AnnuAl RepoRt 2007 by wuyunyi

VIEWS: 2 PAGES: 156

									Capitalizing on
next-generation networks   AnnuAl RepoRt 2007
Our prOfile                                           Our missiOn                                              Welcome
ADVA Optical Networking is at the forefront of pro-   ADVA Optical Networking is creating tomorrow. Our
viding Optical+Ethernet solutions that advance        mission is to be the global leader of Optical+Ethernet
next-generation networks for data, storage, voice     transport solutions that ADVANCE next-genera-
and video services.                                   tion networks for data, storage, voice and video
                                                      services.
ADVA Optical Networking’s strength comes from
passionate and dedicated employees, all sharing a
common vision: a fast, customized response to cus-
tomers’ ever-changing needs.

Our innovative Fiber Service Platform (FSP) and
strong customer focus provide carriers and enter-
prises with the ability to scale their networks and
deliver intelligent, competitive new services.

ADVA Optical Networking’s solutions have been de-
ployed at more than 200 carriers and 10,000 enter-
prises around the world.
Our ADVAntAges
                                                                                                                                                                WElcOME




focus on a high-growth market segment                                         Broad customer base                                                              MANAgEMENt
                                                                                                                                                                 BOArD



•	 We focus on a high-growth market segment in the tele-                      •	 Our Optical+Ethernet solutions have been deployed by more
   com space: Optical+Ethernet transport.                                        than 200 carriers and more than 10,000 enterprises.                           SuPErViSOry
                                                                                                                                                                  BOArD
•	 this market segment is driven by the shift from legacy                     •	 We distribute worldwide, with 63% of our 2007 revenues
   purpose-built networks to next-generation multi-purpose                       generated in EMEA, 33% in the Americas and 4% in Asia-
   networks, where Optical+Ethernet technology provides                          Pacific.
   the underlying foundation.                                                                                                                                   cOrPOrAtE
                                                                                                                                                               gOVErNANcE
                                                                              •	 ADVA Optical Networking has a loyal customer base,
•	 growth in this segment is expected to be 22% per year                         with more than 80% of our revenues from repeat
   between 2007 and 2010,1 similar to the rates seen since                       purchasing.4
   2005.
                                                                                                                                                                 StOck

                                                                              strengthened executive team
Optical+ethernet innovation

                                                                              •	 cEO Brian Protiva founded ADVA Optical Networking in                           iNVEStOr
                                                                                                                                                                rElAtiONS
•	 ADVA Optical Networking’s industry-leading engineering                        1994 and has since driven the growth of the company.
   force is exclusively focused on Optical+Ethernet innova-
   tion, outperforming engineering departments of other ven-                  •	 Deputy cEO and cOO Jürgen Hansjosten came on board in
   dors in this space.                                                           2000, has successfully expanded our broad customer base                        BuSiNESS
                                                                                 and today runs and optimizes global operations.                                OVErViEW
•	 Our focus on innovation drives market success and has
   made us the #1 player worldwide for Ethernet access so-                    •	 ctO christoph glingener, cSO christian unterberger, cFO
   lutions 2 and …                                                               Jaswir Singh and cMSO ron Martin joined the executive
                                                                                 team in 2007, bringing multi-year senior management                           MANAgEMENt
                                                                                                                                                                 rEPOrt
•	 … the #2 player in Europe and #4 worldwide in the met-                        background in blue-chip telecommunications equipment
   ro optical market.3                                                           companies to position ADVA Optical Networking for rene-
                                                                                 wed	profitable	growth.
                                                                                                                                                                FiNANciAl
                                                                                                                                                               StAtEMENtS
1
    Source: industry analysts Dell’Oro group, infonetics research, Ovum rHk
    and ADVA Optical Networking internal estimates – October 2007.
2
    Source: infonetics research, October 2007, based on 2006 total revenues
    for Ethernet access devices.                                                                                                                                ADDitiONAl
                                                                              	 Repeat	purchasing	is	defined	as	quarterly	revenues	generated	from	custo-
                                                                              4
                                                                                                                                                               iNFOrMAtiON
3
    Source: Ovum rHk, November 2007, based on Q4 2006 to Q3 2007 total          mers who had generated previous revenues up to two years prior to the
    revenues for metro optical transport equipment.                             current quarter.




                                                                                                                                                           3
    contents


    WelcOme                          2   cOrpOrAte gOVernAnce repOrt         24

    Our	profile	                     2
    Our mission                      2   tHe ADVA OpticAl netWOrKing stOcK   29
    Our ADVAntages                   3
    2007	financial	highlights	       6
    2007 business highlights         7   inVestOr relAtiOns reVieW
                                         AnD finAnciAl cAlenDAr              33

    mAnAgement BOArD                12
                                         Business OVerVieW                   37
    Members and their backgrounds   13
    letter to our shareholders      16   Our mission                         38
                                         technology                          38
                                         Market and growth drivers           39
    superVisOry BOArD               20   Products                            41
                                         Sales regions and customers         43
    Members                         21   Sales and marketing                 44
    report to shareholders          22   Operations                          46
                                         research and development            47
                                         Quality management                  49




4
ifrs grOup mAnAgement repOrt                            51   ifrs cOnsOliDAteD finAnciAl stAtements                    83

Forward-looking statements                              52   consolidated balance sheet                                 84
general economic and market conditions                  52   consolidated income statement                              85
First-time consolidation of Movaz Networks              54   Consolidated	cash	flow	statement		                         86
Business development and operational performance        54   consolidated statement of changes in stockholders’ equity 87
Net	assets	and	financial	position	                      59   Notes	to	the	consolidated	financial	statements	            88
Share capital and shareholder structure                 65   Affirmative	declaration	of	the	Management	Board	          143
Appointment and dismissal of Management Board members   65   independent auditor’s opinion                             144
changes of articles of association                      66
issuance and buy-back of shares                         66
take-over bid driven change of control provisions       67   ADDitiOnAl infOrmAtiOn                                  146
Employees and social responsibility                     67
remuneration of Management and Supervisory Boards       70   Quarterly iFrS income statements 2005-2007               147
Environmental responsibility                            71   Multi-year overview 1997-2007                            148
risk report                                             72   glossary                                                 149
Events after the balance sheet date                     77   corporate information                                    154
Outlook                                                 78




                                                                                                                             5
    2007 FiNANciAl HigHligHtS
    2007 BuSiNESS HigHligHtS




                                2007 finAnciAl HigHligHts


                                (in millions of Eur)

                                   • 2004                           •   2005                         •	2006                            • 2007
                                revenues
                                                                                                                                       251.5
                                                                                                                                      251.5
                                                                                                                                      251.5
                                                                                                     192.7
                                                                                                     192.7
                                                                                                     192.7
                                                                    131.3
                                                                    131.3
                                   102.1
                                   102.1                            131.3
                                   102.1




                                pro forma operating income (ifrs) *

                                                                     19.1
                                                                     19.1
                                                                     19.1
                                   12.9                                                               13.1
                                                                                                      13.1
                                   12.9                                                               13.1

                                                                                                                                         1.8
                                                                                                                                        1.8
                                                                                                                                        1.8


                                cash and cash equivalents (as of December 31)
                                                                                                                                        41.6
                                                                                                                                       41.6
                                                                                                                                       41.6
                                                                                                      32.2
                                                                                                      32.2
                                                                     27.7
                                                                     27.7                             32.2
                                    24.1                             27.7
                                    24.1




                                * Pro forma operating income is calculated prior to non-cash charges related to the stock option programs and
                                  amortization and impairment of goodwill and acquisition-related intangible assets.




6
2007 Business HigHligHts
                                                                                                                       WElcOME




We have continued to ADVAnce in 2007     customer achievements                                                        MANAgEMENt
                                                                                                                        BOArD



•	 Ongoing strong business growth        carrier ethernet access
                                         •	 in Q1, British telecom (Bt) selected ADVA Optical Net-                    SuPErViSOry
•	 Significantly	improved	organization      working	 as	 its	 first	 supplier	 of	 Ethernet	 last-mile	 access	          BOArD
   for	increased	efficiency                 products in Bt’s 21st century Network (21cN), one of
                                            the world’s largest next-generation networks. ADVA Op-
•	 changes in management team               tical Networking’s Ethernet access platform FSP 150ccf-
                                            825 (see Optical+Ethernet innovation) will be deployed                     cOrPOrAtE
                                                                                                                      gOVErNANcE
                                            throughout this network as a critical element of Bt’s offer
                                            of bandwidth-intensive applications, such as internet te-
                                            levision and internet telephony to a wide market of busi-
                                            ness and residential customers. ADVA Optical Networking
                                            has provided key Ethernet access solutions to Bt since                      StOck

                                            2001, supporting Bt’s Ethernet services for business cu-
                                            stomers. Bt has deployed more than 100,000 ADVA Opti-
                                            cal Networking Ethernet access ports to date.
                                                                                                                       iNVEStOr
                                                                                                                       rElAtiONS
                                         •	 in Q1, Exponential-e, the united kingdom’s leading pro-
                                            vider of tailor-made Ethernet solutions to the corporate
                                            market, was announced to deploy products from the ADVA
                                            Optical Networking FSP 150 family into its next-genera-                    BuSiNESS
                                            tion network.                                                              OVErViEW


                                         •	 in Q3, Belgacom selected ADVA Optical Networking and
                                            partner Nokia Siemens Networks as a supplier of Ether-
                                            net access equipment for deployment in its carrier Ether-                 MANAgEMENt
                                                                                                                        rEPOrt
                                            net backbone. ADVA Optical Networking’s FSP 150 intelli-
                                            gent Ethernet family of products will enable Belgacom to
                                            simplify the transport and management of its innovative,
                                            revenue-generating broadband services to enterprise and
                                                                                                                       FiNANciAl
                                            business customers.                                                       StAtEMENtS




                                                                                                                       ADDitiONAl
                                                                                                                      iNFOrMAtiON




                                                                                                                  7
    2007 BuSiNESS HigHligHtS




                               carrier infrastructure
                               •	 in Q1, Deutsche telekom (Dt) signed a multi-year framework            •	 in Q2, u.S.-based local carrier cross telephone in Oklahoma was
                                  contract in collaboration with ADVA Optical Networking and part-         announced to use ADVA Optical Networking’s FSP 3000rE plat-
                                  ner Siemens communications (now Nokia Siemens Networks), for             form	 to	 modernize	 its	 network	 backbone	 for	 profitable	 growth	
                                  the implementation of WDM-based transmission technology in its           in services to business customers, residential users and other
                                  next-generation metro and regional networks, using ADVA Op-              service providers.
                                  tical Networking’s FSP 3000 platform. this implementation en-
                                  ables the provision of triple play services (data, voice and video)   •	 in Q3, Portugal telecom (Pt), in cooperation with ADVA Optical
                                  and other bandwidth-intensive services for Dt’s business and             Networking and partner Nokia Siemens Networks, was announced
                                  residential customers.                                                   to use ADVA Optical Networking’s FSP 3000 platform and FSP Net-
                                                                                                           work Manager in new metro deployments throughout Portugal’s
                               •	 in Q2, Neuf cegetel, the leading alternative carrier in France and       major	cities.	The	new	deployments	enable	PT	to	ease	traffic	con-
                                  one of the world’s most innovative broadband operators, was an-          gestion	and	relieve	fiber	exhaust	in	the	metro	core	as	it	contin-
                                  nounced to deploy ADVA Optical Networking’s FSP 3000 to expand           ues to roll out new bandwidth-intensive business and residential
                                  its optical metro core and regional networks. this expansion al-         services to a wider market.
                                  lows	Neuf	Cegetel	to	accommodate	the	growth	in	its	DSL	traffic,	
                                  benefit	from	extra	bandwidth	capacity,	connect	core	routers	and	
                                  offer enhanced business solutions and wholesale services.




8
enterprise networks
                                                                                                                                           WElcOME
•	 in Q1, the university of Arkansas in the u.S. was announced     •	 in Q3, the university of illinois in the u.S. was announced
   to have successfully deployed ADVA Optical Networking’s            to use ADVA Optical Networking’s FSP 3000rE platform
   FSP 3000rE platform to link to state, regional, national and       to expand both its intercampus data network and the net-
   international research-and-education infrastructures.              works	of	its	three	main	campuses	in	Chicago,	Springfield	
                                                                      and urbana-champaign.                                               MANAgEMENt
                                                                                                                                            BOArD
•	 in Q1, the german research Network (Deutsches For-
   schungsnetz, DFN) was announced to have successfully            •	 in Q3, the lonestar Education and research Network
   deployed ADVA Optical Networking’s FSP 3000 platform               (lEArN) in the u.S. was announced to use ADVA Opti-
   within the framework of the Vertically integrated Opti-            cal Networking’s FSP 3000rE platform as part of its on-             SuPErViSOry
   cal testbed for large Applications (ViOlA) research proj-          going expansion to 14 cities and 25 colleges and univer-               BOArD
   ect. ViOlA is a collaborative project involving universi-          sities across texas.
   ties, research institutes, industrial companies and the DFN
   organization.                                                   •	 in Q4, the university of Alabama System in the u.S. was an-
                                                                      nounced to deploy ADVA Optical Networking’s FSP 3000rE               cOrPOrAtE
                                                                                                                                          gOVErNANcE
•	 in Q2, Derby city council, one of the united kingdom’s lead-       platform to connect National Aeronautics and Space Ad-
   ing unitary local governments, in cooperation with ADVA            ministration (NASA) facilities through a collaboration of lo-
   Optical	 Networking	 and	 partner	 Affiniti,	 was	 announced	      cal, regional and national optical networks.
   to use ADVA Optical Networking’s FSP 2000 platform to
   create a network that connects its city center locations.       •	 in Q4, MBO Video in the u.S. was announced to use ADVA                StOck

   the new deployment enables Derby city council to op-               Optical Networking’s FSP 3000rE platform to provide vid-
   erate high-bandwidth applications, access shared services,         eo transport for a major Oklahoma-wide internet-based vi-
   streamline its communication systems and enhance busi-             deo network that connects universities, colleges and sec-
   ness continuity solutions.                                         ondary educational facilities for distance learning applica-         iNVEStOr
                                                                                                                                           rElAtiONS
                                                                      tions, as well as a wholesale video network that enables
                                                                      service providers to deliver digital video services.

                                                                                                                                           BuSiNESS
                                                                                                                                           OVErViEW




                                                                                                                                          MANAgEMENt
                                                                                                                                            rEPOrt




                                                                                                                                           FiNANciAl
                                                                                                                                          StAtEMENtS




                                                                                                                                           ADDitiONAl
                                                                                                                                          iNFOrMAtiON




                                                                                                                                      9
 BuSiNESS HigHligHtS 2007




                            Optical+ethernet innovation                                         management Board changes

                            •	 in Q1, ADVA Optical Networking launched the latest               today, the Management Board of ADVA Optical Networking
                               member of its market-leading FSP 150 family of intelli-          consists of six members:
                               gent Ethernet access products – the FSP 150ccf-825. this
                               new	product	is	one	of	the	world’s	first	carrier-class	next-      •	 Brian	Protiva,	Chief	Executive	Officer	(CEO)
                               generation Ethernet access solutions, delivering previ-
                               ously unattainable levels of service demarcation, strict         •	 Jürgen Hansjosten, Deputy cEO and
                               monitoring of service level agreements and advanced re-             Chief	Operating	Officer	(COO)
                               mote operations, administration and maintenance. the
                               FSP	150CCf-825	at	current	is	the	flagship	member	of	the	         •	 Christoph	Glingener,	Chief	Technology	Officer	(CTO)
                               FSP 150 family and has already been selected for deploy-
                               ment in British telecom’s 21st century Network (see cus-         •	 Christian	Unterberger,	Chief	Sales	Officer	(CSO)
                               tomer achievements).
                                                                                                •	 Jaswir	Singh,	Chief	Financial	Officer	(CFO)
                            •	 in Q2, ADVA Optical Networking launched the latest release
                               of	its	flagship	optical	platform,	the	FSP	3000	release	8.	The	   •	 Ron	Martin,	Chief	Marketing	&	Strategy	Officer	(CMSO)
                               platform	gives	service	providers	and	enterprises	more	flex-
                               ibility in delivering new services, as well as a greater abil-
                               ity to scale their networks. the intelligent integration of
                               Optical+Ethernet technologies provides a scalable easy-          Brian Protiva and Jürgen Hansjosten have been in their cur-
                               to-use foundation for next-generation networks.                  rent roles before the beginning of 2007. christoph glingener,
                                                                                                christian unterberger, Jaswir Singh and ron Martin joined
                                                                                                the Management Board in 2007:

                                                                                                •	 in Q1, christoph glingener was promoted to the newly cre-
                                                                                                   ated ctO position. Since his appointment, christoph has
                                                                                                   been leading ADVA Optical Networking’s strategic prod-
                                                                                                   uct development efforts, in addition to all engineering,
                                                                                                   research and development activities across sites in Eu-
                                                                                                   rope, the united States and china. christoph brings a long
                                                                                                   and extensive background in optical and Ethernet net-
                                                                                                   working product development and research, gained at Mar-
                                                                                                   coni communications (now Ericsson) and Siemens com-
                                                                                                   munications (now Nokia Siemens Networks).




10
•	 in Q4, christian unterberger took the position of cSO.          •	 Finally, also in Q4, ron Martin took over the position of
                                                                                                                                            WElcOME
   Since joining the company, christian has been enhancing            cMSO and president of all ADVA Optical Networking North
   the company’s global sales strategy, including direct, re-         American subsidiaries from Brian Mccann, who became
   seller and Original Equipment Manufacturer (OEM) distri-           the founding president of ADVA Optical Networking North
   bution channels. in addition, he is expanding the regio-           America	in	1996	and	an	officer	of	the	company	since	2000.	
   nal sales organizations to focus on selling to key accounts        Brian remains with ADVA Optical Networking and serves in             MANAgEMENt
                                                                                                                                             BOArD
   and developing market share via new customer and verti-            the newly created position of senior vice president of cor-
   cal segment targets. Deputy cEO and cOO Jürgen Hans-               porate marketing and strategy. ron will solidify and further
   josten, who previously held a combined cOO / cSO role,             expand ADVA Optical Networking’s position in the critical
   continues to oversee daily global operational responsibi-          North American market. As president of all North Ameri-              SuPErViSOry
   lity. christian brings to ADVA Optical Networking extensive        can entities, he assumed full legal responsibilities and di-            BOArD
   sales experience in the telecommunications industry. Prior         rectly drives the regional sales organization for increased
   to joining ADVA Optical Networking, he was with Siemens            market	share	and	profitability.	As	CMSO,	Ron	is	charged	
   communications (now Nokia Siemens Networks) for more               with	helping	define	the	future	vision	of	the	company,	in-
   than 20 years, where he climbed through the ranks, hol-            cluding determining product positioning and market launch             cOrPOrAtE
                                                                                                                                           gOVErNANcE
   ding sales and management positions with increasing re-            strategies, building the portfolio of merger and acquisition
   sponsibility, including positions overseeing Europe, Middle        opportunities and creating an even stronger global brand
   East,	Africa	and	Asia-Pacific.	He	concluded	his	career	at	         identity. ron came to ADVA Optical Networking from cisco
   Siemens communications as president of the company’s               Systems, where he held various roles, including vice pres-
   global Fixed Networks business prior to being appointed            ident and general manager of the worldwide optical busi-               StOck

   as head of the Service core and Applications business at           ness and service provider development. ron recently was
   Nokia Siemens Networks.                                            part	of	a	team	that	led	the	integration	of	the	Scientific	At-
                                                                      lanta sales and marketing organizations. While at cisco, he
•	 in Q4, Jaswir Singh took over the position of cFO from             held responsibility for a team of more than 1,000 people              iNVEStOr
                                                                                                                                            rElAtiONS
   Andreas rutsch, who had served in this position since 1999.        and a revenue base of approximately uSD 1 billion. Prior
   Jaswir will introduce the next stage of evolution to ADVA          to cisco, ron spent 15 years at Fujitsu Network commu-
   Optical	Networking’s	financial	and	commercial	management	          nications (FNc), where he ended his tenure as Executive
   processes, enabling upcoming growth. With more than 20             Vice	President	and	Chief	Operating	Officer.	At	FNC,	he	set	           BuSiNESS
   years of international experience in senior management and         the direction for growth to a uSD 2.8 billion business and            OVErViEW
   cFO roles for numerous telecommunications and high-tech            oversaw	a	team	of	more	than	3,000	employees	across	five	
   companies,	Jaswir	has	led	financial	and	business	manage-           locations in the u.S. and one in ireland.
   ment teams in several parts of the world. Most recently,
   he held cFO and senior business management positions at                                                                                 MANAgEMENt
                                                                                                                                             rEPOrt
   Nokia, inc., the multi-billion dollar North American subsi-
   diary of Nokia; AirDefense, inc.; and Equant, inc., a mem-
   ber of the France telecom group (now Orange Business
   Services). He has led international teams based in Europe,
                                                                                                                                            FiNANciAl
   North	America	and	Asia-Pacific,	at	both	public	and	privately	                                                                           StAtEMENtS
   held companies, has been responsible for growing global
   business	units	and	has	designed	and	implemented	finan-
   cial	processes	and	controls	that	ensured	profitable	growth	
   and a solid footing for the future.                                                                                                      ADDitiONAl
                                                                                                                                           iNFOrMAtiON




                                                                                                                                      11
                                                                   management
                                                                   Board




christoph                                                Brian
glingener   Jaswir                              ron      Protiva
            Singh    christian     Jürgen       Martin
                     unterberger   Hansjosten
memBers AnD tHeir
                                                                                                                                               WElcOME
BAcKgrOunDs

ADVA Optical Networking is led by a dynamic, international and       Brian protiva,	Chief	Executive	Officer	(CEO)
highly-motivated team. leading, supporting and directing the         Jürgen Hansjosten, Deputy cEO and                                        MANAgEMENt
                                                                                                                                                BOArD
firm’s	rapid	growth	are	our	six	executive	officers:                  Chief	Operating	Officer	(COO)
                                                                     christoph glingener,	Chief	Technology	Officer	(CTO)
                                                                     ron martin,	Chief	Marketing	&	Strategy	Officer	(CMSO)
                                                                     Jaswir singh,	Chief	Financial	Officer	(CFO)                              SuPErViSOry
                                                                     christian unterberger,	Chief	Sales	Officer	(CSO)                            BOArD



Brian protiva                                                        Jürgen Hansjosten
Chief	Executive	Officer	(CEO)                                        Deputy	CEO	and	Chief	Operating	Officer	(COO)
                                                                                                                                               cOrPOrAtE
                  Bachelor of Science in electrical engineering,                       Diploma in electrical engineering and business         gOVErNANcE

                  Stanford university, uSA                                             administration (Diplom-Wirtschaftsingenieur),
                                                                                       rhenish-Westphalian technical university of
                                                                                       Applied Sciences, Aachen, germany

                                                                                                                                                StOck




Brian Protiva co-founded ADVA Optical Networking in 1994 and,        Jürgen Hansjosten joined ADVA Optical Networking in 2000 as               iNVEStOr
                                                                                                                                               rElAtiONS
as one of two managing directors, he initially focused on creating   vice president of sales for Europe, Middle East, Africa (EMEA)
ADVA Optical Networking’s marketing, sales and growth strat-         and latin America (lA), and successfully positioned the company
egy. in 2001, with the change of the Management Board struc-         with carriers, expanded the EMEA / lA team by 35 sales person-
ture to emulate a u.S. company structure, Brian was appointed        nel and grew annual revenues over 200%. in 2001, Jürgen be-
                                                                                                                                               BuSiNESS
cEO and set in motion the strategies that fuel the company’s         came a member of the Management Board and assumed global                  OVErViEW
success today. under his leadership, ADVA Optical Networking         responsibility for the sales organization, growing ADVA Optical
advanced to become the global market leader in Ethernet access       Networking’s large customer base and maintaining stable reve-
devices and one of the top players in metro Wavelength Division      nues	during	the	difficult	industry	downturn.	In	2004,	he	assumed	
Multiplexing (WDM) worldwide. to date, ADVA Optical Network-         even greater responsibility, overseeing the company’s full scope         MANAgEMENt
                                                                                                                                                rEPOrt
ing’s innovative Optical+Ethernet solutions have been deployed       of operations and was named cOO. Jürgen added the respon-
with more than 10,000 enterprises and more than 200 carriers         sibility of Deputy cEO in 2007, where he now steers the global
around the world. revenues reached more than Eur 250 million         daily operations of ADVA Optical Networking and supports Brian
in 2007, while employment climbed to more than 1,000 employ-         in developing the company vision and coordinating the cross-
                                                                                                                                               FiNANciAl
ees at year-end 2007. Prior to ADVA Optical Networking, Brian        functional group activities. With christian assuming the cSO             StAtEMENtS
was managing director at AMS technologies (now the EgOrA             role in October 2007, Jürgen handed over his sales responsibil-
group), which he joined in 1987 and where he focused on co-          ity and continues his focus on operations. Prior to ADVA Optical
managing its subsidiaries.                                           Networking, Jürgen spent seven years at Siemens communica-
                                                                     tions (now Nokia Siemens Networks) and concluded his career               ADDitiONAl
                                                                                                                                              iNFOrMAtiON
                                                                     there as the Senior Vice President of Sales, Europe.




                                                                                                                                         13
 MEMBErS AND tHEir
 BAckgrOuNDS




                     christoph glingener                                                 ron martin
                     Chief	Technology	Officer	(CTO)                                      Chief	Marketing	&	Strategy	Officer	(CMSO)


                                       Ph.D. in electrical engineering,
                                       university of Dortmund, germany




                     christoph glingener joined ADVA Optical Networking in April         An experienced industry veteran, ron Martin joined ADVA
                     2006 as vice president of engineering, assuming responsibil-        Optical Networking in November 2007 to solidify and fur-
                     ity for all global engineering activities at sites in Europe, the   ther expand the company’s position in the global and North
                     united States and china. christoph brought extensive experi-        American market-places. As president of all North American en-
                     ence to ADVA Optical Networking, gained in leading positions at     tities, he assumed full legal responsibilities and drives the sales
                     Marconi communications (now Ericsson) and before at Siemens         organization	 for	 increased	 market	 share	 and	 profitability.	 As	
                     communications (now Nokia Siemens Networks). in his most re-        CMSO,	Ron	is	charged	with	helping	define	the	Company	vision,	
                     cent role at Marconi / Ericsson, he oversaw the wireless product    including determining product positioning and market launch
                     unit, focusing on strategic product roadmaps, product manage-       strategies, building the portfolio of merger and acquisition oppor-
                     ment, engineering, new product introduction and procurement,        tunities and promoting the company’s global brand identity. ron
                     and was responsible for 360 employees and annual sales of more      came to ADVA Optical Networking from cisco Systems, where he
                     than Eur 200 million. Building on that experience, christoph has    spent	five	years	in	numerous	roles,	including	as	vice	president	
                     focused on strengthening ADVA Optical Networking’s innovative       and general manager of the worldwide optical business and vice
                     Optical+Ethernet	portfolio,	significantly	enhancing	the	Compa-      president of service provider development. He held responsibil-
                     ny’s standing as a global leader. in 2007, christoph assumed the    ity for a team of more than 1,000 people and a revenue base of
                     role of ctO and in addition to his global research and engineer-    approximately uSD 1 billion. Prior to cisco, ron spent 15 years
                     ing responsibilities now leads ADVA Optical Networking’s stra-      at Fujitsu Network communications (FNc), where he ended his
                     tegic materials management team.                                    tenure	as	executive	vice	president	and	chief	operating	officer.	
                                                                                         At FNc, he set the direction for growth to a uSD 2.8 billion busi-
                                                                                         ness and oversaw a team of more than 3,000 employees across
                                                                                         five	locations	in	the	U.S.	and	one	in	Ireland.




14
                                                                                                                                                  WElcOME




                                                                                                                                                 MANAgEMENt
                                                                                                                                                   BOArD




Jaswir singh                                                           christian unterberger
Chief	Financial	Officer	(CFO)                                          Chief	Sales	Officer	(CSO)                                                 SuPErViSOry
                                                                                                                                                    BOArD

                   Master of Advanced Business Practice,
                   university of South Australia, Australia                              Diploma in engineering (Diplom-ingenieur),
                                                                                         university of klagenfurt, Austria
                   Master of Accountancy, with distinction,
                   charles Sturt university, Australia                                                                                            cOrPOrAtE
                                                                                                                                                 gOVErNANcE
                   Bachelor of commerce,
                   university of canterbury, New Zealand
                   Member of the Australian Society of
                   Certified	Public	Accountants

                                                                                                                                                   StOck

Jaswir Singh joined ADVA Optical Networking in November 2007           christian unterberger joined ADVA Optical Networking in October
to enable the company’s next growth stage. He has a long and           2007 to drive corporate sales revenue through a comprehensive
successful background with global telecommunications and high-         and	proactive	global	program,	benefiting	from	extensive	sales	
tech companies, including Nokia, inc. (the North American sub-         experience in the telecommunications industry. Prior to joining            iNVEStOr
                                                                                                                                                  rElAtiONS
sidiary of Nokia); AirDefense, inc; and Equant, inc. (a division       ADVA Optical Networking, christian was appointed head of the
of the France telecom group now known as Orange Business               Service core and Applications business at Nokia Siemens Net-
Services). Jaswir has more than 20 years experience in senior          works, where primary responsibilities included managing the
management and cFO roles, including managing uSD multi-bil-            global activities of the unit. Before that, he was with Siemens
                                                                                                                                                  BuSiNESS
lion	enterprises	globally.	He	has	established	and	led	financial,	      communications (now Nokia Siemens Networks) for 20 years,                  OVErViEW
business operations, customer service, human resources and             where he progressed through the ranks, holding sales and man-
quality management teams in many parts of the world and held           agement positions of increasing responsibility, including posi-
responsibility	for	regional	and	global	profitability.	In	his	global	   tions	overseeing	Europe,	Middle	East,	Africa	and	Asia-Pacific.	He	
finance	roles,	he	has	designed	and	implemented	financial	pro-          concluded his career at Siemens communications as president               MANAgEMENt
                                                                                                                                                   rEPOrt
cesses	and	controls	that	ensured	profitable	growth	and	estab-          of the company’s global Fixed Networks business.
lished metrics and fundamentals that drove positive change for
all company stakeholders. Further, he has successfully estab-
lished legal entities and completed joint ventures, mergers and
                                                                                                                                                  FiNANciAl
acquisitions in many countries.                                                                                                                  StAtEMENtS




                                                                                                                                                  ADDitiONAl
                                                                                                                                                 iNFOrMAtiON




                                                                                                                                            15
 lEttEr tO Our SHArEHOlDErS




                              letter tO Our sHAreHOlDers                                      We consolidated our product portfolio by integrating
                                                                                              multiple internal product platforms and acquired product ar-
                                                                                              chitectures onto common FSP 150 and FSP 3000 hardware
                                                                                              and	software	platforms.	This	makes	us	more	efficient	in	our	
                              Dear shareholders and friends,                                  engineering department and lowers our cost of doing busi-
                                                                                              ness dramatically by scaling volumes of the common archi-
       Major changes          2007 was a year of major change at ADVA Optical Networking.     tectures and reducing the number of product versions. this
       in 2007                We successfully consolidated our product portfolio and our it   in turn allows us to reduce waste, capital needs and complex-
                              applications environment, we built on our global process en-    ity within our business. Most importantly we can now drive
                              vironment to capture all of our more than 1,000 employees       further innovation leadership in our target markets, creating
                              with	one	common	infrastructure,	we	essentially	finalized	the	   additional value for our customers. With our experienced and
                              integration of two acquisitions, Movaz and covaro, and we       well-diversified	engineering	team	focused	on	driving	innova-
                              created a new management team consisting of six very ex-        tion	in	the	Optical+Ethernet	space,	we	possess	a	significant	
                              perienced	executive	officers,	with	four	of	them	new	to	their	   advantage over almost every other global competitor.
                              roles at ADVA Optical Networking.
                                                                                              We consolidated our it landscape by integrating 30 ap-
                              in addition, we grew our organic business, which does not       plications onto three core software architectures including
                              include the revenues from a major Movaz distribution part-      state of the art enterprise resource planning (ErP), customer
                              ner in the u.S., each quarter through Q3 2007. in Q4 2007       relationship management (crM) and product data manage-
                              our organic business weakened due to reduced order input        ment (PDM) platforms. this consolidation cost us both in-
                              from our European customers. We believe that this is related    ternal bandwidth as well as external consulting expenses
                              to the changing macro economic environment creating un-         and loaded our already stretched employee base with extra
                              certainty, coupled with a complex regulatory situation, an      responsibility. So far, all rollouts have gone extremely well,
                              aggressive competitive landscape amongst carriers and a         and both the crM and PDM systems are being used glob-
                              European carrier consolidation wave which is still in its in-   ally. the ErP system, after an already successful rollout in
                              fancy. Nevertheless, ADVA Optical Networking has neither        germany, will go global over the next twelve months. con-
                              lost customers nor market share at existing large custom-       solidating our it landscape also enables us to drive improve-
                              ers and thus the breadth and depth in our customer base         ments in our global processes.
                              will drive long-term growth.

                              Our major Movaz distribution partner in the u.S. in 2007 was
                              challenged with merger-related issues and reduced sales
                              forecasts. the steep decline in revenue starting in Q2 2007
                              was	magnified	by	product	portfolio	decisions	as	well	as	the	
                              logistics mandate to dramatically reduce inventory. this in-
                              ventory is approaching its target level and we have started
                              to receive new orders for future demand. We expect new or-
                              ders to continue and slightly improve moving into 2008.




16
global processes allow us to simplify our business and           We also built a new executive team. While our Deputy
                                                                                                                                            WElcOME
they will enable ADVA Optical Networking to grow and be-         CEO	and	Chief	Operating	Officer	(COO)	Jürgen	Hansjosten	
come a uSD 1 billion business. Our solutions have been de-       and myself continue to be members of ADVA Optical Net-
ployed at more than 200 carriers and 10,000 enterprises          working’s executive team, we added four very experienced
around the world. Without the major investment into our          managers to the team:
consolidated it landscape we would not have been able to                                                                                   MANAgEMENt
                                                                                                                                             BOArD
drive processes which capture all aspects of our business on     •	 christoph glingener, since January 2007, in newly created
a global level. Our development, new product introduction,          role	of	Chief	Technology	Officer	(CTO),	
and business life cycle processes have been globalized and
will now allow us to successfully manage our global reach        •	 christian unterberger, since October 2007, in chief Sales              SuPErViSOry
and customer commitments. global processes are especially           Officer	(CSO)	role,	taking	over	part	of	Jürgen’s	previous	                BOArD
critical for managing the requirements of our global tier 1         responsibility, which was a combined cOO / cSO role,
customers with their distributed organizations.
                                                                 •	 Jaswir Singh, since November 2007, in cFO role, taking
The last steps were taken to essentially finalize our               over from Andreas rutsch and                                            cOrPOrAtE
                                                                                                                                           gOVErNANcE
two acquisitions made in 2006. Both covaro and Movaz,
our	first	U.S.-based	acquisitions,	were	challenging	to	inte-     •	 ron Martin, also since November 2007, in chief Marketing
grate because we did not have global processes or the ap-           &	 Strategy	 Officer	 (CMSO)	 role,	 taking	 over	 from	 Brian	
propriate it systems landscape in place at the beginning of         Mccann, who remains with us in the newly created posi-
2007. concluding these massive changes in our infrastruc-           tion of senior vice president of corporate marketing and                 StOck

ture, as well as building the management team in the u.S.,          strategy.
allow	us	to	take	the	final	steps	to	integrate	both	Covaro	and	
Movaz. Both acquisitions have been strategically very impor-
tant to ADVA Optical Networking, enabling us to expand our       christoph, christian, Jaswir and ron have all been in senior               iNVEStOr
                                                                                                                                            rElAtiONS
key customers, to scale our engineering department and to        roles	in	their	fields	overseeing	very	large	teams	in	blue-chip	
build innovation leadership. the size and complexity of the      companies such as Marconi communications (now Ericsson),
Movaz	acquisition,	most	significantly	the	large	U.S.	distribu-   Siemens communications (now Nokia Siemens Networks),
tion partnership issues, created many challenges which im-       Nokia, France télécom, cisco and Fujitsu Network commu-                    BuSiNESS
pacted	our	financial	results	throughout	2007.                    nications. Each of them proved in prior roles his ability to               OVErViEW
                                                                 grow	complex	organizations	profitably.


                                                                                                                                           MANAgEMENt
                                                                                                                                             rEPOrt




                                                                                                                                            FiNANciAl
                                                                                                                                           StAtEMENtS




                                                                                                                                            ADDitiONAl
                                                                                                                                           iNFOrMAtiON




                                                                                                                                      17
 lEttEr tO Our SHArEHOlDErS




       restructuring          With this new executive team we will drive our sales growth,   Over the last months, we focused on optimizing r & D and
       and numerous                                   &	
                              continue	to	optimize	R	 D	spending	and	efficiency,	further	    operations expenses. in Q1 2008, these activities intensi-
       improvements
       in 2008
                              optimize inventory management which challenged us throug-      fied	and	we	launched	a	focused	restructuring	of	the	Com-
                              hout 2007, and optimize our operations. 2008 will be a chal-   pany. the restructuring initiative encompasses closure of
                              lenging year for many companies, however we believe that       select research and development facilities as well as head-
                              well-positioned companies targeting strong market growth       count reductions across all sites, implying an overall cutback
                              opportunities, companies that respond quickly to short-term    of 7% of employees. the initiative will entail a one-off re-
                              macro environment challenges and companies which lead          structuring charge of around Eur 3.0 million. this consoli-
                              with innovation, will continue to grow and succeed.            dation allows us to both reduce costs and ramp investment
                                                                                             in lower-cost engineering sites in china and Poland. in addi-
                              At the end of 2007, we began to anticipate the current ma-     tion, the consolidation implies the adjustment of our opera-
                              jor uncertainty in the global economy and decided to re-       tions capacity to the new demand environment. this allows
                              structure ADVA Optical Networking. We anticipate stronger      us to reduce our planned operations costs while continuing
                              growth in 2009 and beyond. We will focus on strategic cus-     to execute our operations strategy and achieve our quality
                              tomers and driving sales breadth as well as innovation lead-   goals.	The	restructuring	decisions	have	been	very	difficult,	
                              ership. We are convinced that our annual revenue growth of     but necessary for ADVA Optical Networking to remain the
                              31% (2007), 47% (2006) and 29% (2005) over the last three      global innovation leader in our market space and will allow
                              years, coupled with two acquisitions has created a number of   us	flexibility	in	reacting	to	demand	volatility.
                              inefficient	structures	within	ADVA	Optical	Networking	which	
                              can be optimized.




