any kind, all of which are expressly waived by Parent and Borrowers.

     8.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election. and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it.

9. TAXES AND EXPENSES.

     If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to any Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves against the Borrowing Base or the Maximum Revolver Amount as Agent deems necessary to protect the Lender Group from the exposure created by such failure, or (c) in the case of the failure to comply with Section 5.8, obtain and maintain insurance policies of the type described in Section 5.8 and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing.

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10. WAIVERS; INDEMNIFICATION.

     10.1 Demand; Protest; etc. Parent and each Borrower waive demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Parent or any such Borrower may in any way be liable.

     10.2 The Lender Group’s Liability for Collateral. Parent and each Borrower hereby agree that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Parent and Borrowers.

     10.3 Indemnification. Parent and each Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons, and each Participant (each, an “Indemnified Person”) harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, liabilities, fines, costs, penalties, and damages, and all reasonable fees and disbursements of attorneys, experts, or consultants and all other costs and expenses actually incurred in connection therewith or in connection with the enforcement of this indemnification (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration (including any restructuring or workout with respect hereto) of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby or the monitoring of Parent’s and its Subsidiaries’ compliance with the terms of the Loan Documents, (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto, and (c) in connection with or arising out of any presence or release of Hazardous Materials at, on, under, to or from any assets or properties owned, leased or operated by Parent or any of its Subsidiaries or any Environmental Actions, Environmental Liabilities and Costs or Remedial Actions related in any way to any such assets or properties of Parent or any of its Subsidiaries (each and all of the foregoing, the “Indemnified Liabilities”). The foregoing to the contrary notwithstanding, neither Parent nor Borrowers shall have any obligation to any Indemnified Person under this Section 10.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Parent or Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by such Person with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION (BUT NOT GROSS NEGLIGENCE OR WILLFUL MISCONDUCT) OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON.

11. NOTICES.

     Unless otherwise provided in this Agreement, all notices or demands by Parent, Borrowers, or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Administrative Borrower or Agent, as applicable,

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may designate to each other in accordance herewith), or telefacsimile to Borrowers in care of Administrative Borrower or to Agent, as the case may be, at its address set forth below:

If to Administrative Borrower:	BOOKHAM TECHNOLOGY PLC
	2584 Junction Avenue
	San Jose, California 95134
	Attn: Jerry Turin, Corporate Controller
	Fax No.: 408.904.5072
with copies to:	WILMER HALE
	60 State Street
	Boston, Massachusetts 02109
	Attn: John D. Sigel, Esq.
	Fax No.: 617.526.5000
If to Agent:	WELLS FARGO FOOTHILL, INC.
	2450 Colorado Avenue
	Suite 3000 West
	Santa Monica, California 90404
	Attn: Business Finance Division Manager
	Fax No.: 310.453.7413
with copies to:	BUCHALTER NEMER
	1000 Wilshire Boulevard, Suite 1500
	Los Angeles, CA 90017-2457
	Attn: Robert J. Davidson, Esq.
	Fax No.: 213.896.0400

     Agent and Administrative Borrower may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 11, other than notices by Agent in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail. Parent and each Borrower acknowledges and agrees that notices sent by the Lender Group in connection with the exercise of enforcement rights against Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above.

12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

          (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

          (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES,

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STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWERS AND EACH MEMBER OF THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 12(b).

          (c) PARENT, BORROWERS AND EACH MEMBER OF THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWERS AND EACH MEMBER OF THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

13. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.

     13.1 Assignments and Participations.

          (a) Any Lender may assign and delegate to one or more assignees (each an “Assignee”) that are Eligible Transferees all or any portion, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount (unless waived by the Agent) of $5,000,000 (except such minimum amount shall not apply to (x) an assignment or delegation by any Lender to any other Lender or an Affiliate of any Lender or (y) a group of new Lenders, each of whom is an Affiliate of each other or a fund or account managed by any such new Lender or an Affiliate of such new Lender to the extent that the aggregate amount to be assigned to all such new Lenders is at least $5,000,000); provided, however, that Borrowers and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Administrative Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Administrative Borrower and Agent an Assignment and Acceptance and Agent has notified the assigning Lender of its receipt thereof in accordance with Section 13.1(b), and (iii) unless waived by the Agent, the assigning Lender or Assignee has paid to Agent for Agent’s separate account a processing fee in the amount of $3,500. Anything contained herein to the contrary notwithstanding, the payment of any fees shall not be required and the Assignee need not be an Eligible Transferee if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of the assigning Lender.

          (b) From and after the date that Agent notifies the assigning Lender (with a copy to Administrative Borrower) that it has received an executed Assignment and Acceptance and, if applicable, payment of the required processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assigning Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 10.3 hereof) and be released from any future obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and

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obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation among Borrowers, the assigning Lender, and the Assignee; provided, however, that nothing contained herein shall release any assigning Lender from obligations that survive the termination of this Agreement, including such assigning Lender’s obligations under Section 15 and Section 16.7(a) of this Agreement.

          (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Parent or Borrowers or the performance or observance by Parent or Borrowers of any of their obligations under this Agreement or any other Loan Document furnished pursuant hereto, (iii) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (iv) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (v) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (vi) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

          (d) Immediately upon Agent’s receipt of the required processing fee, if applicable, and delivery of notice to the assigning Lender pursuant to Section 13.1(b), this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto.

          (e) Any Lender may at any time sell to one or more commercial banks, financial institutions, or other Persons (a “Participant”) participating interests in all or any portion of its Obligations, its Commitment, and the other rights and interests of that Lender (the “Originating Lender”) hereunder and under the other Loan Documents; provided, however, that (i) the Originating Lender shall remain a “Lender” for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a “Lender” hereunder or under the other Loan Documents and the Originating Lender’s obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrowers, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender’s rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrowers hereunder shall be determined as if such Lender had not

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sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Parent, Borrowers, the Collections of Parent or its Subsidiaries, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves.

          (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may, subject to the provisions of Section 16.7, disclose all documents and information which it now or hereafter may have relating to Parent and its Subsidiaries and their respective businesses.

          (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR § 203.24, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.

     13.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that none of Parent or Borrowers may assign this Agreement or any rights or duties hereunder without the Lenders’ prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Parent or any Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 13.1 and, except as expressly required pursuant to Section 13.1, no consent or approval by Parent or any Borrower is required in connection with any such assignment.

14. AMENDMENTS; WAIVERS.

     14.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document (other than Bank Product Agreements or the Fee Letter), and no consent with respect to any departure by any Obligor therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Administrative Borrower (on behalf of all Obligors) and then any such waiver or consent shall be effective, but only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all of the Lenders directly affected thereby and Administrative Borrower (on behalf of all Obligors), do any of the following:

          (a) increase or extend any Commitment of any Lender,

          (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document,

          (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document,

          (d) change the Pro Rata Share that is required to take any action hereunder,

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          (e) amend or modify this Section or any provision of this Agreement providing for consent or other action by all Lenders,

          (f) other than as permitted by Section 15.12, release Agent’s Lien in and to any of the Collateral,

          (g) change the definition of “Required Lenders” or “Pro Rata Share”,

          (h) contractually subordinate any of the Agent’s Liens,

          (i) other than in connection with a merger, liquidation, dissolution or sale of such Person expressly permitted by the terms hereof or the other Loan Documents, release any Obligor from any obligation for the payment of money,

          (j) amend any of the provisions of Section 2.4(b)(i) or (ii),

          (k) change the definitions of Borrowing Base, Eligible Accounts, or Maximum Revolver Amount, or change Section 2.1(b), or

          (l) amend any of the provisions of Section 15,

and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, Issuing Lender, or Swing Lender, as applicable, affect the rights or duties of Agent, Issuing Lender, or Swing Lender, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of any Obligor, shall not require consent by or the agreement of the Obligors.

     14.2 Replacement of Holdout Lender.

          (a) If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender (“Holdout Lender”) fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a “Replacement Lender”), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given.

          (b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 13.1. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender’s Pro Rata Share of Advances and to purchase a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit.

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     14.3 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent’s and each Lender’s rights thereafter to require strict performance by Obligors of any provision of this Agreement or any other Loan Document. Agent’s and each Lender’s rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have.

15. AGENT; THE LENDER GROUP.

     15.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints WFF as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to execute and deliver each of the other Loan Documents on its behalf and to take such other action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 15. The provisions of this Section 15 (other than the proviso to Section 15.11(a)) are solely for the benefit of Agent, and the Lenders, and Parent and its Subsidiaries shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word “Agent” is for convenience only, that WFF is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections of Parent and its Subsidiaries, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections of Parent and its Subsidiaries as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections of Parent and its Subsidiaries, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to any Obligor, the Obligations, the Collateral, the Collections of Parent and its Subsidiaries, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents.

     15.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys in fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney in fact that it selects as long as such selection was made without gross negligence or willful misconduct.

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     15.3 Liability of Agent. None of the Agent Related Persons shall (a) be liable to any Lender for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (b) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Parent or any Subsidiary or Affiliate of Parent, or any officer or director thereof , contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of any Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the books and records or properties of Parent or the books or records or properties of any of Parent’s Subsidiaries or Affiliates.

     15.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, telefacsimile or other electronic method of transmission, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrowers or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the requisite Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders.

     15.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders and, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Administrative Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a “notice of default.” Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 15.4, Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 8; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable.

     15.6 Credit Decision. Each Lender acknowledges that none of the Agent Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Parent and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other

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Person party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrowers. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrowers and any other Person party to a Loan Document that may come into the possession of any of the Agent Related Persons.

     15.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, attorneys fees and expenses, fees and expenses of financial accountants, advisors, consultants, and appraisers, costs of collection by outside collection agencies, auctioneer fees and expenses, and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Parent or its Subsidiaries are obligated to reimburse Agent or Lenders for such expenses pursuant to this Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from the Collections of Parent and its Subsidiaries received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses by Parent or its Subsidiaries, each Lender hereby agrees that it is and shall be obligated to pay to Agent such Lender’s Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrowers and without limiting the obligation of Borrowers to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Person’s gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender’s Pro Rata Share of any costs or out of pocket expenses (including attorneys, accountants, advisors, and consultants fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrowers. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent.

     15.8 Agent in Individual Capacity. WFF and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Parent and its Subsidiaries and Affiliates and any other Person party to any Loan Documents as though WFF were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, WFF or its Affiliates may receive information regarding Parent, its Subsidiaries, or its Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Parent, its Subsidiaries, or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms “Lender” and “Lenders” include WFF in its individual capacity.

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     15.9 Successor Agent. Agent may resign as Agent upon 45 days notice to the Lenders (unless such notice is waived by the Required Lenders). If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term “Agent” shall mean such successor Agent and the retiring Agent’s appointment, powers, and duties as Agent shall be terminated. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 15 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above.

     15.10 Lender in Individual Capacity. Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Parent and its Subsidiaries and Affiliates and any other Person party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Parent or its Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Parent or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender shall not be under any obligation to provide such information to them. With respect to the Swing Loans and Protective Advances, Swing Lender shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the sub-agent of Agent.

     15.11 Withholding Taxes.

          (a) All payments made by any Borrower hereunder or under any note or other Loan Document will be made without setoff, counterclaim, or other defense. In addition, all such payments will be made free and clear of, and without deduction or withholding for, any present or future Taxes, and in the event any deduction or withholding of Taxes is required, each Borrower shall comply with the penultimate sentence of this Section 15.11(a). “Taxes” shall mean, any taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein measured by or based on the net income or net profits of any Lender or any withholding tax that is imposed on amounts payable to such Lender at the time such Lender becomes a party to the Agreement or is attributable to such Lender’s failure to comply with Sections 15.11(b) or (c)) and all interest, penalties or similar liabilities with respect thereto. If any Taxes are so levied or imposed, each Borrower agrees to pay the full amount of such Taxes and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement, any note, or Loan Document, including any amount paid pursuant to this Section 15.11(a) after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrowers shall not be required to increase any such amounts if the increase in such amount payable results from Agent’s or such Lender’s own willful misconduct or gross negligence (as finally determined by a court of competent jurisdiction). Each Borrower will furnish to Agent as promptly as possible

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after the date the payment of any Tax is due pursuant to applicable law certified copies of tax receipts evidencing such payment by any Borrower.

          (b) If a Lender claims an exemption from United States withholding tax, Lender agrees with and in favor of Agent and any Borrower, to deliver to Agent and the Administrative Borrower:

               (i) if such Lender claims an exemption from United States withholding tax pursuant to its portfolio interest exception, (A) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a “bank” as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder of any Borrower (within the meaning of Section 871(h)(3)(B) of the IRC), or (III) a controlled foreign corporation related to any Borrower within the meaning of Section 864(d)(4) of the IRC, and (B) a properly completed and executed IRS Form W-8BEN, before it becomes a Lender under this Agreement and at any other time reasonably requested by Agent or any Borrower;

               (ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed and executed IRS Form W-8BEN before receiving its first payment under this Agreement and at any other time reasonably requested by Agent or any Borrower;

               (iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before receiving its first payment under this Agreement and at any other time reasonably requested by Agent or any Borrower; or

               (iv) such other form or forms, including IRS Form W-9, as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding or backup withholding tax before receiving its first payment under this Agreement and at any other time reasonably requested by Agent or any Borrower.

Lender agrees promptly to notify Agent and Administrative Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction.

          (c) If a Lender claims an exemption from withholding tax in a jurisdiction other than the United States, Lender agrees with and in favor of Agent and Borrowers, to deliver to Agent any such form or forms, as may be required under the laws of such jurisdiction as a condition to exemption from, or reduction of, foreign withholding or backup withholding tax before receiving its first payment under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower.

Lender agrees promptly to notify Agent and Administrative Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction.

          (d) If any Lender claims exemption from, or reduction of, withholding tax and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrowers to such Lender, such Lender agrees to notify Agent and Administrative Borrower of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrowers to such Lender. To the extent of such percentage amount, Agent and Borrowers will treat such Lender’s documentation provided pursuant to Sections 15.11(b) or 15.11(c) as no longer valid. With respect to such percentage amount, Lender may provide new documentation, pursuant to Sections 15.11(b) or 15.11(c), if applicable.

          (e) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (b) or (c)

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of this Section 15.11 are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax.

          (f) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender due to a failure on the part of the Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent, as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section 15.11, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent.

          (g) If a Borrower has paid an amount to any Lender under Section 15.11(a) and the Lender subsequently utilizes, retains or receives a Tax Credit that arises as a result of the deduction or withholding or payment of Taxes which gave rise to the payment of the amount in question, the Lender shall pay to Borrowers the lesser of (x) the amount of such Tax Credit or (y) such amount as the Lender determines in its discretion (acting reasonably) will leave the Borrower (after that payment) in the same after-Tax position as it would have been in had such deduction or withholding or payment of Taxes not been required to be made by the Borrower in the first place. “Tax Credit” shall mean a credit against, relief or remission for, or repayment of any Taxes.

          (h) WFF, in its capacity as a Lender, hereby represents and warrants to Borrowers that it is a Treaty Lender at the date of this Agreement. “Treaty Lender” means, in relation to any Lender, that the Lender: (i) is a resident of a Treaty State for the purposes of the relevant Treaty, and is entitled to the full benefit of that Treaty with respect to interest payments, (ii) is the beneficial owner of any payments made hereunder by a Borrower for the purposes of the relevant Treaty, and (iii) does not carry on a business in any state other than the Treaty State through a permanent establishment with which that Lender’s receipt of any payments hereunder is effectively connected. “Treaty State” means a jurisdiction having a Treaty with the United Kingdom which makes provision for full exemption from Tax imposed by the United Kingdom on any payment of interest. “Treaty” means a double taxation convention.

          (i) Notwithstanding anything else in this Agreement, in respect of United Kingdom Taxes only, so long as no Event of Default shall have occurred and be continuing, no Lender shall be able to assign the benefit of Section 15.11(a) (pursuant to Section 13 or otherwise) unless the Assignee represents to Borrower Agent, Agent, and the assigning Lender that it is a Treaty Lender or a Qualifying Lender at the date of that assignment. “Qualifying Lender” means a bank within the charge to United Kingdom corporation tax or a company resident in the United Kingdom for United Kingdom Tax purposes (provided that such company or bank does not carry on any business through a permanent establishment outside of the United Kingdom with which that Lender’s receipt of any payments hereunder is effectively connected).

     15.12 Collateral Matters.

          (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrowers of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Administrative Borrower certifies to Agent that the sale or disposition is permitted under Section 6.4 or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which neither Parent nor any of its Subsidiaries owned any interest at the time the Agent’s Lien was granted nor at any time

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thereafter, (iv) constituting property leased to Parent or its Subsidiaries under a lease that has expired or is terminated in a transaction permitted under this Agreement, or (v) constituting property of a Subsidiary, the Stock of which is being sold in accordance with the terms of this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Administrative Borrower at any time, the Lenders will confirm in writing Agent’s authority to release any such Liens on particular types or items of Collateral pursuant to this Section 15.12; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent’s opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Parent or any of its Subsidiaries in respect of) all interests retained by Parent or any of its Subsidiaries, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral.

          (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Parent or any of its Subsidiaries or is cared for, protected, or insured or has been encumbered, or that the Agent’s Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent’s own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein.

     15.13 Restrictions on Actions by Lenders; Sharing of Payments.

          (a) Each of the Lenders agrees that it shall not, without the express written consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the written request of Agent, set off against the Obligations, any amounts owing by such Lender to Parent, or any of its Subsidiaries, or any deposit accounts of Parent, or any of its Subsidiaries, now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so in writing by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral.

          (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender’s Pro Rata Share of all such distributions by Agent, such Lender promptly shall (A) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (B) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that to the extent that such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment.

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     15.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent’s Liens in assets which, in accordance with Article 8 or Article 9, as applicable, of the Code can be perfected only by possession or control. Should any Lender obtain possession or control of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent’s request therefor shall deliver possession or control of such Collateral to Agent or in accordance with Agent’s instructions.

     15.15 Payments by Agent to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, fees, or interest of the Obligations.

     15.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders.

     15.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender:

          (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a “Report” and collectively, “Reports”) prepared by or at the request of Agent, and Agent shall so furnish each Lender with such Reports,

          (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report,

          (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Parent and its Subsidiaries and will rely significantly upon Parent’s and its Subsidiaries’ books and records, as well as on representations of such Person’s personnel,

          (d) agrees to keep all Reports and other material, non-public information regarding Parent and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner in accordance with Section 16.7, and

          (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or fail to take or any conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrowers, or the indemnifying Lender’s participation in, or the indemnifying Lender’s purchase of, a loan or loans of Borrowers; and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.

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In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Parent or its Subsidiaries to Agent that has not been contemporaneously provided by Parent or its Subsidiaries to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Parent or its Subsidiaries, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender’s notice to Agent, whereupon Agent promptly shall request of Administrative Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Administrative Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Administrative Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender.

     15.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 15.7, no member of the Lender Group shall have any liability for the acts of any other member of the Lender Group. No Lender shall be responsible to Parent, any Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein.

     15.19 Bank Product Providers. Each Bank Product Provider shall be deemed a party hereto for purposes of any reference in a Loan Document to the parties for whom Agent is acting; it being understood and agreed that the rights and benefits of such Bank Product Provider under the Loan Documents consist exclusively of such Bank Product Provider’s right to share in payments and collections out of the Collateral as more fully set forth herein. In connection with any such distribution of payments and collections, Agent shall be entitled to assume no amounts are due to any Bank Product Provider unless such Bank Product Provider has notified Agent in writing of the amount of any such liability owed to it prior to such distribution.

16. GENERAL PROVISIONS.

     16.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrowers, Agent, and each Lender whose signature is provided for on the signature pages hereof.

     16.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement.

     16.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group, Parent, or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto.

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     16.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

     16.5 Counterparts; Electronic Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis.

     16.6 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by any Obligor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors’ rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (each, a “Voidable Transfer”), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Obligors automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made.

     16.7 Confidentiality.

          (a) Agent and Lenders each individually (and not jointly or jointly and severally) agree that material, non-public information regarding Parent and its Subsidiaries, their operations, assets, and existing and contemplated business plans shall be treated by Agent and the Lenders in a confidential manner, and shall not be disclosed by Agent and the Lenders to Persons who are not parties to this Agreement, except: (i) to attorneys for and other advisors, accountants, auditors, and consultants to any member of the Lender Group, (ii) to Subsidiaries and Affiliates of any member of the Lender Group (including the Bank Product Providers), provided that any such Subsidiary or Affiliate shall have agreed to receive such information hereunder subject to the terms of this Section 16.7, (iii) as may be required by statute, decision, or judicial or administrative order, rule, or regulation, (iv) as may be agreed to in advance by Parent or its Subsidiaries or as requested or required by any Governmental Authority pursuant to any subpoena or other legal process, (v) as to any such information that is or becomes generally available to the public (other than as a result of prohibited disclosure by Agent or the Lenders), (vi) in connection with any assignment, participation or pledge of any Lender’s interest under this Agreement, provided that any such assignee, participant, or pledgee shall have agreed in writing to receive such information hereunder subject to the terms of this Section, and (vii) in connection with any litigation or other adversary proceeding involving parties hereto which such litigation or adversary proceeding involves claims related to the rights or duties of such parties under this Agreement or the other Loan Documents. The provisions of this Section 16.7(a) shall survive for 2 years after the payment in full of the Obligations.

          (b) Anything in this Agreement to the contrary notwithstanding, Agent may provide information concerning the terms and conditions of this Agreement and the other Loan Documents to loan syndication and pricing reporting services.

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     16.8 Lender Group Expenses. Borrowers agree to pay any and all Lender Group Expenses promptly after demand therefor by Agent and agrees that their obligations contained in this Section 16.8 shall survive payment or satisfaction in full of all other Obligations.

