Subsequent Event - Impact of Thailand Floods on our operations

Background

On October 24, 2011, our primary contract manufacturer announced that, as a result of the flooding in Thailand, it had suspended operations at its facility that is used to manufacture certain of our fiber optics products. Rising water penetrated the facility and submerged most of our manufacturing and test equipment as well as our inventory at the facility.

Strategic Plan

Over the last two months, we have developed and implemented alternative manufacturing plans in our own facilities in China and in the U.S. to meet the needs of our customers. Concurrently, we have been focusing on rebuilding our high-volume manufacturing infrastructure at other Thailand locations supported by our contract manufacturer and at our own manufacturing facility in China. We have been working closely with our insurance carriers, banks, customers, and business partners to address short-term liquidity requirements and we and our manufacturing partners have placed purchase orders for long lead-time capital equipment. We expect to complete the rebuild and product qualification for our major product lines in our third quarter of fiscal 2012.

As a result of the flood, certain inventory and fixed assets were damaged or destroyed. Our contract manufacturer is required under its production agreement with us to reimburse us for losses to fixed assets and inventory incurred while at the manufacturer's facilities. We are working with our contract manufacturer (and the contract manufacturer's insurance carrier) to receive insurance proceeds to cover the direct damages to our assets that were impacted by the flood. We are not a named beneficiary of our contract manufacturer's insurance policy. The timing and amounts of the recovery from the contract manufacturer, including insurance proceeds, are uncertain at this time.

Additionally, we claimed damages under our own insurance policy relating to business interruption due to the flooding. To date, we have collected $2.0 million from our policy and we expect to receive an additional $3.0 million by January 2012.

With respect to measures taken to improve liquidity:


•	In November 2011, we implemented various cost reduction measures, including temporary salary reduction, furlough, reduction of discretionary spending including travel, capital expenditures, and development material costs, and improve working capital management. We believe that our cost reduction activities will reduce the overall cost structure of our operations.

We also entered into an agreement with our contract manufacturer whereby our contract manufacturer will purchase equipment to rebuild our affected manufacturing lines for which we will repay our contract manufacturer from insurance proceeds received from that contract manufacturer. Additionally, we restructured our outstanding payables owed to our contract manufacturer, which delayed payments to future dates to coincide with expected timing of insurance proceeds.

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In December 2011, we signed agreements with certain customers pursuant to which they will receive an allocation of our finished goods inventory as well as a percentage of future output from our new production lines being placed into service in fiscal 2012. As consideration, we have received partial prepayments for future product shipments. These advanced payments will be used to support our working capital requirements until we receive the insurance proceeds.

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On December 21, 2011, we signed an amendment to our credit facility with Wells Fargo Bank that increased our eligible borrowing base by up to $10 million by adding to the borrowing base formula 85% of the appraised value of the Company's equipment and 50% of the appraised value of the Company's real estate, for which the appraisals are currently in process. In addition, Wells Fargo Bank reduced our restrictions under the excess availability financial covenant requirement from $7.5 million to $3.5 million through December 2012. The interest rate on outstanding borrowings was increased to LIBOR rate plus four percent. We now expect at least 70% of the total amount of credit under our $35 million credit facility to be available for use based on the revised borrowing base formula during fiscal year 2012.

Financial Impact

Although we have not yet definitively quantified the possible impacts of the flooding in Thailand on our business, we expect that flooding at our primary contract manufacturer in Thailand will have a significant adverse impact on our operations and our ability to meet customer demand for our fiber optics products in the near-term. Our Thailand contract manufacturer historically supported greater than 50 percent of our total fiber optics-related revenue. Our current evaluation is that our fiber optics revenue could be $12 to $15 million less in our first quarter of fiscal 2012 as a result of this natural disaster. There is no assurance that the disruption in our fiscal 2012 fiber optics quarterly revenue will be limited to this range, nor can it be assured that the adverse impact will be limited to the next three fiscal quarters. It is possible that our customers may seek alternative suppliers of comparable products if we are unable to meet their needs. While we believe our insurance coverage, both property and business interruption, will mitigate a portion of the adverse impact, there can be no assurance as to the extent or timing of insurance recoveries. Our Photovoltaics segment has not been affected by the floods in Thailand.

As of December 31, 2011, we will perform an impairment test of our long-lived assets related to our Fiber Optics segment. The outcome of these tests may result in recording of impairment charges. We expect to write-off the carrying value of damaged equipment and inventory which is estimated to be in the range of $10 to $20 million. Insurance proceeds including recoveries from our contract manufacturer will be recorded as a gain upon receipt.