18
Further,	we	are	driving	dramatic	efficiency	gains	within	our	       We	 are	 confident	 that	 we	 can	 return	 to	 profitable	 growth	
                                                                                                                                               WElcOME
general and administrative functions by reducing the com-           in	2008.	This	will	enable	us	to	financially	support	our	long-
plexity of our global processes as well as focusing on reducing     term strategic goal of becoming the global leader in Optical+
the number of reports, processes and ineffective and unnec-         Ethernet transport solutions. the combination of our people,
essary	controls.	And	finally,	we	will	invest	in	sales	so	that	we	   Optical+Ethernet	innovation	and	profitable	growth	will	be	the	
can continue to outperform the market over the next years           unique differentiation for ADVA Optical Networking to provide             MANAgEMENt
                                                                                                                                                BOArD
as we have done for the better part of a decade.                    a	sustainable	and	profitable	business	model	for	the	benefit	
                                                                    of our shareholders, customers and employees. Most impor-
                                                                    tantly, none of the milestones we’ve achieved to date would
                                                                    have been possible without the loyalty and commitment of                  SuPErViSOry
                                                                    our employees. We thank our incredible employees for the                     BOArD
                                                                    energy and creativity they have shown, and trust their capa-
                                                                    bilities to help us to ADVANCE in the coming years.

                                                                                                                                               cOrPOrAtE
                                                                                                                                              gOVErNANcE

                                                                    March 18, 2008


                                                                                                                                                StOck




                                                                    Brian Protiva
                                                                    Chief Executive Officer                                                    iNVEStOr
                                                                                                                                               rElAtiONS




                                                                                                                                               BuSiNESS
                                                                                                                                               OVErViEW




                                                                                                                                              MANAgEMENt
                                                                                                                                                rEPOrt




                                                                                                                                               FiNANciAl
                                                                                                                                              StAtEMENtS




                                                                                                                                               ADDitiONAl
                                                                                                                                              iNFOrMAtiON




                                                                                                                                         19
supervisory
Board
memBers
                                                                                                                             WElcOME




ADVA Optical Networking’s Supervisory Board consists of a diverse and international group of six seasoned experts
in	their	respective	fields:                                                                                                 MANAgEMENt
                                                                                                                              BOArD



•	 Albert rädler, since 1999                      chairman of the compensation committee
   chairman                                       Member of the Audit committee
                                                                                                                            SuPErViSOry
                                                                                                                               BOArD
                                                  tax adviser, linklaters llP, Munich, germany



•	 Anthony maher, since 2002                      chairman of the Strategic initiatives committee                            cOrPOrAtE
                                                                                                                            gOVErNANcE
   Vice chairman                                  Member of the compensation committee
                                                  Merchant

                                                                                                                              StOck

•	 thomas smach, since 2005                       chairman of the Audit committee
   Vice chairman                                  Member of the Strategic initiatives committee
                                                  Chief	Financial	Officer,	Flextronics	International	Ltd.,	Singapore
                                                                                                                             iNVEStOr
                                                                                                                             rElAtiONS



•	 edward glassmeyer, since 2007                  Member of the compensation committee
                                                  general Partner, Oak investment Partners, l.P., uSA
                                                                                                                             BuSiNESS
                                                                                                                             OVErViEW


•	 Bernd Jäger, since 2001                        Member of the Audit committee
                                                  Member of the compensation committee
                                                                                                                            MANAgEMENt
                                                  Managing Director, Dr. Jäger Beteiligungs-gmbH and                          rEPOrt
                                                  Dr. Jäger consulting gmbH, Bonn, germany


                                                                                                                             FiNANciAl
                                                                                                                            StAtEMENtS
•	 eric protiva, since 1999                       Managing Director, EgOrA Holding gmbH,
                                                  Martinsried / Munich, germany

                                                                                                                             ADDitiONAl
                                                                                                                            iNFOrMAtiON




                                                                                                                       21
 rEPOrt tO SHArEHOlDErS




                             repOrt tO sHAreHOlDers                                            beginning of the year, in order to strengthen the risk man-
                                                                                               agement and compliance system of the company.

                                                                                               the Supervisory Board discussed the organization of the
       Management            The	preceding	year	proved	to	be	a	very	difficult	year	for	the	    company and the group with the Management Board and
       Board consulting      company, in particular at the end of Q4. this also had an         assured	itself	of	the	efficiency	of	this	organization.	The	Man-
       and monitoring
                             impact on the work of the Supervisory Board.                      agement Board submitted all transactions and decisions re-
                                                                                               quiring the approval of the Supervisory Board according
                             the Supervisory Board once again performed all of its legal       to the company articles. the Supervisory Board approved
                             and	mandated	duties	in	the	preceding	fiscal	year,	and	has	        those,	in	particular	the	opening	of	new	branch	offices	of	ADVA	
                             continuously advised the Management Board and closely             Ag Optical Networking in Switzerland and South Africa.
                             monitored its work. the Supervisory Board has been directly
                             involved in the important strategic decisions of the company,     committees
                             which were intensely discussed. to the extent required by         As in the previous year, the Supervisory Board formed three              three commit-
                             legal provisions or by company articles, the Supervisory          committees in 2007: members of the Audit committee were               tees were formed
                                                                                                                                                                          with focus on
                             Board reviewed and approved these decisions. During the           thomas Smach (chairman), Bernd Jäger and Albert rädler;               audit, compensa-
                             six ordinary and seven extraordinary meetings, in which the       members of the compensation committee were Albert                     tion and strategic
                             members of the Management Board regularly participated,           rädler (chairman), Bernd Jäger, Anthony Maher and, newly,            initiatives matters
                             the Management Board consistently, promptly and compre-           Edward glassmeyer; and members of the Strategic initiatives
                             hensively informed the Supervisory Board about important          committee were Anthony Maher (chairman) and thomas
                             business issues such as strategic orientation and planning,       Smach. the committees’ tasks have been to discuss and
                             market development, prospects for growth and current busi-        prepare resolutions for the Board’s plenary meetings. they
                             ness	development,	including	budgeting,	risk	profile	and	risk	     have not been granted decision-making authority. the Au-
                             management. in particular, the chairman and the Vice chair-       dit committee held eight meetings during the course of the
                             men of the Supervisory Board maintained regular commu-            year, whereby in addition to reviewing the consolidated an-
                             nication with individual members of the Management Board          nual	and	three	quarterly	financial	statements,	the	Commit-
                             outside of the scheduled meetings and were kept up-to-date        tee	 discussed	 the	 financial	 condition	 of	 the	 Company,	 the	
                             with respect to current business developments, important          appointment of the auditors for 2007, intra-group trans-
                             transactions and forthcoming decisions.                           fer pricing and the company’s tax situation. the compen-
                                                                                               sation committee met six times during the past year. its
                             core consulting activities                                        discussions focused mainly on the remuneration for mem-
       Focus on current      the consulting activities of the Supervisory Board focused        bers of the Management Board as well as the appointment
       business de-          mainly on the current business development and strategic          of new members of the Management Board. the compensa-
       velopment and
       strategic direction
                             direction of the company. in addition to the acquisition of       tion committee held individual performance appraisals with
                             gryfsoft sp. z o.o. (Poland), which it approved on July 31,       each member of the Management Board, with the results of
                             2007, the Supervisory Board closely monitored and assisted        these assessments impacting Management Board members’
                             further mergers & acquisitions-related activities of the Man-     performance bonuses. the Strategic initiatives committee
                             agement Board. Further, the Supervisory Board monitored           did not formally meet during 2007; however its members
                             and assisted the measures the Management Board decided            regularly discussed, together with the Management Board,
                             upon	in	Q4	2007	to	increase	the	profitability	of	the	Company	     in particular the overall situation of the telecommunications
                             in light of the deteriorating economic situation. At the Super-   industry, the company’s acquisition strategy and the stra-
                             visory Board’s suggestion, the Management Board adopted a         tegic direction with regard to the company’s most impor-
                             group-wide applicable code of conduct and compliance at the       tant partners. reports on the work of the Supervisory Board




22
                      committees were regularly presented and discussed during         plained	net	assets,	the	financial	position	and	the	results	of	
                                                                                                                                                                                  WElcOME
                      the subsequent Supervisory Board plenary meeting.                operations of the company and the group and was available
                                                                                       to answer additional questions from the members of the Su-
                      corporate governance code                                        pervisory Board.
german corporate      the Supervisory Board welcomes and supports the german
governance            corporate governance code and its objectives, and had al-        in view and consideration of these audit reports and on the                               MANAgEMENt
code largely                                                                                                                                                                       BOArD
implemented
                      ready approved compliance with and the implementation            basis of the additional information provided by the audi-
since many years      of most recommendations and proposals of the corporate           tor, the Supervisory Board discussed and examined in de-
                      governance code within the ADVA Optical Networking orga-         tail	 the	 financial	 statements	 and	 management	 reports.	 It	
                      nization in 2002. the Supervisory Board together with the        unanimously approved ADVA Ag Optical Networking’s an-                                     SuPErViSOry
                      Management Board approved ADVA Ag Optical Networking’s           nual	 financial	 statements	 and	 management	 report	 as	 well	                              BOArD
                      declaration of compliance for the year 2007 in accordance        as	 ADVA	 Optical	 Networking’s	 consolidated	 annual	 finan-
                      with section 161 of the german Stock corporation law (Ak-        cial statements and group management report in its meet-
                      tiengesetz, Aktg) in December 2007. this declaration is pub-     ing	on	March	14,	2008.	The	annual	financial	statements	of	
                      lished on the company’s website.                                 ADVA	 AG	 Optical	 Networking	 for	 the	 fiscal	 year	 2007	 are	                          cOrPOrAtE
                                                                                                                                                                                 gOVErNANcE
                                                                                       thereby adopted.
                      Annual financial statements and management reports
Unqualified	audit	    ADVA	 Optical	 Networking’s	 consolidated	 annual	 financial	    changes within the management and
opinions issued       statements as of December 31, 2007 and ADVA Ag Optical           supervisory Boards
                      Networking’s	 annual	 financial	 statements	 as	 of	 December	   the Annual Shareholder Meeting of June 13, 2007, reap-              Appointment of          StOck

                      31, 2007, as well as the group management report and the         pointed all members of the Supervisory Board for another                 three new
                                                                                                                                                           members of the
                      management report of ADVA Ag Optical Networking for the          four years. the Supervisory Board appointed christian                 Management
                      fiscal	year	2007	were	audited	by	the	Company’s	appointed	        unterberger on May 31, 2007 (effective October 1, 2007),                     Board
                      auditor for 2007, Ernst & young Ag Wirtschaftsprüfungsge-        Jaswir Singh on September 26, 2007 (effective November                                     iNVEStOr
                                                                                                                                                                                  rElAtiONS
                      sellschaft Steuerberatungsgesellschaft, Stuttgart, Munich        7, 2007) and ron Martin on October 3, 2007 (effective No-
                      Branch,	who	issued	unqualified	audit	opinions.	Pursuant	to	      vember 15, 2007) as additional members of the Management
                      section 315 a paragraph 1 of the german commercial code          Board. Andreas rutsch resigned as a member of the Man-
                      (Handelsgesetzbuch,	HGB),	the	consolidated	annual	finan-         agement Board effective December 31, 2007. the Supervi-                                    BuSiNESS
                      cial statements have been prepared according to interna-         sory Board thanked Andreas rutsch for his more than eight                                  OVErViEW
                      tional Financial reporting Standards (iFrS). All remarks of      years of service to the company.
                      the auditor were taken up, discussed with the Management
                      Board, and their consideration was ensured.                      the Supervisory Board would like to thank the members of
                                                                                       the Management Board and all employees of the company                                     MANAgEMENt
                                                                                                                                                                                   rEPOrt
Detailed discussion   All auditing materials and reports have been submitted to        for their dedication in a changing environment during the
and unanimous         the Supervisory Board members prior to the meeting of the        preceding year.
approval of the
annual	financial	
                      Supervisory	Board	dealing	with	the	Company’s	2007	finan-
statements and        cial statements. On March 5 and 11, 2008, these materials        March 14, 2008
                                                                                                                                                                                  FiNANciAl
management            were discussed and reviewed in detail by the Audit com-          On behalf of the Supervisory Board:                                                       StAtEMENtS
reports               mittee together with the auditor and in consideration of the
                      auditor’s	report.	The	Audit	Committee	reported	its	findings	
                      to the entire Supervisory Board in its meetings on March
                      12 and 14, 2008. Furthermore, the auditor, present in both       Albert rädler                                                                              ADDitiONAl
                                                                                                                                                                                 iNFOrMAtiON
                      meetings, reported on the material results of the audit, ex-     Chairman of the Supervisory Board




                                                                                                                                                                            23
corporate
governance
report
german corporate   corporate governance is highly valued at ADVA Optical Net-     We believe that it is very important to inform all relevant             compliance
governance                                                                                                                                                                    WElcOME
                   working. the recommendations of the german corporate           and interested parties of developments within the group in             with highest
code largely                                                                                                                                            transparency
implemented
                   governance code in its latest version have been largely im-    a fair and comprehensive manner and comply with the high-          and publication
                   plemented within the ADVA Optical Networking group. Minor      est transparency and publication standards, so that we can      standards is a key
                   deviations from these recommendations will be explained in     establish a solid foundation of trust. For example, we have      priority for ADVA
                   detail in the declaration of compliance and typically result   voluntarily published the individual remuneration of the Man-   Optical Networking         MANAgEMENt
                                                                                                                                                                               BOArD
                   from practical considerations based on circumstances within    agement Board members since 2001. We have already im-
                   the company. the most recent declaration of compliance, as     plemented the existing regulations with few exceptions, such
                   well as earlier declarations are made available on ADVA Op-    that no amendments had to be implemented in 2007.
                   tical Networking’s website for review by shareholders and                                                                                                 SuPErViSOry
                   other interested parties.                                                                                                                                    BOArD




                                                                                                                                                                              cOrPOrAtE
                                                                                                                                                                             gOVErNANcE




                                                                                                                                                                               StOck




                                                                                                                                                                              iNVEStOr
                                                                                                                                                                              rElAtiONS




                                                                                                                                                                              BuSiNESS
                                                                                                                                                                              OVErViEW




                                                                                                                                                                             MANAgEMENt
                                                                                                                                                                               rEPOrt




                                                                                                                                                                              FiNANciAl
                                                                                                                                                                             StAtEMENtS




                                                                                                                                                                              ADDitiONAl
                                                                                                                                                                             iNFOrMAtiON




                                                                                                                                                                        25
 DEclArAtiON OF cOMPliANcE
 ExPlANAtiON OF tHE DEViAtiONS




                             Declaration of compliance


                             On December 17, 2007, the Management Board and the Su-          Age limits for members of the supervisory Board
                             pervisory Board of ADVA Optical Networking issued the fol-      ADVA	Optical	Networking	specifies	an	age	limit	for	members	
                             lowing declaration of compliance for the german corporate       of the Management Board, but not for members of the Su-
                             governance code pursuant to section 161 of the german           pervisory Board (section 5.4.1).
                             Stock corporation law (Aktiengesetz, Aktg):
                                                                                             management Board compensation and
                             “the Management Board and the Supervisory Board of ADVA         annual financial statements
                             Ag Optical Networking (ADVA Optical Networking) welcome         the stock options that the members of the Management
                             and support the german corporate governance code, as            Board receive as part of their compensation are only related
                             well as its pursued goals. Except for the deviations listed     to the share price, not to demanding, relevant comparison
                             below, ADVA Optical Networking complies, and will continue      parameters. therefore, an exclusion of retroactive changes
                             to comply, with all recommendations of the german corpo-        to such performance targets or comparison parameters and
                             rate governance code in the version of June 14, 2007, and       an agreement with the Supervisory Board for their limita-
                             has also complied, with the deviations set forth in the rele-   tion (cap) for extraordinary, unforeseen developments is not
                             vant declarations of compliance, with the recommendations       necessary (section 4.2.3 paragraph 2).
                             of the code in its applicable version:
                                                                                             supervisory Board
        Deviations from      Deductible for D & O insurance                                  ADVA Optical Networking does not require that the
        code recom-          ADVA Optical Networking has taken out a D & O (directors’       chairman of the Supervisory Board shall chair the com-
        mendations
                             and	officers’	liability	insurance)	policy	for	the	Management	   mittee that handles contracts with members of the
                             Board and the Supervisory Board without a deductible (sec-      Management Board (section 5.2 paragraph 2).”
                             tion 3.8 paragraph 2).




26
explanation of the deviations
                                                                                                                                         WElcOME



ADVA Optical Networking complies with the recommenda-              management Board compensation and
tions set forth in the german corporate governance code,           annual financial statements
with the exception of the few deviations set forth in the dec-     the stock options granted to the members of the Manage-              MANAgEMENt
                                                                                                                                          BOArD
laration of compliance in its applicable version. For the extent   ment Board as part of their remuneration do not relate to any
to which these deviations continue to apply in the future, an      “demanding, relevant comparison parameters” (section 4.2.3
explanation is provided below:                                     paragraph 2), but instead only to the share price. thus, in
                                                                   ADVA Optical Networking’s opinion, an exclusion of retroac-          SuPErViSOry
Deductible for D & O insurance                                     tive changes to such performance targets or comparison pa-              BOArD
ADVA Optical Networking believes that the strong motiva-           rameters and an agreement with the Supervisory Board for
tion and keen sense of responsibility in the performance of        their limitation (cap) for extraordinary, unforeseen develop-
their duties displayed by the members of the Management            ments is not necessary (section 4.2.3 paragraph 2).
Board and Supervisory Board is guaranteed, even if the D & O                                                                             cOrPOrAtE
                                                                                                                                        gOVErNANcE
insurance does not contain a deductible (section 3.8). it is       supervisory Board
also unusual and out of the ordinary, particularly from an         Although ADVA Optical Networking does not require that the
international perspective, to set up this type of deductible.      chairman of the Supervisory Board shall chair the commit-
therefore, in support of an international Supervisory Board        tee that handles contracts with members of the Management
and Management Board, ADVA Optical Networking refrains             Board (section 5.2 paragraph 2), the chairman of the Super-            StOck

from this type of deductible.                                      visory Board is currently chairing this committee.

Age limits for members of the supervisory Board
ADVA Optical Networking considers the setting of an age limit                                                                            iNVEStOr
                                                                                                                                         rElAtiONS
for members of the Supervisory Board (section 5.4.1) to be
an inappropriate limitation of shareholder rights when se-
lecting the members of the Supervisory Board. Suitability to
serve as a member of the Supervisory Board should depend                                                                                 BuSiNESS
on	a	person’s	qualifications	and	not	on	his	or	her	age.                                                                                  OVErViEW




                                                                                                                                        MANAgEMENt
                                                                                                                                          rEPOrt




                                                                                                                                         FiNANciAl
                                                                                                                                        StAtEMENtS




                                                                                                                                         ADDitiONAl
                                                                                                                                        iNFOrMAtiON




                                                                                                                                   27
stock
                     tHe ADVA OpticAl netWOrKing                                                      stock information 3
                                                                                                                                                                                  WElcOME
                     stOcK

                                                                                                                                                 iSiN DE0005103006/WkN
                                                                                                          trade name                                                             MANAgEMENt

Disappointing        the price of ADVA Optical Networking’s share decreased in                                                                   510300                            BOArD

share price devel-   2007, from Eur 8.60 on December 31, 2006 to Eur 3.42 on
opment in 2007
                     December 31, 2007. this represents a decline of Eur 5.18,                            Symbol                                 ADV
                     or	 60.2%	 for	 the	 year.	 The	 share	 significantly	 underper-                                                                                            SuPErViSOry
                     formed the broad Nasdaq composite index (+7%) and the                                                                                                          BOArD
                                                                                                                                                 Prime Standard Segment,
                     tecDAx (+29%), the average for major technology stocks in                            Exchange
                                                                                                                                                 Frankfurt Stock Exchange
                     the Frankfurt Stock Exchange’s Prime Standard segment.
                     the company’s share price also underperformed a portfolio
                     of telecommunication equipment stocks 1 (-3%).                                       Sector                                 technology                       cOrPOrAtE
                                                                                                                                                                                 gOVErNANcE

High	free	float      As of December 31, 2007, the company’s nominal share
                                                                                                                                                 communications
                     capital totaled Eur 45,992,443, an increase of Eur 628,904                           industry
                                                                                                                                                 technology
                     since December 31, 2006.2 As for the shareholder structure
                     of	ADVA	Optical	Networking,	at	the	end	of	2007	free	float	                           Number of shares
                                                                                                                                                                                   StOck

                     equaled 86.2%, including 2.1% of outstanding ADVA Opti-                              outstanding                            45,992,443
                     cal Networking stock held directly by members of the Man-                            at year-end 2007
                     agement and Supervisory Boards, while major shareholder
                     EgOrA group held 13.8%. compared to the end of 2006,                                 2007 high/low price                    Eur 9.44/Eur 3.39                iNVEStOr
                                                                                                                                                                                  rElAtiONS
                     free	float	rose	by	0.2%	points,	due	to	the	issuance	of	shares	
                     related to the exercise of employee stock options and option
                     bonds. During 2007, the company did not utilize the share                            2007 year-end price                    Eur 3.42
                     buyback authorized at the annual shareholders’ meeting in                                                                                                    BuSiNESS
                     June 2006.                                                                                                                                                   OVErViEW
                                                                                                          2007 year-end
                                                                                                                                                 Eur 157.3 million
                                                                                                          market capitalization

                                                                                                          2006 year-end price                    Eur 8.60                        MANAgEMENt
                                                                                                                                                                                   rEPOrt

                     		 Companies	included	in	this	portfolio	are:	Adtran,	Ciena,	ECI	Telecom/Infi-
                     1
                                                                                                          2007 share price
                        nera, Foundry Networks and tellabs. Since Eci telecom was taken private                                                  -60.2%
                        and became de-listed at the end of September 2007, it has been replaced           performance
                        by	Infinera	since.                                                                                                                                        FiNANciAl
                     2
                         the higher share capital is attributable to a total of 628,904 new shares.                                                                              StAtEMENtS

                         these new shares were issued related to the exercise of employee stock
                         options from conditional capital in 2007 as well as related to a capital
                         increase from authorized capital following the exercise of employee option
                         bonds exercised in 2006, which was entered into the commercial register
                                                                                                                                                                                  ADDitiONAl
                         in 2007. the new shares issued in 2007 for the exercise of employee stock
                                                                                                                                                                                 iNFOrMAtiON
                         options and the option bonds will only be recorded in the commercial
                         register in 2008.                                                            3
                                                                                                          Price information based on xetra closing prices.




                                                                                                                                                                            29
 SHArEHOlDEr StructurE
 PricE DEVElOPMENt 2007




                           shareholder structure                                                                       &	
                                                                                                  only	 moderately	 (S	 P	 500:	 +4%),	 with	 the	 financial	 sec-
                                                                                                  tor underperforming other industries. the development of
                                                                                                  the Japanese equity market was disappointing (Nikkei 225:
                                  2006 year end                     2007 year end                 -11%), related to lackluster domestic and international de-
                                                                                                  mand. technology stocks tended to perform slightly better
                                                                                                  than the overall market indices in 2007. the technology sec-                 technology
                                              14.0%                             13.8%                                                                                     stocks tended to
                                                                                                  tor,	in	general,	benefited	from	lower	debt	financing	related	
                                                                                                                                                                           outperform the
                                                                                                  to the global credit crunch (Nasdaq composite: +10%). in                  overall market
                                                                                                  germany, the strong demand for alternative energies, com-
                                                                                                  bined with high oil prices and climate protection efforts gave
                                                                                                  a major push to technology stocks (tecDAx: +29%).

                                                                                                  in 2007, ADVA Optical Networking’s share price was unable to                ADVA Optical
                            86.0%                             86.2%                                                                                                           Networking’s
                                                                                                  continue its upward trend of prior years (2006: +40%, 2005:
                                                                                                                                                                           share price was
                                                                                                  +36%).	Through	February,	without	major	industry	news	flow,	
                                                 Shares outstanding                                                                                                     unable to continue
                                                                                                  the	 share	 price	 developed	 flattish.	 With	 tailwind	 from	 the	     its upward trend
                                     45,363,539                        45,992,443                 announcement of British telecom’s selection of ADVA Opti-                   of prior years
                                                                                                  cal	Networking	as	the	first	supplier	of	Ethernet	access	de-
                                     • Free	float                   • EgOrA group                 vices for their 21st century Network, on February 23, 2007,
                                                                                                  at Eur 9.44, our share price reached its high for the year.
        Equity markets     Overall, global equity markets grew only moderately in 2007.           in March, the release of our Q4 2006 numbers and the an-
        developed weaker   On a local currency basis, in 2007, the MSci World index               nouncement	of	a	first	revenue	and	profitability	guidance	for	
        in 2007 than in
        the prior year
                           climbed	around	3%,	significantly	less	than	in	the	previous	            2007 led to a slight market disappointment due to the de-
                           year. While strong global growth and earnings as well as               ferral of some revenues from Q4 2006 into Q1 2007. Still,
                           brisk merger & acquisition activity drove equity markets in            2007 guidance numbers at the time were in line with mar-
                           many	 countries	 to	 new	 all-time	 highs	 during	 the	 first	 half	   ket expectations. in the second half of April, mixed indus-
                           of 2007, investors grew concerned about escalating issues              try news on market growth had further negative impact on
                           in	the	financial	sector.	This	development	was	driven	by	the	           our share price. With the release of our Q1 2007 numbers in
                           subprime mortgage crisis in the u.S. which became appar-               early	May,	we	reduced	our	revenues	and	profitability	outlook	
                           ent with the faltering of several hedge funds and mortgage             for the remainder of the year, driven by the dramatic reduc-
                           houses in the second half of 2007 and led to a world-wide              tion in revenue contribution from one major u.S. distribu-
                           credit crunch. However, due to lowered interest rates in the           tion channel in Q2 and Q3 2007, but otherwise still strong
                           u.S. and ongoing strong economic growth in the emerging                underlying growth. in early August, with the release of our
                           markets,	and	despite	significant	volatility,	overall	global	eq-        Q2	2007	numbers,	we	adjusted	our	profitability	outlook	for	
        By tendency,       uity markets were slightly up for the year. Emerging markets           the remainder of the year once more, largely due to a slower
        equity markets     were up strongest in 2007 (MSci Emerging Markets index on              gross margin ramp-up than originally expected as a result
        in emerging
        countries devel-
                           a local currency basis: +30%), with china and india leading            of the integration of initially low gross margin Movaz oper-
        oped better than   the pack as they did in 2006. European equity markets per-             ations acquired in mid-2006. Q3 2007 numbers were in line
        in high-income     formed much more moderately (Euro Stoxx 50: +7%), with                 with guidance in early November. yet, based on a tempo-
        countries          germany at the top of the list of Western European coun-               rary and industry-wide weakness in spending from our larg-
                           tries (DAx: +19%), largely based on strong earnings and                est customers in Q4, we had to decrease our revenue and
                           favorable impact of the weakened Eur / uSD exchange rate               profitability	outlook	for	the	remaining	quarter	of	2007.	We	
                           to the export-heavy german industry. the u.S. market rose              found this weakness to be more pronounced than originally




30
                   expected, resulting in a fourth adjustment of our revenue           price development 2007 in comparison
                                                                                                                                                                                    WElcOME
                   and	profitability	expectations,	as	published	in	an	ad-hoc	re-       (in %, indexed)
                   lease on December 21. With this, on December 27, 2007,
                   at Eur 3.39, our share price reached the low for the year.
                   ADVA Optical Networking ended 2007 with a share price of
                   Eur 3.42 and a market valuation of Eur 157.3 million, down          150                                                                              150        MANAgEMENt
                                                                                       140                                                                              140          BOArD
                   60% for the year.                                                   130                                                                              130
                                                                                       120                                                                              120
ADVA Optical       compared to other listed telecommunication equipment peer           110                                                                              110
Networking’s       group companies, at year-end 2007 ADVA Optical Networking           100                                                                              100
                                                                                        90                                                                              90         SuPErViSOry
valuation is low
when compared
                   held an aggregate valuation at the lower end of the spectrum.        80                                                                              80            BOArD

to industry peer   currently, as of March 12, 2008, ADVA Optical Networking             70                                                                              70
group companies    has reached a market capitalization of Eur 77.3 million at a         60                                                                              60
                                                                                        50                                                                              50
                   share	price	of	EUR	1.68,	significantly	below	year-end	2007	
                                                                                        40                                                                              40
                   levels. the valuation gap vis-à-vis our peer group shows a           30                                                                              30
                                                                                                                                                                                    cOrPOrAtE
                                                                                                                                                                                   gOVErNANcE
                                                                            /	
                   significant	 discount	 on	 the	basis	of	enterprise	 value	 sales	         Jan.   Feb.   Mar. Apr.   May   Jun.   Jul.   Aug. Sep. Oct.   Nov. Dec.

                                          /	
                   and	enterprise	value	 operating	profit	ratios	for	2008.	We	be-
                   lieve that returning successful operating performance and           • ADVA Optical Networking • Peer group                        *

                   successful	growth	will	be	reflected	in	appropriate	valuation	
                   levels going forward.                                               • tecDAx • Nasdaq composite                                                                   StOck



No dividend        to strengthen stockholders’ equity and ADVA Optical Net-
payment            working’s strategic options, we again decided not to pay divi-      * Peer group data are calculated with the arithmetic average of Adtran,
                   dends for 2007. instead, ADVA Optical Networking will invest          Ciena,	ECI	Telecom/Infinera,	Foundry	Networks	and	Tellabs	stock	prices.	                   iNVEStOr
                                                                                         Eci telecom was taken private and became de-listed at the end of Sep-                      rElAtiONS
                   the funds in the development of new products and the ex-              tember	2007	and	since	has	been	replaced	by	Infinera	in	the	peer	group	
                   pansion	of	its	sales	efforts,	in	order	to	benefit	from	the	mar-       data.
                   ket’s growth potential and thus create sustainable, long-term
                   value for ADVA Optical Networking’s shareholders.                                                                                                                BuSiNESS
                                                                                                                                                                                    OVErViEW




                                                                                                                                                                                   MANAgEMENt
                                                                                                                                                                                     rEPOrt




                                                                                                                                                                                    FiNANciAl
                                                                                                                                                                                   StAtEMENtS




                                                                                                                                                                                    ADDitiONAl
                                                                                                                                                                                   iNFOrMAtiON




                                                                                                                                                                              31
investor
relations
                     inVestOr relAtiOns reVieW
                                                                                                                                                                                        WElcOME
                     AnD finAnciAl cAlenDAr

                                                                                                                                                                                       MANAgEMENt
                                                                                                                                                                                         BOArD
                     key determining factors for ADVA Optical Networking’s in-
                     vestor relations focus in 2007 were:

                     •	 the ongoing market growth,                                                                                                                                     SuPErViSOry
                                                                                                                                                                                          BOArD
                     •	 the dramatic reduction in revenue contribution from one
                        major u.S. distribution channel in Q2 and Q3 2007,

                     •	 slower gross margin ramp-up than originally expected as a                                                                                                       cOrPOrAtE
                                                                                                                                                                                       gOVErNANcE
                        result of the integration of initially low gross margin Movaz
                        operations acquired in mid-2006, and

                     •	 the changes in our Management Board.
                                                                                                                                                                                         StOck




investor relations   We	 expanded	 our	 investor	 relations	 activities	 significantly	   Further, we re-launched the investor relations pages of our
activities were      and completed a total of 33 roadshows (2006: 22) in cities           website www.advaoptical.com in October 2007 that now of-                                      iNVEStOr
significantly	                                                                                                                                                                          rElAtiONS
expanded
                     such as london, New york, Boston, San Francisco, Frank-              fers easier-to-navigate access to more comprehensive in-
                     furt, Paris and Zurich. We held more than 300 one-on-one             formation, including full transcripts of archived conference
                     meetings (2006: more than 190), and participated in a total          calls / webcasts.
                     of 20 investor conferences. Of these, 10 were technology-                                                                                                          BuSiNESS
                     focused events, 7 were cross-sector conferences targeting            through these measures, we were able to broaden our cov-            Numerous	finan-           OVErViEW
                     institutional investors, and 3 were events attended primarily        erage	base	by	financial	analysts	as	well	as	expand	the	num-       cial analysts cover
                                                                                                                                                                  ADVA Optical
                     by retail investors and private asset managers. these con-           ber of institutional investors. At the end of 2007, 16 analysts          Networking
                     ferences were hosted by cdc, cheuvreux, citigroup, com-              (end of 2006: 14) provided research coverage of our stock.
                     merzbank, credit Suisse, Deutsche Börse, DSW, Jeffries,                                                                                                           MANAgEMENt
                                                                                                                                                                                         rEPOrt
                     JPMorgan, Merriman curhan Ford, Société générale, uni-
                     credit, uBS and WestlB. in addition, with a total of 32 press
                     releases, 6 ad hoc releases, quarterly reports and regu-
                                          /	
                     lar	conference	calls	 webcasts,	the	financial	community	was	
                                                                                                                                                                                        FiNANciAl
                     kept well-informed about ADVA Optical Networking’s signif-                                                                                                        StAtEMENtS
                     icant developments.


                                                                                                                                                                                        ADDitiONAl
                                                                                                                                                                                       iNFOrMAtiON




                                                                                                                                                                                  33
 FiNANciAl ANAlySt cOVErAgE
 FiNANciAl cAlENDAr
 iNVEStOr rElAtiONS cONtAct




                              financial analyst coverage

                              (as of December 31, 2007)

                                institution                                          Financial analyst name                         location
                                Arete research Services                              Jason Mauricio                                 london, united kingdom
                                Blue Oak capital *                                   James crawshaw                                 london, united kingdom
                                cheuvreux                                            Felix Braune                                   Frankfurt am Main, germany
                                citigroup   *
                                                                                     Benjamin kluftinger                            london, united kingdom
                                credit Suisse (new)                                  karsten iltgen                                 Frankfurt am Main, germany
                                Deutsche Bank                                        Benjamin kohnke                                Frankfurt am Main, germany
                                DZ Bank *                                            Jasko terzic                                   Frankfurt am Main, germany
                                goldman Sachs                                        tim Boddy                                      london, united kingdom
                                JPMorgan (new)                                       rod Hall                                       london, united kingdom
                                kalliwoda research                                   Norbert kalliwoda                              Frankfurt am Main, germany
                                lBBW                                                 Stephan Wittwer                                Stuttgart, germany
                                Merriman curhan Ford                                 tim Savageaux                                  San Francisco, uSA
                                SES research                                         Malte Schaumann                                Hamburg, germany
                                Société générale                                     Vincent rech                                   Paris, France
                                unicredit                                            roland Pitz                                    Munich, germany
                                WestlB                                               thomas langer                                  Dusseldorf, germany

                              * Blue Oak capital and citigroup discontinued coverage in January 2008, DZ Bank in February 2008.


        improved tra-         With	a	stable	free	float	of	around	86%,	the	expansion	of	our	                     the annual shareholders’ meeting took place on June 13,         Successful annual
        ding liquidity        investor	relations	activities	have	led	to	significantly	increased	                2007, in Meiningen, germany. Except for the creation of ad-         shareholders’
                                                                                                                                                                                         meeting
                              trading liquidity in our shares. the average xetra trading vol-                   ditional authorized capital with a possible exclusion of sub-
                              ume nearly tripled from 137 thousand shares per day in Q3                         scription rights, all items on the agenda were approved by a
                              2006 to 358 thousand shares per day in Q4 2007.                                   majority, including amendments to the stock option program
                                                                                                                for the Management Board and employees of the company.
                                                                                                                Ernst & young Ag Wirtschaftsprüfungsgesellschaft Steuer-
                                                                                                                beratungsgesellschaft were reappointed as the auditors for
                                                                                                                the	2007	audited	financial	results.