     16.9 USA PATRIOT Act. Each Lender that is subject to the requirements of the USA Patriot Act (Title 111 of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”) hereby notifies Parent and Borrowers that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies Parent and Borrowers, which information includes the name and address of Parent and Borrowers and other information that will allow such Lender to identify Parent and Borrowers in accordance with the Act.

     16.10 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof.

     16.11 Bookham UK as Agent for Borrowers. Each Borrower hereby irrevocably appoints Bookham UK as the borrowing agent and attorney-in-fact for all Borrowers (the “Administrative Borrower”) which appointment shall remain in full force and effect unless and until Agent shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Administrative Borrower. Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (i) to provide Agent with all notices with respect to Advances and Letters of Credit obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (ii) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Advances and Letters of Credit and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Lender Group shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce the Lender Group to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify each member of the Lender Group and hold each member of the Lender Group harmless against any and all liability, expense, loss or claim of damage or injury, made against the Lender Group by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral of Borrowers as herein provided, (b) the Lender Group’s relying on any instructions of the Administrative Borrower, or (c) any other action taken by the Lender Group hereunder or under the other Loan Documents, except that Borrowers will have no liability to the relevant Agent-Related Person or Lender-Related Person under this Section 16.10 with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Agent-Related Person or Lender-Related Person, as the case may be.

     16.12 Judgment Currency. The specification under this Agreement of Dollars is of the essence. Each Obligor’s obligations hereunder and under the other Loan Documents to make payments in Dollars shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any currency other than Dollars, except to the extent that such tender or recovery results in the effective receipt by the Lender Group of the full amount of Dollars expressed to be payable to the Lender Group under this Agreement or the other Loan Documents. If, for the purpose of obtaining or enforcing judgment in any court, it is necessary to convert into or from any currency other than Dollars (such other currency being hereinafter referred to as the “Judgment Currency”) an amount due in Dollars, the rate of exchange used shall be that at which Agent could, in accordance with normal banking procedures, purchase Dollars with the Judgment Currency on the Business Day preceding that on which final judgment is given. The obligation of

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each Obligor in respect of any such sum due from it to Agent or Lenders hereunder shall, notwithstanding any judgment in such Judgment Currency, be discharged only to the extent that, on the Business Day immediately following the date on which Agent or such Lenders receive any sum adjudged to be so due in the Judgment Currency, Agent or such Lenders may, in accordance with normal banking procedures, purchase Dollars with the Judgment Currency. If the Dollars so purchased are less than the sum originally due to Agent or such Lenders in Dollars, each Obligor agrees, as a separate obligation and notwithstanding any such judgment, to indemnify Agent or such Lenders, as the case may be, against such loss, and if the Dollars so purchased exceed the sum originally due to Agent or Lenders in Dollars, Agent or Lenders, as the case may be, agree to remit to such Obligor such excess.

[signature pages to follow]

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.

BOOKHAM, INC., a Delaware corporation, as Parent
By:	/s/ Steve Abely
Name: Title:	Steve Abely Chief Financial Officer
BOOKHAM TECHNOLOGY PLC, a limited liability company incorporated under the laws of England and Wales, as a Borrower
By:	/s/ Steve Abely
Name: Title:	Steve Abely Director
NEW FOCUS, INC., a Delaware corporation, as a Borrower
By:	/s/ Steve Abely
Name: Title:	Steve Abely President
BOOKHAM (US) INC., a Delaware corporation, as a Borrower
By:	/s/ Steve Abely
Name: Title:	Steve Abely President

S-1
Credit Agreement

WELLS FARGO FOOTHILL, INC., a California corporation, as Agent and as a Lender
By:	/s/ Alex Hechler
Name: Title	Alex Hechler Vice President

S-2
Credit Agreement

EXHIBIT A-1

FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT

     This ASSIGNMENT AND ACCEPTANCE AGREEMENT (“Assignment Agreement”) is entered into as of                                          between                                          (“Assignor”) and                                          (“Assignee”). Reference is made to the Agreement described in Annex I hereto (the “Credit Agreement”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Credit Agreement.

     1. In accordance with the terms and conditions of Section 13 of the Credit Agreement, the Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to the Assignor’s rights and obligations under the Loan Documents as of the date hereof with respect to the Obligations owing to the Assignor, and Assignor’s portion of the Commitments, all to the extent specified on Annex I.

     2. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim and (ii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment Agreement and to consummate the transactions contemplated hereby; (b) makes no representation or warranty and assumes no responsibility with respect to (i) any statements, representations or warranties made in or in connection with the Loan Documents, or (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (c) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Borrower or any Guarantor or the performance or observance by any Borrower or any Guarantor of any of their respective obligations under the Loan Documents or any other instrument or document furnished pursuant thereto, and (d) represents and warrants that the amount set forth as the Purchase Price on Annex I represents the amount owed by Borrowers to Assignor with respect to Assignor’s share of the Advances assigned hereunder, as reflected on Assignor’s books and records.

     3. The Assignee (a) confirms that it has received copies of the Credit Agreement and the other Loan Documents, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (b) agrees that it will, independently and without reliance upon Agent, Assignor, or any other Lender, based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under the Loan Documents; (c) confirms that it is an Eligible Transferee; (d) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (e) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender; [and (f) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee’s status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty.]

     4. Following the execution of this Assignment Agreement by the Assignor and Assignee, the Assignor will deliver this Assignment Agreement to the Agent for recording by the Agent. The effective date of this Assignment (the “Settlement Date”) shall be the latest to occur of (a) the date of the execution and delivery hereof by the Assignor and the Assignee, (b) the receipt by Agent for its sole and separate account a

1

processing fee in the amount of $5,000 (if required by the Credit Agreement), (c) the receipt of any required consent of the Agent, and (d) the date specified in Annex I.

     5. As of the Settlement Date (a) the Assignee shall be a party to the Credit Agreement and, to the extent of the interest assigned pursuant to this Assignment Agreement, have the rights and obligations of a Lender thereunder and under the other Loan Documents, and (b) the Assignor shall, to the extent of the interest assigned pursuant to this Assignment Agreement, relinquish its rights and be released from its obligations under the Credit Agreement and the other Loan Documents, provided, however, that nothing contained herein shall release any assigning Lender from obligations that survive the termination of this Agreement, including such assigning Lender’s obligations under Article 15 and Section 16.7 of the Credit Agreement.

     6. Upon the Settlement Date, Assignee shall pay to Assignor the Purchase Price (as set forth in Annex I). From and after the Settlement Date, Agent shall make all payments that are due and payable to the holder of the interest assigned hereunder (including payments of principal, interest, fees and other amounts) to Assignor for amounts which have accrued up to but excluding the Settlement Date and to Assignee for amounts which have accrued from and after the Settlement Date. On the Settlement Date, Assignor shall pay to Assignee an amount equal to the portion of any interest, fee, or any other charge that was paid to Assignor prior to the Settlement Date on account of the interest assigned hereunder and that are due and payable to Assignee with respect thereto, to the extent that such interest, fee or other charge relates to the period of time from and after the Settlement Date.

     7. This Assignment Agreement may be executed in counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. This Assignment Agreement may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same were a fully executed and delivered original manual counterpart.

     8. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.

2

     IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement and Annex I hereto to be executed by their respective officers, as of the first date written above.

[NAME OF ASSIGNOR]

as Assignor

By

Name:

Title:

[NAME OF ASSIGNEE]

as Assignee

By

Name:

Title:

[ACCEPTED THIS ___DAY OF
                                        ]

WELLS FARGO FOOTHILL, INC.,
a California corporation, as Agent

By                                                            
Name:
Title:

3

ANNEX FOR ASSIGNMENT AND ACCEPTANCE

ANNEX I

1.	Borrowers: Bookham Technology PLC and New Focus Inc.
2.	Name and Date of Credit Agreement:
	Credit Agreement, dated as of July ___, 2006, by and among Bookham Inc., a Delaware corporation (“Parent”), the subsidiaries of Parent party thereto as Borrowers, the lenders from time to time a party thereto (the “Lenders”), and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders

3.	Date of Assignment Agreement:
4.	Amounts:
	(a)	Assigned Amount of Revolver Commitment	$
	(b)	Assigned Amount of Advances	$
5.	Settlement Date:
6.	Purchase Price		$

7. Notice and Payment Instructions, etc.

Assignee: Assignor:

Annex I-1

8. Agreed and Accepted:

[ASSIGNOR] [ASSIGNEE]

Accepted:

WELLS FARGO FOOTHILL, INC.,
a California corporation, as Agent

By                                        
Name:
Title:

Annex I-2

EXHIBIT C-1

FORM OF COMPLIANCE CERTIFICATE

[on Parent’s letterhead]

To:	Wells Fargo Foothill, Inc.
	2450 Colorado Avenue
	Suite 3000 West
	Santa Monica, CA 90404
	Attn: Business Finance Division Manager

Re: Compliance Certificate dated                     , 20___

Ladies and Gentlemen:

     Reference is made to that certain CREDIT AGREEMENT (the “Credit Agreement”) dated as of July ___, 2006, by and among the lenders identified on the signature pages thereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “Lender” and collectively as the “Lenders”), WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (“Agent”), Bookham, Inc., a Delaware corporation (“Parent”), and each of its Subsidiaries party thereto. Initially capitalized terms used in this Compliance Certificate have the meanings set forth in the Credit Agreement unless specifically defined herein.

     Pursuant to Schedule 5.3 of the Credit Agreement, the undersigned officer of Parent hereby certifies that:

     1. The financial information of Parent and its Subsidiaries furnished in Schedule 1 attached hereto, has been prepared in accordance with GAAP (except for year-end adjustments and the lack of footnotes), and fairly presents in all material respects the financial condition of Parent and its Subsidiaries.

     2. Such officer has reviewed the terms of the Credit Agreement and has made, or caused to be made under his/her supervision, a review in reasonable detail of the transactions and condition of Parent and its Subsidiaries during the accounting period covered by the financial statements delivered pursuant to Schedule 5.3 of the Credit Agreement.

     3. Such review has not disclosed the existence on and as of the date hereof, and the undersigned does not have knowledge of the existence as of the date hereof, of any event or condition that constitutes a Default or Event of Default, except for such conditions or events listed on Schedule 2 attached hereto, specifying the nature and period of existence thereof and what action Parent and its Subsidiaries have taken, are taking, or propose to take with respect thereto.

     4. The representations and warranties of Parent and its Subsidiaries set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof (except to the extent they relate to a specified date), except as set forth on Schedule 3 attached hereto.

     5. Parent and its Subsidiaries are in compliance with the applicable covenants contained in Section 6.16 of the Credit Agreement as demonstrated on Schedule 4 hereof.

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     IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned this ___day of                                         ,                     .

BOOKHAM, INC.,

a Delaware corporation

By:

Name:

Title:

2

SCHEDULE 4

Financial Covenants

1. Minimum EBITDA.

     Parent’s and its Subsidiaries’ EBITDA, measured on a quarter-end basis, for the quarter period ending                     ,                      is $                    , which amount [is/is not] greater than or equal to the amount set forth in Section 6.16(a) of the Credit Agreement for the corresponding period.

2. Capital Expenditures.

     Parent’s and its Subsidiaries Capital Expenditures from the beginning of Parent’s most recent Fiscal Year to the date hereof is                     , which [is/is not] greater than or equal to the amount set forth in Section 6.16(b) of the Credit Agreement for the corresponding period.

Schedule 4

EXHIBIT L-1

FORM OF LIBOR NOTICE

Wells Fargo Foothill, Inc., as Agent
under the below referenced Credit Agreement
2450 Colorado Avenue
Suite 3000 West
Santa Monica, California 90404

Ladies and Gentlemen:

     Reference hereby is made to that certain Credit Agreement, dated as of July ___, 2006 (the “Credit Agreement”), among Bookham, Inc., a Delaware corporation (“Parent”), each of its Subsidiaries signatory thereto (such Subsidiaries, each, a “Borrower” and collectively, jointly and severally, “Borrowers”), the lenders signatory thereto (the “Lenders”), and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders (“Agent”). Initially capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.

     This LIBOR Notice represents Borrowers’ request to elect the LIBOR Option with respect to outstanding Advances in the amount of $                     (the “LIBOR Rate Advance”)[, and is a written confirmation of the telephonic notice of such election given to Agent].

     The LIBOR Rate Advance will have an Interest Period of [1, 2, [or] 3] month(s) commencing on                                         .

     This LIBOR Notice further confirms Borrowers’ acceptance, for purposes of determining the rate of interest based on the LIBOR Rate under the Credit Agreement, of the LIBOR Rate as determined pursuant to the Credit Agreement.

     Administrative Borrower represents and warrants that (i) as of the date hereof, each representation or warranty contained in or pursuant to any Loan Document or any agreement, instrument, certificate, document or other writing furnished at any time under or in connection with any Loan Document, and as of the effective date of any advance, continuation or conversion requested above, is true and correct in all material respects (except to the extent any representation or warranty expressly related to an earlier date), (ii) each of the covenants and agreements contained in any Loan Document have been performed (to the extent required to be performed on or before the date hereof or each such effective date), and (iii) no Default or Event of Default has occurred and is continuing on the date hereof, nor will any thereof occur after giving effect to the request above.

Wells Fargo Foothill, Inc., as Agent
Page 2

Dated:

BOOKHAM TECHNOLOGY PLC,

a company incorporated under the laws of England and

Wales, as Administrative Borrower

By

Name:

Title:

Acknowledged by:

WELLS FARGO FOOTHILL, INC.,
a California corporation, as Agent

By:                                        
Name:
Title:

SCHEDULE F-1

Foreign Security Documents

• Debenture, dated as of the Closing Date, granted by Bookham UK and Bookham Nominees Limited, a company incorporated under the laws of England and Wales (“BNL”), in favor of Agent.

• Mortgage Over Shares, dated as of the Closing Date, granted by Parent and BNL in favor of Agent.

• Deed of Charge, dated as of the Closing Date, by and among Bookham International Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands, and Agent.

• Charge Over Shares, dated as of the Closing Date, by and between Bookham UK and Agent.

• Confirmatory Assignment of Security Interest for filing under the Patent Act (Canada), dated as of the Closing Date, by and between Bookham UK and Agent.

Schedule 1.1

As used in the Agreement, the following terms shall have the following definitions:

     “Account” means an account (as that term is defined in the Code).

     “Account Debtor” means any Person who is obligated on an Account, chattel paper, or a general intangible.

     “ACH Transactions” means any cash management or related services (including the Automated Clearing House processing of electronic fund transfers through the direct Federal Reserve Fedline system) provided by a Bank Product Provider for the account of Parent or its Subsidiaries.

     “Active Obligor” means each Obligor that is not an Inactive Obligor.

     “Additional Documents” has the meaning specified therefor in Section 5.17.

     “Administrative Borrower” has the meaning specified therefor in Section 16.10.

     “Advances” has the meaning specified therefor in Section 2.1(a).

     “Affiliate” means, as applied to any Person, any other Person who controls, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” means the possession, directly or indirectly through one or more intermediaries, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, for purposes of the definition of Eligible Accounts and Section 6.13 of the Agreement: (a) any Person which owns directly or indirectly 10% or more of the Stock having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed an Affiliate of such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership in which a Person is a general partner shall be deemed an Affiliate of such Person.

     “Agent” has the meaning specified therefor in the preamble to the Agreement.

     “Agent-Related Persons” means Agent, together with its Affiliates, officers, directors, employees, attorneys, and agents.

     “Agent’s Account” means the Deposit Account of Agent identified on Schedule A-1.

     “Agent’s Liens” means the Liens granted by Borrowers or their Subsidiaries to Agent under the Loan Documents.

     “Agreement” means the Credit Agreement to which this Schedule 1.1 is attached.

     “Assignee” has the meaning specified therefor in Section 13.1(a).

     “Assignment and Acceptance” means an Assignment and Acceptance Agreement substantially in the form of Exhibit A-1.

     “Authorized Person” means any officer or employee of Administrative Borrower.

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     “Availability” means, as of any date of determination, the amount that Borrowers are entitled to borrow as Advances under Section 2.1 of the Agreement (after giving effect to all then outstanding Obligations (other than Bank Product Obligations) and all sublimits and reserves then applicable hereunder).

     “Bank Product” means any financial accommodation extended to Parent or its Subsidiaries by a Bank Product Provider (other than pursuant to the Agreement) including: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH Transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) transactions under Hedge Agreements.

     “Bank Product Agreements” means those agreements entered into from time to time by Parent or its Subsidiaries with a Bank Product Provider in connection with the obtaining of any of the Bank Products.

     “Bank Product Obligations” means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by Parent or its Subsidiaries to any Bank Product Provider pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that Parent or its Subsidiaries are obligated to reimburse to Agent or any member of the Lender Group as a result of Agent or such member of the Lender Group purchasing participations from, or executing indemnities or reimbursement obligations to, a Bank Product Provider with respect to the Bank Products provided by such Bank Product Provider to Parent or its Subsidiaries.

     “Bank Product Provider” means Wells Fargo or any of its Affiliates.

     “Bank Product Reserve” means, as of any date of determination, the amount of reserves that Agent has established (based upon the Bank Product Providers’ reasonable determination of the credit exposure of Parent and its Subsidiaries in respect of Bank Products) in respect of Bank Products then provided or outstanding.

     “Bankruptcy Code” means title 11 of the United States Code, as in effect from time to time.

     “Base LIBOR Rate” means the rate per annum, determined by Agent in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate, to be the rate at which Dollar deposits (for delivery on the first day of the requested Interest Period) are offered to major banks in the London interbank market 2 Business Days prior to the commencement of the requested Interest Period, for a term and in an amount comparable to the Interest Period and the amount of the LIBOR Rate Loan requested (whether as an initial LIBOR Rate Loan or as a continuation of a LIBOR Rate Loan or as a conversion of a Base Rate Loan to a LIBOR Rate Loan) by Administrative Borrower in accordance with the Agreement, which determination shall be conclusive in the absence of manifest error.

     “Base Rate” means, the rate of interest announced, from time to time, within Wells Fargo at its principal office in San Francisco as its “prime rate”, with the understanding that the “prime rate” is one of Wells Fargo’s base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publications as Wells Fargo may designate.

     “Base Rate Loan” means the portion of the Advances that bears interest at a rate determined by reference to the Base Rate.

     “Base Rate Margin” means 1.25 percentage points.

     “Benefit Plan” means a “defined benefit plan” (as defined in Section 3(35) of ERISA) for which any Borrower or any Subsidiary or ERISA Affiliate of any Borrower has been an “employer” (as defined in Section 3(5) of ERISA) within the past six years.

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     “Board of Directors” means the board of directors (or comparable managers) of Person or any committee thereof duly authorized to act on behalf of the board of directors (or comparable managers).

     “Bookham Canada” means Bookham (Canada) Inc., a company organized under the federal laws of Canada.

     “Bookham China” means Bookham Technology (Shenzhen) (FFTZ) Co. Ltd., a company organized under the laws of The People’s Republic of China.

     “Bookham China Sale and Leaseback” means a sale and leaseback financing transaction by Bookham China with respect to its operating facility in Shenzhen, China.

     “Bookham Switzerland” means Bookham (Switzerland) AG, a company organized under the laws of Switzerland.

     “Bookham UK” means Bookham Technology plc, a limited liability company incorporated under the laws of England and Wales.

     “Bookham (US)” means Bookham (US) Inc., a Delaware corporation.

     “Borrower” and “Borrowers” have the respective meanings specified therefor in the preamble to the Agreement.

     “Borrowing” means a borrowing hereunder consisting of Advances made on the same day by the Lenders (or Agent on behalf thereof), or by Swing Lender in the case of a Swing Loan, or by Agent in the case of a Protective Advance, in each case, to Administrative Borrower.

     “Borrowing Base” means, as of any date of determination, 80% of the amount of Eligible Accounts, minus the sum of (i) the amount, if any, of the Dilution Reserve, (ii) the Bank Product Reserve, and (iii) the aggregate amount of reserves, if any, established by Agent under Section 2.1(b).

     “Borrowing Base Certificate” means a certificate in the form of Exhibit B-1.

     “Business Day” means any day that is not a Saturday, Sunday, or other day on which banks are authorized or required to close in the state of California, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term “Business Day” also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market.

     “Capital Expenditures” means, with respect to any Person for any period, the aggregate of all expenditures by such Person and its Subsidiaries during such period that are capital expenditures as determined in accordance with GAAP, whether such expenditures are paid in cash or financed.

     “Capitalized Lease Obligation” means that portion of the obligations under a Capital Lease that is required to be capitalized in accordance with GAAP.

     “Capital Lease” means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

     “Cash Equivalents” means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or by the United Kingdom or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof

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and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor’s Rating Group (“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”), (c) commercial paper maturing no more than 270 days from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody’s, (d) certificates of deposit or bankers’ acceptances maturing within 1 year from the date of acquisition thereof issued by any bank organized under the laws of the United States or of the United Kingdom or any state thereof having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000, (e) Deposit Accounts maintained with (i) any bank that satisfies the criteria described in clause (d) above, or (ii) any other bank organized under the laws of the United States or any state thereof so long as the amount maintained with any such other bank is less than or equal to $100,000 and is insured by the Federal Deposit Insurance Corporation, and (f) Investments in money market funds substantially all of whose assets are invested in the types of assets described in clauses (a) through (e) above.

     “Cash Management Account” has the meaning specified therefor in Section 2.7(a).

     “Cash Management Agreements” means those certain cash management agreements, in form and substance satisfactory to Agent, each of which is among Parent or one of its Subsidiaries, Agent, and one of the Cash Management Banks.

     “Cash Management Bank” has the meaning specified therefor in Section 2.7(a).

     “Change of Control” means that (a) any “person” or “group” (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35%, or more, of the Stock of Parent having the right to vote for the election of members of the Board of Directors of Parent, or (b) a majority of the members of the Board of Directors of Parent do not constitute Continuing Directors, or (c) any Obligor ceases to own and control, directly or indirectly, 100% (or such lesser percentage owned by such Obligor as of the Closing Date) of the outstanding capital Stock of each of its respective Subsidiaries existing as of the Closing Date, other than as a result of a Permitted Disposition or as otherwise specifically permitted under the Agreement.