34
Multiple changes      During 2007, multiple changes in legal provisions impacted
in legal provisions                                                                                                                WElcOME
                      capital market communication in germany, for example the
                      enactment of the transparency Directive implementation
                      Act (transparenzrichtlinie-umsetzungsgesetz, tug) in Jan-
                      uary 2007 and a revision of the german corporate gover-
                      nance code in June 2007. As a Prime Standard company on                                                     MANAgEMENt
                                                                                                                                    BOArD
                      the Frankfurt Stock Exchange, we have continuously met the
                      highest standards for open and transparent communication
                      since our initial public offering in 1999. We therefore
                      welcome all regulations that provide enhanced standards                                                     SuPErViSOry
                      of transparency and publication for our shareholders. Our                                                      BOArD
                      compliance and implementation of these regulations, as
                      with the corporate governance code, is supervised by a
                      special	compliance	officer.
                                                                                                                                   cOrPOrAtE
                                                                                                                                  gOVErNANcE

                      financial calendar                                           investor relations contact

                                                                                                                                    StOck
                        Publication of                May 8, 2008
                        three-Month report 2008       Martinsried / Munich,                    Wolfgang guessgen
                                                      germany
                                                                                               Director investor relations
                                                                                               t +49 89 89 06 65 940               iNVEStOr
                        Annual shareholders’          June 11, 2008                            wguessgen@advaoptical.com           rElAtiONS

                        meeting                       Meiningen, germany


                                                                                                                                   BuSiNESS
                        Publication of                August 5, 2008                           karin tovar                         OVErViEW
                        Six-Month report 2008         Martinsried / Munich,
                                                      germany                                  Manager investor relations
                                                                                               t +1 201 258 8302
                                                                                               ktovar@advaoptical.com             MANAgEMENt
                        Publication of                November 6, 2008                                                              rEPOrt
                        Nine-Month report 2008        Martinsried / Munich,
                                                      germany

                                                                                                                                   FiNANciAl
                                                                                                                                  StAtEMENtS




                                                                                                                                   ADDitiONAl
                                                                                                                                  iNFOrMAtiON




                                                                                                                             35
Business
overvieW   38 | Our mission

           38 | technology

           39 | Market and growth drivers

           41 | Products

           43 | Sales regions and customers

           44 | Sales and marketing

           46 | Operations

           47 | research and development

           49 | Quality management
 Our MiSSiON
 tEcHNOlOgy
 MArkEt AND grOWtH DriVErS




                              Our mission


       leading supplier       ADVA Optical Networking is creating tomorrow. Our mission          ethernet                                                              Ethernet is the
       of next-generation     is to be the global leader of Optical+Ethernet transport so-       Ethernet is the dominant data-link protocol for today’s net-      dominant data-link
       data transport                                                                                                                                                 protocol for ad-
       solutions
                              lutions that ADVANCE next-generation networks for data,            works supporting a multitude of communication applications.         vanced networks
                              storage, voice and video services.                                 ADVA Optical Networking provides Ethernet-optimized trans-
                                                                                                 mission	solutions	for	fiber-	or	copper-based	lines	(typically	
                                                                                                 no WDM technology applied here), used to provide access-
                              technology                                                         for enterprises into a carrier’s network. Also, Ethernet is one
                                                                                                 of the key protocols used to carry applications in high-speed
                                                                                                 optical	networks	for	backhauling	access	traffic	and	the	inter-
                              ADVA Optical Networking develops transport solutions for           connectivity of routers (see “Optical” above).
                              next-generation telecommunication networks. Our products
                              are	based	on	fiber-optic	technology	combined	with	Ethernet	        Optical+ethernet                                                   Optical+Ethernet
                              functionality (Optical+Ethernet).                                  The	combination	of	fiber-optic	transmission	technology	and	            = foundation
                                                                                                                                                                      for high-speed
                                                                                                 Ethernet-optimized data processing (Optical+Ethernet) is the               networks
       Multiplication of      Optical                                                            perfect solution to deliver high-speed connectivity for data,
       fiber	capacity	with	   Fiber is the optimum physical medium to transmit large             storage, voice and video applications.
       Wavelength Divi-
       sion Multiplexing
                              amounts of data over long distances. the bandwidth-over-
       technology (WDM)       distance	capabilities	of	fiber	by	far	exceed	those	of	any	other	   We create Optical+Ethernet solutions from inception through
                              medium such as copper or wireless technologies. there-             to manufacture and into service. the following paragraphs
                              fore	fiber-optic	transport	is	the	unchallenged	foundation	for	     describe some of the important market dynamics that drive
                              all high-speed networks. ADVA Optical Networking’s optical         growth for our business.
                              transmission solutions are based on Wavelength Division Mul-
                              tiplexing (WDM) technology. With WDM multiple data streams
                              are	transmitted	simultaneously	over	one	single	optical	fiber	
                              by assigning each stream to a different wavelength. Every
                              wavelength (up to 160 in total) can carry a different appli-
                              cation	such	as	voice,	video,	data	or	storage	traffic.	Combin-
                              ing (i.e. multiplexing) these wavelengths at one end of the
                              fiber,	transmitting	them	over	distance	and	then	separating	
                              (i.e. de-multiplexing) them at the far end multiplies the ca-
                              pacity	of	fiber	and	makes	transmission	more	efficient.	WDM	
                              supports all data protocols and transmission speeds, and is
                              a natural foundation for all high-capacity networks.




38
                     market and growth drivers                                           than a factor of 100 higher than the bandwidth required for
                                                                                                                                                                                         WElcOME
                                                                                         a traditional phone service and multiplies with the number
                                                                                         of subscribers. So at a node that serves 100 households,
growth is driven     ADVA Optical Networking’s market encompasses data net-              which all subscribe to the new service the network needs to
by three market      working solutions based on optical WDM technology, and              handle 10,000 times the bandwidth.
segments largely
independent from
                     Ethernet access devices. Within this market, we cover three                                                                                                        MANAgEMENt
                                                                                                                                                                                          BOArD
one another          areas with distinct and largely independent growth drivers:         there are several ways for service providers to deliver broad-          carriers use a
                     carrier infrastructure, carrier Ethernet access and enter-          band connectivity to their customers. traditional telecom-           wide range of ac-
                                                                                                                                                              cess technologies
                     prise networks.                                                     munications companies often bet on Digital Subscriber line
                                                                                         (DSl) technology to increase the capacity of their phone                                       SuPErViSOry
Our innovative       With innovative products we enable carriers and enterprises         lines, i.e., twisted pairs of copper wires, which are typically                                   BOArD
products add value   to deliver intelligent services, simplify their networks and        available to every household. coax cables are a good alter-
to and remove
cost from our cus-
                     scale their infrastructure for future growth. Our market-lead-      native, typically owned by cable tV companies who are ex-
tomers’ networks     ing approach to combining Optical+Ethernet technologies in          panding their offerings to become Multiple Service Operators
                     one integrated family of products provides a compelling value       (MSOs).	New	initiatives	for	fiber	to	the	home	or	building	are	                                  cOrPOrAtE
                                                                                                                                                                                        gOVErNANcE
                     proposition to network operators looking for greater service        rolling out providing the ultimate bandwidth pipe. And last but
                     assurance,	automated	operation	and	expanded	flexibility	for	        not least there are new wireless technologies available, most
                     a variety of services and topologies. Moreover, our custom-         well known in the form of the new universal Mobile telecom-
                     ers	 benefit	 from	 our	 powerful	 software	 and	 service	 provi-   munications System (uMtS) and Worldwide interoperabil-
                     sioning features that manage and control the entire network         ity for Microwave Access (WiMAx) standards, which provide                                        StOck

                     with lower costs and higher quality of service.                     higher bandwidth per end user than legacy technology.

                     carrier infrastructure                                              For carriers the challenge is to provide good connectivity to
Video drives band-   the largest driver for growth in the carrier infrastructure area    as many customers as possible at the lowest possible cost.                                      iNVEStOr
width demand                                                                                                                                                                             rElAtiONS
                     of our market is the demand of the residential households for       that means making good use of existing infrastructure espe-
                     bandwidth-intensive applications, most prominently video.           cially in the last mile and intelligent investment in new tech-
                                                                                         nology to support growth and emerging applications. With
                     Across the globe, this bandwidth demand is creating a surge         the dramatic increase of end user bandwidth the underlying                                      BuSiNESS
                     in	 network	 traffic.	 Residential	 households	 demand	 faster	     network infrastructure need to scale by many orders of mag-                                     OVErViEW
                     access to the ever increasing wealth of information on the          nitude,	pushing	fiber	optic	transmission	technology	closer	to	
                     internet. in addition they want broadband connectivity to ex-       the end customer and making it the only viable choice for
                     change digital images, watch videos or participate in online        the backhaul and core part of the network.
                     games and other bandwidth-intensive peer-to-peer applica-                                                                                                          MANAgEMENt
                                                                                                                                                                                          rEPOrt
                     tions. recent reports now place video services (including vid-      ADVA Optical Networking helps carriers to simplify their net-            ADVA Optical
                     eo-on-demand,	Internet	television	and	video	file	sharing)	as	       works and build a scalable network infrastructure that is             Networking pro-
                                                                                                                                                               vides a scalable
                     the most popular applications in the residential market. this       future proof. With our Optical+Ethernet product solution               and converged
                     demand for high quality video signals is forcing carriers to        carriers	 can	 combine	 the	 various	 traffic	 streams	 from	 the	   backhaul solution          FiNANciAl
                     rapidly scale their networks to provision for intelligent triple    different access technologies onto a single transport plat-              for all access        StAtEMENtS
                     play services (data, voice and video) and future growth.            form.	Backhaul	for	copper,	coax,	fiber	and	wireless	access	               technologies

                                                                                         technologies on a single platform eliminates the costly oper-
                     A network upgrade for triple play services is not without           ation of parallel systems. in addition ADVA Optical Network-
                     challenges. carriers have started to deliver bandwidth in           ing offers one of the most scalable platforms in the market,                                    ADDitiONAl
                                                                                                                                                                                        iNFOrMAtiON
                     the range of 10Mbit/s or higher per household. this is more         allowing seamless transport from the customer premise to




                                                                                                                                                                                   39
 MArkEt AND grOWtH DriVErS
 PrODuctS




                             the core of the network. thus carriers can bypass some of        The	use	of	Ethernet	in	carrier	networks	requires	modifica-           ADVA Optical
                             their small access nodes, eliminating the expense of oper-       tions to some of these concepts since carriers are in the        Networking is the
                                                                                                                                                               market leader for
                             ating these locations.                                           business of serving a wide-range of customers from a com-         carrier Ethernet
                                                                                              mon infrastructure platform. carrier private services need         access devices
                             carrier ethernet access                                          to	offer	high	security	from	snooping	or	leakage	of	traffic	be-
       Enterprises seek      the key driver for growth in the carrier Ethernet access         tween customers, isolation of faults on a customer’s service
       connectivity based    area of our market is the migration from legacy services         from affecting others, access controls to ensure customers
       on Ethernet
                             based on Synchronous Optical Network / Synchronous Dig-          get the service they paid for (but no more), quality of ser-
                             ital Hierarchy (SONEt / SDH), Asynchronous transfer Mode         vice guarantees and service level agreements. ADVA Opti-
                             (ATM)	and	Frame	Relay	to	intelligent	and	unified	Ethernet-       cal Networking has built a market leading position in carrier
                             based services, fueled by increased bandwidth demand from        Ethernet access devices enabling carriers to deliver intel-
                             enterprises.                                                     ligent Ethernet services over any physical media including
                                                                                              fiber	and	copper.	Our	unique	Etherjack® demarcation soft-
       Enterprises want      The	drive	for	bandwidth	is	also	reflected	in	the	enterprise	     ware provides unparalleled service assurance and Opera-
       bandwidth, quality    market where corporations seek high-speed connectivity           tions, Administration, Maintenance & Provisioning (OAM & P)
       and performance
                             between their geographically dispersed sites in order to ex-     capabilities that enable carriers to guarantee highest qual-
                             change	and	store	data	more	efficiently.	Enterprises	typically	   ity of service to their end users.
                             have two options when it comes to interconnecting their
                             sites: they can build and operate a private network or rely      the strong popularity of Ethernet among enterprise users
                             on a managed service provider to give them the connectiv-        and the rapidly growing acceptance of carrier Ethernet com-
                             ity they need. unlike residential customers, enterprises do      bined with the typically lower cost of maintaining an Ether-
                             not only demand high bandwidth, but also have stringent          net-based access network vs. running an access network
                             requirements regarding quality of service, network perfor-       based on legacy protocols such as Frame relay and AtM
                             mance and availability. Service providers can charge a pre-      have paved the way for Ethernet to replace these incumbent
                             mium for these attributes but need to back their service         technologies in the foreseeable future.
                             offerings with service level agreements.
                                                                                              enterprise networks
       Ethernet: from        Most enterprise networks today are based on Ethernet tech-       the key driver for growth in the Enterprise networks area of         losing data is
       corporate local       nology, which has established itself as the dominant data        our market is the increasing need of enterprises to protect          a threat to all
       Area Networks to                                                                                                                                               companies
       carrier networks
                             protocol for local Area Networks (lAN). Ethernet was orig-       themselves against data loss. total loss of mission-critical
                             inally developed as a fair access, open and ubiquitous con-      data is, for many companies, a highly-threatening scenario
                             nectivity network to inter-connect computers within a single     that may destroy or severely impact their business. in ad-
                             organization. the priorities here were low cost, ease of con-    dition, more and more business transactions depend on the
                             necting / disconnecting from the network, fair allocation of     availability of electronic platforms. Application downtime re-
                             best effort bandwidth amongst all users and automatic dis-       sults in revenue losses, idle staff and damaged reputation
                             covery of resources on the network. the simplicity of its        for an enterprise.
                             protocol, its close relation to the internet Protocol (iP) and
                             its adaptability to new iP-based technologies has driven its     While Ethernet services can solve the problem of high band-          geographically
                             popularity in the enterprise market to the point where it is     width connectivity for corporate lANs between sites, enter-      dispersed storage
                                                                                                                                                                   networks pro-
                             almost universally deployed. this popularity has driven vol-     prise ciOs are also increasingly concerned about the cost,          vide maximum
                             umes and reduced the cost of the basic technology blocks         security and availability of their business data. As a result,           protection
                             to very low levels.                                              many large companies or research and education institutions
                                                                                              are building their own private networks to provide greater




40
                    control.	In	addition,	financial	institutions,	insurance	firms	and	   products
                                                                                                                                                                                        WElcOME
                    other Fortune 1000 companies are generating mission-crit-
                    ical data at a rapid pace. losing any data, not just mission-
                    critical, puts an organization’s future at risk, and application     ADVA Optical Networking’s portfolio strategy is built on a          Optical+Ethernet
                    downtime is costly. these concerns are reinforced by regu-           foundation of innovative Optical+Ethernet solutions that              = intelligence,
                                                                                                                                                                    simplicity,
                    latory regimes such as Basel ii and Sarbanes-Oxley legis-            combine the strengths of our two core technologies in one                  scalability
                                                                                                                                                                                       MANAgEMENt
                                                                                                                                                                                         BOArD
                    lation, ensuring that corporate attention will continue to be        unified	family	of	products.	We	will	use	this	strategy	to	strive	
                    focused on data storage management. While Storage Area               for global leadership, delivering next-generation transport
                    Networks (SANs) improve local corporate resource utiliza-            solutions with intelligence, simplicity and scale, ultimately
                    tion	 and	 enable	 efficient	 management	 of	 rapidly-growing	       increasing our customers’ service revenue potential and de-                                   SuPErViSOry
                    amounts of data at one particular site, a higher number of           creasing their total cost of ownership.                                                          BOArD
                    enterprises are seeking more comprehensive approaches to
                    their data center management. consolidation of storage re-           Our optical expertise is built on a core technology of WDM.           WDM provides
                    sources to a number of different locations is the next step          this technology enables the simultaneous transmission                   maximum
                                                                                                                                                                  scalability
                    in storage management: enterprises achieve previously un-            of	 independent	 applications	 across	 a	 common	 fiber	 infra-                                cOrPOrAtE
                                                                                                                                                                                       gOVErNANcE
                    known levels of data availability and improve their cost and         structure. By using separate wavelengths for different data
                    productivity position, thanks to a geographically-dispersed          streams	WDM	is	multiplying	the	capacity	of	fiber	cables.	Net-
                    SAN setup. Optical WDM is the pre-eminent connectivity               work	operators	can	leverage	their	existing	fiber	infrastruc-
                    solution for enterprises wanting to implement high-perfor-           ture	for	new	applications	and	do	more	with	fewer	fibers	to	
                    mance distributed storage solutions that meet their needs            accommodate bandwidth growth. WDM systems can aggre-                                            StOck

                    for business continuity and data availability.                       gate,	extend,	add,	drop	or	switch	traffic	based	on	the	appli-
                                                                                         cation requirements.
More and more       As more and more business transactions depend on the
enterprises build   availability of electronic platforms, an increasing number           ADVA Optical Networking has a leading position in service             Our innovative           iNVEStOr
their own optical                                                                                                                                            products simplify          rElAtiONS
networks
                    of industries (e.g., the health care and educational sectors)        aggregation over wavelengths. With our latest Optical trans-
                                                                                                                                                                networks and
                    have found it economic to deploy private enterprise net-             port Network (OtN) and generic Framing Procedure (gFP)             network operation
                    works, enlarging the size of ADVA Optical Networking’s tar-          service aggregation we are reducing the service costs and
                    get market.                                                          improving the interoperability with other systems. in 2007                                     BuSiNESS
                                                                                         we continued to enhance our integrated Ethernet aggrega-                                       OVErViEW
                                                                                         tion capabilities to further optimize the platform for scal-
                                                                                         able	 Ethernet	 transport.	 Our	 Reconfigurable	 Optical	 Add /
                                                                                         Drop Multiplexing (rOADM) functionality (both two-degree
                                                                                         and multi-degree rOADMs), which we leveraged from the                                         MANAgEMENt
                                                                                                                                                                                         rEPOrt
                                                                                         Movaz acquisition in 2006, is now fully integrated with our
                                                                                         portfolio, including the embedded software intelligence called
                                                                                         rAycontrol®, a state-of-the-art generalized Multiprotocol la-
                                                                                         bel Switching (gMPlS)-based control plane. these elements
                                                                                                                                                                                        FiNANciAl
                                                                                         provide the highest level of dynamic provisioning for optical                                 StAtEMENtS
                                                                                         services ranging from 1Mbit/s to 100gbit/s across distances
                                                                                         of 1 km to 2,000 km.

                                                                                                                                                                                        ADDitiONAl
                                                                                                                                                                                       iNFOrMAtiON




                                                                                                                                                                                  41
 PrODuctS
 SAlES rEgiONS
 AND cuStOMErS




       Ethernet provides    Our	Ethernet	access	solutions	have	been	a	significant	part	of	                     mise to the core of the network. the scalable architecture
       the intelligence     our product portfolio since 2000, driven by the increasing de-                     minimizes the total cost of ownership, taking into conside-
       for innovative end
       user services
                            mand for Ethernet services with our carrier customers. Ether-                      ration both the initial capital investment and the ongoing
                            net technology is about to replace legacy services, such as                        operating expenses.
                            Frame relay, AtM and SONEt / SDH. ADVA Optical Network-
                            ing has built a market leading position in Ethernet access de-      With our Fiber Service Platform (FSP), we offer a portfo-                                           the Fiber Service
                            vices enabling our customers to deliver intelligent Ethernet        lio of Optical+Ethernet networking products designed to                                                Platform (FSP)
                                                                                                                                                                                                       – ADVA Optical
                            services	over	any	physical	media	including	fiber	and	copper.	       help carriers and enterprise customers build a next-gener-                                           Networking’s so-
                            Our unique Etherjack® demarcation software provides unpar-          ation infrastructure across metropolitan and regional areas.                                       lution for next-ge-
                            alleled service assurance and OAM & P capabilities that en-         the products are optimized for ease-of-use with simple and                                         neration networks
                            able carriers to guarantee highest quality of service to their      smooth installation and set-up – areas especially critical in
                            end users. the portfolio is complemented by compact ag-             carrier access and enterprise networks. Our FSP service con-
                            gregation devices that simplify network expansion allowing          cept includes support in the planning, set-up and operation
                            service providers to scale the delivery of Ethernet services        of a network throughout its entire lifecycle.
                            to	a	profitable	mainstream	proposition.
                                                                                                An	 overview	 of	 our	 FSP	 product	 line	 and	 its	 fields	 of	 ap-
                                                                                                plication demonstrates the broad range of solutions that
                            the major advantages of our product portfolio are best sum-         ADVA Optical Networking delivers to carrier and enterprise
                            marized in three main bullets:                                      customers:

                            •	 intelligence                                                                                                                  FSP Software Suite




                                                                                                 Core & regional
                                                                                                                                                              FSP Software Suite
                               Our Ethernet demarcation, extension and aggregation so-                                                FSP 3000              with integrated GMPLS
                                                                                                                                                            with integrated GMPLS
                                                                                                                                                                 control plane
                                                                                                                                                                  control plane
                               lutions enable the ubiquitous delivery of intelligent services
                               over any media. the market leading Etherjack® software                                                   OTN




                                                                                                                                                                                         Carrier
                               allows	the	definition	of	differentiated	services	and	provi-                                                                          Flexible
                                                                                                                                                                    infrastructure
                               des full end-to-end service assurance.




                                                                                                Metro access
                                                                                                                          CWDM/DWDM              Ethernet
                            •	 simplicity                                                                                                                            Universal
                                                                                                                                                                     access
                               the combination of our two core technologies (Optical+
                               Ethernet) creates a universal transport platform for carrier




                                                                                                 Customer premise
                               and	enterprise	networks	leading	to	simplified	network	ar-                              FSP 3000                   FSP 150

                               chitecture with fewer purpose-built systems. Our power-
                               ful software (Etherjack® and rAycontrol®) eliminates the




                                                                                                                                                                                     Enterprise
                                                                                                                                                                     Ethernet

                               need for time-consuming manual operation enabling sim-
                               plified	end-to-end	provisioning	of	any	service,	anywhere,	                                                                            Storage


                               anytime.

                            • scalability                                                       Our product portfolio focuses on two major product areas:
                              A	 flexible	 array	 of	 Coarse	 WDM	 (CWDM),	 Dense	 WDM	         the FSP 3000 systems for scalable optical transport and the
                              (DWDM),	ROADM,	optical	amplification,	service	aggrega-            FSP 150 solutions for intelligent Ethernet access. While each
                              tion and network management capabilities enables net-             platform offers its own Optical+Ethernet service functional-
                              work operators to converge their transport requirements           ity, these platforms can be combined together for a fully in-
                              onto a single platform that scales from the customer pre-         tegrated end-to-end solution.




42
                   sales regions and customers                                                     An average market growth per year of 17% 2 is expected for
                                                                                                                                                                                                             WElcOME
                                                                                                   this region through 2010. We anticipate the WDM market
                                                                                                   will continue to represent a major driver, as network capac-
Diverse global     ADVA Optical Networking sells its products to a broad cus-                      ity is expanded to meet the rising business and residential
customer base      tomer base worldwide, either through distribution partners                      demand for bandwidth in the access, the metro and the re-
drives record
revenues in 2007
                   or our own direct sales force. in 2007 we continued to in-                      gional spaces. the market for Ethernet access solutions also                                             MANAgEMENt
                                                                                                                                                                                                              BOArD
                   crease	our	global	end-customer	base	with	significant	wins	                      offers	significant	opportunity,	with	higher	growth	rates	than	
                   with both carriers and enterprise customers across all re-                      the WDM market. Although still in an early adoption stage
                   gions. the evolution of our product portfolio further strength-                 in many European countries, Ethernet access solutions have
                   ened valuable relationships with British telecom and other                      quickly and successfully been deployed in large numbers in                                               SuPErViSOry
                   large carriers. the additional distribution strength obtained                   the	 United	 Kingdom,	 where	 fiber	 availability	 and	 more	 in-                                           BOArD
                   through a broader sales team and expanded partnerships                          tense metro carrier competition are driving new service ap-
                   have enabled us to more effectively address the network-                        proaches. British telecom’s decision to select ADVA Optical
                   ing requirements of our customers. Overall, in 2007 we re-                      Networking as a direct supplier of Ethernet access products
                   corded record revenues of Eur 251.5 million, up 30.5% from                      for their 21st century Network (21cN) initiative underpins                                                cOrPOrAtE
                                                                                                                                                                                                            gOVErNANcE
                   Eur 192.7 million in 2006, including Movaz revenues since                       the eminent role of the Ethernet technology in the united
                   July 12, 2006.1 Since ADVA Optical Networking’s inception                       kingdom going forward. given the growth potential for WDM
                   in 1994, our solutions have been deployed at more than 200                      and Ethernet access, we expect further positive develop-
                   carriers and 10,000 enterprises. While enterprise end-cus-                      ment of our business in the EMEA region and strengthening
                   tomers comprised more than two-thirds of our total reve-                        of our market position.                                                                                    StOck

                   nues several years ago, this ratio has reversed during recent
                   years. the trend toward outsourcing data services such as                       Americas                                                                          Business in the
                   Ethernet business services to carriers, as well as growing                      the Americas region comprises                                                    Americas shows
                                                                                                                                                                                   solid growth and
                   infrastructure deployments by communications service pro-                       North America and South America.                                               offers even stron-
                                                                                                                                                                                                             iNVEStOr
                                                                                                                                                                                                             rElAtiONS
                   viders have driven the development in ADVA Optical Net-                         Employees at year-end 2007: 258 (year-end 2006: 234)                           ger growth oppor-
                   working’s business and the entire industry.                                     revenues in 2007: Eur 82.9 million (2006: Eur 62.6 million)                   tunities than EMEA


EMEA is the        emeA                                                                            in the Americas, ADVA Optical Networking overall achieved                                                 BuSiNESS
largest sales      the region is comprised of Europe, Middle East and Africa.                      solid growth in 2007. Our carrier customers include Brasil                                                OVErViEW
region and
shows continued
                   Employees at year-end 2007: 705 (year-end 2006: 567)                            telecom, comcast, cox communications, level 3, time War-
growth potential   revenues in 2007: Eur 158.8 million (2006: Eur 125.3 million)                   ner cable and Verizon Business. Following the acquisition of
                                                                                                   Movaz in July 2006, we added one major u.S. distribution
                   Our carrier customers in this region include Arcor, Belga-                      partner, who initially contributed well to the Americas rev-                                             MANAgEMENt
                                                                                                                                                                                                              rEPOrt
                   com, British telecom, cOlt, Deutsche telekom, Neuf cege-                        enues as they built a large inventory position, but then had
                   tel, telecom italia and telkom South Africa. EMEA continued                     strongly declining revenue streams throughout 2007. How-
                   to be ADVA Optical Networking’s largest sales region in 2007                    ever, our underlying business advanced strongly in the Amer-
                   and will continue to play a prominent role in the future.                       icas. Additional focus on North American sales allows us to
                                                                                                                                                                                                             FiNANciAl
                                                                                                   take advantage of high growth potential in the world’s largest                                           StAtEMENtS
                   1
                       the split of total 2007 revenues of Eur 251.5 million is as follows:        regional market for WDM and Ethernet access solutions.
                       •	 WDM	product	lines	FSP	3000R7,	FSP	3000RE,	FSP	3000RR	and
                          FSP 2000: Eur 180.3 million,
                       •	 Ethernet	access	product	lines	FSP	500	and	FSP	150:	EUR	56.4	million,		
                                                                                                                                                                                                             ADDitiONAl
                          and
                                                                                                                                                                                                            iNFOrMAtiON
                       •		other:	EUR	14.8	million.                                                 2
                                                                                                       Source: industry analysts Dell’Oro group, infonetics research, Ovum rHk
                                                                                                       and ADVA Optical Networking internal estimates – October 2007.




                                                                                                                                                                                                       43
 SAlES rEgiONS
 AND cuStOMErS
 SAlES AND MArkEtiNg




                            An average market growth of 21% per year is expected                             but still healthy rate. Since legacy network infrastructure in
                            through 2010. Our sales efforts are focused on servicing                         this region is virtually non-existent, new solutions based on
                            carriers and corporate customers. corporate verticals in-                        Ethernet technology are being deployed from the outset.
                            clude research and education organizations, major internet                       these market conditions present excellent growth oppor-
                            service	providers,	healthcare	and	financial	institutions,	fed-                   tunities for ADVA Optical Networking and our new Ethernet
                            eral and municipal governmental agencies. growth in this                         access	products.	We	are	specifically	focusing	efforts	on	Aus-
                            region will be driven through demand for WDM as well as                          tralia, india, Japan and china.
                            for Ethernet access solutions, for which ADVA Optical Net-
                            working is well-positioned. We will continue to build out our
                            sales efforts in this region in 2008.                                            sales and marketing


                                                                                                             sales                                                              three-prong sales
                                                                                                             ADVA Optical Networking employs a highly successful and          distribution strategy
                                  AMERICAS                       EMEA                         ASIA PACIFIC

                                                                                                             proven three-prong sales distribution strategy to maximize
                                                                                                             our customer reach around the world:

                                                                                                             •	 Direct sales efforts

                                                                                                             •	 Sales through system integrators
                                                                                                                (known as Value Added reseller partners or VArs)

                                                                                                             •	 Strategic partnerships with
                                                                                                                Original Equipment Manufacturers (OEMs)


                                                                                                             Direct sales                                                        Direct sales is par-
                                             The global presence of ADVA Optical Networking                  We continue to expand our direct touch initiative as well as     ticularly important in
                                                                                                                                                                               the Ethernet access
                                                                                                             our direct sales force to win new customers. Establishing di-       market and will be
                                                                                                             rect contact with enterprises and carriers enables us to work        further expanded
       Strong growth in     Asia-Pacific                                                                     more	closely	and	better	understand	their	specific	require-
       Asia-Pacific	from	   The	Asia-Pacific	region	primarily	comprises                                      ments, which in turn helps us to develop the right products
       a small base with
       highest growth
                            Japan, china, india, Singapore and Australia.                                    and solutions. A broad-based direct sales approach is par-
       expectations         Employees at year-end 2007: 77 (year-end 2006: 52)                               ticularly required to address the fragmented and evolution-
       of all regions       revenues in 2007: Eur 9.8 million (2006: Eur 4.8 million)                        ary nature of the Ethernet access market. We increased our
                                                                                                             sales headcount during the year across all regions by hiring
                            Overall,	we	gained	nice	traction	in	the	Asia-Pacific	region	in	                  additional employees. the expanded sales organization has
                            2007, although still on a small scale. Our carrier customers                     helped to strengthen the sales process and to more inten-
                            here include Ntt, telstra, uecomm, VSNl and ZtV.                                 sively support our strategic OEM and VAr partners around
                                                                                                             the world.
                            the region’s average annual market growth of 34% 2 through
                            2010 will be primarily driven by increasing deployments of
                            Ethernet access solutions, with WDM growing at a less rapid




44
VAr partners           VAR partners                                                     drive thought leadership, we continued strong relationships
mostly provide                                                                                                                                                                       WElcOME
                       VAr partners market our products primarily under the brand       with industry trade press and analysts, delivered presenta-
access to carrier
and large enterprise
                       name “ADVA Optical Networking” or with co-branded prod-          tions at conferences, launched special event campaigns and
customers              ucts under the name “Powered by ADVA Optical Networking”.        undertook select print and online advertising campaigns.
                       We work particularly closely with our distribution partners to
                       provide planning and network consulting services for large       the external communication was focused on Optical+Ether-          Focus on innova-          MANAgEMENt
                                                                                                                                                                                      BOArD
                       enterprise and carrier customers and are intensely focused       net innovation, one of the key messages in our current              tion leadership

                       on developing optimized solutions for our customers. Our         “ADVANCE” marketing campaign, the “ADVANCE” campaign
                       partners typically provide the required technical support        was launched in 2006, reinforcing the company’s success as
                       following network installation. We guarantee high-quality        a market and technology leader. the campaign also under-                                    SuPErViSOry
                       support by working proactively to provide in-depth person-       scores our drive to help customers accelerate their transi-                                    BOArD
                       nel training for our distribution partners. Our VAr partners     tion to next-generation networks.
                       include EMc, general Dynamics, Hewlett-Packard, Hitachi
                       Data Systems, iBM, NEc, Sagem télécommunications, Sun            ADVA Optical Networking’s external marketing activities are         the value pro-
                       Microsystems and Wipro.                                          targeted toward carriers that offer metro access services and      position for our          cOrPOrAtE
                                                                                                                                                         product portfolio:         gOVErNANcE
                                                                                        the enterprise customers that buy them. We continue to lead           intelligence,
OEM partners           OEM partners                                                     the industry with advanced Ethernet access and optical func-             simplicity,
largely drive sales    OEM partners market, sell and support our products with          tionality, and our marketing messages underscore our inno-               scalability
into incum-
bent carriers
                       extensive software and features integration into their own       vative, industry-leading position. the delivery of messaging
                       comprehensive product portfolios. Our main OEM partners          supporting our advanced infrastructure for the access, core                                   StOck

                       are Nokia Siemens Networks (NSN), Fujitsu Network com-           and regional spaces continues to be shared with our part-
                       munications (FNc) and Alcatel-lucent (Alu). these channel        ners. together, we and our partners convey a strong value
                       partners generally have long and deep-rooted relationships       proposition to the marketplace about the intelligence, sim-
                       with incumbent carriers and governmental agencies. they          plicity and scalability of our joint product portfolios.                                     iNVEStOr
                                                                                                                                                                                     rElAtiONS
                       also sell our solutions with full integration into their net-
                       work management platforms. Most incumbent carrier cus-           Furthermore, we continue to actively support marketing          Marketing alliances
                       tomers and select governmental agencies clearly value the        alliances with other global communications hardware and             with additional
                                                                                                                                                           network equip-
                       OEM relationship to provide faster and more seamless new         software vendors like Brocade, iBM, infovista and Spirent         ment providers            BuSiNESS
                       product integration.                                             communications. the numerous interoperability tests we                                       OVErViEW
                                                                                        conduct	with	partners	carry	significant	weight,	as	they	dem-
                       marketing                                                        onstrate the compatibility of the various systems and assure
Positioning of         Direct sales efforts are proactively supported by our mar-       customers that our products seamlessly integrate and oper-
the ‘ADVA Optical      keting team to build the ADVA Optical Networking brand           ate with our partners’ systems and the customers’ existing                                  MANAgEMENt
Networking’ brand                                                                                                                                                                     rEPOrt
                       and	expand	visibility	of	our	FSP	product	portfolio.	Specific	    it infrastructures. ADVA Optical Networking’s partners serve
                       marketing activities include regular participation in trade-     as multipliers for joint marketing programs, and through all
                       shows, online advertising, news coverage and bylined arti-       these measures we actively drive new customer opportuni-
                       cles in trade publications. We conduct customer and partner      ties and strengthen our sales efforts.
                                                                                                                                                                                     FiNANciAl
                       workshops, support co-marketing efforts with our partners                                                                                                    StAtEMENtS
                       and deliver an electronic customer newsletter. in 2007, we
                       exhibited at the ceBit tradeshow in Hanover, germany, and
                       at the Nxtcomm tradeshow in chicago, uSA. in addition to
                       these two major events, we also participated in numerous                                                                                                      ADDitiONAl
                                                                                                                                                                                    iNFOrMAtiON
                       smaller shows and customer events with targeted focus. to




                                                                                                                                                                               45
 OPErAtiONS
 rESEArcH AND DEVElOPMENt




                            Operations                                                          mize	technology	adoption,	to	maintain	high	flexibility	and	to	
                                                                                                minimize costs. ADVA Optical Networking’s internal manu-
                                                                                                facturing organization is located in our purpose-built 9,000
       three core           ADVA Optical Networking’s operations activities consist of          square meter facility in Meiningen, germany. the transpar-
       functions: supply    three core func tions: supply chain management, new prod-           ent,	 glass-walled	 and	 award-winning	 building	 reflects	 our	
       chain manage-
       ment, new product
                            uct introduction and production. the integration of these           transparent	order	fulfillment	process.	This	production	set-up	
       introduction,        functions with our global sales, r & D and quality manage-          provides a convincing answer for the ever increasing de-
       manufacturing        ment departments is the foundation for our proven ability to        mand	for	customized	and	flexible	manufacturing	with	many	
                            provide innovative Optical+Ethernet networking solutions at         short-term change requests in particular in WDM projects.
       Focus on highest
                            highest quality levels and product performance while main-          compared to fully contracted manufacturing, this approach
       quality levels,
       short delivery       taining	short	delivery	and	response	times	and	the	benefit	of	       ensures direct access and full control in this key phase of
       times and low cost   the lowest total cost of ownership for the customer.                our	customer	order	fulfillment	process	with	significantly	in-
                                                                                                creased	flexibility	and	drastically	shortened	lead	times	for	
       Supply chain         the supply chain management (ScM) team is responsible               the	benefit	of	our	customers.
       management:          for	customer	order	fulfillment,	including	material	and	capac-
       high-quality and
       cost-efficient	
                            ity	planning,	supply	of	components	and	shipment	of	finished	        Outsourcing of non-core manufacturing activities ensures
       customer order       goods to our customers. Furthermore, the ScM team drives            an	efficient	and	flexible	utilization	of	our	own	production	re-
       fulfillment          global inventory management and supplier management.                sources as well as virtually unlimited access to manufactur-
                            Integrated	SCM	ensures	the	high-quality	and	cost-efficient	         ing capacity. Our main outsourcing partners leverage cost
                            manufacturing	 of	 build-to-order,	 even	 customer-specific	        advantages for ADVA Optical Networking in low-cost regions
                            WDM solutions with short delivery times, as well as the pro-        as Eastern Europe and china. Sensitive optical assembly, so-
                            duction of off-the-shelf and higher volume Ethernet access          phisticated and capital-intensive functional testing along with
                            solutions.                                                          customized complex system assembly is considered core
                                                                                                manufacturing expertise and therefore retained in-house.
       New product          ADVA Optical Networking’s new product introduction (NPi)            ADVA Optical Networking has obtained iSO 9001:2000 cer-
       introduction:        team drives the NPi process and collaborates closely with           tification	for	all	our	manufacturing	facilities.
       interface between
       development and
                            our research and development engineers. the team applies
       manufacturing        a commonly approved industrialization process and works
                            closely with all development sites and manufacturing lines
                            during the entire product lifecycle. the NPi team is responsi-
                            ble for driving concurrent product developments under con-
                            sideration of design for manufacturability, testability, quality,
                            logistics and cost. it also maintains product master data in
                            our integrated manufacturing resource planning it system,
                            and	performs	product-specific	manufacturing	test	solutions.	
                            With this, the NPi team acts as key interface between our
                            r & D and manufacturing functions, and has a major positive
                            impact on our ability to rapidly introduce innovative function-
                            alities for customers on a mass-manufacturing basis.
       Manufacturing:
       combination of in-
                            ADVA Optical Networking has developed a unique and bal-
       house production     anced manufacturing strategy combining the best from both                 System verification test at one of ADVA Optical Networking’s
                                                                                                                           manufacturing lines
       and outsourcing      outsourcing and in-house production. Our target is to maxi-




46
Further expansion    in addition to the capacity expansion in Meiningen, we sig-      research and development
of output capacity                                                                                                                                                                      WElcOME
                     nificantly	increased	our	operations	presence	in	the	Americas	
and, going for-
ward, increased
                     via the acquisition of Movaz Networks in 2006 and by focus-
outsourcing levels   ing the American operations on ScM and NPi since. Driven         ADVA Optical Networking’s engineering activities are driven         Development with
                     by further increasing sales volumes in 2008, we will con-        by the distinct emphasis on differentiating our highly inno-        customer focus on
                                                                                                                                                          customer	benefits
                     tinue to expand our output capacity by increased leverag-        vative Optical+Ethernet solutions, working with customers                                        MANAgEMENt
                                                                                                                                                                                         BOArD
                     ing of our outsourcing manufacturing service partners and        and partners to identify and meet their current and future
                     by the growth of our operations headcount in key functions.      needs. the resulting key technologies and products radi-
                     We are continuously improving our ScM processes to enable        cally simplify complicated network structures, while reducing
                     us to secure in-time delivery of our products and further im-    operating and capital expenses and supplementing exist-                                          SuPErViSOry
                     prove our customer relationships. With a strong customer         ing solutions.                                                                                      BOArD
                     focus,	a	flexible	and	lean	organization	and	an	efficient	cost	
                     structure we have all prerequisites in place for further suc-    Our product vision combines Optical+Ethernet technolo-                     combination
                     cessful growth.                                                  gies	in	a	unified	approach	addressing	carrier	and	enterprise	           of ‘Optical’ and
                                                                                                                                                          ‘Ethernet’ techno-
                                                                                      transmission and service delivery needs. ADVA Optical Net-             logies	simplifies	
                                                                                                                                                                                        cOrPOrAtE
                                                                                                                                                                                       gOVErNANcE
                                                                                      working’s optical innovations serve to solve the main bot-               networks and
                                                                                      tleneck in today’s networks driven by increased bandwidth               decreases cost
                                                                                      demand	addressing	the	backhauling	of	traffic	from	DSL	ac-
                                                                                      cess multiplexers, base stations and enterprise customers
                                                                                      to	a	carrier’s	local	and	central	offices,	in	a	revolutionary	and	                                  StOck

                                                                                      cost-efficient	way.	In	parallel,	we	continuously	drive	innova-
                                                                                      tion	to	efficiently	build	backbone	transport	networks	inter-
                                                                                      connecting	a	carrier’s	central	offices.	Our	leading	Ethernet	
                                                                                      innovations provide Ethernet access for enterprise customers                                      iNVEStOr
                                                                                                                                                                                        rElAtiONS
                                                                                      and carriers. carrier applications and our Optical+Ethernet
                                                                                      vision combine both technologies uniquely, paving the way
                                                                                      for	simplified	end-to-end	future	networks.	The	management	
                                                                                      and control of these networks is based on modern web-based                                        BuSiNESS
                                                                                      techniques and enables the easy set-up and maintenance of                                         OVErViEW
                                                                                      end-to-end transport solutions and services.

                                                                                      in 2007, our development activities were centered around              Driving towards
                                                                                      the consolidation of our portfolio towards two hardware plat-          a two-product             MANAgEMENt
                                                                                                                                                                    strategy             rEPOrt
                                                                                      forms (FSP 3000 and FSP 150) and one integral software
                                                                                      platform (FSP Network Management System, NMS), achiev-
                                                                                      ing our product vision and successfully optimizing all appli-
                                                                                      cations of our previous product lines. the FSP 3000 is the
                                                                                                                                                                                        FiNANciAl
                                                                                      only optical platform available which addresses optical ac-                                      StAtEMENtS
                                                                                      cess, core, and regional networks, plus enterprise solutions
                                                                                      in one single product. ADVA Optical Networking’s FSP 150
                                                                                      combines	diverse	Ethernet	demarcation	solutions	in	a	flex-
                                                                                      ible and scalable way, allowing both our platforms to seam-                                       ADDitiONAl
                                                                                                                                                                                       iNFOrMAtiON
                                                                                      lessly interwork. the FSP NMS and our proven gMPlS control




                                                                                                                                                                                  47
 rESEArcH AND DEVElOPMENt
 QuAlity MANAgEMENt




                            plane enable the advanced management and supervision of
                            the networks and services.

       global integration   ADVA Optical Networking’s technology organization is based
       with proximity to    on a decentralized but globally integrated approach enabling
       the customer
                            our talented engineers to be near to our customers while
                            maintaining a creative exchange of ideas across different
                            engineering locations. in order to maximize engineering
                            efficiency,	 all	 locations	 follow	 identical	 processes,	 use	 the	
                            same environments and the engineers work on the above-
                            mentioned	unified	product	platforms.	Our	R & D headcount
                            reached a total of 389 employees at the end of 2007, up from
                            297 at the end of the previous year, and organized in product
                            areas (WDM core, WDM access, Ethernet access and network
                                                                                                           Test setup for the development of an ADVA Optical Networking
                            management / planning & control planes) and related prod-                                         optical transport function
                            uct line management. Our engineering locations are Berlin
                            and Meiningen in germany, richardson (texas), Norcross
                            (georgia) and Maclean (Virginia) in the u.S., Oslo in Norway,           the emphasis in 2008 will be on a continued increase of                     Focus 2008:
                            kista / Stockholm in Sweden, rumia / gdansk in Poland, york             our	engineering	efficiency	by	further	simplifying	our	prod-           executing against
                                                                                                                                                                          our product vision
                            in the united kingdom and Shenzhen in china. During 2007,               uct and site structures (i.e. the phase out of our kista /                  while increa-
                            we especially grew in Shenzhen and rumia / gdansk.                      Stockholm engineering activities announced at the end of                  sing	efficiency
                                                                                                    2007) while aggressively turning our product vision into re-
                                                                                                    ality with a focus on advanced technologies like 100 gbit/s
                                                                                                    Ethernet transport, passive optical networks (PONs) and
                                                                                                    enhanced Ethernet and SAN capabilities. Furthermore, with
                                                                                                    the creation of a new organization, the strategic materials
                                                                                                    management, we are combining strategic procurement and
                                                                                                    component engineering in an integrated approach to opti-
                                                                                                    mize and drive our suppliers.




48
                    Quality management
                                                                                                                                                                                    WElcOME



improvement         Quality management plays a crucial role in all ADVA Optical       Quality management is particularly important to ensure cus-         customer feed-
of quality levels   Networking business processes and is an inherent part of all      tomer satisfaction. We conduct an annual customer survey         back drives quality
across all corpo-                                                                                                                                           improvement
rate functions
                    research & development, operations and sales & marketing          to obtain comprehensive feedback as a basis for implement-                initiatives
                                                                                                                                                                                   MANAgEMENt
                                                                                                                                                                                     BOArD
                    activities. As in previous years, through continued supplier      ing improvements, and we systematically document the sat-
                    evaluation we have improved the quality of our suppliers.         isfaction of our customers for all larger projects in a prompt
                    this represents an important step for assuring high levels of     and thorough manner. Hence customer satisfaction, besides
                    product quality and reduced return rates. We have also sig-       pro forma operating income, represents a further compo-                                      SuPErViSOry
                    nificantly	 improved	 documentation	 of	 product	 defects,	 re-   nent in determining the variable compensation for members                                       BOArD
                    sponsibilities and problem resolutions, which enables us to       of the management team; beyond the members of the Man-
                    rapidly and systematically address issues as they arise. in       agement Board, this team also includes the second level of
                    2008, we will increase our project management resources           management. Further, with several years of customer feed-
                    in order to improve the external and internal visibility of our   back	data	collected,	we	have	seen	significant	improvements	                                   cOrPOrAtE
                                                                                                                                                                                   gOVErNANcE
                    ongoing quality improvement activities.                           in many areas. Quality management acts as a group-wide
                                                                                      overarching advisory function, which helps to uncover and
                                                                                      eliminate weaknesses in all areas and processes within the
                                                                                      Company.	It	contributes	to	greater	efficiency	and	improve-
                                                                                      ment in our process control.                                                                   StOck




                                                                                                                                                                                    iNVEStOr
                                                                                                                                                                                    rElAtiONS




                                                                                                                                                                                    BuSiNESS
                                                                                                                                                                                    OVErViEW




                                                                                                                                                                                   MANAgEMENt
                                                                                                                                                                                     rEPOrt




                                                                                                                                                                                    FiNANciAl
                                                                                                                                                                                   StAtEMENtS




                                                                                                                                                                                    ADDitiONAl
                                                                                                                                                                                   iNFOrMAtiON




                                                                                                                                                                              49
iFrs group
management
report       52 | Forward-looking statements

             52 | general economic and market conditions

             54 | First-time consolidation of Movaz Networks

             54 | Business development and operational performance

             59	|	 Net	assets	and	financial	position

             65 | Share capital and shareholder structure

             65 | Appointment and dismissal of Management Board members

             66 | changes of articles of association

             66 | issuance and buy-back of shares

             67 | take-over bid driven change of control provisions

             67 | Employees and social responsibility

             70 | remuneration of Management and Supervisory Boards

             71 | Environmental responsibility

             72 | risk report

             77 | Events after the balance sheet date

             78 | Outlook
 FOrWArD-lOOkiNg StAtEMENtS
 gENErAl EcONOMic AND
 MArkEt cONDitiONS




                              forward-looking statements                                      global economic prospects 1                                                   growth expected
                                                                                              Worldwide economic growth is projected to further ease to                        to be at 3.3%
                                                                                                                                                                                     in 2008
                                                                                              3.3% in 2008. High commodity prices, together with vol-
                              this group management report of ADVA Ag Optical Network-        atile equity and currency markets, are expected to con-
                              ing (ADVA Optical Networking) contains forward-looking          tinue to impact growth, especially in high-income countries
                              statements with words such as “believes”, “anticipates” and     and in some developing regions in 2008. Developing coun-
                              “expects” about expected revenues and earnings, anticipated     tries should again outperform high-income countries by a
                              demand for optical networking solutions, internal estimates     substantial margin, driven by strong domestic momentum
                              and liquidity. these forward-looking statements involve a       in most of the developing markets. Despite weaker growth
                              number of unknown risks, uncertainties and other factors        of u.S. imports, there are strong signs for continued robust
                              that could cause actual results to differ materially. unknown   spending by oil-exporting countries and vibrant expansion
                              risks, uncertainties and other factors are discussed in the     in china and india. real gross domestic product of devel-
                              “risk report” section further below.                            oping countries is expected to grow at least 7.0% in 2008.
                                                                                              2009 is likely to see slightly improved worldwide economic
                                                                                              expansion again, impacted by a recovery of the u.S. econ-
                              general economic and market conditions                          omy and otherwise stable economic growth.

                                                                                              market environment for ADVA Optical networking                                relevant market
       growth at              the global economy in 2007 1                                    In	 2007,	 communications	 equipment	 suppliers	 benefited                     grew by 25.8%
       3.6% in 2007                                                                                                                                                                 in 2007
                              global economic development eased in 2007 compared to           significantly	less	from	the	growing	global	economy	than	in	
                              the prior year. global real gross domestic product increased    the previous year. Especially during H2 2007, there were in-                   Average growth
                              by 3.6% in 2007 after 3.9% in 2006. this was driven by con-     creasing signs of an investment slow-down by carriers and                          of 22% per
                                                                                                                                                                              year expected
                              tinued rapid expansion in developing countries, especially in   enterprises alike. industry analysts continue to project that                    through 2010
                              China	and	India,	and	significantly	less	pronounced	growth	in	   the communications equipment market will grow, but at lower
                              high-income nations. the real gross domestic product of the     rates than before, at least for 2008. ADVA Optical Network-
                              developing countries expanded by 7.4% (2006: 7.5%), while       ing is particularly active in the segment for metro network-
                              the combined economies of the group of high-income nations      ing	solutions	based	on	fiber-optic	transmission	technology	
                              only grew by 2.6% (2006: 2.9%). Within this group, the Euro     and Ethernet-optimized data processing (Optical+Ethernet).
                              countries contributed with 2.7% growth (2006: 2.8%), the        Our addressable market is split into three areas: enterprise
                              u.S. with 2.2% (2006: 2.9%) and Japan with 2.0% (2006:          networks, carrier infrastructure and carrier Ethernet ac-
                              2.2%). After strong development during H1 2007, the global      cess. the market volume of ADVA Optical Networking’s rel-
                              business	climate	deteriorated	significantly	towards	the	end	    evant market segment amounted to uSD 2,390 million 2 (Eur
                              of	the	year,	reflecting	the	impact	of	the	U.S.	subprime	mort-   1,747 million 3) in the year 2007, 25.8% higher than in 2006.
                              gage crisis. Since mid-2007, global markets have entered a      Of this total volume, “Optical” accounted for uSD 2,100 mil-
                              phase	of	heightened	uncertainty,	reflected	in	increased	vol-    lion 2 (Eur 1,535 million 3), while “Ethernet” contributed uSD
                              atility in equity markets, commodity prices and exchange        290 million 2 (Eur 212 million 3). the growth of the overall
                              rates. Although fundamentals in many regions improved dur-      market is primarily driven by steadily increasing demand for
                              ing 2007, in H2 2007 growth rates weakened especially in        bandwidth from residential end customers and corporations,
                              the u.S., but also in many other countries.
                                                                                              2
                                                                                                  Source: industry analysts Dell’Oro group, infonetics research, Ovum rHk
                                                                                                  and ADVA Optical Networking internal estimates – October 2007.
                                                                                              3
                                                                                                  Source: industry analysts Dell’Oro group, infonetics research, Ovum rHk
                                                                                                  and ADVA Optical Networking internal estimates – October 2007, calcu-
                              1
                                  Source: the World Bank – January 2008.                          lated at the average exchange rate of uSD 1.36833 per Eur in 2007.




52
                 with carriers investing strongly in new optical networking in-     be strongest over the next three years. this trend is driven
                                                                                                                                                                                         WElcOME
                 frastructure solutions. As in the previous year, carrier cus-      by the substitution of legacy services with intelligent and uni-
                 tomer decisions to roll out triple play services (data, voice      fied	Ethernet-based	services,	fueled	by	increased	bandwidth	
                 and video) to residential end customers on a large scale were      demand from enterprises. For ADVA Optical Networking,
                 a major driver for many next-generation network infrastruc-        this market is an excellent opportunity to generate further
                 ture projects kicked off during 2007. Data storage, the con-       revenue	 and	 profit	 growth	 through	 new	 developments	 in	                                       MANAgEMENt
                                                                                                                                                                                          BOArD
                 vergence of enterprise networks and the expansion of local         Ethernet technology.
                 area networks to multiple locations are in particularly high
                 demand by enterprises. Furthermore, over the last couple
                                                                                        Addressable market                  2007          share        cAgr
                 of years, the Ethernet protocol has evolved into the stan-
                                                                                        and growth rates 2             usD billion       of total      2007-                            SuPErViSOry
                 dard carrier network protocol 4, replacing incumbent proto-                                                                                                               BOArD
                                                                                                                                                        2010
                 cols such as AtM and Frame relay. Based on these trends,
                 the overall market for our Optical+Ethernet solutions should           Enterprise networks                      350         15%         13%
                 grow by an average 22% per year through 2010.2
                                                                                                                                                                                         cOrPOrAtE
                                                                                        carrier infrastructure                 1,750         73%         20%                            gOVErNANcE
15% of total     market environment for enterprise networks
market           the market for enterprise networks comprises approximately             carrier Ethernet access                  290         12%         45%
Average growth   15% 2 of the total market and will grow at an average rate of
of 13% per       13% per year through 2010. increasing enterprise demand                total addressable
year expected
through 2010
                 for high bandwidth services is counterbalanced in part by a            Optical+ethernet                      2,390        100%         22%                               StOck

                 continued outsourcing trend, as enterprises increasingly uti-          market
                 lize the services of carriers instead of implementing or ex-
                 panding their own networks.
                                                                                                                                                                                         iNVEStOr
                                                                                                                                                                                         rElAtiONS
73% of total     market environment for carrier infrastructure                      in its overall market, ADVA Optical Networking continued to                   Strong market
market           the market for carrier infrastructure represents ADVA Op-          hold a strong position in 2007. For Ethernet access devices,                        position

Average growth   tical Networking’s most important opportunity at current.          with a 32% market share, we are the global market leader 5,
of 20% per       this area comprises 73% 2 of the total addressable market          and for metro optical transport solutions we rank second in
year expected                                                                                                                                                                            BuSiNESS
through 2010
                 and will grow by an average 20% 2 per year through 2010.           EMEA (Europe, Middle East and Africa) and fourth worldwide,                                          OVErViEW
                 the market for carrier infrastructure with a volume of uSD         with market shares of 19% and 12%, respectively.6 All in all,
                 1,750 million 2 (Eur 1,279 million 3) grew a strong 25.0% in       this makes ADVA Optical Networking one of the top global
                 2007, primarily due to expanding bandwidth demand from             suppliers of metro Optical+Ethernet solutions.
                 the carriers’ residential and business customers. Expanding                                                                                                            MANAgEMENt
                                                                                                                                                                                          rEPOrt
                 data	traffic	will	continue	to	strain	existing	networks,	thereby	
                 requiring carriers to further build out their infrastructure in
                 the future.
                                                                                                                                                                                         FiNANciAl
12% of total     market environment for carrier ethernet access                                                                                                                         StAtEMENtS
market           ADVA Optical Networking traditionally holds a strong posi-
Average growth   tion in this area, which makes up 12% 2 of the total address-
of 45% per       able market. At an average annual accretion rate of 45% 2,         5
                                                                                        Source: infonetics research, October 2007, based on 2006 total revenues
year expected
through 2010
                 growth in the carrier Ethernet access market is projected to           for Ethernet access devices.                                                                     ADDitiONAl
                                                                                                                                                                                        iNFOrMAtiON
                                                                                    6
                                                                                        Source: Ovum rHk, November 2007, based on Q4 2006 to Q3 2007 total
                 4
                     Source: infonetics research, January 2008.                         revenues for metro optical transport equipment.




                                                                                                                                                                                   53
 FirSt-tiME cONSOliDAtiON OF
 MOVAZ NEtWOrkS
 BuSiNESS DEVElOPMENt AND
 OPErAtiONAl PErFOrMANcE




                               first-time consolidation of                                      tinued to successfully maintain our market position, and we
                               Movaz Networks                                                   continue to meet the demand of a broad customer base, with
                                                                                                more than 200 carriers and more than 10,000 enterprises
                                                                                                served. During 2007, we added new accounts and expanded
                               in July 2006, ADVA Optical Networking completed the ac-          our relationships with existing customers.
                               quisition of Movaz Networks, a leading u.S.-based opti-
                               cal equipment provider. Movaz operations are contained           the most important sales region in 2007 remained EMEA, fol-              EMEA is most
                               in	the	consolidated	financial	statements	beginning	July	12,	     lowed	by	the	Americas	and	Asia-Pacific.	With	a	strong	project	         important sales
                                                                                                                                                                      region, followed
                               2006.	Hence	the	comparison	of	the	financial	statements	of	       flow	and	new	product	features	introduced	to	the	market,	we	           by the Americas
                               ADVA Optical Networking for 2007 and for 2006 is not self-       increased EMEA revenues by 26.8% from Eur 125.3 million               and	Asia-Pacific
                               explanatory.                                                     to Eur 158.8 million. the share of total revenues declined
                                                                                                from	65.0%	to	63.2%,	driven	by	the	first-time	full-year	con-
                                                                                                solidation of Movaz revenues in 2007. given the u.S.-heavy
                               Business development and                                         Movaz consolidation effect, declining revenues with one ma-
                               operational performance                                          jor u.S. distribution channel and otherwise strong organic
                                                                                                growth in the Americas, revenues in this region increased
                                                                                                from Eur 62.6 million in 2006 by 32.4% to Eur 82.9 million
        record revenues        revenues                                                         in 2007. the corresponding share of total revenues increased
        in 2007, although      in 2007, ADVA Optical Networking generated record reve-          slightly	from	32.5%	to	32.9%.	In	the	Asia-Pacific	region,	rev-
        below original
        expectations
                               nues of Eur 251.5 million. in comparison to revenues of Eur      enues in 2007 were at a sound Eur 9.8 million after Eur 4.8
                               192.7 million in 2006, this represents a growth of 30.5% and     million in 2006. We saw nice traction in this region in 2007,
                               is in line with the latest guidance issued in December 2007      driven by both new customer wins and expanded relation-
                               of between Eur 248 million and Eur 253 million. However,         ships with existing customers. We will continue to focus on
                               the development of revenues is disappointing when com-           translating enhanced customer access into additional reve-
                               pared to our original expectation of at least Eur 260 million    nues	going	forward.	The	Asia-Pacific	region	comprised	3.9%	
                               as released in March 2007 and to our even more optimistic        of total revenues in 2007, compared to 2.5% in 2006.
                               guidance of at least Eur 267 million released in May 2007.
                               key drivers for the decline of our revenue expectations in H2    We will continue to focus on expanding our presence in the           Market presence
                               2007	included	significantly	declining	revenues	with	one	ma-      Americas	 and	 Asia-Pacific	 to	 improve	 our	 market	 share	 in	     in the Americas
                                                                                                                                                                    and	in	Asia-Pacific	
                               jor u.S. distribution channel between Q1 and Q3 2007 and         these	regions	and	to	benefit	from	the	growth	opportunities	             will be further
                               overall weaker business than originally expected in Q4 2007.     there. Since we are only active in a single operating seg-                   expanded
                               the revenue increase 2007 versus 2006 results from organic       ment, the development, production and marketing of opti-
                               growth in our core markets, as well as consolidation of the      cal networking solutions, a further breakdown of revenues
                               Movaz operations, which have been included for the full year     is not possible.
                               2007, but were only included for 2006 from July 12. the in-
                               crease	 was	 dampened	 by	 significantly	 declining	 revenues	
                               with the distribution channel mentioned above, overshad-
                               owing strong growth in our underlying business. Here, we
                               have seen high-growth residential triple play (data, voice and
                               video) and Ethernet access business opportunities, strong
                               demand for metro infrastructure deployments and ongoing
                               momentum in the market for enterprise solutions, including
                               storage and local area network connectivity. We have con-




54
revenues by region (in millions of Eur)                                    results of operations
                                                                   Total                                                                                 WElcOME



                             83.1                           81.4%           (in millions of Eur,
2004      13.2                                              12.9% 102.1
        5.9                                                  5.7%           except                              portion of            portion of
                                                                            earnings per share)        2007      revenues    2006      revenues
                                                                                                                                                        MANAgEMENt
                                    103.1                   78.5%
2005           23.7                                         18.1% 131.3                                                                                   BOArD
        4.4                                                  3.4%           revenues                   251.5     100.0%      192.7     100.0%

                                            125.3           65.0%
2006                  62.6                                  32.5% 192.7     cost of goods sold         -151.4      60.2%     -109.9      57.1%
        4.8                                                  2.5%
                                                                                                                                                        SuPErViSOry
                                                    158.8   63.2%           Gross profit               100.1       39.8%      82.8       42.9%             BOArD
2007                         82.9                           33.0% 251.5
         9.8                                                 3.9%
                                                                            Selling and
                                                                            marketing expenses          -34.6      13.8%      -29.8      15.5%
       • EMEA                • Americas              •	Asia-Pacific         general and                                                                  cOrPOrAtE
                                                                            administrative expenses     -26.8      10.6%      -20.0      10.4%          gOVErNANcE

                                                                            research and
                                                                            development expenses        -42.5      16.9%      -30.2      15.7%

                                                                            income from capitali-
                                                                            zation of development                                                         StOck
                                                                            expenses, net of amor-
                                                                            tization for capitalized
                                                                            development projects          2.3        0.9%       4.6        2.4%

                                                                            Amortization of intangi-
                                                                                                                                                         iNVEStOr
                                                                            ble assets from
                                                                                                                                                         rElAtiONS
                                                                            acquisitions                -17.3        6.9%      -6.7        3.5%

                                                                            Other operating income
                                                                            (expenses), net               0.1        0.0%       0.2        0.1%

                                                                            Operating                                                                    BuSiNESS
                                                                                                       -18.7             -     0.9        0.5%
                                                                            income (loss)                                                                OVErViEW


                                                                            interest income
                                                                            (expense), net               -0.9        0.3%      -0.5        0.3%

                                                                            Other income                                                                MANAgEMENt
                                                                            (expense), net               -1.7        0.7%      -1.4        0.7%           rEPOrt


                                                                            loss before tax            -21.3             -    -1.0             -

                                                                            Income	tax	(benefit)	
                                                                            expense, net                 -8.2        3.2%      -9.3        4.8%          FiNANciAl
                                                                                                                                                        StAtEMENtS
                                                                            net loss                   -29.5             -   -10.3             -
                                                                            Earnings per share in
                                                                            Eur
                                                                              basic                     -0.64                 -0.26                      ADDitiONAl
                                                                                                                                                        iNFOrMAtiON
                                                                              diluted                   -0.64                 -0.26




                                                                                                                                                   55
 BuSiNESS DEVElOPMENt AND
 OPErAtiONAl PErFOrMANcE




        lower gross         Gross	 profit	 increased	 from	 EUR	 82.8	 million	 in	 2006	 to	             Selling and marketing expenses at Eur 34.6 million were up         Selling and mar-
        margin largely      Eur 100.1 million in 2007, comprising 42.9% and 39.8% of                      16.1% in 2007, developing more moderately than revenues.           keting expenses
        relates to Movaz                                                                                                                                                          grew slower
        acquisition and
                            revenues, respectively. the change in gross margins largely                   However,	 selling	 and	 marketing	 expense	increased	 signifi-       than revenues
        a one-off write-    resulted from initially lower gross margin Movaz operations                   cantly	in	Q4	2007,	reflecting	the	expansion	of	our	direct	touch	
        down of outdated    affecting H2 2006 and full-year 2007 as well as from a one-off                initiative as well as our direct sales force to win new custom-
        inventory items     non-cash write-down of outdated inventory items amount-                       ers. Establishing direct contact with enterprises and carriers
                            ing to Eur 5.5 million in Q4 2007. Excluding this write-down,                 enables us to work more closely with our end customers and
                            the 2007 gross margin would have been at 42.0% of reve-                       better	understand	their	specific	requirements,	which	in	turn	
                            nues. Further, the development of gross margins was im-                       helps us to develop the right products and solutions.
                            pacted by variations in regional revenue distribution and by
                            a higher revenue share of the carrier infrastructure business                 selling and marketing expenses
                            with typically below-average gross margins. Excluding the                     (in millions of Eur and relative to total revenues)
                            mentioned one-off inventory write-down, gross margins by
                            tendency followed an increasing trend over the quarters of                                                                    100.1
                            2007,	and	for	full-year	2007	were	significantly	above	H2	2006	                                                                   34.6
                                                                                                                                              29.8
                            levels of 39.6%. While average selling prices have contin-
                                                                                                                               19.1
                            ued to decrease at similar rates as in the previous year, we                        14.9
                            were able to reduce our costs of goods sold by the same or-
                            der of magnitude. Procurement prices for components have                           14.6%           14.6%          15.5%          13.8%
                            steadily declined over the last few years. Also, with increas-                      2004           2005           2006           2007
                            ing group size and strategic procurement activities, we con-
                            tinue to drive long-term favorable purchase price levels.
                                                                                                          general and administrative expenses at Eur 26.8 million                general and
                            Gross profit                                                                  were up 34.1% in 2007 and grew about in line with revenues.          administrative
                                                                                                                                                                              expenses grew
                            (in millions of Eur and relative to total revenues)                           the increase is largely due to additional engineering-driven         roughly in line
                                                                                                          license fees, as well as increased personnel and recruitment         with revenues
                                                                                                 105.6*   costs	to	improve	back	office	processes.
                                                                        82.8             100.1
                                                     63.6                                                 general and administrative expenses
                                  50.3                                                                    (in millions of Eur and relative to total revenues)


                                  49.5%             48.4%             42.9%              39.8% 42.0%*                                                         26.8
                                                                                                                                               20.0
                                                                                                                               16.0
                                  2004               2005              2006              2007                   12.6

                                                                                                                12.3%          12.2%          10.4%          10.6%
                            * Excluding one-off non-cash cost of goods sold of Eur 5.5 million in 2007.
                                                                                                                2004           2005           2006           2007




56
                     ADVA Optical Networking’s research and development ac-          Amortization of intangible assets from acquisitions more                   impairment
                                                                                                                                                                of goodwill,         WElcOME
                     tivities are driven by the distinct emphasis on differentiat-   than doubled from Eur 6.7 million in 2006 to Eur 17.3 mil-
                                                                                                                                                                  purchased
                     ing our highly innovative Optical+Ethernet solutions, working   lion in 2007, driven by one-off impairments of goodwill (Eur       technology and in-
                     with customers and partners to identify and meet their cur-     6.6 million), purchased technology (Eur 1.0 million) and in-         process r & D due
                     rent and future needs. the resulting key technologies and       process r & D projects (Eur 1.0 million). the impairment of         to a more conser-
                     products radically simplify complicated network structures,     goodwill relates to valuation adjustments of ADVA Optical                vative assess-        MANAgEMENt
                                                                                                                                                            ment of related           BOArD
                     while reducing operating and capital expenses and supple-       Networking’s subsidiaries in the united kingdom (Eur 3.0                future	benefits
                     menting existing solutions. During 2007, our r & D activities   million), Sweden (Eur 2.3 million) and Norway (Eur 1.3 mil-
                     focused on the consolidation of our portfolio towards two       lion). While our Swedish research and development facility
                     hardware platforms (FSP 3000 and FSP 150) and one inte-         will be closed in H1 2008 as part of a global restructuring ini-                               SuPErViSOry
                     gral software platform (FSP Network Management System,          tiative, our united kingdom and Norway operations as well                                         BOArD
r & D expenses       NMS). At Eur 42.5 million, in 2007 r & D expenses were up       as our purchased technology and in-process r & D projects
grew more            40.9% from the levels seen the year before, a dispropor-        are assumed to generate more moderate economic bene-
pronounced
than revenues
                     tionately high increase largely driven by development ac-       fits	 than	 previously	 estimated.	 Regular	 amortization	 was	
                     tivities for our enhanced FSP 3000r7 WDM platform, the          Eur 8.7 million in 2007 after Eur 6.7 million in 2006, and                                      cOrPOrAtE
                                                                                                                                                                                    gOVErNANcE
                     former Movaz FSP 3000rE / rr platforms and our Ethernet         related to intangible assets resulting from the acquisitions
                     access products. in 2007, r & D expenses comprised 16.9%        of Movaz (July 2006, Eur 7.0 million after Eur 5.0 million),
impairment           of revenues, after 15.7% in the previous year. income from      covaro (January 2006, Eur 1.1 million after Eur 1.0 million)
of capitalized       capitalization of development expenses, net of amortization     and Metro Packet Systems (September 2004, Eur 0.6 mil-
development
expenses due to a
                     for capitalized development projects, at Eur 2.3 million was    lion after Eur 0.7 million).                                                                     StOck

more conservative    down from Eur 4.6 million in 2006. the 2007 number was
assessment of the    impacted by a one-off impairment of Eur 4.6 million due         Amortization of intangible assets from acquisitions
revenue potential    to a more conservative assessment of the revenue poten-         (in millions of Eur)
of select products
                     tial of select products, after a respective impairment of Eur                                                                                                   iNVEStOr
                                                                                                                                                                                     rElAtiONS
                     0.1 million in 2006. Stripping out the impairment effect, net
                     capitalization of r & D expenses would have been at Eur 6.9                                                        17.3
                     million in 2007 after Eur 4.5 million in 2006.
                                                                                                                                                                                     BuSiNESS
                     research and development expenses                                                                   6.7                                                         OVErViEW
                     (in millions of Eur and relative to total revenues)                   3.1
                                                                                                            0.7

                                                                      42.5                 2004             2005         2006           2007
                                                                                                                                                                                    MANAgEMENt
                                                                                                                                                                                      rEPOrt
                                                        30.2

                                         15.5
                                                                                        • regular amortization • impairment of goodwill
                          12.3                                                          • impairment of purchased technology and in-process
                          12.1%         11.8%          15.7%         16.9%                 r & D projects                                                                            FiNANciAl
                                                                                                                                                                                    StAtEMENtS
                          2004           2005          2006           2007



                     • Net r & D expenses • Net capitalization effect
                     • One-off noan-cash write-off of capitalized r & D expenses                                                                                                     ADDitiONAl
                                                                                                                                                                                    iNFOrMAtiON




                                                                                                                                                                               57
 BuSiNESS DEVElOPMENt AND
 OPErAtiONAl PErFOrMANcE
 NEt ASSEtS AND
 FiNANciAl POSitiON




        Excluding one-       Overall, ADVA Optical Networking reported an operating loss       dit. A 2006 Eur 38.5 million tax balance sheet write-up of
        off items, the       of Eur 18.7 million in 2007 after an operating income of Eur      ADVA Ag Optical Networking’s investment in ADVA Optical
        slightly decreased
        operating income
                             0.9	million	in	the	previous	year.	The	strong	decline	in	profit-   Networking ltd., york, united kingdom had resulted in in-
        is driven by lower   ability was largely due to the one-off non-cash charges for       creased	tax	expenses	in	2006.	Based	on	the	tax	audit	find-
        gross margins,       the write-down of outdated inventory items as well as for im-     ings, the write-up was reversed however, since an existing
        higher r & D         pairments of capitalized r & D expenses, goodwill, purchased      Eur 63.6 million tax balance sheet write-down of the same
        expenses and
        increased regular
                             technology and in-process r & D projects discussed above.         investment posted in 2001 was not accepted by the tax au-
        amortization of      Without taking into account these one-off items, ADVA Op-         ditors, implying tax income for 2007.
        intangible assets    tical Networking would have reported an operating loss of
                             Eur -0.1 million in 2007 (regular operating loss), compared       Additional factors impacting net loss were foreign currency
                             to an operating income of Eur 0.9 million in 2006. this de-       exchange losses of Eur 1.3 million (2006: Eur 1.1 million),
                             crease is largely driven by lower gross margins, higher r & D     net interest expenses of Eur 0.9 million (2006: Eur 0.5
                             expenses and increased regular amortization of intangible         million) and losses from investments accounted for by the
                             assets from acquisitions.                                         equity method of Eur 0.4 million (2006: Eur 0.3 million).
                                                                                               Foreign currency exchange losses largely related to the on-
                             Operating income (loss)                                           going devaluation of the uSD currency during the year, and
                             (in millions of Eur and relative to total revenues)               the increase in net interest expenses is largely due to higher
                                                                                               average	financial	liabilities	in	2007	than	in	2006.
                                                  17.2
                                   8.5
                                                                                               net income (loss)
                                  8.3%           13.1%           0.9                           (in millions of Eur)
                                                                0.5%
                                                                               -7.4%
                                                                                                                      11.9
                                                                               -18.7                 7.2
                                   2004          2005           2006           2007
                                                                                                                                     -10.3


                             • regular operating income (loss)                                        11.8%                  15.7%               -29.5

                             • One-off non-cash effects                                             2004              2005           2006        2007



                             given the operating income development, we are reporting
        Significant	net	
        loss is driven by    a net loss for 2007 in the amount of Eur 29.5 million, after
                                                                                               • Operating income (loss)
        operating loss
                             a net loss of Eur 10.3 million in 2006. in particular, beyond
                                                                                               • Other pre-tax income (expense)
        and tax charges
                             the operating loss, income tax expenses amounting to Eur
                                                                                               •	Income	tax	benefit	(expense)
                             8.2 million drove the 2007 net loss. the tax expense results
                             from Eur 10.0 million in deferred tax expenses primarily          Basic and diluted earnings per share were each Eur -0.64
                             related to lower deferred tax assets for tax-loss carry-for-      in 2007 after each Eur -0.26 in the prior year. Basic and di-
                             wards and for goodwill on acquisitions following an adjust-       luted weighted average shares outstanding increased each
                             ment resulting from the ongoing 2001 to 2004 tax audit in         by 5.4 million to 45.7 million each in 2007, largely driven by
                             ADVA Ag Optical Networking. in part, the deferred tax ex-         the 2006 issuance of new shares related to the acquisition
                             penses were offset by Eur 1.8 million in current tax income,      of Movaz (+6.5 million shares in July 2006) and a capital in-
                             also	related	to	preliminary	findings	of	the	mentioned	tax	au-     crease for cash in October 2006 (+1.3 million shares).




58
                      Net assets and financial position                                           dors drive short reaction times. trade accounts receivable
                                                                                                                                                                             WElcOME
                                                                                                  decreased as well, from Eur 53.6 million at year-end 2006
                                                                                                  to Eur 49.4 million at year-end 2007, largely due to a lower
                      Balance sheet structure                                                     Q4 2007 revenue base than in Q4 2006. Days sales outstand-
                      ADVA Optical Networking’s total assets decreased by Eur                     ing grew from 73 in 2006 to 79 in 2007, related to a higher
                      27.3 million or 11.7% from Eur 232.7 million at year-end                    portion of infrastructure business with typically longer pay-             MANAgEMENt
                                                                                                                                                                              BOArD
                      2006 to Eur 205.4 million at the end of 2007.                               ment terms. Due to the global nature of our sales activities,
                                                                                                  significant	parts	of	our	accounts	receivable	result	in	GBP	and	
                                                                                                  USD	cash	inflows.	The	decrease	in	current	assets	in	part	was	
                       (as of December 31, in millions of Eur)              2007      2006 *      cushioned by an increase in cash and cash equivalents from                SuPErViSOry
                                                                                                  Eur 32.2 million at year-end 2006 to Eur 41.6 million at the                 BOArD

                       current assets                                      128.5          132.2   end	of	December	2007,	largely	resulting	from	increased	fi-
                                                                                                  nancing. tax assets also rose, by Eur 3.7 million to Eur 4.4
                       Non-current assets                                    76.9         100.5   million at year-end 2007, related to increased tax prepay-
                                                                                                  ments and value-added tax receivables.                                     cOrPOrAtE
                       total assets                                        205.4      232.7                                                                                 gOVErNANcE

                                                                                                  the 23.4% decline in non-current assets from Eur 100.5 mil-
                                                                                                  lion at year-end 2006 to Eur 76.9 million on December 31,
                       current liabilities                                   47.8          66.6   2007, explains 86.3% of the reduced balance sheet total. the
                                                                                                  decrease is driven by a variety of major factors. Deferred                  StOck
                       Non-current liabilities                               47.0          27.8   tax assets declined from Eur 12.5 million to Eur 2.2 million,
                       Stockholders’ equity                                 110.6         138.3   primarily	caused	by	adjusted	estimates	of	the	financial	im-
                                                                                                  pact of an ongoing tax audit and by changes to the german
                       total equity and liabilities                        205.4      232.7       corporation tax legislation that will come into force in 2008.             iNVEStOr
                                                                                                                                                                             rElAtiONS
                                                                                                  Further, purchased technology was at Eur 13.1 million at
                      * Non-current assets and stockholders’ equity have been restated.           year-end 2007 after Eur 22.4 million at the end of the pre-
                                                                                                  vious year, and in-process r & D projects at nil after Eur 1.7
                                                                                                  million. the decline of these balance sheet items is largely               BuSiNESS
Balance sheet total   Eur 3.7 million or 13.7% of this drop was driven by the de-                 due to scheduled amortization of Eur 8.6 million and impair-               OVErViEW
decreased largely     velopment of our current assets, which fell from Eur 132.2                  ments of Eur 2.0 million. in addition, goodwill dropped from
as a result of
lower non-current
                      million to Eur 128.5 million, and comprised 62.5% of the                    Eur 24.2 million to Eur 20.0 million, mainly related to valu-
assets, due to a      balance sheet total after 56.8% at the end of the prior year.               ation adjustments of ADVA Optical Networking’s subsidiaries
decrease in de-       the decrease of current assets is impacted by a Eur 11.0                    in the united kingdom, Sweden and Norway. these subsid-                   MANAgEMENt
ferred tax assets                                                                                                                                                             rEPOrt
                      million reduction of inventories to Eur 31.0 million at year-               iaries are assumed to generate more moderate economic
and impairment
and amortiza-
                      end 2007, due to improved inventory management and a                        benefits	 than	 estimated	 before.	 Finally,	 with	 the	 Q3	 2007	
tion of intan-        Eur 5.5 million one-off non-cash write-down of outdated                     sale of our 31% share in Olympus Microsystems America,
gible assets          inventory items. related to a higher share of infrastructure                investments accounted for by the equity method decreased
                                                                                                                                                                             FiNANciAl
                      business,	which	requires	more	inventory	flexibility	than	the	               from Eur 3.0 million at the end of December 2006 to nil at                StAtEMENtS
                      enterprise and Ethernet access businesses, inventory turn-                  year-end 2007. compensating these effects to some extent
                      over declined from 4.2x in 2006 to 3.7x in 2007. We aim to                  are the increase of other intangibles assets from Eur 4.0
                      keep inventories as low as possible, however also need to                   million to Eur 6.6 million, partially related to enterprise re-
                      ensure that order lead times for our customers are minimal.                 source planning software licenses. Also, capitalized r & D ex-             ADDitiONAl
                                                                                                                                                                            iNFOrMAtiON
                      Flexible supply agreements we have in place with our ven-                   penses rose from Eur 10.2 million to Eur 12.2 million and




                                                                                                                                                                       59
 NEt ASSEtS AND
 FiNANciAl POSitiON




                                property, plant and equipment from Eur 19.3 million to Eur              Stockholders’ equity decreased from Eur 138.3 million at          lower stock-
                                20.6 million.                                                           year-end 2006 to Eur 110.6 million at the end of 2007, mainly   holders’ equity
                                                                                                                                                                        due to net loss
                                                                                                        due to the net loss reported for 2007. the equity ratio was
        Additional off          Major additional assets to ADVA Optical Networking are our              at 53.9% at the end of 2007, after 59.4% at year-end 2006.
        balance sheet           broad and global customer base of more than 200 carriers                the non-current assets ratio amounted to 143.8% on De-
        assets
                                and more than 10,000 enterprises, the ADVA Optical Net-                 cember 31, 2007, fully covering the non-current assets and
                                working brand and our vendor and partner relationships.                 a portion of the current assets. this healthy balance sheet
                                these assets are not included in the balance sheet.                     structure	reflects	our	careful	financing	strategy.

        total liabilities       On the liabilities and equity side, current liabilities decreased
        are about unchan-                                                                                Balance sheet ratios                       2007     2006
                                significantly	from	EUR	66.5	million	at	year-end	2006	to	EUR	
        ged;	refinancing	                                                                                (as of December 31, in %)
        of current with
                                47.8 million at the end of 2007, primarily due to a reduction
        non-current             in	 current	 financial	 liabilities.	 Trade	 accounts	 payable	 also	
        financial	liabilities   decreased, from Eur 22.8 million at year-end 2006 to Eur                                  Stockholders’ equity
                                                                                                         Equity ratio                                53.9     59.4 *
                                18.7 million at year-end 2007. Days payable outstanding of                                total assets
                                51 days in 2007 compared to 46 days in 2006. Deferred reve-
                                nues declined from Eur 8.2 million to Eur 5.3 million. these
                                                                                                         Non-current      Stockholders’ equity
                                effects were offset in part by an increase in current provi-                                                        143.8    137.6 *
                                                                                                         asset ratio      Non-current assets
                                sions from Eur 4.9 million to Eur 6.2 million. Also, other
                                current liabilities rose from Eur 9.4 million to Eur 10.7 mil-
                                lion during 2007.                                                        liability        current liabilities
                                                                                                                                                     50.4     70.5
                                                                                                         structure        total liabilities
                                Non-current liabilities were up from Eur 27.8 million at year-
                                end 2006 to Eur 47.0 million at the end of 2007, largely re-
                                lated	to	an	increase	in	non-current	financial	liabilities.              * Adjusted.