     “Closing Date” means the date of the making of the initial Advance (or other extension of credit) hereunder or the date on which Agent sends Administrative Borrower a written notice that each of the conditions precedent set forth on Schedule 3.1 either have been satisfied or have been waived.

     “Code” means the California Uniform Commercial Code, as in effect from time to time.

     “Collateral” means all assets and interests in assets and proceeds thereof now owned or hereafter acquired by Parent or its Subsidiaries in or upon which a Lien is granted under any of the Loan Documents.

     “Collateral Access Agreement” means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in Parent’s or its Subsidiaries’ books and records, Equipment, or Inventory, in each case, in form and substance satisfactory to Agent.

     “Collections” means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds).

     “Commitment” means, with respect to each Lender, its Revolver Commitment, or its Total Commitment, as the context requires, and, with respect to all Lenders, their Revolver Commitments, or their Total Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 13.1.

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     “Compliance Certificate” means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Parent to Agent.

     “Continuing Director” means (a) any member of the Board of Directors of Parent who was a director (or comparable manager) of Parent on the Closing Date, and (b) any individual who becomes a member of the Board of Directors of Parent after the Closing Date if such individual was appointed or nominated for election to the Board of Directors of Parent by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Parent and whose initial assumption of office resulted from such contest or the settlement thereof.

     “Control Agreement” means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Parent or one of its Subsidiaries, Agent, and the applicable securities intermediary (with respect to a Securities Account) or bank (with respect to a Deposit Account).

     “Copyright Security Agreement” has the meaning specified therefor in the Security Agreement.

     “Daily Balance” means, as of any date of determination and with respect to any Obligation, the amount of such Obligation owed at the end of such day.

     “Default” means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default.

     “Defaulting Lender” means any Lender that fails to make any Advance (or other extension of credit) that it is required to make hereunder on the date that it is required to do so hereunder.

     “Defaulting Lender Rate” means (a) for the first 3 days from and after the date the relevant payment is due, the Base Rate, and (b) thereafter, the interest rate then applicable to Advances that are Base Rate Loans (inclusive of the Base Rate Margin applicable thereto).

     “Deposit Account” means any deposit account (as that term is defined in the Code).

     “Designated Account” means the Deposit Account of Administrative Borrower identified on Schedule D-1.

     “Designated Account Bank” has the meaning specified therefor in Schedule D-1.

     “Dilution” means, as of any date of determination, a percentage, based upon the experience of the immediately prior 90 consecutive days, that is the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items with respect to Borrowers’ Accounts during such period, by (b) Borrowers’ billings with respect to Accounts during such period.

     “Dilution Reserve” means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts by 1 percentage point for each percentage point by which Dilution is in excess of 5%.

     “Dollars” or “$” means United States dollars.

     “EBITDA” means, with respect to any fiscal period, the sum of:

          (a) Parent’s and its Subsidiaries’ consolidated net earnings (or loss) for such period, plus

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          (b) without duplication, the sum of the following amounts for such period, to the extent such amounts were deducted in determining such consolidated net earnings (or loss) for such period: (i) interest expense, plus (ii) income tax expense, plus (iii) depreciation and amortization, plus (iv) restructuring charges of not more than $8,000,000, to the extent incurred on or before March 31, 2007, plus (v) non-cash extraordinary or unusual losses, plus (vi) non-cash impairment and non-cash charges related to the issuance of stock and options, minus

          (c) without duplication, the sum of the following amounts, to the extent such amounts were included in determining such consolidated net earnings (or loss) for such period: (i) extraordinary or unusual gains, plus (ii) interest income.

     “Eligible Accounts” means, without duplication, (i) the Eligible Wuhan Accounts, (ii) the Eligible Marconi Accounts, (iii) the Eligible Siemens Accounts, and (iv) those Accounts created by a Borrower in the ordinary course of its business, that arise out of its sale of goods or rendition of services, that comply with each of the representations and warranties respecting Eligible Accounts made in the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the excluding criteria set forth below; provided, however, that such criteria may be revised from time to time by Agent in Agent’s Permitted Discretion to address the results of any audit performed by Agent from time to time after the Closing Date. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits and unapplied cash. Eligible Accounts shall not include the following:

          (a) Accounts that the Account Debtor has failed to pay within 90 days of original invoice date or Accounts with selling terms of more than 60 days,

          (b) Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above,

          (c) Accounts with respect to which the Account Debtor is an Affiliate of any Borrower or an employee or agent of any Borrower or any Affiliate of any Borrower,

          (d) Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional,

          (e) Accounts that are not payable in Dollars,

          (f) Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office or its registered office in the United States, Canada, the United Kingdom, or such other jurisdiction(s) permitted by Agent in its Permitted Discretion, or (ii) is not organized or incorporated under the laws of the United States, Canada, the United Kingdom, or such other jurisdiction(s) permitted by Agent in its Permitted Discretion, or any state, province, municipality, or other political subdivision thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless, in each such case, (y) the Account is supported by an irrevocable letter of credit satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent and is directly drawable by Agent, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, satisfactory to Agent,

          (g) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which the applicable Borrower has complied, to the reasonable satisfaction of Agent, with the Assignment of Claims Act, 31 USC § 3727), or (ii) any state or other political subdivision of the United States,

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          (h) Accounts with respect to which the Account Debtor is a creditor of any Borrower, has or has asserted a right of setoff, or has disputed its obligation to pay all or any portion of the Account, to the extent of such claim, right of setoff, or dispute,

          (i) Accounts with respect to an Account Debtor whose total obligations owing to Borrowers exceed 10% (or 30% with respect to Flextronics Canada, Inc., or 20% with respect to Huawei Tech Investment Co. Ltd. or Nortel) of all Eligible Accounts (such percentage, as applied to a particular Account Debtor, being subject to reduction by Agent in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates), to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, however, that, in each case, the amount of Eligible Accounts that are excluded because they exceed the foregoing percentage shall be determined by Agent based on all of the otherwise Eligible Accounts prior to giving effect to any eliminations based upon the foregoing concentration limit,

          (j) Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which a Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor,

          (k) Accounts with respect to which the Account Debtor is located in a state or jurisdiction (e.g., New Jersey, Minnesota, and West Virginia) that requires, as a condition to access to the courts of such jurisdiction, that a creditor qualify to transact business, file a business activities report or other report or form, or take one or more other actions, unless the applicable Borrower has so qualified, filed such reports or forms, or taken such actions (and, in each case, paid any required fees or other charges), except to the extent that the applicable Borrower may qualify subsequently as a foreign entity authorized to transact business in such state or jurisdiction and gain access to such courts, without incurring any cost or penalty viewed by Agent to be significant in amount, and such later qualification cures any access to such courts to enforce payment of such Account,

          (l) Accounts, the collection of which, Agent, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor’s financial condition,

          (m) Accounts that are not subject to a valid and perfected first priority Agent’s Lien,

          (n) Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor, or

          (o) Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services.

     “Eligible Marconi Accounts” means Accounts created by a Borrower owing from Marconi SUD SPA (“Marconi”) to Borrowers that (i) would otherwise constitute Eligible Accounts but for the exclusionary criteria set forth in parts (a) or (f) of the definition of Eligible Accounts; (ii) Marconi has not failed to pay within the earlier of 120 days of original invoice date or 60 days after the due date; and (iii) do not contain selling terms of more than 120 days.

     “Eligible Siemens Accounts” means Accounts created by a Borrower owing from Siemens AG (“Siemens”) to Borrowers that (i) would otherwise constitute Eligible Accounts but for the exclusionary criteria set forth in parts (a) or (f) of the definition of Eligible Accounts; (ii) Siemens has not failed to pay within the earlier of 120 days of original invoice date or 60 days after the due date; and (iii) do not contain selling terms of more than 120 days.

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     “Eligible Transferee” means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, financial institution, or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender, (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Administrative Borrower (which approval of Administrative Borrower shall not be unreasonably withheld, delayed, or conditioned), and (f) during the continuation of an Event of Default, any other Person approved by Agent.

     “Eligible Wuhan Accounts” means Accounts created by a Borrower owing from Wuhan Research Institute of Posts (“Wuhan”) to Borrowers that (i) would otherwise constitute Eligible Accounts but for the exclusionary criteria set forth in parts (a) or (f) of the definition of Eligible Accounts; (ii) do not exceed $2,000,000 in the aggregate; (iii) Wuhan has not failed to pay within the earlier of 120 days of original invoice date or 60 days after the due date; (iv) do not contain selling terms of more than 120 days; and (v) are supported by an irrevocable letter of credit satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent.

     “Environmental Actions” means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of Parent, any Subsidiary of Parent, or any of their predecessors in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by Parent, any Subsidiary of Parent, or any of their predecessors in interest.

     “Environmental Law” means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, in each case, to the extent binding on Parent or any Subsidiary of Parent, relating to the environment, the effect of the environment on employee health, or Hazardous Materials, in each case as amended from time to time.

     “Environmental Liabilities” means all liabilities, monetary obligations, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, or Remedial Action required, by any Governmental Authority or any third party, and which relate to any Environmental Action.

     “Environmental Lien” means any Lien in favor of any Governmental Authority for Environmental Liabilities.

     “Equipment” means equipment (as that term is defined in the Code).

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto.

     “ERISA Affiliate” means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of Parent or a Subsidiary of a Parent under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the

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employees of Parent or a Subsidiary of Parent under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Parent or a Subsidiary of Parent is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Parent or a Subsidiary of Parent and whose employees are aggregated with the employees of Parent or a Subsidiary of Parent under IRC Section 414(o).

     “Event of Default” has the meaning specified therefor in Section 7.

     “Excess Availability” means, as of any date of determination, the amount equal to Availability minus the aggregate amount, if any, of all trade payables of Parent and its Subsidiaries aged in excess of their historical levels with respect thereto and all book overdrafts of Parent and its Subsidiaries in excess of their historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion.

     “Exchange Act” means the Securities Exchange Act of 1934, as in effect from time to time.

     “Fee Letter” means that certain fee letter between Borrowers and Agent, in form and substance satisfactory to Agent.

     “Foreign Security Documents” means, collectively, the documents set forth on Schedule F-1 together with the documents, agreements, or instruments executed or delivered in connection therewith, and “Foreign Security Document” means any one of them.

     “Funding Date” means the date on which a Borrowing occurs.

     “Funding Losses” has the meaning specified therefor in Section 2.13(b)(ii).

     “GAAP” means generally accepted accounting principles as in effect from time to time in the United States, consistently applied.

     “Governing Documents” means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person.

     “Governmental Authority” means any domestic or foreign federal, state, local, or other governmental or administrative body, instrumentality, board, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.

     “Guarantors” means, collectively, Parent and each other person which from time to time executes a Guaranty, and “Guarantor” means any one of them.

     “Guaranties” means those certain general continuing guaranties executed and delivered by each Guarantor in favor of Agent, for the benefit of the Lender Group and the Bank Product Providers, in form and substance satisfactory to Agent, and “Guaranty” means any one of them.

     “Hazardous Materials” means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as “hazardous substances,” “hazardous materials,” “hazardous wastes,” “toxic substances,” or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or “EP toxicity”, (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million.

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     “Hedge Agreement” means any and all agreements, or documents now existing or hereafter entered into by Parent or any of its Subsidiaries that provide for an interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging Parent’s or any of its Subsidiaries’ exposure to fluctuations in interest or exchange rates, loan, credit exchange, security, or currency valuations or commodity prices.

     “Holdout Lender” has the meaning specified therefor in Section 14.2(a).

     “Inactive Obligors” means, collectively, Onetta Inc, a Delaware corporation; Focused Research Inc., a California corporation; and Globe Y Technology, Inc., a California corporation and “Inactive Obligor” means any one of them.

     “Indebtedness” means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations as a lessee under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of a Person or its Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations to pay the deferred purchase price of assets (other than trade payables incurred in the ordinary course of business and repayable in accordance with customary trade practices), (f) all obligations owing under Hedge Agreements, and (g) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse) any obligation of any other Person that constitutes Indebtedness under any of clauses (a) through (f) above.

     “Indemnified Liabilities” has the meaning specified therefor in Section 10.3.

     “Indemnified Person” has the meaning specified therefor in Section 10.3.

     “Insolvency Proceeding” means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law or any equivalent laws in any other jurisdiction, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief and including, in the case of any Person incorporated in England and Wales, any corporate action, legal proceedings or other procedure or step is taken (including the making of an application, the presentation of a petition, the filing or service of a notice or the passing of a resolution) in relation to:

(a)	the suspension of payments, a moratorium or any indebtedness, winding-up, dissolution, administration or reorganization (by way of voluntary arrangement scheme of arrangement or otherwise) of such Person other than a solvent liquidation or reorganization of such Person;
(b)	a composition, assignment or arrangement with any creditor of such Person;
(c)	the appointment of a liquidator, supervisor, receiver, administrator, administrative receiver, compulsory manager, trustee or other similar officer in respect of such Person or any of its assets.

     “Intercompany Advances” means loans or advances or the repayment of loans or advances from Parent or one of its Subsidiaries to Parent or one of its Subsidiaries, and includes the repayment of intercompany payables owing on the Closing Date.

     “Intercompany Subordination Agreement” means a subordination agreement executed and delivered by Parent, each of Parent’s Subsidiaries, and Agent, the form and substance of which is satisfactory to Agent.

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     “Interest Expense” means, for any period, the aggregate of the interest expense of Parent and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.

     “Interest Period” means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan (or the continuation of a LIBOR Rate Loan or the conversion of a Base Rate Loan to a LIBOR Rate Loan) and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrowers (or Administrative Borrower on behalf thereof) may not elect an Interest Period which will end after the Maturity Date.

     “Inventory” means inventory (as that term is defined in the Code).

     “Investment” means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising in the ordinary course of business consistent with past practice), purchases or other acquisitions of Indebtedness, Stock, or all or substantially all of the assets of such other Person (or of any division or business line of such other Person), and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP.

     “IRC” means the Internal Revenue Code of 1986, as in effect from time to time.

     “Issuing Lender” means WFF or any other Lender that, at the request of Administrative Borrower and with the consent of Agent, agrees, in such Lender’s sole discretion, to become an Issuing Lender for the purpose of issuing L/Cs or L/C Undertakings pursuant to Section 2.12.

     “L/C” has the meaning specified therefor in Section 2.12(a).

     “L/C Disbursement” means a payment made by the Issuing Lender pursuant to a Letter of Credit.

     “L/C Undertaking” has the meaning specified therefor in Section 2.12(a).

     “Lender” and “Lenders” have the respective meanings set forth in the preamble to the Agreement, and shall include any other Person made a party to the Agreement in accordance with the provisions of Section 13.1.

     “Lender Group” means, individually and collectively, each of the Lenders (including the Issuing Lender) and Agent.

     “Lender Group Expenses” means, subject to the terms and provisions of the Fee Letter, all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by Parent or any of its Subsidiaries under any of the Loan Documents that are paid, advanced, or incurred by the Lender Group, (b) fees or charges paid or incurred by Agent in connection with the Lender Group’s transactions with Parent or its Subsidiaries, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and

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trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic collateral appraisals or business valuations), real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Agent in the disbursement of funds to Borrowers or other members of the Lender Group (by wire transfer or otherwise), (d) charges paid or incurred by Agent resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or after the occurrence of any Default or Event of Default in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Agent related to any inspections or audits to the extent of the fees and charges (and up to the amount of any limitation) contained in the Agreement or the Fee Letter, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or third party claims or any other suit in connection with the transactions contemplated by the Loan Documents or the Lender Group’s relationship with Parent or any Subsidiary of Parent, (h) Agent’s reasonable costs and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, syndicating, or amending the Loan Documents, and (i) Agent’s and each Lender’s reasonable costs and expenses (including attorneys, accountants, consultants, and other advisors fees and expenses) incurred in terminating, enforcing (including attorneys, accountants, consultants, and other advisors fees and expenses incurred in connection with a “workout,” a “restructuring,” or an Insolvency Proceeding concerning Parent or any Subsidiary of Parent or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral.

     “Lender-Related Person” means, with respect to any Lender, such Lender, together with such Lender’s Affiliates, officers, directors, employees, attorneys, and agents.

     “Letter of Credit” means an L/C or an L/C Undertaking, as the context requires.

     “Letter of Credit Usage” means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit.

     “LIBOR Deadline” has the meaning specified therefor in Section 2.13(b)(i).

     “LIBOR Notice” means a written notice in the form of Exhibit L-1.

     “LIBOR Option” has the meaning specified therefor in Section 2.13(a).

     “LIBOR Rate” means, for each Interest Period for each LIBOR Rate Loan, the rate per annum determined by Agent by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage.

     “LIBOR Rate Loan” means each portion of an Advance that bears interest at a rate determined by reference to the LIBOR Rate.

     “LIBOR Rate Margin” means 2.75 percentage points.

     “Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment, charge, deposit arrangement, encumbrance, easement, lien (statutory or other), security interest, or other security arrangement and any other preference, priority, or preferential arrangement of any kind or nature whatsoever, including any conditional sale contract or other title retention agreement, the interest of a lessor under a Capital Lease and any synthetic or other financing lease having substantially the same economic effect as any of the foregoing.

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     “Loan Account” has the meaning specified therefor in Section 2.10.

     “Loan Documents” means the Agreement, the Bank Product Agreements, any Borrowing Base Certificate, the Cash Management Agreements, the Control Agreements, the Copyright Security Agreement, the Fee Letter, the Foreign Security Documents, the Guaranties, the Intercompany Subordination Agreement, the Letters of Credit, the Patent Security Agreement, the Security Agreement, the Trademark Security Agreement, any note or notes executed by a Borrower in connection with the Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by any Obligor and the Lender Group in connection with the Agreement.

     “Material Adverse Change” means (a) a material adverse change in the business, operations, results of operations, assets, liabilities or financial condition of Parent and its Subsidiaries taken as a whole, (b) a material impairment of Parent’s and its Subsidiaries’ ability, taken as a whole, to perform their obligations under the Loan Documents to which it is a party or of the Lender Group’s ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Agent’s Liens with respect to the Collateral as a result of an action or failure to act on the part of Parent or a Subsidiary of Parent.

     “Maturity Date” has the meaning specified therefor in Section 3.3.

     “Maximum Revolver Amount” means $25,000,000.

     “Moody’s” has the meaning specified therefor in the definition of Cash Equivalents.

     “Obligations” means (a) all loans, Advances, debts, principal, interest (including any interest that accrues after the commencement of an Insolvency Proceeding regardless of whether allowed or allowable in whole or in part as a claim in any such Insolvency Proceeding), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrowers’ Loan Account pursuant to the Agreement), obligations (including indemnification obligations), fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that accrue after the commencement of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any such Insolvency Proceeding), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrowers to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all other expenses or other amounts that Borrowers are required to pay or reimburse by the Loan Documents or by law or otherwise in connection with the Loan Documents, and (b) all Bank Product Obligations. Any reference in the Agreement or in the Loan Documents to the Obligations shall include all or any portion thereof and any extensions, modifications, renewals, or alterations thereof, both prior and subsequent to any Insolvency Proceeding.

     “Obligor” means any Person that is a Borrower or a Guarantor.

     “Originating Lender” has the meaning specified therefor in Section 13.1(e).

     “Overadvance” has the meaning specified therefor in Section 2.5.

     “Parent” has the meaning specified therefor in the preamble to the Agreement.

     “Participant” has the meaning specified therefor in Section 13.1(e).

     “Patent Security Agreement” has the meaning specified therefor in the Security Agreement.

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     “Permitted Discretion” means a determination made in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment.

     “Permitted Dispositions” means (a) sales of Inventory to buyers in the ordinary course of business, (b) the use or transfer of money or Cash Equivalents in a manner that is not prohibited by the terms of the Agreement or the other Loan Documents, (c) the licensing, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business, (d) the transfer of assets by an Obligor to an Active Obligor, (e) so long as no Default or Event of Default has occurred and is continuing or would result therefrom, dispositions of assets consisting of obsolete or surplus Equipment or surplus, obsolete, redundant, or immaterial Intellectual Property (as such term is defined in the Security Agreement) not otherwise permitted in clauses (a) through (d) so long as made at fair market value and the aggregate amount of all such dispositions since the Closing Date would not exceed $20,000,000, (f) the sales of New Focus Inc., a Delaware corporation, or the thin film filter operations of Bookham (US), so long as, in either case, (i) Administrative Borrower provides Agent with not less than 30 days prior written notice of such sale, together with written confirmation, supported by detailed calculations satisfactory to Agent, that on a pro forma basis, Borrowers will have positive Availability after giving effect to any such sale and that no Overadvance would result therefrom, (ii) no Default or Event of Default has occurred and is continuing or would result therefrom, (iii) the cash proceeds of any such sale are remitted to a Deposit Account of Parent or a Borrower which is subject to a Control Agreement and any non-cash proceeds of sale are subject to Agent’s Lien, and (iv) on or before the consummation of any such sale, Parent delivers to Agent updated schedules to the Loan Documents reflecting such sale, provided, that in no event may any schedule be updated in a manner that would reflect or evidence a Default or an Event of Default, (g) the sale of the UK Real Property Collateral, Bookham Switzerland, or the high powered laser operations of Bookham Switzerland, so long as, in each case, (i) Parent provides Agent with not less than 15 days prior written notice of such sale, (ii) no Default or Event of Default has occurred and is continuing or would result therefrom, (iii) the cash proceeds of any such sale are remitted to a Deposit Account of Parent or a Borrower which is subject to a Control Agreement and any non-cash proceeds of sale are subject to Agent’s Lien, and (iv) on or before the consummation of any such sale, Parent delivers to Agent updated schedules to the Loan Documents reflecting such sale, provided, that in no event may any schedule be updated in a manner that would reflect or evidence a Default or an Event of Default, and (h) the Bookham China Sale and Leaseback so long as (i) Parent provides Agent with not less than 15 days prior written notice of such transaction, (ii) no Default or Event of Default has occurred and is continuing or would result therefrom, and (iii) on or before the consummation of such sale, Parent delivers to Agent updated schedules to the Loan Documents reflecting such sale, provided, that in no event may any schedule be updated in a manner that would reflect or evidence a Default or an Event of Default.

     “Permitted Intercompany Advance” means Intercompany Advances (a) made by any of Parent’s Subsidiaries that is not an Obligor to any of Parent’s other Subsidiaries that is not an Obligor; (b) made by Parent or any of Parent’s Subsidiaries to an Active Obligor so long as they are the subject of the Intercompany Subordination Agreement; (c) made by any of Parent’s Subsidiaries that is an Obligor to Bookham China, so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom, and (ii) all such Intercompany Advances do not exceed $4,500,000 per month (subject to annual increases requested by Borrowers and acceptable to Agent, which increases must be based upon historic revenue growth since the Closing Date), provided, that no such Intercompany Advances may be made following Bookham China’s receipt of cash proceeds from the Bookham China Sale and Leaseback, until such cash proceeds have been fully utilized to fund the ongoing business of Bookham China,; (d) made by any of Parent’s Subsidiaries that is an Obligor to Bookham Switzerland, so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom, and (ii) all such Intercompany Advances do not exceed $1,400,000 per calendar month; (e) made by any of Parent’s Subsidiaries that is an Obligor to any of Parent’s other Subsidiaries that is not an Obligor (other than Bookham China or Bookham Switzerland), so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom, and (ii) all such Intercompany Advances do not exceed $100,000 outstanding at any one time; and (f) payments made by any Obligor to the Lender Group in respect of obligations under this Agreement or the Loan Documents, to the

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extent that the same are construed as “advances” for the benefit of one or more of the other Obligors and so long as they are subject to the Intercompany Subordination Agreement.

     “Permitted Intercompany Transactions” means (a) each of the transactions set forth on Schedule P-1 that are materially consistent with the past practices of Parent’s and its Subsidiaries’ business operations as in effect on the Closing Date and disclosed to Agent on or before the Closing Date, (b) transactions by and between Obligors that are materially consistent with the past practices of Obligors’ business operations as in effect on the Closing Date and disclosed to Agent on or before the Closing Date, and (c) transactions between Parent or its Subsidiaries, on the one hand, and any Affiliate of Parent or its Subsidiaries, on the other hand, so long as such transactions (i) are upon fair and reasonable terms, (ii) are fully disclosed to Agent if they involve one or more payments by Parent or any of Subsidiary of Parent in excess of $500,000 for any single transaction or series of transactions, and (iii) are no less favorable to Parent or its Subsidiaries, as applicable, than would be obtained in an arm’s length transaction with a non-Affiliate.

     “Permitted Investments” means (a) Permitted Intercompany Advances, (b) Investments in cash and Cash Equivalents, (c) Investments in negotiable instruments for collection, (d) advances made in connection with purchases of goods or services in the ordinary course of business, (e) Investments received in settlement of amounts due to Parent or any Subsidiary of Parent effected in the ordinary course of business or owing to Parent or any Subsidiary of Parent as a result of Insolvency Proceedings involving an Account Debtor or upon the foreclosure or enforcement of any Lien in favor of Parent or any Subsidiary of Parent, (f) so long as no Default or Event of Default has occurred and is continuing, the consummation of the transfer of Equipment and Inventory with respect to Bookham UK’s chip on carrier processes to Bookham China, (g) the forgiveness of any Indebtedness owing from Bookham Switzerland to an Obligor, so long as such forgiveness is fully disclosed to Agent by Parent and is made in the ordinary course of the Obligors’ business as in effect on the Closing Date, (h) so long as no Default or Event of Default has occurred and is continuing, the transfer of wafers and die banks from Bookham UK to Bookham China in the ordinary course of Parent’s and its Subsidiaries’ business as in effect on the Closing Date and (i) contributions by Bookham UK to Bookham China consisting of Equipment to be used by Bookham China in the ordinary course of business so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom, (ii) all such contributions do not exceed $5,000,000 in the aggregate in any calendar year, and (iii) Agent is given prior written notice by Parent of any single contribution in excess of $500,000.

     “Permitted Liens” means (a) Liens held by Agent to secure the Obligations, (b) Liens for unpaid taxes, assessments, or other governmental charges or levies that either (i) are not yet delinquent, or (ii) do not have priority over the Agent’s Liens and the underlying taxes, assessments, or charges or levies are the subject of Permitted Protests, (c) judgment Liens that do not constitute an Event of Default under Section 7.7 of the Agreement, (d) Liens set forth on Schedule P-3, provided that any such Lien only secures the Indebtedness that it secures on the Closing Date and any Refinancing Indebtedness in respect thereof, (e) the interests of lessors under operating leases, (f) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as (i) such Lien attaches only to the asset purchased or acquired and the proceeds thereof, and (ii) such Lien only secures the Indebtedness that was incurred to acquire the asset purchased or acquired or any Refinancing Indebtedness in respect thereof, (g) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (h) Liens on amounts deposited in connection with obtaining worker’s compensation or other unemployment insurance, (i) Liens on amounts deposited in connection with the making or entering into of bids, tenders, or leases in the ordinary course of business and not in connection with the borrowing of money, (j) Liens on amounts deposited as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of business, and (k) with respect to any Real Property, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof.

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     “Permitted Liquidation” means the liquidation, winding up, or dissolution of any Subsidiary of Parent that is not an Active Obligor, Bookham China, or Bookham Switzerland so long as (i) Parent provides Agent with not less than 30 days prior written notice of such liquidation, winding up, or dissolution, (ii) no Default or Event of Default has occurred and is continuing or would result therefrom, and (iii) on or before the consummation of any such liquidation, winding up, or dissolution, Parent delivers to Agent updated schedules to the Loan Documents reflecting such liquidation, winding up, or dissolution, provided, that in no event may any schedule be updated in a manner that would reflect or evidence a Default or an Event of Default.

     “Permitted Merger” means (a) the merger or consolidation of any Obligor with and into a Borrower so long as the Borrower is the surviving entity, (b) the merger or consolidation of any Guarantor with and into any other Guarantor, (c) the merger or consolidation of any Subsidiary of Parent that is not an Obligor with any other Subsidiary of Parent that is not an Obligor, (d) the merger or consolidation of any Subsidiary of Parent that is not an Obligor with any Obligor so long as the Obligor is the surviving entity, provided that, in any of the forgoing cases, (i) Parent provides Agent with not less than 30 days prior written notice of such merger or consolidation, (ii) no Default or Event of Default has occurred and is continuing or would result therefrom, (iii) Agent’s Liens on the Collateral pledged by any Obligor under the Loan Documents to which it is a party are not adversely affected, and (iv) on or before the consummation of any such merger or consolidation, Parent delivers to Agent updated schedules to the Loan Documents reflecting such merger or consolidation, provided, that in no event may any schedule be updated in a manner that would reflect or evidence a Default or an Event of Default.

     “Permitted Protest” means the right of Parent or any of its Subsidiaries to protest any Lien (other than any Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on Parent’s or any of its Subsidiaries’ books and records in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Parent or any of its Subsidiaries, as applicable, in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent’s Liens.

     “Permitted Purchase Money Indebtedness” means, as of any date of determination, Purchase Money Indebtedness incurred by Parent and its Subsidiaries after the Closing Date in an aggregate principal amount outstanding at any one time not in excess of $5,000,000.

     “Permitted Restructuring Transaction” means a Permitted Merger or a Permitted Liquidation.

     “Person” means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof.

     “Projections” means Parent’s forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a basis consistent with Parent’s historical financial statements, together with appropriate supporting details and a statement of underlying assumptions.

     “Pro Rata Share” means, as of any date of determination:

          (a) with respect to a Lender’s obligation to make Advances and right to receive payments of principal, interest, fees, costs, and expenses with respect thereto, (i) prior to the Revolver Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender’s Revolver Commitment, by (z) the aggregate Revolver Commitments of all Lenders, and (ii) from and after the time that the Revolver Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender’s Advances by (z) the aggregate outstanding principal amount of all Advances,

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          (b) with respect to a Lender’s obligation to participate in Letters of Credit, to reimburse the Issuing Lender, and right to receive payments of fees with respect thereto, (i) prior to the Revolver Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender’s Revolver Commitment, by (z) the aggregate Revolver Commitments of all Lenders, and (ii) from and after the time that the Revolver Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender’s Advances by (z) the aggregate outstanding principal amount of all Advances, and

          (c) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 15.7), the percentage obtained by dividing (i) such Lender’s Revolver Commitment, by (ii) the aggregate amount of Revolver Commitments of all Lenders; provided, however, that in the event the Revolver Commitments have been terminated or reduced to zero, Pro Rata Share under this clause shall be the percentage obtained by dividing (A) the outstanding principal amount of such Lender’s Advances plus such Lender’s ratable portion of the Risk Participation Liability with respect to outstanding Letters of Credit, by (B) the outstanding principal amount of all Advances plus the aggregate amount of the Risk Participation Liability with respect to outstanding Letters of Credit.

     “Protective Advances” has the meaning specified therefor in Section 2.3(d)(i).

     “Purchase Money Indebtedness” means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof.

     “Qualified Cash” means, as of any date of determination, the amount of unrestricted cash and Cash Equivalents of Parent, Borrowers, and Bookham Canada that is in Deposit Accounts or in Securities Accounts, or any combination thereof, and which such Deposit Account or Securities Account is the subject of a Control Agreement and is maintained by a branch office of the bank or securities intermediary located within the United States, Canada, or the United Kingdom.

     “Qualifying Lender” has the meaning specified therefor in Section 15.11(i).

     “Real Property” means any estates or interests in real property now owned or hereafter acquired by any Obligor and the improvements thereto.

     “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

     “Refinancing Indebtedness” means refinancings, renewals, or extensions of Indebtedness so long as: (a) the terms and conditions of such refinancings, renewals, or extensions do not, in Agent’s reasonable judgment, materially impair the prospects of repayment of the Obligations by Obligors or materially impair Borrowers’ creditworthiness, (b) such refinancings, renewals, or extensions do not result in an increase in the principal amount of the Indebtedness so refinanced, renewed, or extended, (c) such refinancings, renewals, or extensions do not result in an increase in the interest rate with respect to the Indebtedness so refinanced, renewed, or extended, (d) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions that, taken as a whole, are materially more burdensome or restrictive to Parent or any of its Subsidiaries, (e) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension must include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed, or extended Indebtedness, and (f) the Indebtedness that is refinanced, renewed, or extended is not recourse to any Person that is liable on account of the Obligations other than those Persons which were obligated with respect to the Indebtedness that was refinanced, renewed, or extended.

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     “Remedial Action” means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) restore or reclaim natural resources or the environment, (d) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (e) conduct any other actions with respect to Hazardous Materials authorized by Environmental Laws.

     “Replacement Lender” has the meaning specified therefor in Section 14.2(a).

     “Report” has the meaning specified therefor in Section 15.17.

     “Required Availability” means that the sum of (a) Excess Availability, plus (b) Qualified Cash exceeds $35,000,000.

     “Required Lenders” means, at any time, Lenders whose aggregate Pro Rata Shares (calculated under clause (d) of the definition of Pro Rata Shares) exceed 50.1%.

     “Reserve Percentage” means, on any day, for any Lender, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as “eurocurrency liabilities”) of that Lender, but so long as such Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero.

     “Revolver Commitment” means, with respect to each Lender, its Revolver Commitment, and, with respect to all Lenders, their Revolver Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 13.1.

     “Revolver Usage” means, as of any date of determination, the sum of (a) the amount of outstanding Advances, plus (b) the amount of the Letter of Credit Usage.

     “Risk Participation Liability” means, as to each Letter of Credit, all reimbursement obligations of Borrowers to the Issuing Lender with respect to an L/C Undertaking, consisting of (a) the amount available to be drawn or which may become available to be drawn, (b) all amounts that have been paid by the Issuing Lender to the Underlying Issuer to the extent not reimbursed by Borrowers, whether by the making of an Advance or otherwise, and (c) all accrued and unpaid interest, fees, and expenses payable with respect thereto.

     “SEC” means the United States Securities and Exchange Commission and any successor thereto.

     “Securities Account” means a securities account (as that term is defined in the Code).

     “Security Agreement” means a security agreement, in form and substance satisfactory to Agent, executed and delivered by Obligors to Agent.

     “Series B Preferred Stock” means the shares of Series B Preferred Stock issued by Parent subsequent to the Closing Date, containing dividend, mandatory and optional redemption provisions, and other material terms that are consistent with the terms disclosed to and accepted by Agent on or before the Closing Date.

     “Settlement” has the meaning specified therefor in Section 2.3(e)(i).

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     “Settlement Date” has the meaning specified therefor in Section 2.3(e)(i).

     “Solvent” means, with respect to any Person on a particular date, that, at fair valuations, the sum of such Person’s assets is greater than all of such Person’s debts.

     “S&P” has the meaning specified therefor in the definition of Cash Equivalents.

     “Stock” means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act).

     “Subsidiary” of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity.

     “Swing Lender” means WFF or any other Lender that, at the request of Administrative Borrower and with the consent of Agent agrees, in such Lender’s sole discretion, to become the Swing Lender under Section 2.3(b).

     “Swing Loan” has the meaning specified therefor in Section 2.3(b).

     “Tax Clearance Waiting Period” has the meaning specified therefor in Section 2.13(b)(ii).

     “Tax Credit” has the meaning specified therefor in Section 15.11(g).

     “Taxes” has the meaning specified therefor in Section 15.11(a).

     “Total Commitment” means, with respect to each Lender, its Total Commitment, and, with respect to all Lenders, their Total Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 attached hereto or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 13.1.

     “Trademark Security Agreement” has the meaning specified therefor in the Security Agreement.

     “Treaty” has the meaning specified therefor in Section 15.11(h).

     “Treaty Lender” has the meaning specified therefor in Section 15.11(h).

     “Treaty State” has the meaning specified therefor in Section 15.11(h).

     “UK Real Property Collateral” means that certain real property commonly known as Brixham Road, Paignton, Devon TQ4 7BE United Kingdom.

     “Underlying Issuer” means a third Person which is the beneficiary of an L/C Undertaking and which has issued a letter of credit at the request of the Issuing Lender for the benefit of Borrowers.

     “Underlying Letter of Credit” means a letter of credit that has been issued by an Underlying Issuer.

     “United States” means the United States of America.

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     “Voidable Transfer” has the meaning specified therefor in Section 16.6.

     “Wells Fargo” means Wells Fargo Bank, National Association, a national banking association.

     “WFF” means Wells Fargo Foothill, Inc., a California corporation.

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Schedule 3.1

     The obligation of each Lender to make its initial extension of credit provided for in the Agreement is subject to the fulfillment, to the satisfaction of Agent and each Lender (the making of such initial extension of credit by any Lender being conclusively deemed to be its satisfaction or waiver of the following), of each of the following conditions precedent:

     (a) the Closing Date shall occur on or before August 2, 2006;

     (b) Agent shall have received a letter duly executed by each Borrower and each Guarantor authorizing Agent to file appropriate financing statements in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the security interests to be created by the Loan Documents;

     (c) Agent shall have received evidence that appropriate financing statements have been duly filed in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the Agent’s Liens in and to the Collateral, and Agent shall have received searches reflecting the filing of all such financing statements;

     (d) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect:

          (i) the Cash Management Agreements,

          (ii) the Control Agreements,

          (iii) the Copyright Security Agreement,

          (iv) a disbursement letter executed and delivered by Borrowers to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Agent,

          (v) the Fee Letter,

          (vi) the Foreign Security Documents,

          (vii) the Guaranties,

          (viii) the Intercompany Subordination Agreement,

          (ix) the Patent Security Agreement,

          (x) the Security Agreement,

          (xi) the Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank, and

          (xii) the Trademark Security Agreement;

     (e) Agent shall have received a certificate from the Secretary of each Borrower (i) attesting to the resolutions of such Borrower’s Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party, (ii) authorizing specific officers of such Borrower to execute the same, and (iii) attesting to the incumbency and signatures of such specific officers of such Borrower;

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     (f) Agent shall have received copies of each Borrower’s Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower;

     (g) Agent shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction;

     (h) Agent shall have received certificates of status with respect to each Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions;

     (i) Agent shall have received a certificate from the Secretary of each Guarantor (i) attesting to the resolutions of such Guarantor’s Board of Directors authorizing its execution, delivery, and performance of the Loan Documents to which such Guarantor is a party, (ii) authorizing specific officers of such Guarantor to execute the same and (iii) attesting to the incumbency and signatures of such specific officers of Guarantor;

     (j) Agent shall have received copies of each Guarantor’s Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Guarantor;

     (k) Agent shall have received a certificate of status with respect to each Guarantor, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Guarantor, which certificate shall indicate that such Guarantor is in good standing in such jurisdiction;

     (l) Agent shall have received certificates of status with respect to each Guarantor, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Guarantor) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Guarantor is in good standing in such jurisdictions;

     (m) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 5.8, the form and substance of which shall be satisfactory to Agent;

     (n) Agent shall have received a certificate from an officer of Parent attesting that there is no (i) litigation, investigation or proceeding (judicial or administrative) pending or, to the best knowledge of Parent, threatened, against any Obligor, or any of their respective Subsidiaries by any Governmental Authority arising out of the transactions contemplated by or effected in connection with the Loan Documents, (ii) injunction, writ or restraining order restraining or prohibiting the transactions contemplated by the consummation of the financing arrangements contemplated under the Loan Documents, or (iii) suit, action, investigation proceeding (judicial or administrative) or ERISA Event pending or, to the best knowledge of Parent, threatened against any Obligor or any of their respective Subsidiaries which could reasonably be expected to cause a Material Adverse Change;

     (o) Agent shall have received satisfactory evidence (including a certificate of an officer of Parent) that all tax returns required to be filed by Obligors have been timely filed and all taxes upon each Obligor or any of its properties, assets, income, and franchises (including real property taxes, sales taxes, and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest;

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     (p) Agent shall have received an opinion of Obligors’ counsel in form and substance satisfactory to Agent;

     (q) Borrowers shall have the Required Availability after giving effect to the initial extensions of credit hereunder and the payment of all fees and expenses required to be paid by Borrowers on the Closing Date under this Agreement or the other Loan Documents;

     (r) Agent shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Parent’s and its Subsidiaries’ books and records and verification of Parent’s and Borrowers’ representations and warranties to the Lender Group, the results of which shall be satisfactory to Agent, and (ii) an inspection of each of the locations where Parent’s and its Subsidiaries’ Inventory is located, the results of which shall be satisfactory to Agent;

     (s) Agent shall have received completed reference checks (including compliance with Section 326 of the USA Patriot Act) with respect to Obligors’ senior management, the results of which are satisfactory to Agent in its sole discretion;

     (t) Agent shall have received a set of Projections of the Parent, on a quarter by quarter basis, through December 31, 2007, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent;

     (u) Borrowers shall have paid all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement;

     (v) [Intentionally Omitted];

     (w) Parent and each of its Subsidiaries shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Obligors of the Loan Documents or with the consummation of the transactions contemplated thereby; and

     (x) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent.

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Schedule 5.2

     Provide Agent (and if so requested by Agent, with copies for each Lender) with each of the documents set forth below at the following times in form satisfactory to Agent:

Weekly	(a) an Account roll-forward with supporting details supplied from sales journals, collection journals, credit registers and any other records,
	(b) notice of all claims, offsets, or disputes asserted by Account Debtors with respect to Parent’s and its Subsidiaries’ Accounts,
	(c) a detailed report regarding Parent’s and its Subsidiaries’ cash and Cash Equivalents, including an indication of which amounts constitute Qualified Cash, and
	(d) copies of invoices together with corresponding shipping and delivery documents, and credit memos together with corresponding supporting documentation, with respect to invoices and credit memos in excess of an amount determined in the sole discretion of Agent, from time to time.
Monthly (no later than the 10th day of each month)	(e) a Borrowing Base Certificate, together with a detailed calculation of Borrowers’ average Excess Availability for the month most recently ended,
	(f) a detailed aging, by total, of Parent’s and its Subsidiaries’ Accounts, together with a reconciliation and supporting documentation for any reconciling items noted (delivered electronically in an acceptable format, if Borrowers have implemented electronic reporting),
	(g) a detailed calculation of those Accounts that are not eligible for the Borrowing Base, if Borrowers have not implemented electronic reporting,
	(h) a summary aging, by vendor, of Active Obligors’ accounts payable and any book overdrafts (delivered electronically in an acceptable format, if Borrowers have implemented electronic reporting) and an aging, by vendor, of any held checks, and
	(i) a monthly Account roll-forward, in a format acceptable to Agent in its discretion, tied to the beginning and ending account receivable balances of Borrowers’ general ledgers.
Monthly (no later than the 30th day of each month)	(j) a reconciliation of Accounts and trade accounts payable of Obligors’ general ledger accounts to their monthly financial statements including any book reserves related to each category, and (k) a report regarding Parent’s and its Subsidiaries’ accrued, but unpaid, ad valorem taxes.
	(k) a report regarding Parent’s and its Subsidiaries’ accrued, but unpaid, ad valorem taxes.
Quarterly	(l) a detailed report regarding Parent’s and its Subsidiaries’ Permitted Dispositions including a detailed list of the assets sold or disposed of since the Closing Date and the consideration received in connection therewith.
Annually	(m) a detailed list of Active Obligors’ customers, including contract expiration dates, together with address and contact information.
Upon request by Agent	(n) such other reports as to the Collateral or the financial condition of Parent and its

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Subsidiaries, as Agent may reasonably request.