60
                       capital expenditures                                              Cash flow
                                                                                                                                                                                                 WElcOME
capital ex-            capital expenditures for additions to property, plant and         Cash	flow	from	operating	activities	at	EUR	25.2	million	was	               Strong operating
penditures for         equipment	and	finance	leases	in	2007	amounted	to	EUR	8.6	         positive in 2007 after negative Eur 7.9 million in 2006, which           cash	flow	based	on	
property, plant and                                                                                                                                                 reduced invento-
equipment and
                       million, down from Eur 12.0 million in 2006. the decrease is      was largely due to two factors. Firstly, the strong decrease of           ries and accounts
financial	leases	      largely due to the one-off expansion of our development and       inventories	in	2007	after	a	significant	increase	of	this	balance	                 receivable
are lower than in      production facility in Meiningen in 2006. in 2007, investments    sheet item in 2006. While the 2006 increase was largely re-                                            MANAgEMENt
                                                                                                                                                                                                  BOArD
previous year, due     in production and test equipment and in r & D workstations        lated to the addition of Movaz inventories to the group’s bal-
to 2006 expansion
of Meiningen
                       were at similar levels to the previous year and comprised         ance sheet and reduced inventory turns, the 2007 decrease
production facility    the largest part of the capital expenditures for additions to     primarily is driven by one-off write-down of outdated inven-
                       property,	plant	and	equipment	and	finance	leases.                 tory items. Secondly, the 2007 decrease in accounts receiv-                                            SuPErViSOry
                                                                                         able following a major increase in 2006 contributed to the                                                BOArD
capital expen-         capital expenditures for intangible assets of Eur 13.1 mil-       positive	operating	cash	flow	development.	In	2006,	accounts	
ditures for intangi-   lion	in	2007	are	significantly	up	from	EUR	6.8	million	in	the	    receivable had increased due to the acquisition of Movaz and
ble assets are up
                       previous year. this total is comprised of capitalized r & D ex-   higher days of sales outstanding related to a higher portion
                       penses of Eur 9.6 million in 2007 after Eur 5.9 million in        of infrastructure business than before. the 2007 decrease                                               cOrPOrAtE
                                                                                                                                                                                                gOVErNANcE
                       2006 and of purchased licenses, software and other intan-         of accounts receivable largely relates to the weak revenue
                       gible assets amounting to Eur 3.5 million in 2007 after Eur       development seen in Q4 2007.
                       0.9 million in 2006. capital expenditures for purchased li-
                       censes, software and other intangible assets were primarily       Cash	flow	from	investing	activities	was	EUR	-21.2	million	in	                     Moderately
                       due to the introduction of a group-wide enterprise resource       2007 after Eur -18.4 million in the previous year. the in-                  increased use of             StOck
                                                                                                                                                                       funds for inve-
                       planning software in 2007.                                        creased use of funds for investing activities is largely due to               sting activities
                                                                                         higher capitalized development expenses and the purchase
                                                                                         of software licenses related to the introduction of a group-
                                                                                         wide enterprise resource planning system. this effect was                                               iNVEStOr
                                                                                                                                                                                                 rElAtiONS
                                                                                         compensated in part by lower investments in property, plant
                                                                                         and equipment, which were extraordinary high in 2006, due
                                                                                         to the expansion of our development and production facil-
                                                                                         ity in Meiningen.                                                                                       BuSiNESS
                                                                                                                                                                                                 OVErViEW
                                                                                         Finally,	cash	flow	from	financing	activities	at	EUR	4.9	million	                   Financing
                                                                                         in	2007	was	significantly	below	the	2006	level	of	EUR	30.4	                   proceeds from
                                                                                                                                                                  minor expansion of
                                                                                         million.	 Following	 a	 significant	 increase	 of	 financial	 liabili-    financial	liabilities
                                                                                         ties and the proceeds from a capital increase against cash                                             MANAgEMENt
                                                                                                                                                                                                  rEPOrt
                                                                                         in	2006,	the	2007	cash	flow	from	financing	resulted	largely	
                                                                                         from	moderately	increased	financial	liabilities.


                                                                                                                                                                                                 FiNANciAl
                                                                                                                                                                                                StAtEMENtS




                                                                                                                                                                                                 ADDitiONAl
                                                                                                                                                                                                iNFOrMAtiON




                                                                                                                                                                                           61
 NEt ASSEtS AND
 FiNANciAl POSitiON




                      Overall, including the net effect of foreign currency transla-   financing
                      tion on cash and cash equivalents of Eur 0.5 million (2006:      The	goal	of	ADVA	Optical	Networking’s	financial	management	        Strong equity base
                      Eur 0.4 million), cash and cash equivalents rose by Eur 9.4      is	to	provide	sufficient	funds	to	ensure	ongoing	operations	
                      million in 2007, from Eur 32.2 million at year-end 2006 to       and to support the group’s projected growth. Beyond the               Financial liabili-
                      Eur 41.6 million at year-end 2007, after an increase of Eur      strong equity base appropriate for our high-growth business,           ties are mostly
                                                                                                                                                                 non-current
                      4.5 million in the previous year.                                we	finance	ADVA	Optical	Networking’s	business	by	means	of	
                                                                                       liabilities with maturities typically exceeding the life of the
                      liquidity development (in millions of Eur)                       assets	financed	by	these	liabilities.	For	any	liability	taken,	
                                                                                       we are focused on minimizing related interest cost, as long
                                                                                       as accessibility of funds is not at risk. Excess funds are used
                       Dec. 31, 2005                  27.7                             either to redeem debt or are invested in short-term interest-
                                               -7.9
                                                                                       bearing term deposits or money market funds.

                               2006    -18.4
                                                                                        financial liabilities                       2007      2006
                                                          +30.8                         (as of December 31, in millions of Eur)
                       Dec. 31, 2006                      32.2
                                                                                        Property loans                                 0.4       0.4
                                                                          +25.2

                               2007                    -21.2                            Other	current	financial	liabilities            0.2      13.5
                                                                  +5.4
                                                                                        Total current financial liabilities            0.6     13.9
                       Dec. 31, 2007                              41.6

                                                                                        Property loans                                 0.6       1.0

                      • cash and cash equivalents                                       Other	non-current	financial	liabilities       34.8      15.0
                      •	Cash	flow	from	investing	activities
                      •	Cash	flow	from	operating	activities                             total non-current
                      •	Other	cash	flow                                                 financial liabilities
                                                                                                                                     35.4      16.0

                      Other	cash	flow	represents	cash	flow	from	financing	activ-
                      ities and the net effect of foreign currency translation on       Total financial liabilities                  36.0      29.9
                      cash and cash equivalents.

                                                                                       Total	financial	liabilities	increased	from	EUR	29.9	million	at	
                                                                                       year-end 2006 to Eur 36.0 million at the end of 2007. All
                                                                                       financial	liabilities	were	exclusively	denominated	in	EUR	at	
                                                                                       the end of both periods. the non-current portion increased
                                                                                       significantly	from	EUR	16.0	million	at	December	31,	2006,	
                                                                                       to Eur 35.4 million at year-end 2007, while we decreased
                                                                                       the current portion from Eur 13.9 million to Eur 0.6 million.
                                                                                       This	shift	from	current	to	non-current	financial	liabilities	re-
                                                                                       flects	our	strategy	to	ensure	a	solid	financing	structure	with	




62
a high portion of medium to long-term funding at most fa-                           interest payments for the Eur 0.9 million long-term prop-
                                                                                                                                                                              WElcOME
vorable rates.                                                                      erty	loan	from	UniCredit	float	and	are	based	on	the	6M	EU-
                                                                                    RIBOR.	The	floating	rate	is	capped,	however,	via	a	matching	
the following table gives an overview on interest terms and                         interest rate swap agreement.
the	maturity	structure	of	each	financial	liability	at	year-end	
2007:                                                                               committed loans excluding property loans at year-end 2007                                MANAgEMENt
                                                                                                                                                                               BOArD
                                                                                    amounted to Eur 43.0 million after Eur 30.5 million at the
     financial                                                                      end of the previous year, out of which Eur 35.0 million and
     liabilities                                                                    Eur 28.5 million were drawn, respectively. Further details
     by maturity         Balance                              maturity
     (in millions of   as of Dec.         interest              2009-    After      about	our	financial	liabilities	can	be	found	in	note	(14)	to	the	                        SuPErViSOry
     Eur)               31, 2007            terms      2008      2010    2010       consolidated	financial	statements.                                                          BOArD


     unicredit            0.9   a
                                      Floating rate,    0.3        0.6          -   Finance lease obligations declined from Eur 2.2 million to
                                          based on
                                      6M EuriBOr                                    Eur 1.2 million. given the increase in cash and cash equiv-           increased
                                                                                    alents	overcompensating	the	increase	in	financial	liabilities,	     net liquidity         cOrPOrAtE
                                                                                                                                                                             gOVErNANcE
     city of              0.1               Free of     0.1        0.0          -   our net liquidity rose from Eur 0.3 million to Eur 4.5 mil-
     Meiningen                             interest
                                                                                    lion. cash and cash equivalents of Eur 41.6 million at year-
     total
     property
                                                                                    end 2006 and of Eur 32.2 million at the end of the previous
     loans               1.0                            0.4       0.6           -   year were invested in gBP and Eur to the largest extent. At
                                                                                    year-end 2007, access to Eur 1.7 million of cash and cash                                  StOck
     ikB Deutsche         5.0   b,c
                                      Floating rate,      -        5.0          -
     industriebank                        based on                                  equivalents was restricted, after Eur 0.2 million at year-
     loans                            3M EuriBOr                                    end 2006.
                          2.5   b
                                        Fixed rate,     0.2        0.3        2.0
                                                                                                                                                                              iNVEStOr
                                        subsidized
                                                                                     net liquidity                                2007      2006                              rElAtiONS

                          2.5   b
                                        Fixed rate,       -          -        2.5    (as of December 31, in millions of Eur)
                                        subsidized
                                                                                     cash and cash equivalents                      41.6     32.2
                          5.0   c
                                      Floating rate,      -        3.9        1.1
                                          based on                                   + short-term investments and securities       +0.1      +0.2                             BuSiNESS
                                                                                                                                                                              OVErViEW
                                      3M EuriBOr
     Deutsche Bank       10.0            Fixed rate       -          -       10.0
                                                                                      -	finance	lease	obligations	current
     bonded loans                                                                       current                                     -0.9      -1.2
                         10.0            Fixed rate       -       10.0          -
                                                                                        non-current                                 -0.3      -1.0
                                                                                                                                                                             MANAgEMENt
     total other                                                                                                                                                               rEPOrt
     financial                                                                        -	financial	liabilities
     liabilities        35.0                            0.2      19.2        15.6       current                                     -0.6     -13.9
     Total financial                                                                    non-current                                -35.4     -16.0
     liabilities        36.0                            0.6      19.8        15.6
                                                                                     net liquidity                                  4.5       0.3                             FiNANciAl
                                                                                                                                                                             StAtEMENtS
a
      Maximum interest rate determined.
b
    	 Key	covenant:	ADVA	Optical	Networking	Group	debt	/	equity	ratio	≤	5.          Due	to	the	refinancing	of	current	with	non-current	financial	
c
      key covenant: ADVA Optical Networking group credit lines of at least          liabilities	in	2007,	our	liquidity	ratios	improved	significantly	
      Eur 8 million.                                                                and	reflect	our	healthy	balance	sheet	structure.                                          ADDitiONAl
                                                                                                                                                                             iNFOrMAtiON




                                                                                                                                                                        63
 NEt ASSEtS AND
 FiNANciAl POSitiON
 SHArE cAPitAl AND
 SHArEHOlDEr StructurE
 APPOiNtMENt AND
 DiSMiSSAl OF MANAgEMENt
 BOArD MEMBErS
                              financing ratios                                          2007 2006            transactions with related parties
                              (as of December 31)                                                            transactions with related individuals and legal entities are
                                                                                                             discussed	in	notes	(37)	and	(38)	to	the	consolidated	finan-
                                                   cash and                                                  cial statements.
                              cash ratio           cash equivalents                      0.87       0.48
                                                   current liabilities                                       credit rating                                                        Stable, positive
                                                                                                             ikB Deutsche industriebank Ag (ikB), one of our lending                 credit rating
                                                                                                                                                                                           by ikB
                                                   Monetary current assets *                                 banks, issued a credit rating for ADVA Optical Networking
                              Quick ratio                                                 1.91      1.29
                                                   current liabilities                                       based	on	our	consolidated	2006	financial	statements.	On	a	
                                                                                                             scale	 from	 1.0	 (outstanding)	 to	 6.0	 (bankruptcy	 filed)	 we	
                                                                                                             were rated at 1.5, unchanged from the rating we obtained
                                                   current assets                                            in	the	previous	year	based	on	our	consolidated	2005	finan-
                              current ratio                                              2.69       1.99
                                                   current liabilities                                       cial statements. ikB map their ratings for ADVA Optical Net-
                                                                                                             working into long-term credit ratings as applied by large
                             *	 Monetary	current	assets	are	defined	as	the	sum	of	cash	and	cash	equiva-      international rating agencies. According to ikB, ADVA Opti-
                                lents, short-term investments and securities and trade accounts receiv-      cal Networking’s 1.5 rating corresponds to a rating between
                                able.
                                                                                                             A+ and A as issued by Fitch and S & P, and to a rating be-
                                                                                                             tween A1 and A2 as issued by Moody’s.
        Negative return on   Return	on	capital	employed	in	2007	was	at	-10.9%,	signifi-
        capital employed     cantly down from 0.7% in 2006. this decrease is mostly due                      Dividend payments                                                       No dividend
        due to net loss
                             to the operating loss reported in 2007. Also, the higher av-                    in 2007 there were no dividend payments for 2006 (2006:                  payments

                             erage total assets could not be compensated for by the in-                      nil for 2005). ADVA Optical Networking does not expect to
                             crease in average current liabilities.                                          pay out a dividend for 2007 either.


                              return on capital employed (rOce)                     2007          2006
                              (base data in millions of Eur)

                              Operating income (loss)                                -18.7         0.9

                              Average total assets *                                229.2        176.2 **

                              Average current liabilities*                            57.3        47.7

                                            Operating income
                              rOce          Ø total assets –                     -10.9%            0.7%
                                            Ø current liabilities

                             *	 Arithmetic	average	of	five	quarterly	balance	sheet	values	(Dec.	31	of	the	
                                previous year and Mar. 31, Jun. 30, Sep. 30 and Dec. 31 of the year).

                             ** Adjusted.




64
                      share capital and shareholder structure                       Appointment and dismissal of
                                                                                                                                                              WElcOME
                                                                                    management Board members
                      As of December 31, 2007, ADVA Ag Optical Networking had
                      issued 45,992,443 no par value bearer shares (December        the appointment and dismissal of members of the Manage-
                      31, 2006: 45,363,539). No other class of shares had been      ment Board of ADVA Ag Optical Networking follows the di-                 MANAgEMENt
                                                                                                                                                               BOArD
                      issued during the reporting period.                           rection of the german Stock corporation law (Aktiengesetz,
                                                                                    Aktg), as well as the provisions in section 6 of our current
Free	float	largely	   At year-end 2007, EgOrA Holding gmbH via its 100% sub-        articles of association, dated February 15, 2008. Accord-
unchanged at 86%      sidiary	EGORA	Ventures	GmbH,	both	with	registered	offices	    ing to these articles, in principle the Supervisory Board ap-            SuPErViSOry
                      in Fraunhoferstrasse 22, 82152 Martinsried / Munich, ger-     points the members of the Management Board and does so                      BOArD
                      many, held 6,330,902 shares or 13.8% of all ADVA Optical      for	a	maximum	period	of	five	years.	Repeated	appointment	
                      Networking shares outstanding, after the same number of       is possible. the Management Board of ADVA Ag Optical Net-
                      shares or 14.0% of all ADVA Optical Networking shares out-    working regularly consists of two individuals. However, the
                      standing at the end of the previous year. No other share-     Supervisory Board may appoint a higher number of individ-                 cOrPOrAtE
                                                                                                                                                             gOVErNANcE
                      holder	has	filed	with	us	to	have	held	more	than	10%	of	our	   uals. if the Management Board consists of more than one
                      shares outstanding at December 31, 2007.                      individual, the Supervisory Board may appoint one mem-
                                                                                    ber	 of	 the	 Management	 Board	 Chief	 Executive	 Officer	 or	
                                                                                    Speaker of the Management Board, and another member
                                                                                    his or her deputy. the Supervisory Board may recall an al-                 StOck

                                                                                    ready-effective appointment for important reasons. During
                                                                                    2007, the appointment and dismissal of Management Board
                                                                                    members followed the same procedures. At the end of 2007,
                                                                                    ADVA Optical Networking’s Management Board consisted of                   iNVEStOr
                                                                                                                                                              rElAtiONS
                                                                                    Brian	 Protiva	 (Chief	 Executive	 Officer),	 Jürgen	 Hansjosten	
                                                                                    (Deputy	Chief	Executive	Officer	and	Chief	Operating	Officer),	
                                                                                    Christoph	Glingener	(Chief	Technology	Officer),	Ron	Martin	
                                                                                    (Chief	Marketing	&	Strategy	Officer),	Jaswir	Singh	(Chief	Fi-             BuSiNESS
                                                                                    nancial	Officer),	Christian	Unterberger	(Chief	Sales	Officer)	            OVErViEW
                                                                                    Brian	McCann	(Chief	Officer)	and	Andreas	Rutsch	(Chief	Of-
                                                                                    ficer	until	December	31,	2007).

                                                                                                                                                             MANAgEMENt
                                                                                                                                                               rEPOrt




                                                                                                                                                              FiNANciAl
                                                                                                                                                             StAtEMENtS




                                                                                                                                                              ADDitiONAl
                                                                                                                                                             iNFOrMAtiON




                                                                                                                                                        65
 cHANgES OF ArticlES
 OF ASSOciAtiON
 iSSuANcE AND Buy-BAck
 OF SHArES
 tAkE-OVEr BiD DriVEN cHANgE
 OF cONtrOl PrOViSiONS
 EMPlOyEES AND SOciAl
 rESPONSiBility
                               changes of articles of association                              issuance and buy-back of shares                                 Authorized capital
                                                                                                                                                                    at 37.1% of
                                                                                                                                                                   share capital

                               changes in ADVA Optical Networking’s articles of associa-       the rights of the Management Board to issue new shares are            conditional
                               tion follow section 179 of the german Stock corporation law     regulated in section 4 paragraphs 4 to 5j of the current ar-      capital at 8.8%
                                                                                                                                                                 of share capital
                               (Aktiengesetz, Aktg) in conjunction with section 133 Aktg as    ticles of association of ADVA Ag Optical Networking, dated
                               well as the provisions in section 4 paragraph 6 and section     February 15, 2008. Accordingly, the Management Board at
                               13 paragraph 3 of our current articles of association, dated    current may issue up to 16,921,161 shares from a total of
                               February 15, 2008. Accordingly, in principle any changes to     two tranches of authorized capital, amounting to a total of
                               the articles of association need to be resolved by the Share-   Eur 16,921,161 against cash or contribution in kind with
                               holders’ Meeting. However, the Shareholders’ Meeting has        possible exclusion of subscription rights. On December 31,
                               authorized the Supervisory Board to change the version          2007, the authorized capital amounted to Eur 17,078,055,
                               of the articles of association in accordance with capital in-   i.e., that day the Management Board may still have issued
                               creases from authorized capital and conditional capital. the    up to 17,078,055 shares or 37.1% of the shares. in addition,
                               same procedures have been applied in 2007.                      on December 31, 2007, a total of four tranches of conditional
                                                                                               capital amounting to a total of Eur 4,502,974 were recorded
                                                                                               in the commercial register. the conditional capital has been
                                                                                               used for granting stock option and similar rights to members
                                                                                               of the Management and Supervisory Boards, to employees
                                                                                               of	the	Company	and	to	management	and	employees	of	affil-
                                                                                               iated companies. the conditional capital increase is put into
                                                                                               effect only if and when the holders of the option rights ex-
                                                                                               ercise these rights. On December 31, 2007, 460,037 option
                                                                                               rights of the conditional capital mentioned above had been
                                                                                               exercised and a respective number of shares had been is-
                                                                                               sued already; that day, the conditional capital had been re-
                                                                                               duced by Eur 460,037 and amounted to Eur 4,042,937 or
                                                                                               8.8% of the share capital.

                                                                                               At year-end 2007, the Management Board was not authorized
                                                                                               to buy back any shares issued by the company.




66
take-over bid driven change of                                   employees and social responsibility
                                                                                                                                                               WElcOME
control provisions
                                                                 As of December 31, 2007, ADVA Optical Networking had 1,039
At year-end 2007, two bonded loans with redemption val-          employees, of which 18 were apprentices. this corresponds
ues of Eur 10 million each, and due in November 2010 and         to a growth of 186 employees, or 21.8%, compared to 2006.                                    MANAgEMENt
                                                                                                                                                                BOArD
in	March	2012,	respectively,	are	part	of	our	non-current	fi-     the breakdown of permanent employees by department is
nancial liabilities. in the event of a potential take-over bid   listed in the table below:
driven change in control of ADVA Optical Networking, the
creditor has the right to terminate the bonds with immedi-
                                                                  employees per department          2007     2006    change                                   SuPErViSOry
ate effect. Based on our revenue growth, positive net liquid-                                                                                                    BOArD
                                                                  (as of December 31)
ity and sound equity ratio, we do not classify the potentially
resulting liquidity impact as critical.
                                                                  research and development            389     297        +92
                                                                                                                                                               cOrPOrAtE
                                                                                                                                                              gOVErNANcE
                                                                  Purchasing and production           232     210        +22

                                                                  Quality management                    15      14        +1

                                                                  Sales, marketing,                                                                             StOck
                                                                                                      245     199        +46
                                                                  technical support
                                                                  Management, administration,
                                                                                                      141     115        +26
                                                                  finance,	IT
                                                                                                                                                               iNVEStOr
                                                                                                                                                               rElAtiONS
                                                                  Apprentices                           18      18        +0

                                                                  total employees                  1,040      853      +187
                                                                                                                                                               BuSiNESS
                                                                                                                                                               OVErViEW
                                                                 On average, ADVA Optical Networking employed 970 em-                Significantly	in-
                                                                 ployees during 2007, up from 739 during 2006. Furthermore,       creased headcount

                                                                 there were 25 and 28 temporary employees working for ADVA        Hiring focus was in
                                                                 Optical Networking at year end 2007 and 2006, respectively.      r & D and sales de-         MANAgEMENt
                                                                                                                                  partments in 2007             rEPOrt
                                                                 During 2007, the greatest employee increases occurred in
                                                                 the areas of research & development and sales & marketing.
                                                                 these increases were driven by the gryfsoft acquisition in
                                                                 Poland and by organic growth, especially in our sales orga-
                                                                                                                                                               FiNANciAl
                                                                 nization.	This	trend	strongly	reflects	our	clear	growth	strat-                               StAtEMENtS
                                                                 egy to focus on Optical+Ethernet innovation.


                                                                                                                                                               ADDitiONAl
                                                                                                                                                              iNFOrMAtiON




                                                                                                                                                         67
 EMPlOyEES AND SOciAl
 rESPONSiBility




                           employees per country        2007      2006     change        opportunities in order to advance and foster both their per-
                           (as of December 31)                                           sonal and professional development.

                           germany                                                       We offer three types of continuing education programs based
                           (including apprentices)        475       413        +62       on employee development needs. these needs are identi-
                           united States                  258       234         +24      fied,	 documented	 and	 regularly	 reviewed	 within	 our	 elec-
                                                                                         tronic performance appraisal and competency management
                           united kingdom                 102        96          +6      system at least once a year:

                           china                           66        42         +24      1. through our general development program “toolbox”, we
                           Poland                          63          -       +63          offer employees generic courses on various topics that
                                                                                            are regularly requested on an annual basis, including
                           Norway                          28        26          +2         language	classes,	standard	office	software	know	how	and	
                                                                                            the	improvement	of	communication,	presentation,	conflict	
                           Sweden                          13        17          -4         management and project management skills.
                           italy                            8          5         +3      2. On the basis of employees’ individual development plans
                                                                                            which are agreed annually and regularly reviewed with
                           France                           8          6         +2         their	 respective	 line	 manager,	 we	 offer	 specific	 training	
                                                                                            courses	 tailored	 to	 the	 employee-specific	 learning	 re-
                           Other countries                 19        14          +5
                                                                                            quired. these courses also include technical training mostly
                                                                                            conducted internally by our own technical experts.
                           total employees             1,040        853       +187
                                                                                         3. thirdly, we require and encourage all our managers to
                                                                                            participate in our management development program.
                                                                                            We offer a set of different courses according to experience
                          At year-end 2007, we had 475 employees (including appren-
                                                                                            and level of knowledge, which help our managers to un-
                          tices) in germany, followed by 258 employees in the u.S.,
                                                                                            derstand how to maximize their teams’ as well as their
                          102 in the united kingdom, 66 in china, 63 in Poland, 28 in
                                                                                            own performance.
                          Norway, 13 in Sweden, 8 in both italy and France and an ad-
                          ditional 18 employees in other countries.

       compensation       correspondingly, personnel expenses increased from Eur         We are convinced that with these three components, we have
       comprises	fixed	   58.4 million in 2006 to Eur 77.3 million, representing 30.7%   a solid foundation from which we can utilize the skills of our
       and variable
       elements
                          of revenues in 2007 compared to 30.3% in 2006. Our em-         employees and foster their further development. Within our
                          ployee	compensation	packages	comprise	fixed	and	variable	      company, all relevant local regulations for health, safety and
       comprehen-         elements, and also include stock options and / or option       security in the workplace are complied with and regularly
       sive education     bonds. these compensation packages enable our employ-          monitored	by	an	independent	engineering	office	for	safety	in	
       programs
                          ees to participate appropriately in the success of the group   the workplace. We do not have a workers council, and ADVA
                          and support employee retention, while at the same time re-     Optical	 Networking	 is	 not	 affiliated	 with	 a	 particular	 trade	
                          warding individual efforts, teamwork, innovation and produc-   union and thus not tied to various collective agreements.
                          tivity. Furthermore, employees who perform exceptionally
                          well	or	who	make	significant	improvement	suggestions	are	
                          recognized through our “Spot Award” program. in addition,
                          we offer all employees comprehensive continuing education




68
Equal oppor-       ADVA Optical Networking is an equal opportunity employer            We	possess	a	team	of	highly	qualified	and	motivated	employ-             international,
tunities for all                                                                                                                                                                       WElcOME
                   and has an ongoing commitment to the creation of a work-            ees of different nationalities, with extensive experience in          highly	qualified	
employees                                                                                                                                                     and motivated
                   place free of discrimination and harassment. We recruit, hire,      telecommunications and in various other industries. the in-                employees
                   train and promote individuals in all job titles without regard      terdisciplinary and intercultural exchange amongst employ-
                   to race, religion, ancestry, sexual orientation, national ori-      ees on all levels advances the open and transparent culture
                   gin, age, sex and physical or mental disability. At ADVA Op-        of our company and the creativity of our employees in the                                      MANAgEMENt
                                                                                                                                                                                        BOArD
                   tical Networking, we are committed to a fair and equitable          best possible way. in our regular employee survey conducted
                   workplace where everyone is a respected and valued mem-             with the support of an independent human resources con-
                   ber of the team.                                                    sultancy, last in October 2006, 85% of our employees ex-
                                                                                       pressed their strong satisfaction with the leadership skills of                                SuPErViSOry
recognized         We currently provide 18 apprenticeship positions at our main        their management. this indicates a very high level of over-                                       BOArD
apprenticeship     production and research facility in Meiningen for the pro-          all employee satisfaction.
positions
                   fessions of communication electronics technician, industrial
                   electronics technician, and electronic machines technician.         Beyond our focus on employees, ADVA Optical Networking is                     Social
                   With this program, we are among the most recognized ap-             eager to help address the needs of communities where we                 responsibility          cOrPOrAtE
                                                                                                                                                                                      gOVErNANcE
                   prenticeship providers for industrial electronics professions       conduct business. At our site in Meiningen, we actively sup-
                   in	the	state	of	Thuringia.	In	2007,	for	the	fifth	time	in	a	row,	   port	 a	 local	 non-profit	 organization	 focusing	 on	 the	 needs	
                   one of our apprentices received the “Bildungsfuchs” award           of physically and mentally disabled individuals by integrat-
                   from the chamber of industry and commerce of South thu-             ing these individuals into the site’s operations activities like
                   ringia for the best examination results among his peers.            the assembly of small parts for our products and document                                        StOck

                                                                                       archiving.


                                                                                                                                                                                       iNVEStOr
                                                                                                                                                                                       rElAtiONS




                                                                                                                                                                                       BuSiNESS
                                                                                                                                                                                       OVErViEW




                                                                                                                                                                                      MANAgEMENt
                                                                                                                                                                                        rEPOrt




                                                                                                                                                                                       FiNANciAl
                                                                                                                                                                                      StAtEMENtS




                                                                                                                                                                                       ADDitiONAl
                                                                                                                                                                                      iNFOrMAtiON




                                                                                                                                                                                 69
 rENuMErAtiON OF MANAgEMENt
 AND SuPErViSOry BOArDS
 ENVirONMENtAl
 rESPONSiBility




                              remuneration of                                                                  pensed in 2007, uSD 408 thousand, is shown as receivable
                              management and supervisory Boards                                                in the group’s 2007 year-end balance sheet. No further loans
                                                                                                               or advance payments were granted to the members of the
                                                                                                               Management Board. total Management Board compensa-
        the Management        the compensation of ADVA Optical Networking’s Manage-                            tion payable for 2007 and 2006 was Eur 1,797 thousand and
        and Supervisory                          b
                              ment	Board	mem	 ers	consists	of	fixed	and	variable	compo-                        Eur 1,558 thousand, respectively.
        Boards both
        receive	fixed	
                              nents.	Besides	a	fixed	salary	the	members	of	the	Management	
        compensation and      Board receive variable bonus payments and, as long-term in-                      the compensation of ADVA Optical Networking’s Supervisory
        a variable bonus      citing variable compensation at risk, stock options (in excep-                   Board	members	also	consists	of	fixed	and	variable	compo-
                              tional cases also so-called stock appreciation rights) within                    nents. in contrast to the previous arrangements, the 2007
        in addition, the      the scope of ADVA Optical Networking’s stock option pro-                         annual shareholders’ meeting resolved on June 13, 2007, to
        Management            grams.	The	fixed	salary	of	the	Board	members	in	office	al-                       grant each member of the Supervisory Board a variable pay-
        Board receives
        stock options or
                              ready at the beginning of 2007 remained unchanged again                          ment	for	the	financial	year	2006	of	EUR	22,500	per	twelve	
        similar rights        compared to 2006. Only the two u.S. Management Board                             months appointment as Supervisory Board member; the
                              members newly appointed in 2007 received higher base sal-                        chairman as well as the two vice chairmen each received one
                              aries. the variable compensation is based on the group’s                         and	a	half	times	this	amount.	Starting	in	the	financial	year	
                              iFrS pro forma operating income 7 (50%), the group’s sales                       2007, the shareholders’ meeting determined that, in addi-
                              revenues (25%), as well as individual goals agreed with each                     tion to the reimbursement of out-of-pocket expenses, each
                              member of the Management Board at the beginning of 2007                          member	 of	 the	 Supervisory	 Board	 should	 receive	 a	 fixed	
                              (25%), and is determined annually at the discretion of the                       compensation,	payable	upon	the	end	of	the	financial	year,	
                              Supervisory Board after the completion of the audited annual                     as well as an annual variable payment related to the group’s
                              financial	results.	As	an	exception	to	this,	80%	of	the	target	                   performance; the amount of this variable payment is to be
                              variable salaries of the two u.S. Management Board mem-                          proposed by the Management and the Supervisory Boards
                              bers	newly	 appointed	 in	2007	 are	 guaranteed	 for	 the	 first	                and will be determined annually by the shareholders’ meet-
                              twelve months of employment. the members of the Man-                             ing deciding on the approval of the activities of the Supervi-
                              agement Board additionally receive a company car or a car                        sory	Board	for	the	relevant	financial	year.	Furthermore,	ADVA	
                              allowance, as well as – in germany – reimbursement of half                       Optical Networking bears the cost of a D & O insurance for all
                              of their social security contributions. Moreover, ADVA Opti-                     members of the Supervisory Board. During 2007, no loans
                              cal Networking bears the costs of a pecuniary damage lia-                        or advanced payments were granted to members of the Su-
                              bility insurance for the Management Board members. these                         pervisory Board. Provided that the 2008 annual sharehold-
                              benefits	are	partially	taxable	by	the	members	of	the	Man-                        ers’ meeting approves the 2007 activities of the Supervisory
                              agement	Board	as	non-cash	benefits.	The	two	in	U.S.	Man-                         Board, the total compensation payable to the members of
                              agement Board members newly appointed in 2007 qualify                            the Supervisory Board for 2007 will be Eur 358 thousand,
                              for sign-on bonuses of uSD 280 thousand (Jaswir Singh)                           after Eur 138 thousand for 2006.
                              and uSD 420 thousand (ron Martin), respectively, which
                              each are callable pro rata temporis in case of contract ter-                     Detailed information on the compensation structure of the
                              mination	within	the	first	18	months	of	their	tenures.	While	                     individual members of the Management and Supervisory
                              the sign-on bonus for Jaswir Singh will only be paid out dur-                    Boards	can	be	found	in	note	(38)	to	the	consolidated	finan-
                              ing 2008, the sign-on bonus for ron Martin was already fully                     cial statements.
                              paid out in 2007. the ron Martin bonus fraction not yet ex-

                              7
                                  Pro forma operating income is calculated prior to non-cash charges related
                                  to the stock option programs and amortization and impairment of goodwill
                                  and acquisition-related intangible assets.