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Schedule 5.3

     Deliver to Agent, with copies to each Lender, each of the financial statements, reports, or other items set forth set forth below at the following times in form satisfactory to Agent:

as soon as available, but in any event within 45 days after the end of each month during each of Parent’s fiscal years	(a) an unaudited consolidated and consolidating balance sheet, income statement, and statement of cash flow covering Parent’s and its Subsidiaries’ operations during such period, and
	(b) a Compliance Certificate.
as soon as available, but in any event within 90 days after the end of each of Parent’s fiscal years	(c) consolidated and consolidating financial statements of Parent and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications (including any (A) “going concern” or like qualification or exception, (B) qualification or exception as to the scope of such audit, or (C) qualification which relates to the treatment or classification of any item and which, as a condition to the removal of such qualification, would require an adjustment to such item, the effect of which would be to cause any noncompliance with the provisions of Section 6.16), by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants’ letter to management), and
	(d) a Compliance Certificate.
as soon as available, but in any event within 30 days prior to the start of each of Parent’s fiscal years,	(e) copies of Parent’s Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its Permitted Discretion, for the forthcoming 2 years, year by year, and for the forthcoming fiscal year, quarter by quarter, certified by the chief financial officer of Parent as being such officer’s good faith estimate of the financial performance of Parent during the period covered thereby.
if and when filed by any Borrower,	(f) Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports,
	(g) any other filings made by any Borrower with the SEC, and
	(h) any other information that is provided by Parent to its shareholders generally.
promptly, but in any event within 5 days after an Active Obligor has knowledge of any event or condition that constitutes a Default or an Event of Default,	(i) notice of such event or condition and a statement of the curative action that Parent and its Subsidiaries proposes to take with respect thereto.
promptly after the commencement thereof, but in any event within 5 days after the service of	(j) notice of all actions, suits, or proceedings brought by or against Parent or any Subsidiary of Parent before any Governmental Authority which reasonably could be expected to result in a Material Adverse Change.

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process with respect thereto on Parent or any Subsidiary of a Parent,
upon the request of Agent,	(k) any other information reasonably requested relating to the financial condition of Parent or its Subsidiaries.

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Schedule 5.20

     The continuing obligation of the Lender Group (or any member thereof) to make any Advances hereunder at any time (or to extend any other credit hereunder) shall be subject to the fulfillment, to the satisfaction of Agent (or waiver thereby), of each of the post-closing covenants set forth below. The failure by Borrowers to satisfy any of the post-closing covenants set forth below within such covenant’s prescribed time period shall, as set forth below, constitute an Event of Default or result in the implementation by Agent (in its Permitted Discretion) of a reserve against Availability.

     (a) Within 10 Business Days of the Closing Date, Borrowers shall deliver to Agent the Stock certificates (to the extent such Stock is certificated) representing the Pledged Interests (as defined in the Security Agreement) for each of the companies set forth on Schedule 5 to the Security Agreement, together with Stock powers, in form and substance satisfactory to Agent, endorsed in blank. The failure to timely deliver such materials shall constitute an Event of Default;

     (b) Within 10 days of the Closing Date, Borrowers shall deliver to Agent the Cash Management Agreements and Control Agreements over (i) Borrowers’ two Collections accounts at Mid-Peninsula Bank (bearing numbers DDA 1101107413 and DDA 0107946801) and (ii) Bookham UK’s Collections account at Barclay’s Bank (bearing number 67486544), and within 30 days of the Closing Date, Borrowers shall deliver to Agent the Cash Management Agreements and Control Agreements over such other Deposit Accounts and Securities Accounts set forth on Schedule 4.17 so that Borrowers are in compliance with Section 6.12. The failure to timely deliver such agreements shall constitute an Event of Default;

     (c) Within 30 days of the Closing Date, Borrowers shall have used their best efforts to deliver a Collateral Access Agreement with respect to Obligors’ leasehold property located in (x) Santa Rosa, California, USA, (y) San Jose, California, USA, and (z) Caswell, Northhamptonshire, United Kingdom. The failure to timely deliver such agreements shall result in the continuation of a 3 month rent reserve against Availability until delivered;

     (d) Within 10 days of the Closing Date, Borrowers shall have delivered a copy of the deed of charge over credit balances dated October 10, 2005, between Bookham UK and Barclay’s Bank PLC (“Barclay’s”). The failure to timely deliver such agreements shall constitute an Event of Default;

     (e) Within 15 days of the Closing Date, Borrowers shall either (y) deliver satisfactory evidence to Agent, in its sole discretion, that Barclay’s has no other security interest or Lien on any asset of any Obligor other than a single account identified to Agent, and which account is neither a Cash Management Account into which Collections of Accounts are received nor an account in which Qualified Cash is held (the “Restricted Account”), or (z) have (i) transferred all of the funds currently held at Barclay’s (other than funds held in the Restricted Account) to another financial institution satisfactory to Agent, (ii) delivered, in connection therewith, Cash Management and Control Agreements with respect to such new accounts so that Borrowers are in compliance with Section 6.12, and (iii) provided satisfactory evidence that the accounts currently held at Barclay’s have been closed. The failure to timely comply with the forgoing shall constitute an Event of Default; and

     (f) Within 10 days of the Closing Date, Bookham UK shall either (x) deliver to Agent a form 403a in respect of the account assignment dated July 27, 1996, between Bookham UK and ING Lease (UK) Limited, or (y) otherwise demonstrate to Agent’s satisfaction that failure to do so is immaterial. The failure to timely comply with the foregoing shall constitute an Event of Default.

EX-10.54

Exhibit 10.54

SECURITY AGREEMENT

     This SECURITY AGREEMENT (this “Agreement”) is made this 2nd day of August, 2006, among Grantors listed on the signature pages hereof and those additional entities that hereafter become parties hereto by executing the form of Supplement attached hereto as Annex 1 (collectively, jointly and severally, “Grantors” and each individually “Grantor”), and WELLS FARGO FOOTHILL, INC., in its capacity as administrative agent for the Lender Group and the Bank Product Provider (together with its successors, “Agent”).

W I T N E S S E T H:

     WHEREAS, pursuant to that certain Credit Agreement of even date herewith (as amended, restated, supplemented or otherwise modified from time to time, including all schedules thereto, the “Credit Agreement”) among Bookham, Inc., a Delaware corporation, as Parent and each of Parent’s Subsidiaries identified on the signature pages thereof (such Subsidiaries are referred to hereinafter individually as a “Borrower” and collectively, jointly and severally, as the “Borrowers”), the lenders party thereto as “Lenders” (“Lenders”), and Agent, the Lender Group is willing to make certain financial accommodations available to Borrowers from time to time pursuant to the terms and conditions thereof, and

     WHEREAS, Agent has agreed to act as agent for the benefit of the Lender Group and the Bank Product Provider in connection with the transactions contemplated by this Agreement and the other Loan Documents, and

     WHEREAS, in order to induce the Lender Group to enter into the Credit Agreement and the other Loan Documents and to induce the Lender Group to make financial accommodations to Borrowers as provided for in the Credit Agreement, Grantors have agreed to grant a continuing security interest in and to the Collateral in order to secure the prompt and complete payment, observance and performance of, among other things, (a) all of the present and future obligations of Grantors arising from this Agreement, the Credit Agreement, the Guaranties, and the other Loan Documents, (b) all Bank Product Obligations, (c) all Obligations of each Borrower, including, all reasonable attorneys fees and expenses and any interest, fees or expenses that accrue after the filing of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any Insolvency Proceeding, and (d) all Guarantied Obligations (as defined in each Guaranty) of each Guarantor (in the case of each of clauses (a), (b), (c) and (d), plus reasonable attorneys fees and expenses if the obligations represented thereunder are collected by law, through an attorney-at-law, or under advice therefrom), by the granting of the security interests contemplated by this Agreement (clauses (a), (b), (c), and (d) being hereinafter referred to as the “Secured Obligations”), and

     NOW, THEREFORE, for and in consideration of the recitals made above and other good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

     1. Defined Terms. All capitalized terms used herein (including in the preamble and recitals hereof) without definition shall have the meanings ascribed thereto in the Credit Agreement. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein or in the Credit Agreement; provided, however, that to the extent that the Code is used to define any term herein and such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 of the Code shall govern. In addition to those terms defined elsewhere in this Agreement, as used in this Agreement, the following terms shall have the following meanings:

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               (a) “Bookham China” mans Bookham Technology (Shenzhen) (FFTZ), a corporation organized under the laws of the People’s Republic of China.

               (b) “Books” means books and records (including each Grantor’s Records indicating, summarizing, or evidencing such Grantor’s assets (including the Collateral) or liabilities, each Grantor’s Records relating to such Grantor’s business operations or financial condition, and each Grantor’s goods or General Intangibles related to such information).

               (c) “Chattel Paper” means chattel paper (as that term is defined in the Code) and includes tangible chattel paper and electronic chattel paper.

               (d) “Code” means the California Uniform Commercial Code, as in effect from time to time; provided, however, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, priority, or remedies with respect to Agent’s Lien on any Collateral is governed by the Uniform Commercial Code or the Personal Property Security Act as enacted and in effect in a jurisdiction other than the State of California, the term “Code” shall mean the Uniform Commercial Code or the Personal Property Security Act as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies.

               (e) “Collateral” has the meaning specified therefor in Section 2.

               (f) “Commercial Tort Claims” means commercial tort claims (as that term is defined in the Code), and includes those commercial tort claims listed on Schedule 1 attached hereto.

               (g) “Copyrights” means copyrights and copyright registrations, including the copyright registrations and recordings thereof and all applications in connection therewith listed on Schedule 2 attached hereto and made a part hereof, and (i) all reissues, continuations, extensions or renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iii) the right to sue for past, present and future infringements and dilutions thereof, (iv) the goodwill of each Grantor’s business symbolized by the foregoing and connected therewith, and (v) all of each Grantor’s rights corresponding thereto throughout the world.

               (h) “Copyright Security Agreement” means each Copyright Security Agreement among Grantors, or any of them, and Agent, for the benefit of the Lender Group and the Bank Product Provider, in substantially the form of Exhibit A attached hereto, pursuant to which Grantors have granted to Agent, for the benefit of the Lender Group and the Bank Product Provider, a security interest in all their respective Copyrights.

               (i) “General Intangibles” means general intangibles (as that term is defined in the Code) and, in any event, including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill (including the goodwill associated with any Trademark, Patent, or Copyright), Patents, Trademarks, Copyrights, URLs and domain names, industrial designs, other industrial or Intellectual Property or rights therein or applications therefor, whether under license or otherwise, programs, programming materials, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, including Intellectual Property Licenses, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, pension plan refunds, pension plan refund claims, insurance premium rebates, tax refunds, and tax refund claims, uncertificated securities, and any other personal property other than commercial tort claims, money, Accounts, Chattel Paper, Deposit Accounts, goods, Investment Related Property, Negotiable Collateral, and oil, gas, or other minerals before extraction.

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               (j) “Grantor” and “Grantors” has the meaning specified therefor in the recitals to this Agreement.

               (k) “Intellectual Property” means any and all Intellectual Property Licenses, Patents, Copyrights, Trademarks, the goodwill associated with such Trademarks, trade secrets and customer lists.

               (l) “Intellectual Property Licenses” means rights under or interest in any patent, trademark, copyright or other intellectual property, including software license agreements (other than Shrink-Wrap Licenses) with any other party, whether the applicable Grantor is a licensee or licensor under any such license agreement, including the license agreements listed on Schedule 3 attached hereto and made a part hereof, and the right to use the foregoing in connection with the enforcement of the Lender Group’s rights under the Loan Documents, including the right to prepare for sale and sell any and all Inventory and Equipment now or hereafter owned by any Grantor and now or hereafter covered by such licenses.

               (m) “Intellectual Property Rights” means all of each Grantor’s rights, title and interest in and to Intellectual Property.

               (n) “Investment Related Property” means (i) investment property (as that term is defined in the Code), and (ii) all of the following regardless of whether classified as investment property under the Code: all Pledged Interests, Pledged Operating Agreements, and Pledged Partnership Agreements.

               (o) “Mortgages” means, individually and collectively, one or more mortgages, deeds of trust, or deeds to secure debt, executed and delivered by a Grantor in favor of Agent, in form and substance satisfactory to Agent, that encumber any portion of the Collateral consisting of Real Property.

               (p) “Negotiable Collateral” means letters of credit, letter of credit rights, instruments, promissory notes, drafts and documents (as that term is defined in the Code).

               (q) “Obligations” has the meaning specified therefor in the Credit Agreement.

               (r) “Patents” means patents and patent applications, including the patents and patent applications listed on Schedule 4 attached hereto and made a part hereof, and (i) all renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iii) the right to sue for past, present and future infringements and dilutions thereof, and (iv) all of each Grantor’s rights corresponding thereto throughout the world.

               (s) “Patent Security Agreement” means each Patent Security Agreement among Grantors, or any of them, and Agent, for the benefit of the Lender Group and the Bank Product Provider, in substantially the form of Exhibit B attached hereto, pursuant to which Grantors have granted to Agent, for the benefit of the Lender Group and the Bank Product Provider, a security interest in all their respective Patents.

               (t) “Personal Property Security Act” means for the Province of Ontario the Personal Property Security Act (Ontario) (R.S.O. 1990, Chapter P.10) and for the other Provinces of Canada the equivalent personal property security legislation.

               (u) “Pledged Companies” means, each Person listed on Schedule 5 hereto as a “Pledged Company”, together with each other Person, all or a portion of whose Stock, is acquired or otherwise owned by a Grantor after the Closing Date.

               (v) “Pledged Interests” means all of each Grantor’s right, title and interest in and to all of the Stock now or hereafter owned by such Grantor (except for the Stock of Forthaven, Ltd., a corporation

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organized under the laws of England and Wales and Bookham China), regardless of class or designation, including, in each of the Pledged Companies, and all substitutions therefor and replacements thereof, all proceeds thereof and all rights relating thereto, including any certificates representing the Stock, the right to request after the occurrence and during the continuation of an Event of Default that such Stock be registered in the name of Agent or any of its nominees, the right to receive any certificates representing any of the Stock and the right to require that such certificates be delivered to Agent together with undated powers or assignments of investment securities with respect thereto, duly endorsed in blank by such Grantor, all warrants, options, share appreciation rights and other rights, contractual or otherwise, in respect thereof and of all dividends, distributions of income, profits, surplus, or other compensation by way of income or liquidating distributions, in cash or in kind, and cash, instruments, and other property from time to time received, receivable, or otherwise distributed in respect of or in addition to, in substitution of, on account of, or in exchange for any or all of the foregoing.

               (w) “Pledged Interests Addendum” means a Pledged Interests Addendum substantially in the form of Exhibit C to this Agreement.

               (x) “Pledged Note” has the meaning set forth in Section 5(g).

               (y) “Pledged Operating Agreements” means all of each Grantor’s rights, powers, and remedies under the limited liability company operating agreements of each of the Pledged Companies that are limited liability companies.

               (z) “Pledged Partnership Agreements” means all of each Grantor’s rights, powers, and remedies under the partnership agreements of each of the Pledged Companies that are partnerships.

               (aa) “Proceeds” has the meaning specified therefor in Section 2.

               (bb) “Records” means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form.

               (cc) “Security Interest” has the meaning specified therefor in Section 2.

               (dd) “Secured Obligations” has the meaning specified in the recitals to this Agreement.

               (ee) “Shrink-Wrap License” means an license for the use of generally commercially available software where the user agrees to its terms by opening the package of or downloading such software or similarly manifesting consent to the licensor’s standard terms.

               (ff) “Supporting Obligations” means Supporting Obligations (as such term is defined in the Code), and includes letters of credit and guaranties issued in support of Accounts, Chattel Paper, documents, General Intangibles, instruments, or Investment Related Property.

               (gg) “Trademarks” means trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks and service mark applications, including the trade names, registered trademarks, trademark applications, registered service marks and service mark applications listed on Schedule 6 attached hereto and made a part hereof, and (i) all renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iii) the right to sue for past, present and future infringements and dilutions thereof, (iv) the goodwill of each Grantor’s business symbolized by the foregoing and connected therewith, and (v) all of each Grantor’s rights corresponding thereto throughout the world.

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               (hh) “Trademark Security Agreement” means each Trademark Security Agreement among Grantors, or any of them, and Agent, for the benefit of the Lender Group and the Bank Product Provider, in substantially the form of Exhibit D attached hereto, pursuant to which Grantors have granted to Agent, for the benefit of the Lender Group and the Bank Product Provider, a security interest in all their respective Trademarks.

               (ii) “URL” means “uniform resource locator,” an internet web address.

               (jj) “Wuhan L/C” means an irrevocable commercial letter of credit reflecting a Borrower as a beneficiary issued at the request of Wuhan as support for accounts with respect to purchases of product by Wuhan from such Borrower.

     2. Grant of Security. Each Grantor hereby unconditionally grants, assigns, and pledges to Agent, for the benefit of the Lender Group and the Bank Product Provider, a continuing security interest (hereinafter referred to as the “Security Interest”) in all personal property of such Grantor whether now owned or hereafter acquired or arising and wherever located, including such Grantor’s right, title, and interest in and to the following, whether now owned or hereafter acquired or arising and wherever located (the “Collateral”):

               (a) all of such Grantor’s Accounts;

               (b) all of such Grantor’s Books;

               (c) all of such Grantor’s Chattel Paper;

               (d) all of such Grantor’s interest with respect to any Deposit Account;

               (e) all of such Grantor’s Equipment and fixtures;

               (f) All of such Grantor’s General Intangibles;

               (g) all of such Grantor’s Inventory;

               (h) all of such Grantor’s Investment Related Property;

               (i) all of such Grantor’s Negotiable Collateral;

               (j) all of such Grantor’s rights in respect of Supporting Obligations;

               (k) all of such Grantor’s interest with respect to any Commercial Tort Claims;

               (l) all of such Grantor’s money, Cash Equivalents, or other assets of each such Grantor that now or hereafter come into the possession, custody, or control of Agent or any other member of the Lender Group;

               (m) all of the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance or commercial tort claims covering or relating to any or all of the foregoing, and any and all Accounts, Books, Chattel Paper, Deposit Accounts, Equipment, General Intangibles, Inventory, Investment Related Property, Negotiable Collateral, Supporting Obligations, money, or other tangible or intangible property resulting from the sale, lease, license, exchange, collection, or other disposition of any of the foregoing, the proceeds of any award in condemnation with respect to any of the property of Grantors, any rebates or refunds, whether for taxes or otherwise, and all proceeds of any such proceeds, or any portion thereof or interest therein, and the proceeds thereof, and all proceeds of any loss of,

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damage to, or destruction of the above, whether insured or not insured, and, to the extent not otherwise included, any indemnity, warranty, or guaranty payable by reason of loss or damage to, or otherwise with respect to any of the foregoing Collateral (the “Proceeds”). Without limiting the generality of the foregoing, the term “Proceeds” includes whatever is receivable or received when Investment Related Property or proceeds are sold, exchanged, collected, or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes proceeds of any indemnity or guaranty payable to any Grantor or Agent from time to time with respect to any of the Investment Related Property. Notwithstanding the foregoing the term Collateral shall not include any rights or interest in any contract, lease, permit, license, charter or license agreement covering personal property of a Grantor if under the terms of such contract lease, permit, license, charter or license agreement, or applicable law with respect thereto, the valid grant of a security interest or lien therein to Agent is prohibited as a matter of law or under the terms of such contract (including where the violation of any such prohibition would result in the termination of the applicable contract), lease, permit, license, charter or license agreement and such prohibition has not been or is not waived or the consent of the other party to such contract, lease, permit license, charter or license agreement has not been or is not otherwise obtained; provided, that, the foregoing exclusion shall in no way be construed (a) to apply if any described prohibition is unenforceable under Section 9-406, 9-407, or 9-408 of the Code or other applicable law, or (b) so as to limit, impair or otherwise affect Agent’s continuing security interests in and liens upon any rights or interests of a Grantor in or to monies due or to become due under any described contract, lease permit, license, charter or license agreement (including any Accounts), or (c) to limit, impair, or otherwise affect Agent’s continuing security interests in and liens upon any rights or interest of a Grantor in and to any proceeds from the sale, license, lease, or other dispositions of any such contract, lease, permit, license, charter, license agreement.

     3. Security for Obligations. This Agreement and the Security Interest created hereby secures the payment and performance of all of the Secured Obligations, whether now existing or arising hereafter. Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts which constitute part of the Secured Obligations and would be owed by Grantors, or any of them, to Agent, the Lender Group, the Bank Product Provider or any of them, but for the fact that they are unenforceable or not allowable due to the existence of an Insolvency Proceeding involving any Grantor.

     4. Grantors Remain Liable.

               (a) Anything herein to the contrary notwithstanding, (i) each of the Grantors shall remain liable under the contracts and agreements included in the Collateral, including the Pledged Operating Agreements and the Pledged Partnership Agreements, to perform all of the duties and obligations thereunder to the same extent as if this Agreement had not been executed, (ii) the exercise by Agent or any other member of the Lender Group of any of the rights hereunder shall not release any Grantor from any of its duties or obligations under such contracts and agreements included in the Collateral, and (iii) none of the members of the Lender Group shall have any obligation or liability under such contracts and agreements included in the Collateral by reason of this Agreement, nor shall any of the members of the Lender Group be obligated to perform any of the obligations or duties of any Grantors thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. Until an Event of Default shall occur and be continuing, except as otherwise provided in this Agreement, the Credit Agreement, or other Loan Documents, Grantors shall have the right to possession and enjoyment of the Collateral for the purpose of conducting the ordinary course of their respective businesses, subject to and upon the terms hereof and of the Credit Agreement and the other Loan Documents. Without limiting the generality of the foregoing, it is the intention of the parties hereto that record and beneficial ownership of the Pledged Interests, including all voting, consensual, and dividend rights, shall remain in the applicable Grantor until the occurrence of an Event of Default and until Agent shall notify the applicable Grantor of Agent’s exercise of voting, consensual, or dividend rights with respect to the Pledged Interests pursuant to Section 15 hereof.

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               (b) Grantors shall be entitled to receive and retain any and all dividends and/or distributions paid in respect of the Stock of the Pledged Companies; provided, however, that, except as permitted under the Credit Agreement, any and all:

                         (i) dividends and distributions paid or payable other than in cash in respect of, and any and all additional shares or instruments or other property received, receivable, or otherwise distributed in respect of, or in exchange for the Stock of the Pledged Companies;

                         (ii) dividends and distributions paid or payable in cash in respect of any Stock of the Pledged Companies in connection with a partial or total liquidation or dissolution, merger, consolidation of any Pledged Company, or any exchange of stock, conveyance of assets, or similar corporate reorganization;

                         (iii) cash paid with respect to, payable, or otherwise distributed on redemption of, or in exchange for, any Stock of the Pledged Companies, and

                         (iv) after the occurrence and during the continuance of an Event of Default, all dividends and distributions in respect of any Stock of the Pledged Companies (including cash dividends other than those described in subparagraphs (ii) and (iii) above),

shall be forthwith delivered to Agent to hold as Collateral and shall, if received by Grantors, be received in trust for the benefit of Agent, for the ratable benefit of the Lender Group and the Bank Product Provider, be segregated from the other property or funds of Grantors, and be forthwith delivered to Agent as Collateral in the same form as so received (with any necessary endorsement), and, if deemed necessary by Agent, Grantors shall take such actions, including the actions described in Section 6(h), as Agent may require.

     5. Representations and Warranties. Each Grantor hereby represents and warrants as follows:

               (a) The exact legal name of each of the Grantors is set forth on the signature pages of this Agreement or a written notice provided to Agent pursuant to Section 6.5 of the Credit Agreement.

               (b) Schedule 7 attached hereto sets forth all Real Property owned by Grantors as of the Closing Date.

               (c) As of the Closing Date, no Grantor has any interest in, or title to, any Copyrights, Intellectual Property Licenses, Patents, or Trademarks except as set forth on Schedules 2, 3 , 4 and 6, respectively, attached hereto. This Agreement is effective to create a valid and continuing Lien on such Copyrights, Intellectual Property Licenses, Patents and Trademarks and, upon filing of the Copyright Security Agreement with the United States Copyright Office and filing of the Patent Security Agreement and the Trademark Security Agreement with the United State Patent and Trademark Office, and the filing of appropriate financing statements in the jurisdictions listed on Schedule 8 hereto, all action necessary or desirable to protect and perfect the Security Interest in and to on each Grantor’s Patents, Trademarks, or Copyrights has been taken and such perfected Security Interests are enforceable as such as against any and all creditors of and purchasers from any Grantor.

               (d) This Agreement creates a valid security interest in the Collateral of each of Grantors, to the extent a security interest therein can be created under the Code, securing the payment of the Secured Obligations. Except to the extent a security interest in the Collateral cannot be perfected by the filing of a financing statement under the Code, all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken or will have been taken upon the filing of financing statements listing each applicable Grantor, as a debtor, and Agent, as secured party, in the jurisdictions listed next to such Grantor’s name on Schedule 8 attached hereto. Upon the making of such filings, Agent shall have a first priority perfected security interest in the Collateral of each Grantor (subject only to Permitted Liens) to the

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extent such security interest can be perfected by the filing of a financing statement. All action by any Grantor necessary to protect and perfect such security interest on each item of Collateral has been duly taken.

               (e) Except for the Security Interest created hereby, each Grantor is and will at all times be the sole holder of record and the legal and beneficial owner, free and clear of all Liens other than Permitted Liens, of the Pledged Interests indicated on Schedule 5 as being owned by such Grantor and, when acquired by such Grantor, any Pledged Interests acquired after the Closing Date; (ii) all of the Pledged Interests are duly authorized, validly issued, fully paid and nonassessable and the Pledged Interests constitute or will constitute the percentage of the issued and outstanding Stock of the Pledged Companies of such Grantor identified on Schedule 5 hereto as supplemented or modified by any Pledged Interests Addendum or any Supplement to this Agreement; (ii) such Grantor has the right and requisite authority to pledge, the Investment Related Property pledged by such Grantor to Agent as provided herein; (iii) all actions necessary or desirable to perfect, establish the first priority of, or otherwise protect, Agent’s Liens in the Investment Related Collateral, and the proceeds thereof, have been duly taken, (A) upon the execution and delivery of this Agreement; (B) upon the taking of possession by Agent of any certificates constituting the Pledged Interests, to the extent such Pledged Interests are represented by certificates, together with undated powers endorsed in blank by the applicable Grantor; (C) upon the filing of financing statements in the applicable jurisdiction set forth on Schedule 8 attached hereto for such Grantor with respect to the Pledged Interests of such Grantor that are not represented by certificates, and (D) with respect to any Securities Accounts, upon the delivery of Control Agreements with respect thereto; and (iv) each Grantor has delivered to and deposited with Agent (or, with respect to any Pledged Interests created or obtained after the Closing Date, will deliver and deposit in accordance with Sections 6(a) and 8 hereof) all certificates representing the Pledged Interests owned by such Grantor to the extent such Pledged Interests are represented by certificates, and undated powers endorsed in blank with respect to such certificates. None of the Pledged Interests owned or held by such Grantor has been issued or transferred in violation of any securities registration, securities disclosure or similar laws of any jurisdiction to which such issuance or transfer may be subject.

               (f) No consent, approval, authorization, or other order or other action by, and no notice to or filing with, any Governmental Authority or any other Person is required for the grant of a Security Interest by such Grantor in and to the Collateral pursuant to this Agreement or for the execution, delivery, or performance of this Agreement by such Grantor. No consent, approval, authorization, or other order or action by, and no notice to or filing with, any Government Authority is required for the exercise by Agent of the voting or other rights provided for in this Agreement with respect to the Investment Related Property or the remedies in respect of the Collateral pursuant to this Agreement, except as may be required in connection with such disposition of Investment Related Property by laws affecting the offering and sale of securities generally. No consent, approval, authorization, or other order or action by, and no notice to, any Person is required for the exercise by Agent of the voting or other rights provided for in this Agreement with respect to the Investment Related Property or the remedies in respect of the Collateral pursuant to this Agreement. No Intellectual Property License to which any Grantor is a party requires any consent for such Grantor to grant the security interest granted hereunder in such Grantors’ right, title or interest in or to any such Intellectual Property Licenses.

               (g) There is no default, breach, violation or event of acceleration existing under any promissory note (as defined in the Code) constituting Collateral and pledged hereunder (each a “Pledged Note”) and no event has occurred or circumstance exists which, with the passage of time or the giving of notice, or both, would constitute a default, breach, violation or event of acceleration under any Pledged Note. No Grantor that is an obligee under a Pledged Note has waived any default, breach, violation or event of acceleration under such Pledged Note.

               (h) Each Grantor shall have made all payments, filings and recordations necessary to protect and maintain its interest in such Grantor’s Intellectual Property Rights in the United States or any other jurisdiction that are material to the conduct of such Grantor’s business, including (i) making all necessary

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registration, maintenance, and renewal fee payment and (ii) filing all necessary documents, including all applications for registration of Copyrights, Patents and Trademarks that are material to the conduct of such Grantor’s business.

               (i) Each Grantor has taken all actions reasonably necessary to protect the confidentiality of any trade secrets, the source code of all computer software programs and applications of which it is the owner and that are material to the conduct of its business, or other confidential information relating to the Intellectual Property Rights that are material to the conduct of its business, including (i) protecting the secrecy and confidentiality of its confidential information and trade secrets by having and enforcing a policy requiring all current and former employees, consultants, and contractors to execute appropriate confidentiality agreements and (ii) taking all actions reasonably necessary to ensure that no trade secret falls or has fallen into the public domain.

               (j) Each Grantor has and enforces a policy requiring all employees, consultants and contractors to execute appropriate assignment agreements, pursuant to which each such employee, consultant or contractor assigns to such Grantor all of its rights, including all Intellectual Property Rights, in and to all ideas, inventions, processes, works of authorship and other work products that relate to such Grantor’s business and that were conceived, created, authored or developed during the term of such employee’s, consultant’s or contractor’s employment or engagement by such Grantor. Other than as set forth in Schedules 2, 3, 4 and 6, no past or present employee or contractor of any Grantor has any ownership interest, license, permission or other right in or to any Intellectual Property Rights that are material to the conduct of any such Grantor’s business, except that solely to the extent necessary for the conduct of their work for or on behalf of any Grantor, (i) employees of each Grantor may have permission to use Intellectual Property Rights and (ii) contractors may have permission to use or license rights in the Intellectual Property.

               (k) No claim has been made and is continuing or threatened that the use by any Grantor of any Intellectual Property Rights that are material to the conduct of its business is invalid or unenforceable or that the use by such Grantor of any such Intellectual Property Rights does or may violate the rights of any Person. To the best of each Grantor’s knowledge, there is currently no infringement or unauthorized use of any item of Intellectual Property Rights contained on Schedules 2, 3, 4 or 6.

     6. Covenants. Each Grantor, jointly and severally, covenants and agrees with Agent and the Lender Group that from and after the date of this Agreement and until the date of termination of this Agreement in accordance with Section 22 hereof:

               (a) Possession of Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Investment Related Property, or Chattel Paper, and if and to the extent that perfection or priority of Agent’s Security Interest is dependent on or enhanced by possession, the applicable Grantor, immediately upon the request of Agent and in accordance with Section 8 hereof, shall execute such other documents and instruments as shall be requested by Agent or, if applicable, endorse and deliver physical possession of such Negotiable Collateral, Investment Related Property, or Chattel Paper to Agent, together with such undated powers endorsed in blank as shall be requested by Agent;

               (b) Chattel Paper.

                         (i) Each Grantor shall take all steps reasonably necessary to grant Agent control of all electronic Chattel Paper in accordance with the Code and all “transferable records” as that term is defined in Section 16 of the Uniform Electronic Transaction Act and Section 201 of the federal Electronic Signatures in Global and National Commerce Act as in effect in any relevant jurisdiction;

                         (ii) If any Grantor retains possession of any Chattel Paper or instruments (which retention of possession shall be subject to the extent permitted hereby and by the Credit Agreement), promptly

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upon the request of Agent, such Chattel Paper and instruments shall be marked with the following legend: “This writing and the obligations evidenced or secured hereby are subject to the Security Interest of Wells Fargo Foothill, Inc., as Agent for the benefit of the Lender Group and the Bank Product Provider”;

               (c) Control Agreements.

                         (i) Except to the extent otherwise permitted by the Credit Agreement, each Grantor shall obtain an authenticated Control Agreement, from each bank holding a Deposit Account for such Grantor;

                         (ii) Except to the extent otherwise permitted by the Credit Agreement, each Grantor shall obtain authenticated Control Agreements, from each issuer of uncertificated securities, securities intermediary, or commodities intermediary issuing or holding any financial assets or commodities to or for any Grantor;

               (d) Letter of Credit Rights. Each Grantor that is or becomes the beneficiary of any one letter of credit, other than a Wuhan L/C, with a face amount of $100,000 or one or more Grantors (individually or collectively) are or become the beneficiary of more than one letter of credit, other than Wuhan L/Cs, with face amounts of $200,000 in the aggregate, such Grantor or Grantors shall promptly (and in any event within 2 Business Days after becoming a beneficiary), notify Agent thereof and, upon the request by Agent, enter into a tri-party agreement with Agent and the issuer or confirmation bank with respect to letter-of-credit rights (as that term is defined in the Code) assigning such letter-of-credit rights to Agent and directing all payments thereunder to Agent’s Account, all in form and substance satisfactory to Agent, provided, however, that solely with respect to Wuhan L/Cs, so long as no Event of Default has occurred and is continuing, Grantors shall not be required to enter into the above referenced tri-party agreement;

               (e) Commercial Tort Claims. Each Grantor shall promptly (and in any event within 2 Business Days of receipt thereof), notify Agent in writing upon incurring or otherwise obtaining a Commercial Tort Claim after the date hereof against any third party and, upon request of Agent, promptly amend Schedule 1 to this Agreement, authorize the filing of additional financing statements or amendments to existing financing statements and do such other acts or things deemed necessary or desirable by Agent to give Agent a first priority, perfected security interest in any such Commercial Tort Claim;

               (f) Government Contracts. If any Account or Chattel Paper in an amount of more than $100,000 arises out of a contract or contracts with the United States of America or any department, agency, or instrumentality thereof or if the aggregate amount of Accounts or Chattel Paper arising out of contracts with the United States of America or any department, agency, or instrumentality thereof exceed $250,000, Grantors shall promptly (and in any event within 2 Business Days of the creation thereof) notify Agent thereof in writing and execute any instruments or take any steps reasonably required by Agent in order that all moneys due or to become due under such contract or contracts shall be assigned to Agent, for the benefit of the Lender Group and the Bank Product Providers, and notice thereof given under the Assignment of Claims Act or other applicable law;

               (g) Intellectual Property.

                         (i) Upon request of Agent, in order to facilitate filings with the United States Patent and Trademark Office or any similar office or agency in any jurisdiction and the United States Copyright Office or any similar office or agency in any jurisdiction, each Grantor shall execute and deliver to Agent one or more Copyright Security Agreements, Trademark Security Agreements, or Patent Security Agreements to evidence Agent’s Lien on such Grantor’s Patents, Trademarks, or Copyrights, and the General Intangibles of such Grantor relating thereto or represented thereby;

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                         (ii) Each Grantor shall have the duty, to the extent necessary or economically desirable in the operation of such Grantor’s business, (A) to promptly sue for infringement, misappropriation, or dilution and to recover any and all damages for such infringement, misappropriation, or dilution, (B) to prosecute diligently any trademark application or service mark application that is part of the Trademarks pending as of the date hereof or hereafter until the termination of this Agreement, (C) to prosecute diligently any patent application that is part of the Patents pending as of the date hereof or hereafter until the termination of this Agreement, and (D) to take all reasonable and necessary action to preserve and maintain all of such Grantor’s Trademarks, Patents, Copyrights, Intellectual Property Licenses, and its rights therein, including the filing of applications for renewal, affidavits of use, affidavits of noncontestability and opposition and interference and cancellation proceedings. Any expenses incurred in connection with the foregoing shall be borne by the appropriate Grantor. Grantors will not register with the U.S. Copyright Office any unregistered copyrights (whether in existence on the Closing Date or thereafter acquired, arising, or developed) unless (i) Administrative Borrower provides Agent with written notice of the applicable Grantor intent to register such copyrights not less than 30 days prior to the date of the proposed registration, and (ii) prior to such registration, the applicable Grantor execute and deliver to Agent an Copyright Security Agreement in the form of Exhibit A hereto, or such other documentation as Agent deems necessary in order to perfect and continue perfected Agent’s Liens on such copyrights following such registration. Each Grantor further agrees not to abandon any Trademark, Patent, Copyright, or Intellectual Property License that is necessary or economically desirable in the operation of such Grantor’s business without the prior written consent of Agent;

                         (iii) Grantors acknowledge and agree that the Lender Group shall have no duties with respect to the Trademarks, Patents, Copyrights, or Intellectual Property Licenses. Without limiting the generality of this Section 6(g), Grantors acknowledge and agree that no member of the Lender Group shall be under any obligation to take any steps necessary to preserve rights in the Trademarks, Patents, Copyrights, or Intellectual Property Licenses against any other Person, but any member of the Lender Group may do so at its option from and after the occurrence and during the continuance of an Event of Default, and all expenses incurred in connection therewith (including reasonable fees and expenses of attorneys and other professionals) shall be for the sole account of Borrowers and shall be chargeable to the Loan Account;

                         (iv) Each Grantor agrees to take all necessary steps, including making all necessary payments and filings in connection with registration, maintenance, and renewal of each Grantor’s Patents and Trademarks that are material to the conduct of each Grantor’s business;

                         (v) In no event shall any Grantor, either itself or through any agent, employee, licensee, or designee, file an application for the registration of any Patent, Trademark, or Copyright with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency without giving Agent prior written notice thereof. Promptly upon any such filing, each Grantor shall comply with Section 6(g)(i) hereof;

               (h) Investment Related Property.

                         (i) If: (a) Agent in its sole discretion requires that the Stock of Bookham China be pledged as Collateral hereunder or (b) any Grantor shall receive or become entitled to receive any Pledged Interests after the Closing Date, the applicable Grantor shall promptly (and in any event within 2 Business Days of receipt thereof) deliver to Agent a duly executed Pledged Interests Addendum identifying such Pledged Interests;

                         (ii) All sums of money and property paid or distributed in respect of the Investment Related Property which are received by any Grantor shall be held by the Grantors in trust for the benefit of Agent segregated from such Grantor’s other property, and such Grantor shall deliver it forthwith to Agent’s in the exact form received;

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                         (iii) Each Grantor shall promptly deliver to Agent a copy of each notice or other communication received by it in respect of any Pledged Interests;

                         (iv) No Grantor shall make or consent to any amendment or other modification or waiver with respect to any Pledged Interests, Pledged Operating Agreement, or Pledged Partnership Agreement, or enter into any agreement or permit to exist any restriction with respect to any Pledged Interests other than as permitted by the Loan Documents;

                         (v) Each Grantor agrees that it will cooperate with Agent in obtaining all necessary approvals and making all necessary filings under federal, state, local, or foreign law in connection with the Security Interest on the Investment Related Property or any sale or transfer thereof;

                         (vi) As to all limited liability company or partnership interests, issued under any Pledged Operating Agreement or Pledged Partnership Agreement, each Grantor hereby represents, warrants and covenants that the Pledged Interests issued pursuant to such agreement (A) are not and shall not be dealt in or traded on securities exchanges or in securities markets, (B) do not and will not constitute investment company securities, and (C) are not and will not be held by such Grantor in a securities account. In addition, none of the Pledged Operating Agreements, the Pledged Partnership Agreements, or any other agreements governing any of the Pledged Interests issued under any Pledged Operating Agreement or Pledged Partnership Agreement, provide or shall provide that such Pledged Interests are securities governed by Article 8 of the Uniform Commercial Code as in effect in any relevant jurisdiction;

               (i) Real Property; Fixtures. Each Grantor covenants and agrees that upon the acquisition of any fee interest in Real Property it will promptly (and in any event within 2 Business Days of acquisition) notify Agent of the acquisition of such Real Property and will grant to Agent, for the benefit of the Lender Group and the Bank Product Provider, a first priority Mortgage on each fee interest in Real Property now or hereafter owned by such Grantor and shall deliver such other documentation and opinions, in form and substance satisfactory to Agent, in connection with the grant of such Mortgage as Agent shall request in its Permitted Discretion, including title insurance policies, financing statements, fixture filings and environmental audits and such Grantor shall pay all recording costs, intangible taxes and other fees and costs (including reasonable attorneys fees and expenses) incurred in connection therewith. Each Grantor acknowledges and agrees that, to the extent permitted by applicable law, all of the Collateral shall remain personal property regardless of the manner of its attachment or affixation to real property;

               (j) Transfers and Other Liens. Grantors shall not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, except expressly permitted by the Credit Agreement, or (ii) create or permit to exist any Lien upon or with respect to any of the Collateral of any of Grantors, except for Permitted Liens. The inclusion of Proceeds in the Collateral shall not be deemed to constitute Agent’s consent to any sale or other disposition of any of the Collateral except as expressly permitted in this Agreement or the other Loan Documents; and

               (k) Other Actions as to Any and All Collateral. Each Grantor shall promptly (and in any event within 2 Business Days of acquiring or obtaining such Collateral) notify Agent in writing upon (i) acquiring or otherwise obtaining any Collateral after the date hereof consisting of Trademarks, Patents, Copyrights, Intellectual Property Licenses, Investment Related Property, Chattel Paper (electronic, tangible or otherwise), documents (as defined in Article 9 of the Code), promissory notes (as defined in the Code, or instruments (as defined in the Code) or (ii) any amount payable under or in connection with any of the Collateral being or becoming evidenced after the date hereof by any Chattel Paper, documents, promissory notes, or instruments and, in each such case upon the request of Agent and in accordance with Section 8 hereof, promptly execute such other documents, or if applicable, deliver such Chattel Paper, other documents or certificates evidencing any Investment Related Property in accordance with Section 6 hereof and do such other acts or things deemed necessary or desirable by Agent to protect Agent’s Security Interest therein; and

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     7. Relation to Other Security Documents. The provisions of this Agreement shall be read and construed with the other Loan Documents referred to below in the manner so indicated.

               (a) Credit Agreement. In the event of any conflict between any provision in this Agreement and a provision in the Credit Agreement, such provision of the Credit Agreement shall control.

               (b) Patent, Trademark, Copyright Security Agreements. The provisions of the Copyright Security Agreements, Trademark Security Agreements, and Patent Security Agreements are supplemental to the provisions of this Agreement, and nothing contained in the Copyright Security Agreements, Trademark Security Agreements, or the Patent Security Agreements shall limit any of the rights or remedies of Agent hereunder.

     8. Further Assurances.

               (a) Each Grantor agrees that from time to time, at its own expense, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that Agent may reasonably request, in order to perfect and protect any Security Interest granted or purported to be granted hereby or to enable Agent to exercise and enforce its rights and remedies hereunder with respect to any of the Collateral.

               (b) Each Grantor authorizes the filing by Agent financing or continuation statements, or amendments thereto, and such Grantor will execute and deliver to Agent such other instruments or notices, as may be necessary or as Agent may reasonably request, in order to perfect and preserve the Security Interest granted or purported to be granted hereby.

               (c) Each Grantor authorizes Agent at any time and from time to time to file, transmit, or communicate, as applicable, financing statements and amendments (i) describing the Collateral as “all personal property of debtor” or “all assets of debtor” or words of similar effect, (ii) describing the Collateral as being of equal or lesser scope or with greater detail, or (iii) that contain any information required by part 5 of Article 9 of the Code for the sufficiency or filing office acceptance. Each Grantor also hereby ratifies any and all financing statements or amendments previously filed by Agent in any jurisdiction.