70
                   environmental responsibility
                                                                                                                                                                                   WElcOME



careful utiliza-   caring for the environment has always been of high priority to   the importance of environmental matters to ADVA Optical                  Participation
tion of natural    ADVA Optical Networking. Our main facility in Meiningen          Networking also shows in our ongoing participation in the                  in carbon
resources                                                                                                                                              Disclosure Project
                   takes advantage of state-of-the-art energy-savings con-          carbon Disclosure Project (cDP). the cDP was founded in                                       MANAgEMENt
                                                                                                                                                                                    BOArD
                   cepts. Our platforms use advanced power supplies that con-       2000 and is the largest collective global request signed by
                   sume only very low levels of energy. the modular design          institutional investors for disclosure of information on green-
                   of these platforms has been developed to ensure they are         house gas emissions on an annual basis. in 2006, the cDP
                   easily recyclable at the end of the product life cycle. As a     for	the	first	time	asked	us	to	provide	relevant	input	regarding	                              SuPErViSOry
                   manufacturer of optical and electronic products, we com-         the interdependence of climate changes and our business.                                         BOArD
                   ply with the European union’s directives on waste electrical     Our responses to the requests are available free of charge at
                   and electronic equipment (WEEE) and restriction of hazard-       www.cdproject.net. Due to the comparatively low emission
                   ous substances (roHS) and their implementation in national       levels caused by the consumption of car fuel, heating gas and
                   legislations. Also, we contribute to industry-wide discus-       electrical energy, the direct impact of our business activity                                  cOrPOrAtE
                                                                                                                                                                                  gOVErNANcE
                   sions focused on impacting future adjustments in relevant        on climate change is minimal. rather, our networking solu-
                   European legislation. We also contribute to the respectful       tions may help to reduce overall greenhouse gas emissions
                   utilization of natural resources by using returnable packag-     longer term: these solutions enable applications like e-mail,
                   ing	material	for	the	flow	of	goods	between	component	ven-        internet telephony and videoconferencing via the transmis-
                   dors and our facilities. Furthermore, the assessment of our      sion of massive amounts of data over long distances and can                                     StOck

                   vendors incorporates their policies regarding environmental      reduce the amount of emission-heavy travel activity between
                   matters, among other criteria. in 2008, for our facilities in    geographically dispersed locations.
                   york, united kingdom and Meiningen, germany we are plan-
                   ning to achieve environmental management standard certi-                                                                                                        iNVEStOr
                                                                                                                                                                                   rElAtiONS
                   fication	in	accordance	with	ISO	14001.



                                                                                                                                                                                   BuSiNESS
                                                                                                                                                                                   OVErViEW




                                                                                                                                                                                  MANAgEMENt
                                                                                                                                                                                    rEPOrt




                                                                                                                                                                                   FiNANciAl
                                                                                                                                                                                  StAtEMENtS




                                                                                                                                                                                   ADDitiONAl
                                                                                                                                                                                  iNFOrMAtiON




                                                                                                                                                                             71
 riSk rEPOrt




                           risk report                                                         ADVA Optical Networking’s strategic goals are the basis for       Strategic goals are
                                                                                               this	 risk	 management	 system.	 These	 goals	 are	 profitable	      the basis of the
                                                                                                                                                                       risk manage-
                                                                                               growth, Optical+Ethernet innovation, operational excellence             ment system
                           ADVA Optical Networking’s future development is subject to          and employee development. the strategic goals are reviewed
                           various	general	and	company-specific	risks,	which	in	certain	       by the Management Board on a yearly basis and amended
                           cases can also endanger the group’s continued existence.            where appropriate. they also constitute the basis for our
                           An essential aspect of the group’s strategy is our ability          three-year business plan, which is reviewed and updated
                           to anticipate developments in the marketplace and the fu-           annually.	Each	of	these	goals	is	defined	in	detail	and	then	
                           ture needs of our customers. Special emphasis is given to           broken	down	into	specific	departmental	and	individual	tar-
                           product development and the technical performance of our            gets. the strategic goals are traced down to the individual
                           products. Due to ever-changing market trends and limited            employee, so that each employee can focus and be evalu-
                           planning certainty, risks to ADVA Optical Networking’s fu-          ated on his / her individual performance and contribution to
                           ture cannot be completely excluded.                                 our overall performance.

                           risk management system                                              ADVA Optical Networking measures the accomplishment of                revenues and
        Diversified	       Since the inception of ADVA Optical Networking in 1994 our          its strategic goals against revenues and pro forma operat-           pro forma ope-
        business                                                                                                                                                     rating income
                           business	has	become	more	and	more	diversified.	Our	market	          ing income.7 target values for both metrics are set for the           operationalize
                           splits into three global areas (enterprise networks, carrier        year to come and actual values are measured against the              strategic goals
                           infrastructure, carrier Ethernet access) with drivers largely       target values on a monthly basis. in case of deviations from
                           independent from one another. We market our solutions in            plan, corrective action can be taken quickly. this informa-
                           part via a variety of distribution partners and have become         tion is summarized and communicated in a monthly man-
                           less dependent on these partners over the years. Beyond             agement report.
                           focusing on reducing revenue volatility, we have established
                           a comprehensive risk management system.                             Moreover, budgets are reviewed monthly and adjusted if               Monthy budget
                                                                                               necessary. Our accounting and controlling departments pro-            reviews, tight
                                                                                                                                                                      controls and
        improved           ADVA Optical Networking is organized according to functional        vide monthly, globally-consolidated reports on available cash             processes
        controlling and    areas	across	all	international	locations.	This	is	also	reflected	   funds and the development of margins and current assets
        reporting system
                           in the management team’s split of responsibilities, in partic-      (e.g., inventories and receivables). these reports also in-
                           ular as related to risk management. this team continuously          clude budgeted and actual expenditures of each department,
                           analyzes the potential risks and implements the necessary           which must be continuously adapted to meet information re-
                           measures to guard against them to the greatest extent pos-          quirements. All expenditures and investments must be ap-
                           sible.	In	recent	years,	ADVA	Optical	Networking	has	signifi-        proved in advance through an electronic purchase order
                           cantly improved the results-driven controlling and reporting        system. in conjunction with continuously updated revenue
                           system within the group. We have established a risk man-            forecasts, a detailed monthly preview of anticipated group
                           agement system across all departments with the purpose              developments within the next three to twelve months can
                           of quickly uncovering potential risks and establishing coun-        be generated. in addition, ADVA Optical Networking’s Man-
                           termeasures in a timely manner. these measures allow us             agement	Board	regularly	analyzes	the	financial	and	profit-
                           to evaluate ADVA Optical Networking’s present and future            ability position of the group. the Management Board obtains
                           situation at all times. A combination of monthly and ad-hoc         approval	from	the	Supervisory	Board	for	all	significant	busi-
                           reports present a thorough picture of current and future            ness transactions.
                           business developments.




72
                     the analytical tools and processes described above secure             a	decline	in	our	profit	margins.	Since	most	of	our	competitors	
                                                                                                                                                                                            WElcOME
                     a constant and transparent reporting system across all di-            operate in a broader market and overall have considerably
                     visions. in regular monthly conference calls, the extended            more resources available due to their greater size, we must
                     worldwide management team discusses the current busi-                 continue to leverage our competitive advantage of offering
                     ness development, business outlook, group and departmen-              innovative solutions with the highest level of functionality,
                     tal goals.                                                            greatest	efficiency	and	the	lowest	total	cost	of	ownership.                                     MANAgEMENt
                                                                                                                                                                                             BOArD

                     Opportunity identification                                            Financial risks                                                       Potential loss of
                     The	identification	of	opportunities	results	from	applying	the	        Financial risks in essence arise from the potential loss of bad      bad debt, depre-
                                                                                                                                                              ciation risk related
                     same analytical tools and processes as described in the “risk         debt, inventory depreciation related to technological obso-            to technological         SuPErViSOry
                     management system” section above. current opportunities               lescence and failure to discharge payment obligations. Fluc-             obsolescence,             BOArD
                     are discussed in the “outlook” section further below.                 tuations in international currencies and changes in interest        potential failure to
                                                                                           rate levels can impact our business negatively as well. in         discharge payment
                                                                                                                                                                       obligations
                     general risks                                                         2007, depreciation on trade accounts payable due to bad
Dependency           Economic and market risks                                             debts amounted to Eur 0.9 million, up from Eur 0.4 million          Foreign exchange             cOrPOrAtE
on the commu-                                                                                                                                                        and interest          gOVErNANcE
                     Our business activities are subject to the general economic           in	2006,	related	to	one	significant	customer	filing	for	bank-
nication and net-                                                                                                                                                      rate risks
working industry
                     conditions in our primary sales regions and, in particular,           ruptcy.	However,	liquidity	was	sufficient	at	all	points	in	time	
                     to conditions in the communications and networking indus-             to	fulfill	all	payment	obligations.	Because	a	major	portion	of	
                     tries. We are most affected by the investment decisions               our revenues and costs are generated in foreign currencies,
                     made by carriers and enterprises in Europe, the Americas              the	Group	is	particularly	subject	to	fluctuations	in	the	EUR	 /                                   StOck

                     and	the	Asia-Pacific	region.	If	a	long-term	period	of	decline	        uSD and Eur / gBP exchange rates. in 2007, on a net basis,
                     should unexpectedly occur in these regions, it could have a           we	saw	significant	GBP	inflows	and	USD	outflows,	based	on	
                     noticeably detrimental effect on our business, operating re-          strong	GBP	operating	cash	flow	generation	and	largely	USD-
                     sults	and	financial	situation.	In	the	past	few	years,	we	have	        denominated material purchasing, which was less than com-                                        iNVEStOr
                                                                                                                                                                                            rElAtiONS
                     witnessed an increasing volatility in market trends, which            pensated	by	USD	cash	income.	To	combat	fluctuations,	the	
                     makes	planning	and	forecasting	more	difficult	and	could	thus	         USD	and	GBP	net	cash	flows	in	part	were	hedged	against	EUR	
                     result	 in	 negative	 consequences	 for	 the	 financial	 situation	   using forward exchange agreements. All such agreements
                     of the group.                                                         expired still in 2007. the importance of currency hedging,                                       BuSiNESS
                                                                                           especially by means of derivative instruments and natural                                        OVErViEW
Strong competition   Competitive risks                                                     hedges through local purchasing and manufacturing, will in-
                     Additional risks arise as a result of increased competition           crease for ADVA Optical Networking in the future. Further
                     from existing and new competitors. in particular, compa-              expansion in non-Eur regions of the world is likely to raise
                     nies	from	the	Asia-Pacific	region	have	been	increasing	their	         our currency exposure as well. going forward, a weakening                                       MANAgEMENt
                                                                                                                                                                                             rEPOrt
                     market presence and utilizing their cost advantages in de-            of	the	USD	and	the	GBP	can	have	a	significant	financial	im-
                     velopment and production. the market for Optical+Ethernet             pact on our ability to price our products competitively. Since
                     solutions is highly competitive and subject to rapid techno-          many of our major competitors are u.S. American compa-
                     logical change. competition in this market is characterized           nies,	they	benefit	from	a	weakening	USD.	This	could	result	in	
                                                                                                                                                                                            FiNANciAl
                     by various factors, such as price, functionality, service, scal-      a negative impact on our level of competitiveness and busi-                                     StAtEMENtS
                     ability and the ability of systems to meet customers’ immedi-         ness development and could endanger our growth in mar-
                     ate and future network requirements. risks to our business            kets outside of Europe. ADVA Optical Networking’s cash and
                     particularly include the increased pricing competition faced          cash equivalents with banks as well as interest-bearing lia-
                     by our carrier customers, or the proliferation of competitive         bilities with banks and other parties imply interest income                                      ADDitiONAl
                                                                                                                                                                                           iNFOrMAtiON
                     alternatives and multi-solution systems, which could lead to          and	expense	cash	flows	that	can	be	impacted	adversely	by	




                                                                                                                                                                                      73
 riSk rEPOrt




                            changes in interest rates. ADVA Optical Networking in part        Legal risks                                                              Difficult	protection	
                            uses	derivative	financial	instruments	to	hedge	this	risk.	At	     legal risks pertain primarily to protecting intellectual prop-           of intellectual pro-
                                                                                                                                                                       perty, product and
                            the end of 2007, there was one interest rate cap agreement        erty and other trade secrets, as well as potential claims                  warranty liability
                            in place, related to a property loan further described in sec-    under product and warranty liabilities. ADVA Optical Net-
                            tion	“net	assets	and	financial	position”.                         working currently relies on a combination of copyright and
                                                                                              trademark laws, contractual rights, patents and trade se-
        long sales cycles   Time risks                                                        crecy laws to protect its intellectual property. unauthorized
                            conducting business with carriers entails long sales cycles,      parties may attempt to copy or otherwise obtain and use
                            which are governed by the legal, economic and business re-        our products or technology. Monitoring unauthorized use of
                            quirements for carriers, and can result in delays in the recog-   our	products	and	technology	is	difficult,	and	we	cannot	be	
                            nition of revenues. Since our distribution partners generate      certain that the steps that we are taking will prevent unau-
                            a major portion of revenues, the reliability of forecasts for     thorized use of our products and technology. if competitors
                            future revenue trends is greatly limited. through an ongo-        are able to use our products and technology, our ability to
                            ing expansion of our direct sales efforts and the subsequent      compete effectively could be harmed. counter measures
                            improvements in our customer relations, we expect to con-         may	 prove	 insufficient	 in	 the	 future	 and	 result	 in	 conflicts	
                            tinue to minimize this risk in the future.                        regarding the usage of property rights and technologies. in
                                                                                              particular, the continued expansion of our group presence
                                                                                              in china carries the risk that less stringent regulations for
                                                                                              intellectual property rights could lead to an infringement
                                                                                              on ADVA Optical Networking’s patents, intellectual property
                                                                                              and trademarks. Such an infringement on intellectual prop-
                                                                                              erty rights could take the form of the production of illegal
                                                                                              copies of our products and solutions, and could cause con-
                                                                                              siderable damage to the group. third parties may also as-
                                                                                              sert that we have violated their intellectual property rights
                                                                                              and copyright laws. related disputes could result in consid-
                                                                                              erable cost to ADVA Optical Networking in its efforts to pro-
                                                                                              tect intellectual property while also diverting considerable
                                                                                              management resources. this could result in a negative im-
                                                                                              pact on our business activities. risks from product and war-
                                                                                              ranty liability result from possible damages occurring to the
                                                                                              users of our products due to malfunctions or other defects.
                                                                                              Although we usually negotiate for contractual limitations on
                                                                                              liability, the possibility remains that such liability may result
                                                                                              in a negative impact on our business activities.




74
                    Company-specific risks
                                                                                                                                                              WElcOME
inability to meet   Product risks                                                      Dependence on large customers and suppliers
customer demands    Risks	 specific	 to	 ADVA	 Optical	 Networking	 pertain	 primar-   A limited number of distribution partners and direct or in-
                    ily to our capacity to continually adapt business activities to    direct	carrier	customers	currently	account	for	a	significant	
                    the ever-changing market conditions. these types of risks          portion of our revenues. if orders from these major custom-
                    originate to some extent from changes in customer demands          ers	are	postponed	or	cancelled,	our	revenues	and	profitabil-          MANAgEMENt
                                                                                                                                                               BOArD
                    and our ability to meet these requirements reliably and in a       ity would be adversely affected because our cost structure
                    timely manner. Should the group be unable to adapt to new          is largely aligned with our future expectations and can only
                    market conditions, customer requirements or industry stan-         be adjusted on such short notice to a limited extent. We also
                    dards, our development would be negatively impacted. the           depend on a limited number of suppliers to provide numer-             SuPErViSOry
                    same is true if the products cannot be seamlessly integrated       ous components for the manufacturing of our products and                 BOArD
                    into existing customer network infrastructures. this could         systems. Although we follow a general policy of requiring
                    lead to delays in installation, return of products or cancella-    components to be available through at least two suppliers,
                    tion of orders, and would not only result in additional costs      some risks of delivery bottlenecks and associated produc-
                    for warranty and repair services, but would also harm ADVA         tion shortages exist. Overall, there are only a limited number         cOrPOrAtE
                                                                                                                                                             gOVErNANcE
                    Optical Networking’s overall reputation.                           of sources for obtaining the required optical and electronic
                                                                                       components we require for our products; in some cases they
                                                                                       can only be purchased from a single supplier. At times that
                                                                                       source is also a competitor. A consolidation among suppliers
                                                                                       of these components, or negative developments in their busi-            StOck

                                                                                       nesses affecting their ability to supply us, could adversely
                                                                                       impact the availability of components on which we depend
                                                                                       and in turn strongly impair our business.
                                                                                                                                                              iNVEStOr
                                                                                                                                                              rElAtiONS




                                                                                                                                                              BuSiNESS
                                                                                                                                                              OVErViEW




                                                                                                                                                             MANAgEMENt
                                                                                                                                                               rEPOrt




                                                                                                                                                              FiNANciAl
                                                                                                                                                             StAtEMENtS




                                                                                                                                                              ADDitiONAl
                                                                                                                                                             iNFOrMAtiON




                                                                                                                                                        75
 riSk rEPOrt
 EVENtS AFtEr tHE
 BAlANcE SHEEt DAtE




        increased capital    Strategic risks / acquisitions                                    risk assessment                                                   No current risks
        requirements,        We consider acquisitions and strategic investments to be an       Careful	inspection	of	the	Group’s	risk	profile	as	of	Decem-       endangering the
        commitment of                                                                                                                                            group’s survival
        management
                             important part of our group strategy to expand our techno-        ber 31, 2007, shows that there are currently no risks that
        resources, loss of   logical competence and increase our presence in key mar-          pose a danger to ADVA Optical Networking’s survival, nor are
        key employees        kets. this enables us to expand our customer base and allows      any risks evident that may endanger the future existence of
                             for easier access to new clients. Such investments could in-      the group. Our overall risk has slightly increased in 2007.
                             volve increased capital requirements and result in a material     Due to the implications of the u.S. subprime mortgage cri-
                             burden	on	the	financial	position	of	the	Group,	with	the	real-     sis, economic and market risks rose during 2007. Also, at
                             ization	of	anticipated	benefits	remaining	uncertain.	Further-     year-end 2007 ADVA Optical Networking was exposed to
                             more, the acquisition process and the subsequent integration      higher	financial	risks	than	at	the	end	of	the	previous	year,	
                             of new companies into the group require a commitment from         driven by higher interest rates and an overall more conser-
                             management, which may considerably impinge on manage-             vative assessment of counterparty risk by lenders. On the
                             ment’s other important responsibilities in the operating busi-    other hand, we have become less dependent on large cus-
                             ness. there are also direct risks related to the integration of   tomers and distribution partners during 2007. Further, the
                             new companies, such as the potential loss of key employees        risk from acquisitions and strategic investments decreased,
                             of these companies, as well as cultural acclimatization issues    with	no	substantial	acquisitions	in	2007	after	two	significant	
                             or challenges with the pooling of it systems.                     transactions in 2006.




76
                events after the balance sheet date
                                                                                                                                                                       WElcOME



restructuring   in December 2007, ADVA Optical Networking launched a             On March 5, 2008, Deutsche Boerse decided on the exclusion   tecDAx exclusion
until Q3 2008   restructuring initiative, which will be implemented until Q3     of ADVA Optical Networking from the tecDAx equity index.
                2008. As a consequence, the group’s headcount will be re-        this decision will become effective on March 25, 2008.                               MANAgEMENt
                                                                                                                                                                        BOArD
                duced by 7%, mainly in the areas of r & D and operations,
                and select r & D sites will be closed. ADVA Optical Networking
                expects one-off restructuring expenses of around Eur 3.0
                million between Q1 and Q3 2008, mainly driven by severance                                                                                            SuPErViSOry
                payments and exit costs from real estate rental contracts.                                                                                               BOArD




                                                                                                                                                                       cOrPOrAtE
                                                                                                                                                                      gOVErNANcE




                                                                                                                                                                        StOck




                                                                                                                                                                       iNVEStOr
                                                                                                                                                                       rElAtiONS




                                                                                                                                                                       BuSiNESS
                                                                                                                                                                       OVErViEW




                                                                                                                                                                      MANAgEMENt
                                                                                                                                                                        rEPOrt




                                                                                                                                                                       FiNANciAl
                                                                                                                                                                      StAtEMENtS




                                                                                                                                                                       ADDitiONAl
                                                                                                                                                                      iNFOrMAtiON




                                                                                                                                                                 77
 OutlOOk




                            Outlook


       growth expected      Worldwide economic growth is projected to further ease to            the growth of the overall market is primarily driven by            growth driven by
       to be at 3.3%        3.3% in 2008.1 High commodity prices, together with vola-            steadily increasing demand for bandwidth from residen-              increasing band-
       in 2008                                                                                                                                                     width demand and
                            tile equity and currency markets, are expected to continue           tial end customers and corporations, with carriers investing          replacement of
                            to impact growth, especially in high-income countries and            strongly in new optical networking infrastructure solutions.       incumbent proto-
                            in some developing regions in 2008. Developing countries             During 2007, carrier customers took decisions to roll out         cols with Ethernet
                            should again outperform high-income countries by a substan-          triple play services (data, voice and video) to residential end
                            tial margin, driven by strong domestic momentum in most of           customers on a large scale. Data storage, the convergence
                            the developing markets. Despite weaker growth of u.S. im-            of enterprise networks and the expansion of local area net-
                            ports, there are strong signs for continued robust spending          works to multiple locations are in particularly high demand
                            by oil-exporting countries and vibrant expansion in china and        by enterprises. Furthermore, over the last couple of years,
                            india. real gross domestic product of developing countries           the Ethernet protocol has evolved into the standard carrier
                            is expected to grow at least 7.0% in 2008. 2009 is likely to         network protocol,4 replacing incumbent protocols such as
                            see slightly improved worldwide economic expansion again,            AtM and Frame relay.
                            impacted by a recovery of the u.S. economy and otherwise
                            stable economic growth.                                              For the time being, based on these trends, we will concen-           Strategic goals
                                                                                                 trate on the following four strategic elements:
       Optical+Ethernet     Based on this macroeconomic scenario, we expect the mar-
       metro networking     ket for our Optical+Ethernet metro networking solutions to           •	 Grow	our	revenues	profitably	through	continued	strong	di-
       market is expected
       to grow by 15%
                            grow by 15% to 20% in 2008.2 this market reached a size of              rect sales & marketing efforts with key account focus and
       to 20% in 2008       uSD 2,390 million 2 (Eur 1,747 million 3) in the year 2007 and          optimized distribution partnerships.
                            is expected to grow by 22% 2 per year on average through
                            2010. carrier Ethernet access solutions are expected to show         •	 Expand our proven Optical+Ethernet innovation leadership
                            the strongest growth within this segment. However, due to               by meeting our customers’ demand for advanced metro
                            the challenging macroeconomic environment increasingly                  networking solutions more quickly and more comprehen-
                            seen	since	H2	2007,	industry	news	flow	on	enterprise	and	               sively than our competitors.
                            carrier spending for telecommunications equipment has been
                            mixed	 recently,	 and	 we	 see	 significant	 risk	 that	 the	 pro-   •	 Achieve operational excellence by building industry-lea-
                            jected market size increase in 2008 will fall short of the lon-         ding processes and best-in-class execution, which will re-
                            ger-term prospects.                                                     sult	in	quality	leadership,	improved	efficiency	and	increa-
                                                                                                    sed overall customer satisfaction.

                                                                                                 •	 recruit, retain, motivate, educate and nurture our team
                                                                                                    to achieve high levels of performance, personal growth
                                                                                                    and job satisfaction.




78
                                                                                                                                                              WElcOME



2007 expectations   Our Q4 pro forma operating income 7 of Eur -12.1 million or       We understand the drivers for the mentioned deviations from
have not been met   -22.5% of revenues and our full-year 2007 pro forma oper-         expectations	 and	 with	 significant	 changes	 in	 our	 manage-
                    ating income 7 of Eur 1.8 million or 0.7% of revenues came        ment team, a restructuring initiative kicked off in Decem-             MANAgEMENt
                                                                                                                                                               BOArD
                    in according to the latest guidance provided in December          ber 2007 and our strategic focus described above, we have
                    2007,	but	significantly	below	our	expectations	at	the	begin-      taken	appropriate	measures	to	improve	the	profitability	of	
                    ning of 2007 of pro forma operating income 7 of between 10%       the group sustainably.
                    and 13% in H2 2007. the major deviation from the initial ex-                                                                             SuPErViSOry
                    pectation was largely driven by the following factors. Firstly,                                                                             BOArD
                    there was a slower gross margin ramp-up than initially pro-
                    jected following the mid-2006 acquisition of Movaz. in addi-
                    tion, the revenue contribution of one major u.S. distribution
                    channel decreased strongly between Q1 and Q3 2007. As a                                                                                   cOrPOrAtE
                                                                                                                                                             gOVErNANcE
                    result, we were not yet able to accomplish our goal of an in-
                    creased market share in North America in 2007. Finally, in
                    Q4 2007, customer demand was weak and we posted signif-
                    icant one-off non-cash write-downs of inventories and cap-
                    italized development expenses. However, we were able to                                                                                    StOck

                    successfully	implement	our	targeted	intensified	presence	in	
                    china through the ongoing optimization of procurement ini-
                    tiatives and the expansion of our development organization.
                    the number of on-site employees in china increased from                                                                                   iNVEStOr
                                                                                                                                                              rElAtiONS
                    42 at year-end 2006 to 66 at year-end 2007.



                                                                                                                                                              BuSiNESS
                                                                                                                                                              OVErViEW




                                                                                                                                                             MANAgEMENt
                                                                                                                                                               rEPOrt




                                                                                                                                                              FiNANciAl
                                                                                                                                                             StAtEMENtS




                                                                                                                                                              ADDitiONAl
                                                                                                                                                             iNFOrMAtiON




                                                                                                                                                        79
 OutlOOk




       restructuring        the restructuring initiative encompasses closure of select      Due	to	the	weak	financial	results	for	2007	and	the	continued	   No dividend
       initiative reduces   research and development facilities as well as headcount        expansion of our global presence, which goes along with sig-     payments
       headcount by 7%
       until Q3 2008
                            reductions across all sites, with mostly engineering and op-    nificant	investments	as	described	above,	we	will	not	pay	out	
                            erations teams affected, and implying an overall cutback        a dividend for 2007 and do not expect to distribute a divi-
                            of 7% of employees through Q3 2008. With the resulting          dend for 2008 either.
                            smaller	employee	base	we	are	able	to	more	flexibly	react	to	
                            swings	in	market	demand,	and	we	will	significantly	increase	
                            our	efficiency.	Going	forward,	to	further	strengthen	our	mar-
                            ket position, we will continue to invest throughout 2008 in
                            the area of selling & marketing, in order to further expand
       Operating income     our global presence. While we will see one-off restructuring
       in 2008 and 2009     charges of around Eur 3.0 million between Q1 and Q3 2008,
       is expected to
       come out above
                            we expect the full-year 2008 operating margin to come out
       the 2007 level       above the level seen for full-year 2007, even when assum-
                            ing	a	flattish	year-on-year	development	of	revenues.	We	will	
                            continue to invest appropriately in revenue-generating ac-
                            tivities in 2008 and 2009, while investing selectively in the
                            r & D and general & administrative functions. Should reve-
                            nues increase and gross margins remain stable during this
                            period,	we	would	expect	operating	profitability	to	increase.	
                            Actual results may differ materially from expectations pro-
                            vided that risks materialize or the underlying assumptions
                            prove unrealistic.




80
We	are	convinced	that	we	will	return	to	profitable	growth,	
                                                                    WElcOME
even within the currently challenging market environment
and based on our four key advantages – focus on a high-
growth market segment, innovation leadership, a broad cus-
tomer base and a management team stronger than ever in
ADVA Optical Networking’s history.                                 MANAgEMENt
                                                                     BOArD

Meiningen, March 11, 2008

                                                                   SuPErViSOry
                                                                      BOArD




Brian Protiva                     Jürgen Hansjosten                 cOrPOrAtE
                                                                   gOVErNANcE




                                                                     StOck




christoph glingener               ron Martin
                                                                    iNVEStOr
                                                                    rElAtiONS




                                                                    BuSiNESS
                                                                    OVErViEW


Jaswir Singh                      christian unterberger

                                                                   MANAgEMENt
                                                                     rEPOrt




                                                                    FiNANciAl
                                                                   StAtEMENtS




                                                                    ADDitiONAl
                                                                   iNFOrMAtiON




                                                              81
iFrs
consolidated
Financial
statements      84 | consolidated balance sheet

                85 | consolidated income statement

                86	|	 Consolidated	cash	flow	statement

                87 | consolidated statement of changes in stockholders’ equity

                88	|	 Notes	to	the	consolidated	financial	statements

               143	|	 Affirmative	declaration	of	the	Management	Board

               144 | independent auditor’s opinion
 cONSOliDAtED BAlANcE SHEEt
 cONSOliDAtED iNcOME
 StAtEMENt




                              consolidated balance sheet

                                  (as of December 31, in                   note           2007          2006 1                                                      note          2007          2006 2
                                  thousands of Eur)                                                    (restated)
                                                                                                                         equity and liabilities                                                (restated)
                                  Assets
                                                                                                                         current liabilities
                                  current assets
                                                                                                                         Finance lease obligations                    (34)           892          1,194
                                  cash an cash equivalents                     (8)       41,576         32,181
                                                                                                                         Financial liabilities                        (14)           561        13,866
                                  Short term investments
                                                                                                                         trade accounts payable                       (15)       18,661         22,826
                                  and securities                               (9)            92            266
                                                                                                                         Advance payments                                               0             12
                                  trade accounts receivable                  (10)        49,366         53,639
                                                                                                                         Provisions                                   (16)        6,204          4,905
                                  inventories                                (11)        31,029         42,034           tax liabilities                              (25)        5,442           6,176

                                  tax assets                                 (25)         4,355             671          Deferred revenues                            (17)        5,337           8,156
                                                                                                                         Other current liabilities                    (15)       10,679           9,397
                                  Prepaid expenses                                        1,299          1,403
                                                                                                                         total current liabilities                              47,776         66,532
                                  Other current assets                       (12)            734         1,994           non-current liabilities
                                  total current assets                                128,451        132,188             Finance lease obligations                    (34)           227          1,039
                                  non-current assets                                                                     Financial liabilities                        (14)       35,439         16,001
                                                                                                                         Provisions                                   (16)           716            654
                                  Finance leases                             (13)         1,609           2,743
                                                                                                                         Deferred tax liabilities                     (25)        5,484           6,127
                                  Property, plant and equipment              (13)        20,610         19,302           Deferred revenues                            (17)        4,952           3,722
                                  goodwill                                   (13)        20,006         24,247           Other non-current liabilities                               176            288
                                                                                                                         total non-current liabilities                         46,994          27,831
                                  capitalized r&D expenses                   (13)        12,238         10,198
                                                                                                                         total liabilities                                     94,770          94,363
                                  Purchased technology                       (13)        13,141         22,383
                                                                                                                         stockholders’ equity                        (18)
                                  in-process r&D projects                    (13)               0        1,693           Share capital                                           45,992         45,364
                                  Other intangible assets 1                  (13)         6,642          4,031           capital reserve                                       295,847         291,519
                                  investments accounted for                                                              retained earnings
                                                                                                                                                                               -197,412       -187,069
                                  by the equity method                       (13)               0        3,034           (accumulated	deficit)	
                                                                                                                                              2



                                  Deferred tax assets                        (25)         2,172         12,529           Net income (loss)                                      -29,455        -10,343
                                                                                                                         Accumulated other
                                  Other non-current assets                                   532            337                                                                  -4,341          -1,149
                                                                                                                         comprehensive income (loss) 2
                                  total non-current assets                              76,950       100,497             total stockholders’ equity                           110,631        138,322

                                  total assets                                        205,401        232,685             total equity and liabilities                         205,401        232,685
                              1
                                  Other intangible assets have been increased by Eur 1,918 thousand to Eur 4,031     2
                                                                                                                         Retained	earnings	(accumulated	deficit)	and	accumulated	other	comprehensive	income	
                                  thousand compared to the prior year amount of Eur 2,113 thousand (see note (3)).       (loss) have been increased by Eur 2,241 thousand to Eur -187,069 thousand, and re-
                                                                                                                         duced by Eur 323 thousand to Eur -137 thousand compared to the prior year amounts
                                                                                                                         of Eur -189,310 thousand and Eur 186 thousand respectively (see note (3)).

84
consolidated income statement
                                                                                                                                                                                  WElcOME


    (in thousands of Eur, except earnings per share and number of shares)                                                     note                    2007         2006

    revenues                                                                                                                   (19)             251,486          192,709
                                                                                                                                                                                 MANAgEMENt
    cost of goods sold     1
                                                                                                                                                 -151,386        -109,951          BOArD


    Gross profit                                                                                                                                100,100           82,758

    Selling and marketing expenses 1                                                                                                                 -34,651      -29,852        SuPErViSOry
                                                                                                                                                                                    BOArD
    general and administrative expenses             1
                                                                                                                                                     -26,762      -19,960
    research and development expenses               1
                                                                                                                                                     -42,494      -30,168
    income from capitalization of development expenses,                                                                                                                           cOrPOrAtE
                                                                                                                                (20)                   2,315        4,633
    net of amortization for capitalized development projects                                                                                                                     gOVErNANcE


    Amortization of intangible assets from acquisitions 1                                                                       (13)                 -17,308       -6,681
    Other operating income                                                                                                      (21)                    765          216
                                                                                                                                                                                   StOck
    Other operating expenses                                                                                                    (21)                   -679           -31
    Operating income (loss)                                                                                                                      -18,714             915

    interest income                                                                                                             (22)                    782          370          iNVEStOr
                                                                                                                                                                                  rElAtiONS
    interest expenses                                                                                                           (22)                  -1,635        -860
    loss from investments accounted for by the equity method                                                                    (23)                   -412         -296
    Other	financial	gains	(losses),	net                                                                                         (24)                  -1,322       -1,147         BuSiNESS
                                                                                                                                                                                  OVErViEW
    income (loss) before tax                                                                                                                     -21,301          -1,018

    Income	tax	benefit	(expense),	net                                                                                          (25)                   -8,154       -9,325
                                                                                                                                                                                 MANAgEMENt
    net income (loss)                                                                                                                            -29,455         -10,343           rEPOrt



    Earnings per share in Eur                                                                                                   (27)
      basic                                                                                                                                            -0.64        -0.26         FiNANciAl
                                                                                                                                                                                 StAtEMENtS
      diluted                                                                                                                                          -0.64        -0.26

    Weighted average number of shares for calculation of earnings per share
      basic                                                                                                                                   45,687,855       40,271,807         ADDitiONAl
                                                                                                                                                                                 iNFOrMAtiON
      diluted                                                                                                                                 45,687,855       40,271,807
1
    Amortization of intangible assets from acquisitions is presented as a separate line item in the consolidated income statement (see note (13)).




                                                                                                                                                                            85
 cONSOliDAtED cASH FlOW
 StAtEMENt
 cONSOliDAtED StAtEMENt OF
 cHANgES iN StOckHOlDErS’
 EQuity


                             Consolidated cash flow statement

                             (in thousands of Eur)                  note    2007      2006                                               note      2007     2006
                             Cash flow from operating                                          Cash flow from investing activities
                             activities
                             income (loss) before tax                      -21,301    -1,018   Proceeds from disposal of property,
                                                                                               plant and equipment and intangible                    14        30
                             Adjustments to reconcile                                          assets
                             loss	before	tax	to	net	cash	flows
                                                                                               Proceeds from sale of equity
                             Non-cash                                                                                                               210         0
                                                                                               investments
                               Depreciation and amortization of
                                                                           33,704    15,551    Purchase of property, plant and
                               non-current assets                                                                                         (13)   -21,717   -17,084
                                                                                               equipment and intangible assets
                               loss from disposal of
                               property, plant and equipment and               22         1    Net cash paid in acquisitions of
                                                                                                                                           (7)      -205    -1,729
                               intangible assets                                               subsidiaries
                               Stock compensation expenses          (35)    3,186     3,935    interest received                                    515       368
                                                                                               net cash used in investing
                               Foreign currency exchange gain                -223     -1,337
                                                                                               activities                                        -21,183 -18,415
                               loss from investments accounted
                                                                    (13)      740       296
                               for by the equity method                                        Cash flow from financing activities
                               gain from sale of securities and                                Proceeds from capital increase                      1,215   17,352
                                                                    (13)     -328         0
                               financial	investments                                           Proceeds from issuance of
                                                                                                                                          (18)      764       745
                               Other non-cash losses                           59         0    convertible bonds
                                                                                               cash repayment of convertible bonds                   0        -42
                             changes in assets and liabilities                                 Payments	for	finance	leases                      -1,293     -1,367
                               (increase) decrease of                                          Increase	of	financial	liabilities          (14) 20,703      15,849
                                                                            4,419    -16,692
                               trade accounts receivable                                       Cash	repayment	of	financial	liabilities    (14) -14,570     -1,209
                               (increase) decrease of inventories          10,719    -15,607   interest paid                                    -1,879       -935
                               (increase) decrease of                                          net cash provided by
                                                                             -520     4,723    financing activities                               4,940    30,393
                               other assets
                               increase (decrease) of                                          Net effect of foreign currency
                                                                            -4,170    9,145
                               trade accounts payable                                          translation on cash and cash                         488       445
                               increase (decrease) of provisions            1,360     -1,292   equivalents
                                                                                               net change in cash and
                               increase (decrease) of
                                                                            -1,533    -2,918   cash equivalents                                   9,395     4,524
                               other liabilities
                             income tax paid                                 -984    -2,686    cash and cash equivalents at January 1             32,181   27,657

                             net cash provided by (used in)                                    cash and cash equivalents at
                             operating activities                          25,150    -7,899    December 31                                       41,576    32,181




86
consolidated statement of changes in stockholders’ equity
                                                                                                                                      WElcOME


                                               share capital                        net income
                                                                                     (loss) and
                                                                                       retained       Accumulated                    MANAgEMENt
                                                                                       earnings             other                      BOArD
(in thousands of Eur, except number of        number             par    capital   (accumulated     comprehensive
shares)                                      of shares         value   reserve          deficit)     income (loss)     total
Balance as of January 1, 2006               34,932,030    34,932       233,873        -189,310                186     79,681
                                                                                                                                     SuPErViSOry
iAS 8 adjustment per note (3)                                                             2,241               -323     1,918            BOArD

Balance as of January 1, 2006
(restated)                                  34,932,030    34,932       233,873         -187,069              -137     81,599
increase in share capital                     9,652,030        9,652    54,818                                        64,470          cOrPOrAtE
                                                                                                                                     gOVErNANcE
Stock options exercised                        531,951          532      1,078                                         1,610
Stock options outstanding                      247,528          248      1,750                                         1,998
Net income (loss)                                                                        -10,343                      -10,343
 Revaluation of derivatives                                                                                    19          19          StOck

 Deferred taxes on revaluations                                                                                -7          -7
 Foreign currency translation adjustments
                                                                                                            -1,024     -1,024
 (after tax effects)
                                                                                                                                      iNVEStOr
changes in accumulated other                                                                                -1,012     -1,012         rElAtiONS
comprehensive income (loss)
changes in total comprehensive income                                                    -10,343            -1,012    -11,355
(loss)
                                                                                                                                      BuSiNESS
Balance as of December 31, 2006             45,363,539    45,364       291,519         -197,412            -1,149    138,322          OVErViEW

Stock options exercised                        628,904          628      1,142                                         1,770
Stock options outstanding                                                3,186                                         3,186
                                                                                                                                     MANAgEMENt
Net income (loss)                                                                        -29,455                      -29,455          rEPOrt
 Revaluation of derivatives                                                                                      2          2
 Deferred taxes on revaluations                                                                                 -1         -1
 Foreign currency translation adjustments
                                                                                                            -3,193     -3,193
 (after tax effects)                                                                                                                  FiNANciAl
                                                                                                                                     StAtEMENtS
changes in accumulated other                                                                                -3,192     -3,192
comprehensive income (loss)
changes in total comprehensive income                                                    -29,455            -3,192    -32,647
(loss)                                                                                                                                ADDitiONAl
                                                                                                                                     iNFOrMAtiON
Balance as of December 31, 2007             45,992,443    45,992       295,847        -226,867             -4,341    110,631




                                                                                                                                87
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             notes to the                                                              ment are summarized in the interest of clarity, this is explained in
                             consolidated financial statements                                         the	“notes	to	the	consolidated	financial	statements”.	The	additional	
                                                                                                       disclosure requirements in order to comply with section 315a para-
                                                                                                       graph 1 of the german commercial code (Handelsgesetzbuch, HgB)
                             principles and policies                                                   are all met.