               (d) Each Grantor acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement filed in connection with this Agreement without the prior written consent of Agent, subject to such Grantor’s rights under Section 9-509(d)(2) of the Code.

     9. Agent’s Right to Perform Contracts. Upon the occurrence and during the continuance of an Event of Default, Agent (or its designee) may proceed to perform any and all of the obligations of any Grantor contained in any contract, lease, or other agreement and exercise any and all rights of any Grantor therein contained as fully as such Grantor itself could.

     10. Agent Appointed Attorney-in-Fact. Each Grantor hereby irrevocably appoints Agent its attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, at such time as an Event of Default has occurred and is continuing under the Credit Agreement, to take any action and to execute any instrument which Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including:

               (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in connection with the Accounts or any other Collateral of such Grantor;

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               (b) to receive and open all mail addressed to such Grantor and to notify postal authorities to change the address for the delivery of mail to such Grantor to that of Agent;

               (c) to receive, indorse, and collect any drafts or other instruments, documents, Negotiable Collateral or Chattel Paper;

               (d) to file any claims or take any action or institute any proceedings which Agent may deem necessary or desirable for the collection of any of the Collateral of such Grantor or otherwise to enforce the rights of Agent with respect to any of the Collateral;

               (e) to repair, alter, or supply goods, if any, necessary to fulfill in whole or in part the purchase order of any Person obligated to such Grantor in respect of any Account of such Grantor;

               (f) to use any labels, Patents, Trademarks, trade names, URLs, domain names, industrial designs, Copyrights, advertising matter or other industrial or intellectual property rights, in advertising for sale and selling Inventory and other Collateral and to collect any amounts due under Accounts, contracts or Negotiable Collateral of such Grantor; and

               (g) Agent on behalf of the Lender Group shall have the right, but shall not be obligated, to bring suit in its own name to enforce the Trademarks, Patents, Copyrights and Intellectual Property Licenses and, if Agent shall commence any such suit, the appropriate Grantor shall, at the request of Agent, do any and all lawful acts and execute any and all proper documents reasonably required by Agent in aid of such enforcement.

     To the extent permitted by law, each Grantor hereby ratifies all that such attorney-in-fact shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable until this Agreement is terminated.

     11. Agent May Perform. If any of Grantors fails to perform any agreement contained herein, Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Agent incurred in connection therewith shall be payable, jointly and severally, by Grantors.

     12. Agent’s Duties. The powers conferred on Agent hereunder are solely to protect Agent’s interest in the Collateral, for the benefit of the Lender Group and the Bank Product Provider, and shall not impose any duty upon Agent to exercise any such powers. Except for the safe custody of any Collateral in its actual possession and the accounting for moneys actually received by it hereunder, Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its actual possession if such Collateral is accorded treatment substantially equal to that which Agent accords its own property.

     13. Collection of Accounts, General Intangibles and Negotiable Collateral. At any time upon the occurrence and during the continuation of an Event of Default, Agent or Agent’s designee may (a) notify Account Debtors of any Grantor that the Accounts, General Intangibles, Chattel Paper or Negotiable Collateral have been assigned to Agent, for the benefit of the Lender Group and the Bank Product Provider, or that Agent has a security interest therein, and (b) collect the Accounts, General Intangibles and Negotiable Collateral directly, and any collection costs and expenses shall constitute part of such Grantor’s Secured Obligations under the Loan Documents.

     14. Disposition of Pledged Interests by Agent. None of the Pledged Interests existing as of the date of this Agreement are, and none of the Pledged Interests hereafter acquired on the date of acquisition thereof will be, registered or qualified under the various federal or state securities laws of the United States and

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disposition thereof after an Event of Default may be restricted to one or more private (instead of public) sales in view of the lack of such registration. Each Grantor understands that in connection with such disposition, Agent may approach only a restricted number of potential purchasers and further understands that a sale under such circumstances may yield a lower price for the Pledged Interests than if the Pledged Interests were registered and qualified pursuant to federal and state securities laws and sold on the open market. Each Grantor, therefore, agrees that: (a) if Agent shall, pursuant to the terms of this Agreement, sell or cause the Pledged Interests or any portion thereof to be sold at a private sale, Agent shall have the right to rely upon the advice and opinion of any nationally recognized brokerage or investment firm (but shall not be obligated to seek such advice and the failure to do so shall not be considered in determining the commercial reasonableness of such action) as to the best manner in which to offer the Pledged Interest or any portion thereof for sale and as to the best price reasonably obtainable at the private sale thereof; and (b) such reliance shall be conclusive evidence that Agent has handled the disposition in a commercially reasonable manner.

     15. Voting Rights.

               (a) Upon the occurrence and during the continuation of an Event of Default, (i) Agent may, at its option, and with 2 Business Days prior notice to any Grantor, and in addition to all rights and remedies available to Agent under any other agreement, at law, in equity, or otherwise, exercise all voting rights, and all other ownership or consensual rights in respect of the Pledged Interests owned by such Grantor, but under no circumstances is Agent obligated by the terms of this Agreement to exercise such rights, and (ii) if Agent duly exercises its right to vote any of such Pledged Interests, each Grantor hereby appoints Agent, such Grantor’s true and lawful attorney-in-fact and IRREVOCABLE PROXY to vote such Pledged Interests in any manner Agent deems advisable for or against all matters submitted or which may be submitted to a vote of shareholders, partners or members, as the case may be. The power-of-attorney granted hereby is coupled with an interest and shall be irrevocable.

               (b) For so long as any Grantor shall have the right to vote the Pledged Interests owned by it, such Grantor covenants and agrees that it will not, without the prior written consent of Agent, vote or take any consensual action with respect to such Pledged Interests which would materially adversely affect the rights of Agent and the other members of the Lender Group with respect to the Pledged Interests or the value of the Pledged Interests.

     16. Remedies. Upon the occurrence and during the continuance of an Event of Default:

               (a) Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, in the other Loan Documents, or otherwise available to it, all the rights and remedies of a secured party on default under the Code or any other applicable law. Without limiting the generality of the foregoing, each Grantor expressly agrees that, in any such event, Agent without demand of performance or other demand, advertisement or notice of any kind (except a notice specified below of time and place of public or private sale) to or upon any of Grantors or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code or any other applicable law), may take immediate possession of all or any portion of the Collateral and (i) require Grantors to, and each Grantor hereby agrees that it will at its own expense and upon request of Agent forthwith, assemble all or part of the Collateral as directed by Agent and make it available to Agent at one or more locations where such Grantor regularly maintains Inventory, and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Agent’s offices or elsewhere, for cash, on credit, and upon such other terms as Agent may deem commercially reasonable. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least 10 days notice to any of Grantors of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification and specifically such notice shall constitute a reasonable “authenticated notification of disposition” within the meaning of Section 9-611 of the Code. Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Agent may adjourn

15

any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

               (b) Agent is hereby granted a license or other right to use, without liability for royalties or any other charge, each Grantor’s labels, Patents, Copyrights, rights of use of any name, trade secrets, trade names, Trademarks, service marks and advertising matter, URLs, domain names, industrial designs, other industrial or intellectual property or any property of a similar nature, whether owned by any of Grantors or with respect to which any of Grantors have rights under license, sublicense, or other agreements, as it pertains to the Collateral, in preparing for sale, advertising for sale and selling any Collateral, and each Grantor’s rights under all licenses and all franchise agreements shall inure to the benefit of Agent.

               (c) Any cash held by Agent as Collateral and all cash proceeds received by Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied against the Secured Obligations in the order set forth in the Credit Agreement. In the event the proceeds of Collateral are insufficient to satisfy all of the Secured Obligations in full, each Grantor shall remain jointly and severally liable for any such deficiency.

               (d) Each Grantor hereby acknowledges that the Secured Obligations arose out of a commercial transaction, and agrees that if an Event of Default shall occur and be continuing Agent shall have the right to an immediate writ of possession without notice of a hearing. Agent shall have the right to the appointment of a receiver for the properties and assets of each of Grantors, and each Grantor hereby consents to such rights and such appointment and hereby waives any objection such Grantors may have thereto or the right to have a bond or other security posted by Agent.

     17. Remedies Cumulative. Each right, power, and remedy of Agent as provided for in this Agreement or in the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Agreement or in the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Agent, of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by Agent of any or all such other rights, powers, or remedies.

     18. Marshaling. Agent shall not be required to marshal any present or future collateral security (including but not limited to the Collateral) for, or other assurances of payment of, the Secured Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of its rights and remedies hereunder and in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights and remedies, however existing or arising. To the extent that it lawfully may, each Grantor hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of Agent’s rights and remedies under this Agreement or under any other instrument creating or evidencing any of the Secured Obligations or under which any of the Secured Obligations is outstanding or by which any of the Secured Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, each Grantor hereby irrevocably waives the benefits of all such laws.

     19. Indemnity and Expenses.

               (a) Each Grantor agrees to indemnify Agent and the other members of the Lender Group from and against all claims, lawsuits and liabilities (including reasonable attorneys fees) growing out of or resulting from this Agreement (including enforcement of this Agreement) or any other Loan Document to which such Grantor is a party, except claims, losses or liabilities resulting from the gross negligence or willful misconduct of the party seeking indemnification as determined by a final non-appealable order of a court of

16

competent jurisdiction. This provision shall survive the termination of this Agreement and the Credit Agreement and the repayment of the Secured Obligations.

               (b) Grantors, jointly and severally, shall, upon demand, pay to Agent (or Agent, may charge to the Loan Account) all the Lender Group Expenses which Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or, upon an Event of Default, the sale of, collection from, or other realization upon, any of the Collateral in accordance with this Agreement and the other Loan Documents, (iii) the exercise or enforcement of any of the rights of Agent hereunder or (iv) the failure by any of Grantors to perform or observe any of the provisions hereof.

     20. Merger, Amendments; Etc. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. No waiver of any provision of this Agreement, and no consent to any departure by any of Grantors herefrom, shall in any event be effective unless the same shall be in writing and signed by Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment of any provision of this Agreement shall be effective unless the same shall be in writing and signed by Agent and each of Grantors to which such amendment applies.

     21. Addresses for Notices. All notices and other communications provided for hereunder shall be given in the form and manner and delivered to Agent at its address specified in the Credit Agreement, and to any of the Grantors at their respective addresses specified in the Credit Agreement or Guaranty, as applicable, or, as to any party, at such other address as shall be designated by such party in a written notice to the other party.

     22. Continuing Security Interest: Assignments under Credit Agreement. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the Obligations have been paid in full in cash in accordance with the provisions of the Credit Agreement and the Commitments have expired or have been terminated, (b) be binding upon each of Grantors, and their respective successors and assigns, and (c) inure to the benefit of, and be enforceable by, Agent, and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), any the Lender may, in accordance with the provisions of the Credit Agreement, assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such the Lender herein or otherwise. Upon payment in full in cash of the Obligations in accordance with the provisions of the Credit Agreement and the expiration or termination of the Commitments, the Security Interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantors or any other Person entitled thereto. At such time, Agent will authorize the filing of appropriate termination statements to terminate such Security Interests. No transfer or renewal, extension, assignment, or termination of this Agreement or of the Credit Agreement, any other Loan Document, or any other instrument or document executed and delivered by any Grantor to Agent nor any additional Advances or other loans made by any the Lender to any Borrower, nor the taking of further security, nor the retaking or re-delivery of the Collateral to Grantors, or any of them, by Agent, nor any other act of the Lender Group or the Bank Product Provider, or any of them, shall release any of Grantors from any obligation, except a release or discharge executed in writing by Agent in accordance with the provisions of the Credit Agreement. Agent shall not by any act, delay, omission or otherwise, be deemed to have waived any of its rights or remedies hereunder, unless such waiver is in writing and signed by Agent and then only to the extent therein set forth. A waiver by Agent of any right or remedy on any occasion shall not be construed as a bar to the exercise of any such right or remedy which Agent would otherwise have had on any other occasion.

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     23. Governing Law.

               (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

               (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. AGENT AND EACH GRANTOR WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 23(b).

               (c) AGENT AND EACH GRANTOR HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. AGENT AND EACH GRANTOR REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

     24. New Subsidiaries. To the extent required by Section 5.16 of the Credit Agreement, any new direct or indirect Subsidiary (whether by acquisition or creation) of Grantor is required to enter into this Agreement by executing and delivering in favor of Agent a supplement to this Agreement in the form of Annex 1 attached hereto. Upon the execution and delivery of Annex 1 by such new Subsidiary, such Subsidiary shall become a Grantor hereunder with the same force and effect as if originally named as a Grantor herein. The execution and delivery of any instrument adding an additional Grantor as a party to this Agreement shall not require the consent of any Grantor hereunder. The rights and obligations of each Grantor hereunder shall remain in full force and effect notwithstanding the addition of any new Grantor hereunder.

     25. Agent. Each reference herein to any right granted to, benefit conferred upon or power exercisable by the “Agent” shall be a reference to Agent, for the benefit of the Lender Group and the Bank Product Provider.

     26. Miscellaneous.

               (a) This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission shall be

18

equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis.

               (b) Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction.

               (c) Headings used in this Agreement are for convenience only and shall not be used in connection with the interpretation of any provision hereof.

               (d) The pronouns used herein shall include, when appropriate, either gender and both singular and plural, and the grammatical construction of sentences shall conform thereto.

               (e) Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the terms “includes” and “including” are not limiting, and the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in any other Loan Document to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein or in any other Loan Document to the satisfaction or repayment in full of the Obligations shall mean the repayment in full in cash (or cash collateralization in accordance with the terms hereof) of all Obligations other than unasserted contingent indemnification Obligations and other than any Bank Product Obligations that, at such time, are allowed by the applicable Bank Product Provider to remain outstanding and that are not required by the provisions of the Credit Agreement to be repaid or cash collateralized. Any reference herein to any Person shall be construed to include such Person’s successors and assigns. Any requirement of a writing contained herein or in any other Loan Document shall be satisfied by the transmission of a Record and any Record so transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein.

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     IN WITNESS WHEREOF, the undersigned parties hereto have executed this Agreement by and through their duly authorized officers, as of the day and year first above written.

GRANTORS:	BOOKHAM, INC., a Delaware corporation
	By:	/s/ Steve Abely
	Name: Title:	Steve Abely Chief Financial Officer
	BOOKHAM TECHNOLOGY PLC, a limited liability company incorporated under the laws of England and Wales
	By:	/s/ Steve Abely
	Name: Title:	Steve Abely Director
	NEW FOCUS, INC., a Delaware corporation
	By:	/s/ Steve Abely
	Name: Title:	Steve Abely President
	BOOKHAM (US) INC., a Delaware corporation
	By:	/s/ Steve Abely
	Name: Title:	Steve Abely President
	BOOKHAM (CANADA) INC., a federally incorporated Canadian corporation
	By:	/s/ Steve Abely
	Name: Title:	Steve Abely President

S-1
Security Agreement

ONETTA, INC., a Delaware corporation
By:	/s/ Steve Abely
Name: Title:	Steve Abely President
IGNIS OPTICS INC., a Delaware corporation
By:	/s/ Steve Abely
Name: Title:	Steve Abely President
FOCUSED RESEARCH INC., a California corporation
By:	/s/ Steve Abely
Name: Title:	Steve Abely President
GLOBE Y. TECHNOLOGY, INC., a California corporation
By:	/s/ Steve Abely
Name: Title:	Steve Abely President
BOOKHAM NOMINEES LIMITED, a Company organized under the laws of England and Wales
By:	/s/ Steve Abely
Name: Title:	Steve Abely Director

S-2
Security Agreement

EXECUTED as a DEED by	)
BOOKHAM INTERNATIONAL	)
LTD.	)
In the presence of:	)	Per:	/s/ Steve Abely
	)		Director/Attorney-in-fact
	)
	)
/s/ Jacobin Zorin	)
Witness: Jacobin Zorin
Name: Secretary
Address: 2584 Junction Avenue                    San Jose, CA 95134

S-3
Security Agreement

AGENT:	WELLS FARGO FOOTHILL, INC., as Agent
	By:	/s/ Alex Hechler
	Name: Title:	Alex Hechler Vice President

S-4
Security Agreement

SCHEDULE 1

COMMERCIAL TORT CLAIMS

Schedule 1

SCHEDULE 2

COPYRIGHTS

Schedule 2

SCHEDULE 3

INTELLECTUAL PROPERTY LICENSES

Schedule 3

SCHEDULE 4

PATENTS

Schedule 4

SCHEDULE 5

PLEDGED COMPANIES

	Name of Pledged	Number of	Class of	Percentage of	Certificate
Name of Pledgor	Company	Shares/Units	Interests	Class Owned	Nos.
Bookham, Inc., a Delaware corporation	Bookham Technology plc, a limited liability company incorporated under the laws of England and Wales
Bookham, Inc.	Bookham Nominees Limited, a company incorporated under the laws of England and Wales
Bookham Nominees Limited	Bookham Technology plc, a limited liability company incorporated under the laws of England and Wales
Bookham Technology plc	Bookham (US) Inc., a Delaware corporation
Bookham Technology plc	New Focus Inc., a Delaware corporation
Bookham Technology plc	Bookham (Canada) Inc., a federally incorporated Canadian corporation
Bookham Technology plc	Bookham International Ltd, a corporation organized under the laws of the Cayman Islands
Bookham Technology plc	Bookham Technology kk, a corporation organized under the laws of Japan
Bookham Technology plc	Bookham (Switzerland) AG, a corporation organized under the laws of Switzerland
Bookham (US) Inc.	Onetta, Inc., a Delaware corporation
Bookham (US) Inc.	Ignis Optics Inc., a Delaware corporation
New Focus Inc.	Focused Research Inc., a California corporation

Schedule 5

	Name of Pledged	Number of	Class of	Percentage of	Certificate
Name of Pledgor	Company	Shares/Units	Interests	Class Owned	Nos.
New Focus Inc.	Globe Y. Technology, Inc., a California corporation
New Focus, Inc.	New Focus PSC, Inc., a corporation organized under the laws of Barbados
New Focus, Inc.	New Focus GmbH, a corporation organized under the laws of Germany

Schedule 5

SCHEDULE 6

TRADEMARKS

Schedule 6

SCHEDULE 7

OWNED REAL PROPERTY

Schedule 7

SCHEDULE 8

LIST OF UNIFORM COMMERCIAL CODE FILING JURISDICTIONS

Grantor Jurisdictions

Schedule 8

ANNEX 1 TO SECURITY AGREEMENT
FORM OF SUPPLEMENT

     Supplement No. ___(this “Supplement”) dated as of ___, 20___, to the Security Agreement of even date herewith (as amended, restated, supplemented or otherwise modified from time to time, the “Security Agreement”) by each of the parties listed on the signature pages thereto and those additional entities that thereafter become parties thereto (collectively, jointly and severally, “Grantors” and each individually “Grantor”) and WELLS FARGO FOOTHILL, INC. in its capacity as Agent for the Lender Group and the Bank Product Provider (together with the successors, “Agent”).

W I T N E S S E T H:

     WHEREAS, pursuant to that certain Credit Agreement, dated as of August 2, 2006 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Bookham, Inc., a Delaware corporation, as Parent and each of Parent’s Subsidiaries identified on the signature pages thereof (such Subsidiaries are referred to hereinafter individually as a “Borrower” and collectively, jointly and severally, as the “Borrowers”), the lenders party thereto as “Lenders” (“Lenders”), and Agent, the Lender Group is willing to make certain financial accommodations available to Borrowers from time to time pursuant to the terms and conditions thereof; and

     WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement or the Credit Agreement; and

     WHEREAS, Grantors have entered into the Security Agreement in order to induce the Lender Group to make certain financial accommodations to Borrowers; and

     WHEREAS, pursuant to Section 5.16 of the Credit Agreement, new direct or indirect Subsidiaries of Parent, must execute and deliver certain Loan Documents, including the Security Agreement, and the execution of the Security Agreement by the undersigned new Grantor or Grantors (collectively, the “New Grantors”) may be accomplished by the execution of this Supplement in favor of Agent, for the benefit of the Lender Group and the Bank Product Provider;

     NOW, THEREFORE, for and in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each New Grantor hereby agrees as follows:

     1. In accordance with Section 24 of the Security Agreement, each New Grantor, by its signature below, becomes a “Grantor” under the Security Agreement with the same force and effect as if originally named therein as a “Grantor” and each New Grantor hereby (a) agrees to all of the terms and provisions of the Security Agreement applicable to it as a “Grantor” thereunder and (b) represents and warrants that the representations and warranties made by it as a “Grantor” thereunder are true and correct on and as of the date hereof. In furtherance of the foregoing, each New Grantor, as security for the payment and performance in full of the Secured Obligations, does hereby grant, assign, and pledge to Agent, for the benefit of the Lender Group and the Bank Product Provider, a security interest in to all assets of such New Grantor including, all property of the type described in Section 2 of the Security Agreement to secure the full and prompt payment of the Secured Obligations, including, any interest thereon, plus reasonable attorneys’ fees and expenses if the Secured Obligations represented by the Security Agreement are collected by law, through an attorney-at-law, or under advice therefrom. Schedule 1, “Commercial Tort Claims”, Schedule 2, “Copyrights”, Schedule 3, “Intellectual Property Licenses”, Schedule 4, “Patents”, Schedule 5, “Pledged Companies”, Schedule 6, “Trademarks”, Schedule 7, “Owned Real Property,” and Schedule 8, “List of Uniform Commercial Code Filing Jurisdictions” attached hereto supplement Schedule 1, Schedule 2, Schedule 3, Schedule 4, Schedule 5,

Annex 1 to Security Agreement
1

Schedule 6, Schedule 7, and Schedule 8 respectively, to the Security Agreement and shall be deemed a part thereof for all purposes of the Security Agreement. Each reference to a “Grantor” in the Security Agreement shall be deemed to include each New Grantor. The Security Agreement is incorporated herein by reference.