                             (1)   information about the company and the group                         The	structure	of	the	present	financial	statements	has	been	amended	
                                                                                                       compared to prior periods to comply with the requirements of iFrS 7.
                             The	consolidated	financial	statements	of	ADVA	AG	Optical	Network-         Short term investments and securities maturing in three months or
                             ing (hereinafter referred to as “the company” or “ADVA Optical Net-       less are now shown separately from cash and cash equivalents as
                             working”) for the year ended December 31, 2007 were authorized            a	line	item	in	the	balance	sheet.	Other	financial	gains	(losses),	net,	
                             for issue in accordance with a resolution of the Management Board         has replaced Foreign currency exchange gains (losses) as a line
                             on March 11, 2008. Since 1999, the company has operated under             item	in	the	income	statement.	Other	financial	gains	(losses),	net,	
                             the name ADVA Ag Optical Networking. the company’s registered             are	analyzed	in	the	notes	to	the	financial	statements.		Prior	year	
                             office	is	at	its	main	manufacturing	site	in	Maerzenquelle	1-3,	98617	     comparatives have been restated accordingly.
                             Meiningen-Dreissigacker, germany. the company’s headquarters
                             are in Fraunhoferstrasse 9a, 82152 Martinsried/Munich, germany.           The	 annual	 financial	 statements	 of	 the	 individual	 subsidiaries	 of	
                                                                                                       the holding company ADVA Ag Optical Networking, as subsumed in
                             ADVA Optical Networking develops, manufactures and sells optical          the	consolidated	annual	financial	statements,	are	all	prepared	us-
                             and Ethernet-based networking solutions to telecommunications             ing the same accounting and valuation policies and the same bal-
                             carriers and enterprises to deploy, manage and deliver data stor-         ance sheet date.
                             age, voice and video services in metropolitan areas.
                                                                                                       (3)   Adjustments according to iAS 8 Accounting Policies,
                             the group’s systems are used by telecommunications service pro-                 changes in Accounting Estimates, Errors
                             viders, companies, universities and government agencies worldwide.
                             ADVA Optical Networking sells its product portfolio both directly and     Within other intangible assets, an iAS 8 error has been corrected
                             through an international network of distribution partners.                in the opening balance sheet as at January 1, 2006, resulting in
                                                                                                       an increase of other intangible assets by Eur 1,918 thousand from
                             (2)   Basic principles for the preparation of the                         Eur 2,113 thousand to Eur 4,031 thousand. this correction is due
                                   consolidated	annual	financial	statements                            to an incomplete de-consolidation of an amortization balance in
                                                                                                       2004 (Eur 3,148 thousand) offset by the misallocation of hidden
                             The	Group’s	consolidated	annual	financial	statements	for	the	fiscal	      reserves which were realized during a consolidation in 2000 (Eur
                             year ended December 31, 2007, are prepared in accordance with             1,230 thousand). retained earnings and accumulated other com-
                             the international Financial reporting Standards (iFrS) published          prehensive income as at January 1, 2006, have been adjusted ac-
                             by the international Accounting Standards Board (iASB), as appli-         cordingly by Eur 2,241 thousand from Eur -189,310 thousand to
                             cable in the European union.                                              Eur -187,069 thousand and by Eur -323 thousand from Eur 186
                                                                                                       thousand to Eur -137 thousand respectively. there is no impact on
                             The	consolidated	annual	financial	statements	are	presented	in	EUR.	       profit	or	loss	for	the	years	2006	and	2007	from	this	correction.
                             unless otherwise stated, all amounts quoted are in thousands of
                             Eur. the balance sheet is broken down into current and non-cur-
                             rent	assets	and	liabilities.	The	classification	of	income	and	expenses	
                             in the income statement is based on their function within the en-
                             tity. Where items on the balance sheet and in the income state-




88
(4)   Effect of the application of new standards                        Amendments to iAs 1 presentation of financial
                                                                                                                                                        WElcOME
                                                                        statements – Disclosure to equity
Adoption of new or amended standards during the year                    the publication of iAS 1 requires including new disclosures to en-
                                                                        able users to evaluate the group’s capital management goals, pol-
the group has adopted the following new and amended iFrS and            icies and processes. the amendments of iAS 1 are applicable for
iFric interpretations during the year. Adoption of these revised        annual periods starting on or after January 1, 2007. the applica-              MANAgEMENt
                                                                                                                                                         BOArD
standards	and	interpretations	did	not	have	any	effect	on	the	finan-     tion has resulted in extended disclosures in the notes to the con-
cial performance or position of the group. they did however give        solidated	financial	statements	of	ADVA	Optical	Networking.
rise to additional disclosures, including in some cases, revisions to
accounting policies.                                                    ifric 11 to ifrs 2 group and treasury share transactions                       SuPErViSOry
                                                                        in November 2006, the iASB published interpretation iFric 11. the                 BOArD
•	 iFrS 7 Financial instruments: Disclosures                            interpretation provides guidance on applying iFrS 2 in three cir-
                                                                        cumstances. iFrS 2 needs to be applied if an entity chooses or is
•	 iAS 1 Amendment – Presentation of Financial Statements               required to purchase its own equity instruments (treasury shares)
                                                                        to settle the share-based payment obligation. Additionally, iFric 11            cOrPOrAtE
                                                                                                                                                       gOVErNANcE
•	 iFric 8 Scope of iFrS 2                                              outlines that iFrS 2 needs to be applied, if a parent company or a
                                                                        subsidiary grants rights of its equity instruments to the employees
•	 iFric 9 reassessment of Embedded Derivatives                         of the subsidiary. Each of the two cases leads to different account-
                                                                        ing	in	the	individual	financial	statements	of	the	respective	subsid-
•	 iFric 10 interim Financial reporting and impairment                  iary. the interpretation is effective for annual periods starting on             StOck

                                                                        or after March 1, 2007.
the group has also early adopted iFric 11 (iFrS 2 – group and
treasury Share transactions). Adoption of this interpretation did       ifric 8 – scope of ifrs 2
not	have	any	effect	on	the	financial	performance	or	position	of	the	    in January 2006 the iASB published interpretation iFric 8. the                  iNVEStOr
                                                                                                                                                        rElAtiONS
group. it did however give rise to additional disclosures. the ex-      Interpretation	clarifies	that	IFRS	2	applies	to	arrangements	where	
penses	of	stock	options	granted	to	affiliated	companies	of	ADVA	AG	     an entity makes share-based payments for apparently nil or inad-
Optical Networking have been on-charged to the respective sub-          equate	consideration.	IFRIC	8	explains	that,	if	the	identifiable	con-
sidiaries. From a consolidated perspective this does not impact the     sideration given appears to be less than the fair value of the equity           BuSiNESS
total expense from stock option programs.                               instruments granted or liability incurred, this situation typically in-         OVErViEW
                                                                        dicates that other consideration has been or will be received. iFrS 2
the principal effects of these changes are as follows:                  therefore applies. the interpretation is effective for annual periods
                                                                        beginning on or after May 1, 2006. Earlier application is encour-
ifrs 7 financial instruments: Disclosure                                aged. currently no arrangements of ADVA Optical Networking fall                MANAgEMENt
                                                                                                                                                         rEPOrt
in August 2006, the iASB published iFrS 7. the Standard summa-          under the provisions of iFric 8.
rizes	disclosure	requirements	for	financial	instruments	formerly	in-
cluded in iAS 30 (Disclosures in Financial Statements of Banks and      ifric 9 – reassessment of embedded Derivatives
Similar Financial institutions) and iAS 32 (Financial instruments:      in March 2006 the iASB published interpretation iFric 9. An em-
                                                                                                                                                        FiNANciAl
Disclosure and Presentation) and amends and expands some dis-           bedded	 derivative	 is	 a	 component	 of	 a	 hybrid	 (combined)	 finan-        StAtEMENtS
closure requirements. iFrS 7 is effective for annual periods start-     cial instrument that also includes a non-derivative host contract.
ing on or after January 1, 2007. the Standard is applicable for all     iFric 9 concludes that an entity must assess whether an embed-
entities	and	has	resulted	in	extended	disclosures	concerning	finan-     ded derivative is required to be separated from the host contract
cial	instruments	in	the	consolidated	financial	statements	of	ADVA	      and	accounted	for	as	a	derivative	when	the	entity	first	becomes	a	              ADDitiONAl
                                                                                                                                                       iNFOrMAtiON
Optical Networking.                                                     party to the contract. Subsequent reassessment is prohibited un-




                                                                                                                                                  89
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             less	there	is	a	change	in	the	terms	of	the	contract	that	significantly	     performance. ADVA Optical Networking anticipates extended dis-
                             modifies	the	cash	flows	resulting	from	that	contract.	In	this	case	         closures in its segment reporting in the notes to the consolidated
                             reassessment is mandatory. the interpretation is effective for an-          financial	statements	from	the	first	time	adoption	of	IFRS	8.
                             nual periods beginning on or after June 1, 2006. Earlier application
                             is	encouraged.	There	have	been	no	significant	effects	on	ADVA	Op-           iAs 23 Borrowing costs
                             tical	Networking’s	consolidated	financial	statements	from	the	first-        A revised iAS 23 Borrowing costs was issued in March 2007, and
                             time application of iFric 9.                                                becomes	effective	for	financial	years	beginning	on	or	after	Janu-
                                                                                                         ary 1, 2009. the standard has been revised to require capitalization
                             ifric 10 - interim financial reporting and impairment                       of borrowing costs when such costs relate to a qualifying asset. A
                             in July 2006 the iASB published interpretation iFric 10. the inter-         qualifying asset is an asset that necessarily takes a substantial pe-
                             pretation	addresses	an	apparent	conflict	between	the	requirement	           riod of time to get ready for its intended use or sale. in accordance
                             of iAS 34 “interim Financial reporting” and those standards on the          with the transitional requirements in the Standard, the group will
                             recognition and reversal of impairment losses on goodwill and cer-          adopt this as a prospective change. Accordingly, borrowing costs
                             tain	financial	assets	in	the	financial	statements.	IFRIC	10	concludes	      will be capitalized on qualifying assets with a commencement date
                             that an entity shall not reverse an impairment loss recognized in           after January 1, 2009. No changes will be made for borrowing costs
                             a previous interim period in respect to goodwill or an investment           incurred to this date that have been expensed. ADVA Optical Net-
                             in	either	an	equity	instrument	or	a	financial	asset	carried	at	cost,	       working	does	not	anticipate	significant	effects	on	its	consolidated	
                             and that an entity shall not extend this consensus by analogy to            financial	statements	from	the	first-time	adoption	of	this	standard.	
                             other	areas	of	potential	conflict	between	IAS	34	and	other	stan-
                             dards. iFric 10 is effective for annual periods beginning on or af-         ifric 12 service concession Arrangements
                             ter November 1, 2006. Earlier application is encouraged. there              iFric interpretation 12 was issued in November 2006 and becomes
                             have	been	no	significant	effects	on	ADVA	Optical	Networking’s	con-          effective for annual periods beginning on or after January 1, 2008.
                             solidated	 financial	 statements	 from	 the	 first-time	 application	 of	   this interpretation applies to service concession operators and
                             iFric 10.                                                                   explains how to account for the obligations undertaken and rights
                                                                                                         received in service concession arrangements. No member of the
                             Standards issued but not yet effective                                      group is an operator and hence this interpretation will have no im-
                                                                                                         pact on the group.
                             Among others, the iASB and iFric published the following new
                             standards, interpretations and amendments to standards. Due to              ifric 13 customer loyalty programs
                             the nature of its business transactions, ADVA Optical Networking            iFric interpretation 13 was issued in June 2007 and becomes ef-
                             may be required to adopt those standards. the group has refrained           fective for annual periods beginning on or after July 13, 2008. this
                             from early adoption of these standards and expects to apply them            interpretation requires customer loyalty award credits to be ac-
                             only when they become effective.                                            counted for as a separate component of the sales transaction in
                                                                                                         which they are granted and therefore part of the fair value of the
                             ifrs 8 Operating segments                                                   consideration received is allocated to the award credits and deferred
                             iFrS 8 was issued in November 2006, and becomes effective for               over	the	period	that	the	award	credits	are	fulfilled.	The	Group	ex-
                             financial	years	beginning	on	or	after	January	1,	2009.	This	stan-           pects	that	this	interpretation	will	have	no	impact	on	the	Group’s	fi-
                             dard requires disclosure of information about the group’s operat-           nancial statements as no such schemes currently exist.
                             ing segments and replaced the requirement to determine primary
                             (business) and secondary (geographical) reporting segments of the           IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset,
                             Group.	Under	IFRS	8,	an	operating	segment	is	identified	on	the	basis	       minimum funding requirements and their interaction
                             of internal reports that are regularly reviewed by the entity’s chief       iFric interpretation 14 was issued in July 2007 and becomes effec-
                             operating decision maker in order to allocate resources and assess          tive for annual periods beginning on or after January 1, 2008. this




90
interpretation provides guidance on how to assess the limit on the      uity instruments, which is dependent on the terms and conditions
                                                                                                                                                           WElcOME
amount	of	surplus	in	a	defined	benefit	scheme	that	can	be	recog-        of the grant. this also requires determining the most appropriate
nized	as	an	asset	under	IAS	19	Employee	Benefits.	The	Group	ex-         inputs to the valuation model including the expected life of the op-
pects	that	this	Interpretation	will	have	no	impact	on	the	financial	    tion, volatility and dividend yield and making assumptions about
position or performance of the group as there are currently no de-      them. refer to note (35) for the carrying amounts involved.
fined	benefit	schemes.                                                                                                                                    MANAgEMENt
                                                                                                                                                            BOArD
                                                                        Deferred tax assets
(5)	 Significant	accounting	judgments,	estimates	and	                   Deferred tax assets are recognized for all unused tax losses to the
     assumptions                                                        extent	that	it	is	probable	that	taxable	profit	will	be	available	against	
                                                                        those	losses	that	can	be	utilized.	Significant	management	judgment	               SuPErViSOry
The	preparation	of	the	Group’s	financial	statements	requires	man-       is required to determine the amount of deferred tax assets that can                  BOArD
agement to make judgments, estimates and assumptions that affect        be recognized, based upon the likely timing and level of future tax-
the reported amounts of revenues, expenses, assets and liabilities,     able	profits	together	with	future	tax	planning	strategies.	Refer	to	
and the disclosure of contingent liabilities, at the reporting date.    note (25) for the carrying amounts involved.
However, uncertainty about these assumptions and estimates could                                                                                           cOrPOrAtE
                                                                                                                                                          gOVErNANcE
result in outcomes that could require a material adjustment to the      Development costs
carrying amount of the asset or liability affected in the future.       Development costs are capitalized in accordance with the account-
                                                                        ing policy in note 6. initial capitalization of costs is based on man-
                                                                        agement’s judgment that technological and economical feasibility
the key judgments and assumptions concerning the future and             is	 confirmed,	 usually	 when	 a	 product	 development	 project	 has	               StOck

other key sources of estimation uncertainty at the balance sheet        reached	 a	 defined	 milestone	 according	 to	 an	 established	 project	
date,	that	have	a	significant	risk	of	causing	a	material	adjustment	    management model. in determining the amounts to be capital-
to	the	carrying	amounts	of	assets	and	liabilities	within	the	next	fi-   ized management makes assumptions regarding the expected fu-
nancial year are discussed below.                                       ture cash generation of the assets, discount rates to be applied and               iNVEStOr
                                                                                                                                                           rElAtiONS
                                                                        the	expected	period	of	benefits.	Refer	to	note	(13)	for	the	carry-
Impairment of non-financial assets                                      ing amounts involved.
the group assesses whether there are any indicators of impair-
ment	for	all	non-financial	assets	at	each	reporting	date.	Goodwill	     (6)	   Significant	accounting	policies                                             BuSiNESS
and	other	indefinite	life	intangibles	are	tested	for	impairment	an-                                                                                        OVErViEW
nually	and	at	other	times	when	such	indicators	exist.	Other	non-fi-     principles of consolidation
nancial assets are tested for impairment when there are indicators      All companies in which the group has direct or indirect control
that the carrying amounts may not be recoverable. When value-in-        through subsidiaries are fully consolidated at the date of change of
use calculations are undertaken, management must estimate the           control to ADVA Optical Networking. companies are de-consolidated                 MANAgEMENt
                                                                                                                                                            rEPOrt
expected	future	cash	flows	from	the	asset	or	cash	generating	unit	      at the date when ADVA Optical Networking’s control ceases.
and choose a suitable discount rate in order to calculate the pres-
ent	value	of	those	cash	flows.	Refer	to	note	(13)	for	the	carrying	     the capital consolidation is based on the purchase method, whereby
amounts involved.                                                       the cost of the stake acquired is netted against the group’s share
                                                                                                                                                           FiNANciAl
                                                                        in the consolidated subsidiary’s equity at the time of acquisition.               StAtEMENtS
share-based payments                                                    the cost of the acquisition is measured as the aggregate outlay of
the group measures the cost of equity-settled transactions with         cash and cash equivalents, as well as the fair values of the assets
employees by reference to the fair value of the equity instruments      given, equity instruments issued and liabilities incurred or assumed
at the date at which they are granted. Estimating fair value requires   at the date of exchange, plus any costs directly attributable to the               ADDitiONAl
                                                                                                                                                          iNFOrMAtiON
determining the most appropriate valuation model for a grant of eq-     acquisition.	On	initial	recognition,	the	identifiable	assets,	liabilities	




                                                                                                                                                     91
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             and contingent liabilities in the context of the business combina-           Intercompany	profits	that	arise	from	deliveries	and	services	pro-
                             tion are measured at their fair value at the acquisition date with-          vided within the group are eliminated.
                             out considering existing minority interests. Any excess of cost over
                             book value is assigned to the group’s assets insofar as the fair             foreign currency translation
                             value of the acquired share exceeds the book value of the assets.            Where	 the	 annual	 financial	 statements	 of	 consolidated	 compa-
                             The	 remaining	 excess	 of	 cost	 over	 book	 value	 arising	 from	 first-   nies	are	presented	in	a	foreign	currency,	the	reported	figures	are	
                             time consolidation is recognized as goodwill. in accordance with             translated into Eur using the concept of the functional currency
                             iFrS 3, goodwill is subject to an impairment review at least once a          (iAS 21: the Effects of changes in Foreign Exchange rates) based
                             year. Such reviews can lead to write-downs (pursuant to the “im-             on	 the	 modified	 closing	 date	 method.	 The	 functional	 currency	 of	
                             pairment only” approach). For the purpose of impairment testing,             each group company is the currency of the main economic envi-
                             goodwill acquired in a business combination is, from the acquisition         ronment in which the company operates. the reporting currency of
                             date, allocated to each of the group’s cash generating units that            ADVA	Optical	Networking’s	consolidated	financial	statements	is	the	
                             are	expected	to	benefit	from	the	synergies	of	the	combination,	ir-           functional currency of the parent company, ADVA Ag Optical Net-
                             respective of whether other assets or liabilities of the acquiree are        working. Accordingly, the value of assets and liabilities, contingent
                             assigned to those units.                                                     liabilities	and	other	financial	obligations	of	subsidiaries	to	the	re-
                                                                                                          porting currency is translated at the closing rate at the date of the
                             Insofar	as	the	fair	values	of	acquired	net	assets	can	not	be	finally	        balance sheet. Expenses and revenues are translated at average
                             determined, the initial accounting for business combinations is per-         exchange rates for the year. translation adjustments are taken di-
                             formed provisionally according to iFrS 3. Adjustments of prelimi-            rectly to a separate component of stockholders’ equity and do not
                             nary data are included within twelve months starting from the date           affect the income statement. Any goodwill arising on the acquisi-
                             of	the	first-time	consolidation.                                             tion of a foreign operation and any fair value adjustments to the
                                                                                                          carrying amount of assets and liabilities arising on acquisition are
                             the equity method according to iAS 28 (investments in Associates)            treated as assets and liabilities of the foreign operation and trans-
                             is used to account for investments in entities in which ADVA Opti-           lated at the closing rate.
                             cal Networking holds 20% to 50% of the voting rights, either di-
                             rectly	or	indirectly,	and	over	whose	operating	and	financial	policy	         translation gains and losses arising from the valuation of foreign
                             decisions	ADVA	Optical	Networking	exercises	significant	influence	           currency receivables and payables reported in the relevant func-
                             (associated companies). the investment is initially recognized at            tional currency in the balance sheets of individual group compa-
                             cost and the carrying amount is increased or decreased to recog-             nies	at	the	closing	date	are	taken	as	profit	or	loss.
                             nize	the	investors’	share	of	the	profit	or	loss	generated.	The	Group	
                             share	of	the	profit	or	loss	of	investments	accounted	for	by	the	eq-
                             uity method is recognized in the consolidated income statement,
                             whereas the share of changes in the equity of investments ac-
                             counted for by the equity method that has not been recognized in
                             profit	or	loss	is	shown	in	the	reserves	of	the	consolidated	equity.	In	
                             case the group share of losses exceeds the carrying amount of the
                             investment accounted for by the equity method, no further losses
                             are recognized on the group level. goodwill relating to an invest-
                             ment accounted for by the equity method is included in the carry-
                             ing amount of the investment.

                             intercompany revenues, expenses, income, receivables and pay-
                             ables within the group are netted.




92
the relevant currency translation rates are listed below:
                                                                                                                                                       WElcOME


                                 usD/eur         gBp/eur         nOK/eur         Jpy/eur         cny/eur         sgD/eur          pln/eur

 closing rate                                                                                                                                         MANAgEMENt
                                   0.67940          1.35710         0.12560       0.00605          0.09315         0.47000          0.27963
 at Dec. 31, 2007                                                                                                                                       BOArD


 Average rate
 for the period                    0.73082          1.46206         0.12485       0.00620          0.09616         0.48494          0.26865
 Jan. 1 to Dec. 31, 2007                                                                                                                              SuPErViSOry
                                                                                                                                                         BOArD


revenue recognition
revenue is recognized to the extent that it is probable that the eco-    in arrangements with a customer that include delivery of goods as
nomic	benefits	will	flow	to	the	Group	and	the	revenue	can	be	reliably	   well as rendering of services, the shipment of the goods is sepa-             cOrPOrAtE
                                                                                                                                                      gOVErNANcE
measured. revenue is measured at the fair value of the consider-         rated from the rendering of the services if the goods have a stand-
ation received, excluding discounts, rebates and other sales taxes       alone value for the customer and the fair value of the service can
or	duty.	The	following	specific	recognition	criteria	must	also	be	met	   be reliably determined.
before revenue is recognized:
                                                                         Loan equipment                                                                 StOck

Sale of goods                                                            the group does not recognize revenues generated by “loaned prod-
Revenue	from	the	sale	of	goods	is	recognized	when	the	significant	       ucts” (products supplied to the customer on a trial basis with a view
risks and rewards of ownership of the goods have passed to the           to subsequent sale) until the customer has accepted the supplied
buyer, usually on delivery of the goods.                                 product and payment has been received.                                        iNVEStOr
                                                                                                                                                       rElAtiONS

Product returns that are estimated according to contractual obli-        cost of goods sold
gations and past revenues statistics are recognized as a reduction       the cost of goods sold comprises the costs incurred in the produc-
of revenues.                                                             tion and rendering of services. this item subsumes both the direct            BuSiNESS
                                                                         cost of materials and production directly assignable to a product             OVErViEW
Rendering of services                                                    and indirect (overhead) costs, including the depreciation of produc-
revenues arising from the sale of services primarily derive from         tion equipment and write-downs on inventories. the cost of goods
training, maintenance and installation services and are recognized       sold also includes appropriations to warranty provisions. income
when those services have been rendered. installation services are        from the reversal of write-downs on inventories reduces the cost             MANAgEMENt
                                                                                                                                                        rEPOrt
recognized	as	revenue	if	the	final	installation	has	been	approved	by	    of goods sold. cost of goods sold does not include amortizations on
the customer. generally, maintenance services are pre-calculated,        intangible assets from acquisitions.
reported as deferred revenue and recognized as revenue straight-
line over the contract period. training is recognized as revenue im-     earnings per share
                                                                                                                                                       FiNANciAl
mediately after supply of the service.                                   the group calculates undiluted and diluted earnings per share in ac-         StAtEMENtS
                                                                         cordance with iAS 33 “Earnings per Share”. undiluted earnings per
                                                                         share are calculated based on the weighted average number of no-
                                                                         par value shares outstanding during the reporting period. Diluted
                                                                         earnings per share are calculated based on the weighted average               ADDitiONAl
                                                                                                                                                      iNFOrMAtiON
                                                                         number of no-par value shares outstanding during the reporting




                                                                                                                                                 93
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             period, but also including the number of no-par value shares that              statement at the time the loans and receivables are cancelled from
                             could come into existence if all stock options and / or convertible            the books or impaired, as well as through amortization.
                             bonds were exercised at balance sheet date.
                                                                                                            At each balance sheet date, ADVA Optical Networking assesses
                             cash and cash equivalents                                                      whether	a	financial	asset	is	impaired.	If	there	is	objective	evidence	
                             Cash	and	cash	equivalents	as	reported	in	the	consolidated	cash	flow	           that an impairment loss on loans and receivables has been incurred,
                             statement include short-term liquidity, i.e., cash and cash equiva-            the amount of the loss is determined as the difference between the
                             lents and short term investments and securities with a time to ma-             carrying amount of the asset and the present value of expected fu-
                             turity not exceeding three months.                                             ture	cash	flows.	The	recognition	of	the	impairment	loss	affects	the	
                                                                                                            income statement.
                             financial assets
                             Financial	 assets	 within	 the	 scope	 of	 IAS	 39	 are	 either	 classified	   if the amount of the impairment loss decreases in subsequent peri-
                             as	financial	assets	at	fair	value,	affecting	the	statement	of	opera-           ods, and provided that the decrease can be related to an event which
                             tions,	loans	and	receivables,	investments	held	to	maturity	or	finan-           had occurred after the impairment was recognized, the previously
                             cial	assets	available	for	sale.	On	initial	recognition,	financial	assets	      recognized impairment loss is reversed. Any subsequent reversal
                             are measured at fair value. At the time ADVA Optical Networking                of an impairment loss affects the income statement. the loss can
                             becomes a party to a contract, the group assesses whether this                 only be reversed to the extent that the carrying value of the asset
                             contract contains an embedded derivative. in case the underlying               does not exceed its amortized cost at the date of impairment.
                             contract is not recognized at fair value, affecting the income state-
                             ment, the embedded derivatives are separated from the underly-                 For trade receivables a provision for impairment is made provided
                             ing contract, provided that the economic characteristics and risks             that there is objective evidence that ADVA Optical Networking will
                             of the embedded derivatives are not closely related to those of the            not be able to collect the full amount due under the original terms
                             underlying contract.                                                           of the invoice. the carrying amount of the receivable is reduced
                                                                                                            through use of an allowance account. impaired trade receivables
                             ADVA	Optical	Networking	determines	the	classification	of	the	finan-            are derecognized once they are assessed as uncollectible.
                             cial assets after initial recognition and, where allowed and appropri-
                             ate,	re-evaluates	this	designation	at	each	financial	year-end.                 inventories
                                                                                                            inventories are valued at the lower of cost or net realizable value.
                             All	 regular	 way	 purchases	 and	 sales	 of	 financial	 assets	 are	 rec-     the costs of purchase are determined at average prices. Produc-
                             ognized on the trade date, i.e., the date ADVA Optical Network-                tion costs include direct unit costs, an appropriate portion of nec-
                             ing committed to purchase the asset. regular way purchases and                 essary production overheads and production-related depreciation
                             sales	are	purchases	or	sales	of	financial	assets	that	require	deliv-           that can be directly assigned to the production process. Administra-
                             ery of the asset within a period of time determined by market reg-             tive and social insurance charges that can be assigned to production
                             ulation or convention.                                                         are	also	taken	into	account.	Financing	charges	are	not	classified	as	
                                                                                                            part of the at-cost base. the net realizable value is the estimated
                             Loans	and	receivables	are	non-derivative	financial	assets	with	fixed	          selling price that could be realized at the closing date in the con-
                             or determinable payments that are not quoted in an active market.              text of ordinary business activity, less estimated costs of comple-
                             After their initial measurement, loans and receivables subsequently            tion and costs necessary to make the sale.
                             are carried at amortized cost less allowances for impairment. Amor-            inventory depreciation covers risks relating to slow-moving items
                             tized cost is calculated under consideration of any discount or pre-           or technical obsolescence. Where the reasons for previous write-
                             mium at the time of the purchase. the amortized cost includes any              downs no longer apply, those write-downs are reversed. the write-
                             fees that are an integral part of the effective interest rate and of           back is capped to historical costs.
                             the transaction costs. gains and losses are recognized in the income




94
property, plant and equipment                                              Intangibles	with	an	indefinite	useful	life	are	not	amortized.	The	use-
                                                                                                                                                             WElcOME
Property, plant and equipment are stated at cost less accumulated          ful	life	of	an	intangible	asset	with	an	indefinite	life	is	reviewed	annu-
depreciation. Depreciation on property, plant and equipment is cal-        ally	to	determine	whether	indefinite	life	assessment	continues	to	be	
culated on a straight-line basis over the estimated useful lives of        supportable. if not, the change in the useful life assessment from
the assets as follows:                                                     indefinite	to	finite	is	made	on	a	prospective	basis.	There	are	no	in-
                                                                           tangible	assets	with	indefinite	lives	other	than	goodwills.                      MANAgEMENt
                                                                                                                                                              BOArD
•	 Buildings                                           19 to 25 years
                                                                           Goodwill
•	 technical equipment and machinvery                     2 to 4 years     Intangible	assets	with	indefinite	useful	lives	are	tested	for	impair-
                                                                           ment annually either individually or at the cash generating unit level.          SuPErViSOry
•	 Factory	and	office	equipment	                         3	to	10	years     An unlimited useful life is assumed for goodwill acquired in the con-               BOArD
                                                                           text of business combinations. impairment reviews are performed at
                                                                           the balance sheet date or when there is an indication that the asset
the value of property, plant and equipment is written down if the          may be impaired in accordance with iFrS 3. (refer to note (7)).
book value exceeds the net realizable value in the event of a sale.                                                                                          cOrPOrAtE
                                                                                                                                                            gOVErNANcE
                                                                           Purchased technology and in-process R & D projects
Borrowing costs are capitalized if they are directly attributable to       Purchased intangible assets with a limited useful life are stated at
the acquisition or production of the asset.                                cost and amortized on a straight-line basis, if the useful life is de-
                                                                           terminable, over estimated useful lives of two to nine years. they
intangible assets                                                          are tested for impairment if an indication exists that the recover-                StOck

intangible assets acquired separately are measured on initial rec-         able amount of the asset may have decreased.
ognition at cost. the cost of intangible assets acquired in a business
combination is fair value as at the date of acquisition. Following ini-    Capitalized research and development expenses
tial recognition, intangible assets are carried at cost less any ac-       Development expenses for new products are capitalized insofar as                  iNVEStOr
                                                                                                                                                             rElAtiONS
cumulated amortization and any accumulated impairment losses.              they can be unambiguously assigned to those products, and pro-
internally generated intangible assets, excluding capitalized devel-       vided that the products under development are technically feasible
opment	costs,	are	not	capitalized	and	expenditure	is	reflected	in	         and can be marketed. there must also be reasonable certainty that
profit	or	loss	in	the	year	in	which	the	expenditure	is	incurred.           development	activity	will	result	in	future	cash	inflows.                          BuSiNESS
                                                                                                                                                             OVErViEW
The	useful	lives	of	intangible	assets	are	assessed	to	be	either	fi-        capitalized development expenses include all costs that can be di-
nite	or	indefinite.                                                        rectly assigned to the development process, plus an appropriate
                                                                           portion of development-related overhead costs. Financing charges
Intangible	assets	with	finite	lives	are	amortized	over	the	useful	eco-     are not capitalized.                                                             MANAgEMENt
                                                                                                                                                              rEPOrt
nomic life and assessed for impairment whenever there is an indi-
cation that the intangible asset may be impaired. the amortization         After initial recognition of development expenditure as an asset,
period and the amortization method for an intangible asset with a          measurement is at historical cost less accumulated amortization
finite	useful	life	is	reviewed	at	least	at	each	financial	year	end.	The	   and impairment. the straight-line method of amortization is used
                                                                                                                                                             FiNANciAl
amortization	expense	on	intangible	assets	with	finite	lives	is	recog-      from the start of production through the estimated selling periods               StAtEMENtS
nized	in	profit	or	loss	in	the	expense	category	consistent	with	the	       for	the	products	developed	(generally	between	two	and	five	years).	
function of the intangible asset. Amortization on purchased intan-                                          &	
                                                                           Finished	as	well	as	unfinished	R	 D	projects	that	are	not	subject	to	
gible assets and amortization on capitalized r & D expenses is rec-        straight-line depreciation are tested for impairment at the balance
ognized	in	profit	or	loss	in	the	positions	stated	under	note	(13).         sheet date. impairment losses are recognized if appropriate.                      ADDitiONAl
                                                                                                                                                            iNFOrMAtiON
                                                                           research costs are expensed as incurred.




                                                                                                                                                       95
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             leasing                                                                        repayments may be required for other reasons. One example is the
                             the determination of whether an arrangement is or contains a lease             requirement that the group must continue to manufacture its prod-
                             is based on the substance of the arrangement at the inception date             ucts at its german manufacturing site in Meiningen for a period of
                             of	whether	the	fulfillment	of	the	arrangement	is	dependent	on	the	             at least three years, beginning with the end of the grant period. At
                             use	of	a	specific	assets	or	assets,	or	the	arrangement	conveys	a	              December 31, 2007, ADVA Optical Networking’s management does
                             right to use the asset. A reassessment after inception of the lease            not	expect	significant	repayments	of	grants	received.
                             has	to	be	made	only	if	specific	conditions	apply.	For	lease	arrange-
                             ments entered into prior to January 1, 2005, the date of inception             financial liabilities
                             is deemed to be January 1, 2005 in accordance with the transitional            All loans and borrowings are initially recognized at the fair value
                             requirements of iFric 4.                                                       of the consideration received, less directly attributable trans-
                                                                                                            action costs, and have not been designated “as at fair value through
                             Leasing	 contracts	 are	 classified	 as	 finance	 leases	 if	 substantially	   profit	or	loss”.	After	initial	recognition,	interest	bearing	loans	and	
                             all risks and rewards and with it the economic ownership is trans-             borrowings are subsequently measured at amortized cost using the
                             ferred	to	the	lessee.	All	other	leasing	transactions	are	classified	as	        effective	interest	method.	Gains	and	losses	are	recognized	in	profit	
                             operating leases.                                                              or loss when the liabilities are derecognized as well as through the
                                                                                                            amortization process.
                             Property, plant and equipment acquired by ADVA Optical Network-
                             ing	through	finance	lease	contracts	is	stated	at	the	fair	value	of	the	        Derivative financial instruments
                             leased property or, if lower, the present value of the future mini-            in accordance with iAS 39, ADVA Optical Networking recognizes all
                             mum lease payments when the contract commences. Finance lease                  financial	 assets	 and	 liabilities	 and	 all	 derivative	 instruments	 pur-
                             contracts are then amortized using the straight-line method over               chased	for	hedging	purposes,	irrespective	of	their	specific	purpose,	
                             the shorter of the leasing period or the estimated useful life of the          as assets or liabilities on the balance sheet. All these items are mea-
                             assets.	 The	 correspondent	 liability	 is	 shown	 as	 finance	 lease	 ob-     sured either at carrying amount or at fair value. changes in the fair
                             ligation. the lease payment to the lessor is apportioned between               value	of	financial	derivatives	affect	either	earnings	or	equity,	de-
                             finance	charge	and	the	reduction	of	the	outstanding	liability.	The	            pending	on	whether	they	serve	as	fair	value	hedges	or	as	cash	flow	
                             finance	charge	is	allocated	to	each	period	during	the	lease	term	so	           hedges. the effective portion of any change in the fair value of a
                             as to produce a constant periodic rate of interest on the remain-              hedged	transaction	or	of	the	financial	derivative	of	a	fair	value	hedge	
                             ing liability.                                                                 is	 taken	 through	profit	 or	 loss.	 Changes	 in	 the	 fair	 value	 of	 cash	
                                                                                                            flow	hedges,	i.e.,	financial	derivatives	whose	purpose	is	to	hedge	
                             Operating lease payments are recognized as an expense in the in-               future	cash	flows,	are	initially	recognized	within	a	separate	compo-
                             come statement on a straight-line basis over the lease term.                   nent of stockholders’ equity and do not affect earnings. they only
                                                                                                            affect	earnings	when	the	projected	cash	flow	is	realized.	The	non-
                             government grants                                                              effective	portions	of	a	cash	flow	hedge	or	other	covering	transac-
                             the group receives investment subsidies for the acquisition of cer-            tions that do not meet the requirements for hedge accounting are
                             tain	long-lived	assets	(including	finance	leases),	i.e.,	the	new	pro-          taken	through	profit	or	loss	as	incurred.
                             duction, administration and development site in Meiningen. these
                             grants are recorded as a reduction of the cost of the acquired as-
                             sets insofar as the grants are realized and the assets qualify for
                             government support.