     2. Each New Grantor represents and warrants to Agent, the Lender Group and the Bank Product Provider that this Supplement has been duly executed and delivered by such New Grantor and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting creditors’ rights generally and general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity).

     3. This Supplement may be executed in multiple counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. Delivery of a counterpart hereof by facsimile transmission or by e-mail transmission shall be as effective as delivery of a manually executed counterpart hereof.

     4. Except as expressly supplemented hereby, the Security Agreement shall remain in full force and effect.

     5. This Supplement shall be construed in accordance with and governed by the laws of the State of California, without regard to the conflict of laws principles thereof.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

Annex 1 to Security Agreement
2

     IN WITNESS WHEREOF, each New Grantor and Agent have duly executed this Supplement to the Security Agreement as of the day and year first above written.

NEW GRANTORS:	[Name of New Grantor]
	By:
	Name:
	Title:
	[Name of New Grantor]
	By:
	Name:
	Title:

AGENT:	WELLS FARGO FOOTHILL, INC.
	By:
	Name:
	Title:

Annex 1 to Security Agreement
3

EXHIBIT A

COPYRIGHT SECURITY AGREEMENT

     This COPYRIGHT SECURITY AGREEMENT (this “Copyright Security Agreement”) is made this ___day of ___, 20___, among Grantors listed on the signature pages hereof ( collectively, jointly and severally, “Grantors” and each individually “Grantor”), and WELLS FARGO FOOTHILL, INC., in its capacity as Agent for the Lender Group and the Bank Product Provider (together with its successors, the “Agent”).

W I T N E S S E T H:

     WHEREAS, pursuant to that certain Credit Agreement of even date herewith (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Bookham, Inc., a Delaware corporation, as Parent and each of Parent’s Subsidiaries identified on the signature pages thereof (such Subsidiaries are referred to hereinafter individually as a “Borrower” and collectively, jointly and severally, as the “Borrowers”), the lenders party thereto as “Lenders” (“Lenders”), and Agent, the Lender Group is willing to make certain financial accommodations available to Borrowers pursuant to the terms and conditions thereof; and

     WHEREAS, the members of the Lender Group are willing to make the financial accommodations to Borrowers as provided for in the Credit Agreement, but only upon the condition, among others, that Grantors shall have executed and delivered to Agent, for the benefit of the Lender Group and the Bank Product Provider, that certain Security Agreement of even date herewith (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the “Security Agreement”);

     WHEREAS, pursuant to the Security Agreement, Grantors are required to execute and deliver to Agent, for the benefit of the Lender Group and the Bank Product Provider, this Copyright Security Agreement;

     NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantors hereby agree as follows:

     1. DEFINED TERMS. All capitalized terms used but not otherwise defined herein have the meanings given to them in the Security Agreement or the Credit Agreement.

     2. GRANT OF SECURITY INTEREST IN COPYRIGHT COLLATERAL. Each Grantor hereby grants to Agent, for the benefit of the Lender Group and the Bank Product Provider, a continuing first priority security interest in all of such Grantor’s right, title and interest in, to and under the following, whether presently existing or hereafter created or acquired (collectively, the “Copyright Collateral”):

               (a) all of such Grantor’s Copyrights and Copyright Intellectual Property Licenses to which it is a party including those referred to on Schedule I hereto;

               (b) all reissues, continuations or extensions of the foregoing; and

               (c) all products and proceeds of the foregoing, including any claim by such Grantor against third parties for past, present or future infringement or dilution of any Copyright or any Copyright licensed under any Intellectual Property License.

Exhibit A
1

     3. SECURITY FOR OBLIGATIONS. This Copyright Security Agreement and the Security Interest created hereby secures the payment and performance of all the Secured Obligations, whether now existing or arising hereafter. Without limiting the generality of the foregoing, this Copyright Security Agreement secures the payment of all amounts which constitute part of the Obligations and would be owed by Grantors, or any of them, to Agent, the Lender Group, the Bank Product Provider or any of them, whether or not they are unenforceable or not allowable due to the existence of an Insolvency Proceeding involving any Grantor.

     4. SECURITY AGREEMENT. The security interests granted pursuant to this Copyright Security Agreement are granted in conjunction with the security interests granted to Agent, for the benefit of the Lender Group and the Bank Product Provider, pursuant to the Security Agreement. Each Grantor hereby acknowledges and affirms that the rights and remedies of Agent with respect to the security interest in the Copyright Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein.

     5. AUTHORIZATION TO SUPPLEMENT. Grantors shall give Agent prompt notice in writing of any additional United States copyright registrations or applications therefor after the date hereof. Grantors hereby authorize Agent unilaterally to modify this Agreement by amending Schedule I to include any future United States registered copyrights or applications therefor of Grantors. Notwithstanding the foregoing, no failure to so modify this Copyright Security Agreement or amend Schedule I shall in any way affect, invalidate or detract from Agent’s continuing security interest in all Collateral, whether or not listed on Schedule I.

     6. COUNTERPARTS. This Copyright Security Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. In proving this Copyright Security Agreement or any other Loan Document in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Any signatures delivered by a party by facsimile transmission or by e-mail transmission shall be deemed an original signature hereto.

     7. CONSTRUCTION. Unless the context of this Copyright Security Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the terms “includes” and “including” are not limiting, and the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Copyright Security Agreement or any other Loan Document refer to this Copyright Security Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Copyright Security Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Copyright Security Agreement unless otherwise specified. Any reference in this Copyright Security Agreement or in any other Loan Document to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein or in any other Loan Document to the satisfaction or repayment in full of the Obligations shall mean the repayment in full in cash (or cash collateralization in accordance with the terms hereof) of all Obligations other than unasserted contingent indemnification Obligations and other than any Bank Product Obligations that, at such time, are allowed by the applicable Bank Product Provider to remain outstanding and that are not required by the provisions of the Credit Agreement to be repaid or cash collateralized. Any reference herein to any Person shall be construed to include such Person’s successors and assigns. Any requirement of a writing contained herein or in any other Loan Document shall be satisfied by the transmission of a Record and any Record so transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein.

Exhibit A
2

     IN WITNESS WHEREOF, each Grantor has caused this Copyright Security Agreement to be executed and delivered by its duly authorized officer as of the date first set forth above.

By:

Name:

Title:

By:

Name:

Title:

By:

Name:

Title:

ACCEPTED AND ACKNOWLEDGED BY:

WELLS FARGO FOOTHILL, INC., as Agent

By:

Name:

Title:

Exhibit A
3

SCHEDULE I
TO
COPYRIGHT SECURITY AGREEMENT

COPYRIGHT REGISTRATIONS

Grantor Country Copyright Registration No. Registration Date

Schedule 1 to Copyright Security Agreement

EXHIBIT B

PATENT SECURITY AGREEMENT

     This PATENT SECURITY AGREEMENT (this “Patent Security Agreement”) is made this ___day of ___, 20___, among the Grantors listed on the signature pages hereof (collectively, jointly and severally, “Grantors” and each individually “Grantor”), and WELLS FARGO FOOTHILL, INC., in its capacity as administrative agent for the Lender Group and the Bank Product Provider (together with its successors, “Agent”).

W I T N E S S E T H:

     WHEREAS, pursuant to that certain Credit Agreement of even date herewith (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Bookham, Inc., a Delaware corporation, as Parent and each of Parent’s Subsidiaries identified on the signature pages thereof (such Subsidiaries are referred to hereinafter individually as a “Borrower” and collectively, jointly and severally, as the “Borrowers”), the lenders party thereto as “Lenders” (“Lenders”), and Agent, the Lender Group is willing to make certain financial accommodations available to the Borrowers pursuant to the terms and conditions thereof; and

     WHEREAS, the members of Lender Group are willing to make the financial accommodations to Borrowers as provided for in the Credit Agreement, but only upon the condition, among others, that the Grantors shall have executed and delivered to Agent, for the benefit of the Lender Group and the Bank Product Provider, that certain Security Agreement of even date herewith (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the “Security Agreement”);

     WHEREAS, pursuant to the Security Agreement, Grantors are required to execute and deliver to Agent, for the benefit of the Lender Group and the Bank Product Provider, this Patent Security Agreement;

     NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Grantor hereby agrees as follows:

     1. DEFINED TERMS. All capitalized terms used but not otherwise defined herein have the meanings given to them in the Security Agreement or the Credit Agreement.

     2. GRANT OF SECURITY INTEREST IN PATENT COLLATERAL. Each Grantor hereby grants to Agent, for the benefit of the Lender Group and the Bank Product Provider, a continuing first priority security interest in all of such Grantor’s right, title and interest in, to and under the following, whether presently existing or hereafter created or acquired (collectively, the “Patent Collateral”):

               (a) all of its Patents and Patent Intellectual Property Licenses to which it is a party including those referred to on Schedule I hereto;

               (b) all reissues, continuations or extensions of the foregoing; and

               (c) all products and proceeds of the foregoing, including any claim by such Grantor against third parties for past, present or future infringement or dilution of any Patent or any Patent licensed under any Intellectual Property License.

Exhibit B
1

     3. SECURITY FOR OBLIGATIONS. This Patent Security Agreement and the Security Interest created hereby secures the payment and performance of all the Secured Obligations, whether now existing or arising hereafter. Without limiting the generality of the foregoing, this Patent Security Agreement secures the payment of all amounts which constitute part of the Obligations and would be owed by Grantors, or any of them, to Agent, the Lender Group, the Bank Product Provider or any of them, whether or not they are unenforceable or not allowable due to the existence of an Insolvency Proceeding involving any Grantor.

     4. SECURITY AGREEMENT. The security interests granted pursuant to this Patent Security Agreement are granted in conjunction with the security interests granted to Agent, for the benefit of the Lender Group and the Bank Product Provider, pursuant to the Security Agreement. Each Grantor hereby acknowledges and affirms that the rights and remedies of Agent with respect to the security interest in the Patent Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein.

     5. AUTHORIZATION TO SUPPLEMENT. If any Grantor shall obtain rights to any new patentable inventions or become entitled to the benefit of any patent application or patent for any reissue, division, or continuation, of any patent, the provisions of this Patent Security Agreement shall automatically apply thereto. Grantors shall give prompt notice in writing to Agent with respect to any such new patent rights. Without limiting Grantors’ obligations under this Section 5, Grantors hereby authorize Agent unilaterally to modify this Agreement by amending Schedule I to include any such new patent rights of Grantors. Notwithstanding the foregoing, no failure to so modify this Patent Security Agreement or amend Schedule I shall in any way affect, invalidate or detract from Agent’s continuing security interest in all Collateral, whether or not listed on Schedule I.

     6. COUNTERPARTS. This Patent Security Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. In proving this Patent Security Agreement or any other Loan Document in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Any signatures delivered by a party by facsimile transmission or by e-mail transmission shall be deemed an original signature hereto.

     7. CONSTRUCTION. Unless the context of this Patent Security Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the terms “includes” and “including” are not limiting, and the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Patent Security Agreement or any other Loan Document refer to this Patent Security Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Patent Security Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Patent Security Agreement unless otherwise specified. Any reference in this Patent Security Agreement or in any other Loan Document to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein or in any other Loan Document to the satisfaction or repayment in full of the Obligations shall mean the repayment in full in cash (or cash collateralization in accordance with the terms hereof) of all Obligations other than unasserted contingent indemnification Obligations and other than any Bank Product Obligations that, at such time, are allowed by the applicable Bank Product Provider to remain outstanding and that are not required by

Exhibit B
2

the provisions of the Credit Agreement to be repaid or cash collateralized. Any reference herein to any Person shall be construed to include such Person’s successors and assigns. Any requirement of a writing contained herein or in any other Loan Document shall be satisfied by the transmission of a Record and any Record so transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein.

[signature page follows]

Exhibit B
3

     IN WITNESS WHEREOF, each Grantor has caused this Patent Security Agreement to be executed and delivered by its duly authorized officer as of the date first set forth above.

By:

Name:

Title:

By:

Name:

Title:

ACCEPTED AND ACKNOWLEDGED BY:

WELLS FARGO FOOTHILL, INC., as Agent

By:

Name:

Title:

Exhibit B
4

EXHIBIT C

Annex 1 to Pledge and Security Agreement

PLEDGED INTERESTS ADDENDUM

     This Pledged Interests Addendum, dated as of ___, 20___, is delivered pursuant to Section 6 of the Security Agreement referred to below. The undersigned hereby agrees that this Pledged Interests Addendum may be attached to that certain Security Agreement, dated as of July ___, 2006 (as amended, restated, supplemented or otherwise modified from time to time, the “Security Agreement”), made by the undersigned, together with the other Grantors named therein, to Wells Fargo Foothill, Inc., as Agent. Initially capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Security Agreement or the Credit Agreement. The undersigned hereby agrees that the additional interests listed on this Pledged Interests Addendum as set forth below shall be and become part of the Pledged Interests pledged by the undersigned to the Agent in the Security Agreement and any pledged company set forth on this Pledged Interests Addendum as set forth below shall be and become a “Pledged Company” under the Security Agreement, each with the same force and effect as if originally named therein.

     The undersigned hereby certifies that the representations and warranties set forth in Section 4 of the Security Agreement of the undersigned are true and correct as to the Pledged Interests listed herein on and as of the date hereof.

[_______________________________________]

By:

Title

Exhibit C
1

	Name of
Name of	Pledged	Number of	Class of	Percentage of	Certificate
Pledgor	Company	Shares/Units	Interests	Class Owned	Nos.

Exhibit C
2

EXHIBIT D

TRADEMARK SECURITY AGREEMENT

     This TRADEMARK SECURITY AGREEMENT (this “Trademark Security Agreement”) is made this ___day of ___, 20___, among Grantors listed on the signature pages hereof (collectively, jointly and severally, “Grantors” and each individually “Grantor”), and WELLS FARGO FOOTHILL, INC., in its capacity as Agent for the Lender Group and the Bank Product Provider (together with its successors, “Agent”).

W I T N E S S E T H:

     WHEREAS, pursuant to that certain Credit Agreement of even date herewith (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Bookham, Inc., a Delaware corporation, as Parent and each of Parent’s Subsidiaries identified on the signature pages thereof (such Subsidiaries are referred to hereinafter individually as a “Borrower” and collectively, jointly and severally, as the “Borrowers”), the lenders party thereto as “Lenders” (“Lenders”) and Agent, the Lender Group is willing to make certain financial accommodations available to Borrowers pursuant to the terms and conditions thereof; and

     WHEREAS, the members of the Lender Group are willing to make the financial accommodations to Borrowers as provided for in the Credit Agreement, but only upon the condition, among others, that Grantors shall have executed and delivered to Agent, for the benefit of Lender Group and the Bank Product Provider, that certain Security Agreement dated of even date herewith (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the “Security Agreement”);

     WHEREAS, pursuant to the Security Agreement, Grantors are required to execute and deliver to Agent, for the benefit of Lender Group and the Bank Product Provider, this Trademark Security Agreement;

     NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Grantor hereby agrees as follows:

     1. DEFINED TERMS. All capitalized terms used but not otherwise defined herein have the meanings given to them in the Security Agreement or the Credit Agreement.

     2. GRANT OF SECURITY INTEREST IN TRADEMARK COLLATERAL. Each Grantor hereby grants to Agent, for the benefit of the Lender Group and the Bank Product Provider, a continuing first priority security interest in all of such Grantor’s right, title and interest in, to and under the following, whether presently existing or hereafter created or acquired (collectively, the “Trademark Collateral”):

               (a) all of its Trademarks and Trademark Intellectual Property Licenses to which it is a party including those referred to on Schedule I hereto;

               (b) all goodwill, trade secrets, proprietary or confidential information, technical information, procedures, formulae, quality control standards, designs, operating and training manuals, customer lists, and other General Intangibles with respect to the foregoing;

               (c) all reissues, continuations or extensions of the foregoing;

Exhibit D
1

               (d) all goodwill of the business connected with the use of, and symbolized by, each Trademark and each Trademark Intellectual Property License; and

               (e) all products and proceeds of the foregoing, including any claim by such Grantor against third parties for past, present or future (i) infringement or dilution of any Trademark or any Trademark licensed under any Intellectual Property License or (ii) injury to the goodwill associated with any Trademark or any Trademark licensed under any Intellectual Property License.

     3. SECURITY FOR OBLIGATIONS. This Trademark Security Agreement and the Security Interest created hereby secures the payment and performance of all the Secured Obligations, whether now existing or arising hereafter. Without limiting the generality of the foregoing, this Trademark Security Agreement secures the payment of all amounts which constitute part of the Obligations and would be owed by Grantors, or any of them, to Agent, the Lender Group, the Bank Product Provider or any of them, whether or not they are unenforceable or not allowable due to the existence of an Insolvency Proceeding involving any Grantor.

     4. SECURITY AGREEMENT. The security interests granted pursuant to this Trademark Security Agreement are granted in conjunction with the security interests granted to Agent, for the benefit of the Lender Group and the Bank Product Provider, pursuant to the Security Agreement. Each Grantor hereby acknowledges and affirms that the rights and remedies of Agent with respect to the security interest in the Trademark Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein.

     5. AUTHORIZATION TO SUPPLEMENT. If any Grantor shall obtain rights to any new trademarks, the provisions of this Trademark Security Agreement shall automatically apply thereto. Grantors shall give prompt notice in writing to Agent with respect to any such new trademarks or renewal or extension of any trademark registration. Without limiting Grantors’ obligations under this Section 5, Grantors hereby authorize Agent unilaterally to modify this Agreement by amending Schedule I to include any such new trademark rights of Grantors. Notwithstanding the foregoing, no failure to so modify this Trademark Security Agreement or amend Schedule I shall in any way affect, invalidate or detract from Agent’s continuing security interest in all Collateral, whether or not listed on Schedule I.

     6. COUNTERPARTS. This Trademark Security Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. In proving this Trademark Security Agreement or any other Loan Document in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Any signatures delivered by a party by facsimile transmission or by e-mail transmission shall be deemed an original signature hereto.

     7. CONSTRUCTION. Unless the context of this Trademark Security Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the terms “includes” and “including” are not limiting, and the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Trademark Security Agreement or any other Loan Document refer to this Trademark Security Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Trademark Security Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Trademark Security Agreement or in any other Loan Document to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any

Exhibit D
2

reference herein or in any other Loan Document to the satisfaction or repayment in full of the Obligations shall mean the repayment in full in cash (or cash collateralization in accordance with the terms hereof) of all Obligations other than unasserted contingent indemnification Obligations and other than any Bank Product Obligations that, at such time, are allowed by the applicable Bank Product Provider to remain outstanding and that are not required by the provisions of the Credit Agreement to be repaid or cash collateralized. Any reference herein to any Person shall be construed to include such Person’s successors and assigns. Any requirement of a writing contained herein or in any other Loan Document shall be satisfied by the transmission of a Record and any Record so transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein.

[signature page follows]

Exhibit D
3

     IN WITNESS WHEREOF, each Grantor has caused this Trademark Security Agreement to be executed and delivered by its duly authorized officer as of the date first set forth above.

By:

Name:

Title:

By:

Name:

Title:

ACCEPTED AND ACKNOWLEDGED BY:

WELLS FARGO FOOTHILL, INC., as Agent

By:

Name:

Title:

Exhibit D
4

SCHEDULE I
to
TRADEMARK SECURITY AGREEMENT

Trademark Registrations/Applications

			Application/
Grantor	Country	Mark	Registration No.	App/Reg Date

Schedule 1 to Trademark Security Agreement

EX-21.1

Exhibit 21.1

SUBSIDIARIES

Bookham Technology plc, a UK corporation
Onetta, Inc., a Delaware corporation
Bookham (US) Inc., a Delaware corporation
Ignis Optics, Inc., a Delaware corporation
Bookham Technology KK, a Japanese corporation
Bookham (Canada), Inc., an Ottawa, Canada corporation
Bookham (Switzerland) AG, a Swiss corporation
Bookham International Ltd., a Cayman Islands company
Bookham Technology (Shenzhen) (FFTZ) Co. Ltd., a People’s Republic of China company
New Focus, Inc., a Delaware corporation
Focused Research, Inc., a California corporation
New Focus FSC, Inc., a Barbados corporation
New Focus GmbH, a German corporation
Globe Y. Technology, Inc., a California corporation
Bookham Nominees Ltd., a UK company
Avalon Photonics AG, a Swiss corporation
Forthaven Limited, a UK company

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8/A Nos. 333-113341 and 333-13388 and Form S-8 Nos. 333-119011 and 333-129825 and Form S-3 Nos. 333-122630 and 333-133460 and Form S-3/A Nos. 333-127546 and 333-132069 and Form S-3 MEF No. 333-128944) of Bookham, Inc. of our reports dated September 11, 2006, with respect to the consolidated financial statements and schedule of Bookham, Inc., Bookham, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Bookham, Inc., included in this Annual Report (Form 10-K) for the year ended July 1, 2006

/s/ Ernst & Young LLP

San Jose, California
September 14, 2006

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8/A Nos. 333-113341 and 333-13388 and Form S-8 Nos. 333-119011 and 333-129825 and Form S-3 Nos. 333-122630 and 333-133460 and Form S-3/A Nos. 333-127456 and 333-132069 and Form S-3 MEF No. 333-128944) of Bookham, Inc. of our report dated September 8, 2005, with respect to the consolidated financial statements and schedule of Bookham, Inc., included in this Annual Report (Form 10-K) for the year ended July 1, 2006

/s/ Ernst & Young LLP

Reading, England
September 14, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Giorgio Anania, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Bookham, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: September 14, 2006	/s/ Giorgio Anania
	Giorgio Anania Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Stephen Abely, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Bookham, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: September 14, 2006	/s/ Stephen Abely
	Stephen Abely Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report on Form 10-K of Bookham, Inc. (the “Company”) for the period ended July 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Giorgio Anania, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 14, 2006	/s/ Giorgio Anania
	Giorgio Anania Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report on Form 10-K of Bookham, Inc. (the “Company”) for the period ended July 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Stephen Abely, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 14, 2006	/s/ Stephen Abely
	Stephen Abely Chief Financial Officer