                             At the end of the grant period, all government grants are subject to
                             a	final	audit.	Although	the	government	only	reimburses	expenses	
                             that qualify for subsidies during the grant period, it is possible that




96
taxes                                                                     Deferred income tax assets are recognized for all deductible tem-
                                                                                                                                                           WElcOME
Current income tax                                                        porary differences, carry forward of unused tax credits and unused
current income tax assets and liabilities for the current and prior       tax	losses,	to	the	extent	that	it	is	probable	that	taxable	profit	will	
periods are measured at the amount expected to be recovered               be available against which the deductible temporary differences,
from or paid to the taxation authorities. the tax rates and tax laws      and the carry forward of unused tax credits and unused tax losses
used to compute the amount are those that are enacted or sub-             can be utilized except:                                                         MANAgEMENt
                                                                                                                                                            BOArD
stantively enacted by the balance sheet date. current income tax
relating to items recognised directly in equity is recognized in eq-      •	 where the deferred income tax asset relating to the deductible
uity	and	not	in	profit	or	loss.                                              temporary difference arises from the initial recognition of an as-
                                                                             set or liability in a transaction that is not a business combination         SuPErViSOry
Deferred income tax                                                          and, at the time of the transaction, affects neither the accoun-                BOArD
Deferred income tax is provided using the liability method on tem-           ting	profit	nor	taxable	profit	or	loss;	and
porary differences at the balance sheet date between the tax bases
of	assets	and	liabilities	and	their	carrying	amounts	for	financial	re-    •	 in respect of deductible temporary differences associated with in-
porting purposes.                                                            vestments in subsidiaries, associates and interests in joint ven-             cOrPOrAtE
                                                                                                                                                          gOVErNANcE
                                                                             tures, deferred income tax assets are recognized only to the
Deferred income tax liabilities are recognized for all taxable tem-          extent that it is probable that the temporary differences will re-
porary differences, except:                                                  verse	in	the	foreseeable	future	and	taxable	profit	will	be	available	
                                                                             against which the temporary differences can be utilized.
•	 where the deferred income tax liability arises from the initial re-                                                                                      StOck

   cognition of goodwill or of an asset or liability in a transaction     the carrying amount of deferred income tax assets is reviewed at
   that is not a business combination and, at the time of the trans-      each balance sheet date and reduced to the extent that it is no lon-
   action,	affects	neither	the	accounting	profit	nor	taxable	profit	or	   ger	probable	that	sufficient	taxable	profit	will	be	available	to	allow	
   loss; and                                                              all or part of the deferred income tax asset to be utilized. unrecog-            iNVEStOr
                                                                                                                                                           rElAtiONS
                                                                          nized deferred income tax assets are reassessed at each balance
•	 in respect of taxable temporary differences associated with in-        sheet date and are recognized to the extent that it has become
   vestments in subsidiaries, associates and interests in joint ven-      probable	that	future	taxable	profit	will	allow	the	deferred	tax	as-
   tures, where the timing of the reversal of the temporary diffe-        set to be recovered.                                                             BuSiNESS
   rences can be controlled and it is probable that the temporary                                                                                          OVErViEW
   differences will not reverse in the foreseeable future.                Deferred income tax assets and liabilities are measured at the tax
                                                                          rates that are expected to apply to the year when the asset is re-
                                                                          alized or the liability is settled, based on tax rates (and tax laws)
                                                                          that have been enacted or substantively enacted at the balance                  MANAgEMENt
                                                                                                                                                            rEPOrt
                                                                          sheet date.

                                                                          Deferred income tax relating to items recognized directly in equity
                                                                          is	recognized	in	equity	and	not	in	profit	or	loss.
                                                                                                                                                           FiNANciAl
                                                                                                                                                          StAtEMENtS
                                                                          Deferred income tax assets and deferred income tax liabilities are
                                                                          offset, if a legally enforceable right exists to set off current tax
                                                                          assets against current income tax liabilities and the deferred in-
                                                                          come taxes relate to the same taxable entity and the same taxa-                  ADDitiONAl
                                                                                                                                                          iNFOrMAtiON
                                                                          tion authority.




                                                                                                                                                     97
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             provisions                                                                 ity is re-measured at each balance sheet date up to and including
                             Provisions are recognized when the group has a present obliga-             the settlement date with changes in the fair value recognized in
                             tion (legal or constructive) as a result of a past event, it is proba-     profit	or	loss.	
                             ble	that	an	outflow	of	resources	embodying	economic	benefits	will	
                             be required to settle the obligation and a reliable estimate can be        (7)   Scope of consolidation and shareholdings
                             made of the amount of the obligation. Where the group expects
                             some or all of a provision to be reimbursed, for example under an          The	 consolidated	 financial	 statements	 of	 December	 31,	 2007,	 in-
                             insurance contract, the reimbursement is recognized as a separate          clude	the	financial	statements	of	ADVA	AG	Optical	Networking	(ADVA	
                             asset but only when the reimbursement is virtually certain. the ex-        Ag or “the company”) plus those of the ten (nine at December 31,
                             pense	relating	to	any	provision	is	presented	in	profit	or	loss	net	of	     2006) wholly-owned subsidiaries listed below (hereafter collectively
                             any reimbursement. if the effect of the time value of money is ma-         referred to as “the consolidated companies” or “the group”):
                             terial, provisions are discounted using a current pre tax rate that
                             reflects,	where	appropriate,	the	risks	specific	to	the	liability.	Where	
                             discounting is used, the increase in the provision due to the pas-
                             sage	of	time	is	recognized	as	a	finance	cost.

                             share-based payment transactions
                             Employees (including senior executives) of ADVA Optical Networking
                             receive remuneration in the form of share-based payment transac-
                             tions, whereby employees render services as consideration for eq-
                             uity instruments or they are granted stock appreciation rights, which
                             can only be settled in cash. Stock options and stock appreciations
                             rights are reported and valued in accordance with iFrS 2.

                             the cost of equity-settled transaction with employees, for awards
                             granted after November 7, 2002, is measured by reference to the
                             fair value at the grant date. the fair value is determined by an ex-
                             ternal expert using an appropriate pricing model (for further details
                             refer to note (38)). the cost of equity-settled transactions is recog-
                             nized, together with the corresponding increase in equity, over the
                             period in which the relevant employees become fully entitled to the
                             award (vesting date). No expense is recognized for awards that do
                             not ultimately vest, except for awards where vesting is conditional
                             upon market condition, which are treated as vesting irrespective of
                             whether	or	not	market	condition	is	satisfied,	provided	that	all	other	
                             performance	conditions	are	satisfied.

                             The	dilutive	effect	of	outstanding	options	is	reflected	in	the	com-
                             putation of earnings per share (see note (27)).

                             the cost of cash-settled transactions is measured initially at fair
                             value at the grant date. the fair value is expensed over the vest-
                             ing period with recognition of a corresponding liability. the liabil-




98
                                                                                   ADVA Optical Networking North America, inc. (ADVA North America)
                                                                        share in                                                                                  WElcOME
                                                                                   is a r & D, production, sales and administration site in Atlanta.
    (in thousands)                                       equity           equity
                                                                                   ADVA	Optical	Networking	Inc.	(ADVA	Inc.)	is	a	sales	office	for	the	
    ADVA Optical Networking
                                                                                   American market and keeps a research and development depart-
    North America, inc.,                           uSD 19,538               100%
                                                                                   ment at richardson, texas, uSA (ADVA richardson).                             MANAgEMENt
    Norcross, georgia, uSA                                                                                                                                         BOArD

                                                                                   ADVA Optical Networking ltd. (ADVA york) is a r & D, logistics, sales
    ADVA Optical Networking, inc.,                                                 and administration site in york.
                                                    uSD -2,111              100%
    Mahwah, New Jersey, uSA
                                                                                                                                                                 SuPErViSOry
                                                                                   ADVA Optical Networking AS (ADVA Oslo) is a r & D site in Oslo.                  BOArD

    ADVA Optical Networking ltd.,
                                                    gBP 10,829              100%   Metro Packet Systems inc. (MPS), with its wholly-owned Swedish
    york, united kingdom
                                                                                   subsidiary mPacket AB, is a r & D site specialized in the develop-
                                                                                   ment of Ethernet products for metro access networks.                           cOrPOrAtE
                                                                                                                                                                 gOVErNANcE
    ADVA Optical Networking AS,
                                                   NOk 30,353               100%
    Oslo, Norway                                                                   ADVA Optical Networking (Shenzhen) ltd. (ADVA Shenzhen) is a
                                                                                   r & D site in china.

    Metro Packet Systems inc.,                                                     ADVA Optical Networking Singapore Pte ltd. (ADVA Singapore) is a                StOck
                                                     uSD 1,013              100%
    Palo Alto, california, uSA                                                     sales	office	for	the	Asia-Pacific	region,	excluding	Japan	and	South	
                                                                                   korea.
    mPacket AB,
                                                               0(1)         100%   ADVA	Optical	Networking	Corp.	(ADVA	Corp.)	is	a	sales	office	for	              iNVEStOr
    kista / Stockholm, Sweden                                                                                                                                     rElAtiONS
                                                                                   Japan and South korea.

    ADVA Optical Networking ltd.                                                   ADVA Optical Networking sp. z o.o. (ADVA Poland) is a r & D site
                                                      cNy -500              100%
    (Shenzhen), Shenzhen, china                                                    in Poland.                                                                     BuSiNESS
                                                                                                                                                                  OVErViEW
                                                                                   Acquisition of Gryfsoft sp. z o.o. (ADVA Poland)
    ADVA Optical Networking Singapore                                              On June 1, 2007, ADVA Ag Optical Networking acquired a 100% share
                                                       SgD 228              100%
    Pte ltd., Singapore                                                            in gryfsoft sp. z o.o., rumia, Poland. the purchase price of Eur 310
                                                                                   thousand (PlN 1,170,000.00) was paid in cash. the additional direct           MANAgEMENt
                                                                                                                                                                   rEPOrt
                                                                                   costs of the acquisition amounted to Eur 28 thousand.
    ADVA Optical Networking corp.,
                                                     JPy 37,030             100%
    tokyo, Japan
                                                                                   The	first	time	consolidation	according	to	IFRS	3	(purchase	method)	
                                                                                   was performed on June 1, 2007. the excess of purchase price over
                                                                                                                                                                  FiNANciAl
    ADVA Optical Networking sp. z o.o.,                                            the fair value of acquired assets and liabilities has been capitalized        StAtEMENtS
                                                      PlN 1,038             100%
    rumia, Poland                                                                  as goodwill on consolidation and represents the fair value of antic-
                                                                                   ipated synergies from the acquisition.

1
    mPacket AB is included in the Metro Packet Systems inc. sub-consolidation                                                                                     ADDitiONAl
                                                                                                                                                                 iNFOrMAtiON




                                                                                                                                                            99
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             the fair values of acquired assets and liabilities at the date of ac-   The	net	cash	outflow	from	the	acquisition	is	comprised	as	follows:
                             quisition represent the carrying amounts immediately prior to the
                             date of acquisition. they comprise:
                                                                                                      (in thousands of Eur)

                                                                                   fair value         cash acquired from gryfsoft                                        133
                                                                             (carrying value)         cash paid                                                         -338
                                                                                  at the date
                              (in thousands of Eur)                            of acquisition         Net cash outflow                                                  -205

                              cash                                                          133
                                                                                                     From the date of acquisition, ADVA Poland has contributed Eur 254
                              receivables                                                   146      thousand	 to	 the	 net	 profit	 of	 the	 Group.	 If	 the	 combination	 had	
                                                                                                     taken place at the beginning of the year, the group’s result would
                              Property, plant and equipment                                   75     have been Eur 96 thousand higher. the group’s revenues would
                                                                                                     have been unchanged.
                              Purchased technology                                             2

                              Other assets                                                    18     the goodwill of Eur 130 thousand comprises the fair value of ex-
                                                                                                     pected synergies arising from the acquisition.
                              current liabilities                                          -166
                                                                                                     the company changed its name to ADVA Optical Networking sp. z
                              net assets                                                    208
                                                                                                     o.o. on September 4, 2007.
                              goodwill                                                      130
                                                                                                     Acquisitions in 2006
                              total purchase price                                          338
                                                                                                     Acquisition of Movaz Networks, Inc.
                                                                                                     On July 12, 2006 by means of a share deal ADVA Ag Optical Net-
                                                                                                     working purchased a 100% share in Movaz Networks, inc., Norcross,
                                                                                                     georgia, uSA (ADVA North America). the purchase price comprised
                                                                                                     of 6,279,001 newly issued shares. the market price of the shares
                                                                                                     at the acquisition date amounted to Eur 6.69 per share. the addi-
                                                                                                     tional direct costs of the acquisition added up to Eur 2.8 million.
                                                                                                     Additionally, ADVA Ag paid Eur 4.8 million in cash.




100
the fair values of acquired assets and liabilities at the date of ac-   The	cash	inflow	related	to	the	acquisition	is	comprised	as	follows:
                                                                                                                                                       WElcOME
quisition and the carrying amounts immediately prior to the date
of the acquisition are comprised as follows:
                                                                         (in thousands of Eur)

                                 carrying       fair value at the        Net cash acquired of ADVA North America                    10,608
                                                                                                                                                      MANAgEMENt
 (in thousands of Eur)            amount      date of acquisition        cash paid                                                   -7,620
                                                                                                                                                        BOArD


 cash                               10,608                  10,608       Net	cash	inflow                                             2,988
 receivables                         8,398                   8,398                                                                                    SuPErViSOry
                                                                        The	acquired	financial	liabilities	were	fully	redeemed	in	Q4	2006.               BOArD
 inventory                           9,996                  11,111
                                                                        At December 31, 2006, primarily due to supplementary adjust-
 Property, plant and
                                     3,012                   3,012      ments of the fair values of assets and liabilities acquired, goodwill
 equipment
                                                                        had	changed	compared	to	the	date	of	the	preliminary	first-time	con-            cOrPOrAtE
                                                                                                                                                      gOVErNANcE
 Purchased technology                     -                 19,621      solidation. in the course of the fair value adjustment of inventories
                                                                        the fair value of purchased technology was reduced by an amount
 in-process development                                                 of Eur 1,173 thousand compared to the original valuation in the
                                          -                  2,276
 projects                                                               purchase price allocation.
                                                                                                                                                        StOck

 trademarks                               -                    863      in 2007 the purchase price allocation of the acquisition of Movaz
                                                                        was	finalized.	Goodwill	on	the	acquisition	of	Movaz	Networks,	Inc.	
 Order backlog                            -                  1,648
                                                                        increased primarily due to expected future litigation expenses which
 Other intangible assets                 18                      18     amounted to Eur 2.3 million in Q2 2007. this litigation existed at             iNVEStOr
                                                                                                                                                       rElAtiONS
                                                                        the	takeover	and	first	time	consolidation	of	ADVA	North	America	
 investments accounted for                                              on July 12, 2006, but the claim was only made in August 2006. A
                                     3,442                   3,442
 by the equity method                                                   goodwill decrease of Eur 941 thousand resulted from the increase
                                                                        of the fair value for purchased technologies following the 2007 ad-            BuSiNESS
 Other current and                                                      justment to fair value of inventories.
                                       700                     700                                                                                     OVErViEW
 non-current assets
                                                                        ADVA North America generated an income of Eur 1.6 million from
 Financial liabilities                -804                    -804      the date of acquisition to December 31, 2006, which is included
 current liabilities               -14,810                 -14,420      in	the	Group	profit	and	loss	for	the	reporting	period.	ADVA	North	            MANAgEMENt
                                                                                                                                                        rEPOrt
                                                                        America reported revenues of Eur 50.2 million in the period Jan-
 Non-current liabilities               -142                    -142     uary 1 to December 31, 2006. Due to the change from u.S. gAAP
                                                                        to iFrS during 2006 the iFrS income for the full-year 2006 cannot
 net assets                        20,418                  46,331       be reliably determined.
                                                                                                                                                       FiNANciAl
                                                                                                                                                      StAtEMENtS
 goodwill                                 -                 2,597
                                                                        goodwill represents the fair value of expected synergies from the ac-
 total purchase price                     -                48,928       quisition, as well as the client base and the assembled workforce of
                                                                        ADVA North America, which has not been recognized separately.
                                                                                                                                                       ADDitiONAl
                                                                                                                                                      iNFOrMAtiON




                                                                                                                                                101
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             Acquisition of Covaro Networks Inc.                                      the fair values of acquired assets and liabilities of ADVA richardson
                             At January 30, 2006, by means of an asset purchase and contribu-         at the date of acquisition and the carrying amounts immediately
                             tion agreement ADVA Ag Optical Networking purchased substan-             prior to the date of the acquisition are comprised as follows:
                             tially all assets and assumed all liabilities of covaro Networks inc.,
                             richardson, texas, uSA, (ADVA richardson). the purchase price
                                                                                                                                                           fair value at
                             comprised of cash totaling Eur 4.1 million and 1,767,070 newly is-
                                                                                                                                         carrying           the date of
                             sued shares. the market price of the shares at the acquisition date
                                                                                                       (in thousands of Eur)              amount            acquisition
                             amounted to Eur 7.58 per share. the additional direct costs of the
                             acquisition were Eur 0.9 million. the acquired assets were trans-         cash                                     305                  305
                             ferred to ADVA Ag Optical Networking and largely re-sold to ADVA
                             inc. at the same time. Starting from the re-sale of assets, ADVA          receivables                              449                  449
                             Richardson	is	considered	a	branch	office	of	ADVA	Inc.	without	sep-
                             arate	financial	accounting.                                               inventory                              1,531                  943

                                                                                                       Property, plant and
                                                                                                                                                477                  477
                                                                                                       equipment

                                                                                                       Purchased technology                        -                7,111

                                                                                                       trademarks                                  -                 372

                                                                                                       Other assets                             102                  102

                                                                                                       current liabilities                   -1,380               -1,380

                                                                                                       Non-current liabilities                 -188                 -188

                                                                                                       net assets                            1,296                 8,191

                                                                                                       goodwill                                   -              10,150

                                                                                                       total purchase price                       -              18,341


                                                                                                      The	cash	outflow	related	to	the	acquisition	is	comprised	as	follows:


                                                                                                       (in thousands of Eur)

                                                                                                       Net cash acquired of ADVA richardson                         305

                                                                                                       cash paid                                                 -5,022

                                                                                                       Net	cash	outflow                                          -4,717




102
At December 31, 2006, due to supplementary adjustments of the fair        Notes to the consolidated financial statements
                                                                                                                                                        WElcOME
values of some assets acquired as well as the adjustment of shares
considered in the purchase price calculation, goodwill has changed        (8)   cash and cash equivalents
compared	to	the	date	of	the	preliminary	first-time	consolidation.	No	
further adjustments were made to goodwill in 2007.                        cash and cash equivalents at December 31 include the follow-
                                                                          ing amounts to which ADVA Optical Networking has only limited                MANAgEMENt
                                                                                                                                                         BOArD
goodwill represents the fair value of expected synergies from the         access:
acquisition as well as the assembled workforce of ADVA richard-
son that has not been recognized separately.
                                                                           (in thousands of Eur)                   2007               2006
                                                                                                                                                       SuPErViSOry
Investments accounted for by the equity method                             Amounts pledged as security             1,068                 70               BOArD
ADVA Optical Networking has a 44.5% share in Optxcon inc., ra-
leigh, North carolina, uSA. the company concluded operations in            Foreign exchange restrictions             631                178
2002. the investment is accounted for by the equity method and
is fully depreciated.                                                      total                                  1,699                248              cOrPOrAtE
                                                                                                                                                       gOVErNANcE

Disposal of share in Olympus Microsystems America, Inc.                   At December 31, 2007 amounts pledged as security primarily in-
A 31.0% share in Olympus Microsystems America, inc, San Jose,             cludes a performance bond pledged as bank security until the com-
california, uSA (OMi), held by the subsidiary ADVA North America          pletion of a sales order.
was disposed of on September 28, 2007. the investment was ac-                                                                                            StOck

counted for by the equity-method up to the date of disposal. the          Cash	at	banks	earns	interest	at	floating	rates	based	on	daily	bank	
group’s share of losses in 2007 amounted to Eur 740 thousand. the         deposit rates.
net book value at the date of disposal was Eur 2,097 thousand.
                                                                          At December 31, 2007, the group had available Eur 8,000 thousand              iNVEStOr
                                                                                                                                                        rElAtiONS
As part of the disposal, the group was released from all obligations      (2006: Eur 4,454 thousand) of undrawn committed borrowing fa-
relating to litigation to which OMi was party, for which a provision of   cilities in respect of which all conditions had been met.
EUR	2.3	million	had	been	made	in	the	consolidated	financial	state-
ments as of June 30, 2007. in addition, cash consideration of Eur         (9)   Short-term investments and securities                                   BuSiNESS
223 thousand was received. A gain of Eur 328 thousand arose on                                                                                          OVErViEW
the disposal.                                                             Short-term investments and securities at December 31, 2007, and
                                                                          at December 31, 2006, include an amount of Eur 47 thousand
                                                                          and Eur 266 thousand, respectively, for irrevocable guarantees on
                                                                          third-party liabilities. Securities amounting to Eur 94 thousand and         MANAgEMENt
                                                                                                                                                         rEPOrt
                                                                          Eur 532 thousand, respectively, are pledged to a bank. in 2006,
                                                                          the pledged amount was originally included in cash and cash equiv-
                                                                          alents	for	the	purposes	of	the	cash	flow	statement.	For	the	2007	
                                                                          financial	statements,	prior	year	data	has	been	restated	to	the	ad-
                                                                                                                                                        FiNANciAl
                                                                          justed reporting in the balance sheet.                                       StAtEMENtS


                                                                          Short-term investments are made for varying periods of between
                                                                          one day and three months, depending on the immediate cash re-
                                                                          quirements of the group, and earn interest at the respective short-           ADDitiONAl
                                                                                                                                                       iNFOrMAtiON
                                                                          term deposit rates.




                                                                                                                                                 103
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             (10) trade accounts receivable

                             trade accounts receivable are non-interest-bearing and are due      Depreciation of trade accounts receivable is based on an assess-
                             within 30 to 90 days in general.                                    ment of balances past their due date. trade accounts receivable
                                                                                                 past due can be analyzed as follows:
                             Depreciation of trade accounts receivable has developed as
                             follows:
                                                                                                                        2007       2007       2006        2006
                                                                                                  (in thousands of      gross    depre-       gross     depre-
                              (in thousands of Eur)                      2007          2006       Eur)                  value    ciation      value     ciation
                              As at January 1                              425             7      less than
                                                                                                                       11,117           0    10,961           0
                              increase                                     564           527      3 months

                              usage                                        -89           -54      3 to 6 months           407         42        192           0

                              release                                     -167             0      6 to 12 months          533        533        581         280

                              Exchange rate differences                    149           -55      More than 1 year        307        307         147        145

                              As at December 31                           882           425       total               12,364         882     11,881        425


                             the net income (loss) in 2007 and 2006 includes depreciation on     trade accounts receivable that are not overdue are not de-
                             trade accounts receivable due to bad debts or changes in the cal-   preciated.
                             culation of the depreciation amounting to Eur 213 thousand and
                             Eur 152 thousand, respectively. this depreciation is included in
                             “other operating expense”. As of December 31, 2007, there was no
                             material credit risk. refer to note (30) for further disclosures.




104
(11) inventories                                                      (12) Other current assets
                                                                                                                                                    WElcOME

the table below summarizes the composition of inventories at          As of December 31, 2007 the other current assets primarily include
December 31:                                                          receivables due to suppliers. Other current assets are non-interest-
                                                                      bearing and are generally due within 0 to 60 days.
                                                                                                                                                   MANAgEMENt
 (in thousands of Eur)                         2007        2006                                                                                      BOArD


 raw materials and supplies                   20,790      18,492

 Work in process                               1,918      14,555                                                                                   SuPErViSOry
                                                                                                                                                      BOArD
 Finished goods                                8,321       8,987
                                             31,029      42,034

                                                                                                                                                    cOrPOrAtE
                                                                                                                                                   gOVErNANcE
the carrying amount of inventories carried at fair value less costs
to sell at December 31, 2007, and December 31, 2006, amounts to
Eur 2,002 thousand and Eur 1,797 thousand, respectively.

in 2007, write-downs amounting to Eur 7,451 thousand (prior year:                                                                                    StOck

Eur 1,707 thousand) were recognized as expense within costs of
goods sold. in the same period, earlier write-downs in the amount
of Eur 165 thousand (prior year: Eur 173 thousand) were reversed
due to higher selling and input prices.                                                                                                             iNVEStOr
                                                                                                                                                    rElAtiONS

in 2007 and 2006, material cost of Eur 124.2 million and Eur 95.3
million, respectively, has been recognized.
                                                                                                                                                    BuSiNESS
                                                                                                                                                    OVErViEW




                                                                                                                                                   MANAgEMENt
                                                                                                                                                     rEPOrt




                                                                                                                                                    FiNANciAl
                                                                                                                                                   StAtEMENtS




                                                                                                                                                    ADDitiONAl
                                                                                                                                                   iNFOrMAtiON




                                                                                                                                             105
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                                  (13) Fixed assets

                                  The	following	changes	in	fixed	assets	were	recorded	in	2007	and	2006:


(in thousands of EUR)                                    Historical cost                                                       Accumulated depreciation                                   Net book values
                                                                Currency     Changes                                               Deprecia-           Currency    changes
                                               Dis-                 trans-   in scope                          Depre-                tion on             trans-    in scope
                                            posals/    Reclas-      lation     of con-                         ciation            disposals/ Reclas-      lation     of con-                 Dec.     Dec.
                        Jan. 1,     Addi-    retire-    sifica-   adjust-      solida-   Dec. 31,    Jan. 1,    of the   Impair-      retire-  sifica-  adjust-      solida-   Dec. 31,       31,      31,
                         2007       tions    ments       tions      ments         tion     2007       2007     period      ment       ments     tions    ments          tion     2007       2007     2006
Finance leases           3,952        227        13      -549          83           0      3,700      1,209     1,115         0           13     -339       119           0      2,091     1,609     2,743
Property plant
and equipment

Land and buildings       9,749        348         0        219        -54           0     10,262      1,605       528          0           0       48        -38          0      2,143      8,119    8,144
Technical
equipment and
machinery               24,856      6,239       689      3,097       -989          67     32,581     17,135     4,402          0         574    2,013       -776          0     22,200     10,381    7,721
Factory and office
equipment               11,015      1,483       517     -2,879     -2,347           8      6,763      8,127     1,323          0         510    -1,695    -2,284          0      4,961      1,802    2,888
Assets under
construction               549        308        25       -524          0           0        308          0         0          0           0        0         0           0          0       308       549

                        46,169      8,378     1,231        -87     -3,390          75     49,914     26,867     6,253         0        1,084      366    -3,098           0     29,304    20,610    19,302
Intangible
assets

Goodwill                75,132          0         0          0         49       2,107     77,288     50,885         0      6,581           0        0       -184          0     57,282     20,006   24,247
Capitalized R&D
expenses
                        12,393      9,611         0          0       -371           0     21,633      2,195     3,136      4,588           0        0       -524          0      9,395     12,238   10,198
Purchased
technology              29,587          0         0          0     -2,476         815     27,926      7,204     7,887       973            0        0     -1,279          0     14,785     13,141   22,383
In-process R&D
projects                 2,198          0         0          0       -228           0      1,970        505       713       968            0        0       -216          0      1,970         0     1,693
Other intangible
assets                  44,526      3,501       121        636      1,829           2     50,373     40,495     1,492          0          80      -27      1,851          0     43,731      6,642    4,031

                     163,836       13,112       121       636      -1,197      2,924     179,190    101,284    13,228    13,110           80      -27      -352           0    127,163    52,027    62,552
Financial
investments

Investments
accounted for by
the equity method        4,370          0     2,980          0       -525           0        865      1,336       740          0         948        0       -263          0        865         0     3,034

                         4,370          0     2,980          0       -525           0        865      1,336       740         0          948        0      -263           0        865         0     3,034

                     218,327       21,717     4,345          0     -5,029      2,999     233,669    130,696    21,336    13,110        2,125        0    -3,594           0    159,423    74,246    87,631




106
                                                                                                                                                                                                                        WElcOME




                                                                                                                                                                                                                       MANAgEMENt
(in thousands of EUR)                                   Historical cost                                                       Accumulated depreciation                                         Net book values
                                                                                                                                                                                                                         BOArD
                                                               Currency     Changes                                                                         Currency    changes
                                              Dis-                 trans-   in scope                          Depre-                Deprecia-                 trans-    in scope
                                           posals/    Reclas-      lation     of con-                         ciation                  tion on   Reclas-       lation     of con-                Dec.     Dec.
                        Jan. 1,    Addi-    retire-    sifica-   adjust-      solida-   Dec. 31,    Jan. 1,    of the   Impair-    disposals/     sifica-    adjust-      solida-   Dec. 31,      31,      31,
                         2006      tions    ments       tions      ments         tion     2006       2006     period      ment    retirements      tions      ments          tion     2006      2006     2005
                                                                                                                                                                                                                       SuPErViSOry
Finance leases                                                                                                                                                                                                            BOArD
                         1,821     1,791         0         -7       -138        485       3,952       243        874         0              0        -59          77          74      1,209     2,743    1,578
Property plant
and equipment

Land and buildings       5,497     1,310         0      2,568       -101         475      9,749      1,118       283         0              0          0         -17         221      1,605     8,144    4,379          cOrPOrAtE
Technical                                                                                                                                                                                                              gOVErNANcE
equipment and
machinery               14,455     3,152       732      1,028       -498       7,451     24,856     10,192     2,655         0            662         28        -277       5,199     17,135     7,721    4,263
Factory and office
equipment                6,408     2,749       383         63       -153       2,331     11,015      5,222     1,546         0            422         31         -78       1,828      8,127     2,888    1,186           StOck
Assets under
construction
                         1,185     3,034         0     -3,652        -18           0        549          0         0         0              0          0           0           0          0       549    1,185

                        27,545    10,245     1,115          7       -770     10,257      46,169     16,532     4,484         0          1,084         59        -372      7,248      26,867    19,302   11,013
Intangible                                                                                                                                                                                                              iNVEStOr
assets                                                                                                                                                                                                                  rElAtiONS


Goodwill                62,625         0         0          0       -828      13,335     75,132     50,921         0         0              0          0         -36           0     50,885    24,247   11,704
Capitalized R&D
expenses                                                                                                                                                                                                                BuSiNESS
                         6,541     5,852         0          0          0           0     12,393        974     1,165        56              0          0           0           0      2,195    10,198    5,567
                                                                                                                                                                                                                        OVErViEW
Purchased
technology               3,747         0         0          0       -892      26,732     29,587      1,124     6,236         0              0          0        -156           0      7,204    22,383    2,623
In-process R&D
projects
                             0         0         0          0        -78       2,276      2,198          0       523         0              0          0         -18           0        505     1,693        0         MANAgEMENt
Other intangible                                                                                                                                                                                                         rEPOrt
assets
                        39,198       987        27          0       -223       4,591     44,526     36,771     2,213         0             27          0        -147       1,685     40,495     4,031    2,427

                     112,111       6,839        27          0     -2,021     46,934     163,836     89,790    10,137        56             27          0        -357      1,685     101,284    62,552   22,321
Financial                                                                                                                                                                                                               FiNANciAl
investments                                                                                                                                                                                                            StAtEMENtS

Investments
accounted for by
the equity method          965         0         0          0       -121       3,526      4,370        965       281         0              0          0           -3         93      1,336     3,034        0
                                                                                                                                                                                                                        ADDitiONAl
                          965         0          0          0       -121      3,526       4,370       965        281         0              0          0          -3          93      1,336     3,034       0
                                                                                                                                                                                                                       iNFOrMAtiON

                     142,442      18,875     1,142          0     -3,050     61,202     218,327    107,530    15,776        56          1,111          0        -655      9,100     130,696    87,631   34,912




                                                                                                                                                                                                                 107
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             finance leases                                                           goodwill
                             The	Group	has	financial	obligations	arising	from	a	variety	of	finance	   Goodwill	is	allocated	to	the	subsidiaries	and	branch	offices,	respec-
                             lease agreements for certain technical equipment and machinery,          tively, on whose acquisition it arose. the table below shows the
                             as	well	as	factory	and	office	equipment.	                                composition of goodwill at December 31:

                             Further information on the leases as well as the costs and mini-
                                                                                                       (in thousands of Eur)                           2007        2006
                             mum future lease payments arising from these leases are listed
                             under note (34).                                                          FirstFibre ltd. (ADVA york)                     6,841       9,658

                             property, plant and equipment                                             Metro Packet System inc. (MPS)                      0       2,505
                             Buildings include capitalized interest in the amount of Eur 74 thou-
                             sand in 2007 and Eur 102 thousand in 2006.                                Division of Siemens (ADVA Oslo)                     0       1,088

                                                                                                       cellware gmbH
                             the payments on account and assets under construction primarily                                                             481         481
                                                                                                       (ADVA	AG,	branch	office	Berlin)
                             address test and measurement equipment for a new product.
                                                                                                       covaro Networks inc.
                             government grants received in prior years are reducing the net                                                           10,150      10,150
                                                                                                       (ADVA	Inc.,	branch	office	Richardson)
                             book value of property, plant and equipment at December 31, 2007
                             and 2006 by Eur 600 thousand respectively. the group has not re-          Movaz Networks, inc.
                                                                                                                                                       4,448       2,597
                             ceived any government grants in 2007 or 2006.                             (ADVA North America)

                                                                                                       gryfsoft sp. z o.o. (ADVA gdansk)                 130            0

                                                                                                       ADVA Shenzhen (ADVA china)                         18           18

                                                                                                       Effect of foreign currency translation         -2,062      -2,250

                                                                                                                                                     20,006      24,247


                                                                                                      the increase in goodwill for ADVA North America is explained in
                                                                                                      note (7).




108
Impairment of goodwill                                                   tal Asset Pricing Model (cAPM). the costs of equity are composed
                                                                                                                                                          WElcOME
the following goodwill values were impaired based on the results         of	a	risk-free	interest	rate	and	a	specific	risk	mark-up	calculated	as	
of the impairment testing:                                               the difference of the average market rate of return and the risk-free
                                                                         interest	rate	multiplied	with	the	specific	risk	related	to	the	Com-
                                                                         pany	(Beta	coefficient).	The	calculation	uses	discount	rates	of	13%	
 (in thousands of Eur)                           2007        2006
                                                                         to 19% depending on the different cash generating units.                        MANAgEMENt
                                                                                                                                                           BOArD
 FirstFibre ltd. (ADVA york)                     3,035            0
                                                                         Capitalized development projects, purchased technology,
 Metro Packet System inc. (MPS)                  2,257            0      in-process r & D projects and other intangible assets
                                                                         the table below summarizes carrying amounts of capitalized devel-
 Division of Siemens (ADVA Oslo)                 1,289            0      opment, purchased technology, in-process r & D projects and other
                                                                                                                                                         SuPErViSOry
                                                                                                                                                            BOArD

                                                6,581             0      intangible assets at December 31:


                                                                          (in thousands of Eur)                          2007          2006
the impairment on goodwill is included under the separate line item                                                                                       cOrPOrAtE
                                                                                                                                                         gOVErNANcE
“Amortization of intangible assets from acquisitions” in the income       capitalized r & D expenses                   12,238         10,198
statement. if allocated to functional areas, impairment on goodwill
would belong to general and administrative expenses.                      Purchased technology                          13,141        22,383

Key assumptions used in impairment testing                                in-process r & D projects                          0         1,693               StOck

For impairment testing purposes, goodwill is allocated to the ac-         Other intangible assets                        6,642         4,031
quired	subsidiaries	and	branch	offices,	respectively.	Those	subsi-
diaries	and	branch	offices	represent	the	cash	generating	units.                                                        32,021        38,305
                                                                                                                                                          iNVEStOr
                                                                                                                                                          rElAtiONS
As of December 31, 2007, the value in use of the goodwill was calcu-
lated	based	on	future	cash	flows	(“discounted	cash	flow	method”).	   	   capitalized development projects include the development of Eth-
the calculation is most sensitive to the following assumptions:          ernet access products (Eur 4,513 thousand) and of WDM solutions
                                                                         (Eur 7,725 thousand). Purchased technology includes the capital-
                                                                                                                                                          BuSiNESS
•	 gross margin                                                          ized technologies from the acquisitions covaro (Eur 5,014 thou-                  OVErViEW
                                                                         sand) and Movaz (Eur 8,127). Purchased technologies from MPS,
•	 Discount rates                                                        inc, were fully impaired in 2007. Other intangible assets include
                                                                         capitalized brand names from covaro (“Etherjack®” Eur 293 thou-
•	 raw material prices                                                   sand) and Movaz (“rAy rOADM” Eur 561 thousand) as well as                       MANAgEMENt
                                                                                                                                                           rEPOrt
                                                                         capitalized licenses, EDP programs and expenses for the capital-
•	 Market shares expected                                                ized ErP system.

                                                                         Amortization and impairment on capitalized development projects
                                                                                                                                                          FiNANciAl
Cash	flows	include	the	projected	cash	flows	for	the	three	subsequent	    is included under “income from capitalization of development ex-                StAtEMENtS
years as per the approved budget and three year planning for gross       penses, net of amortization for capitalized development projects” in
margins, market share and raw material prices. For further periods,      the income statement. Amortization and impairment on purchased
a perpetual income is estimated based on nil growth. the discount        technology, in-process r & D projects and trademark is included un-
rate used for the calculation is a pre-tax rate, considers the spe-      der the separate line item “Amortization of intangible assets from               ADDitiONAl
                                                                                                                                                         iNFOrMAtiON
cific	risk	of	each	subsidiary	and	is	calculated	according	to	the	Capi-   acquisitions” in the income statement.




                                                                                                                                                   109
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             Amortization of intangible assets                                               Impairment of intangible assets
                             Amortization	 of	 intangible	 assets	 with	 a	 finite	 useful	 life	 is	 com-   Impairment	 on	 intangible	 assets	 with	 finite	 useful	 lives	 was	 as	
                             prised as follows:                                                              follows:


                              (in thousands of Eur)                             2007             2006         (in thousands of Eur)                         2007             2006

                              capitalized r & D expenses                        3,136             1,165       capitalized r & D expenses                    4,588               56

                              Purchased technology                              7,887            6,236        Purchased technology                             973                0

                              in-process r & D projects                           713               523       in-process r & D projects                       968                 0

                              trademark                                           185               110       Other intangible assets                            0                0

                              Other intangible assets                           1,307            2,103                                                      6,529               56

                                                                             13,228            10,137        impairment on capitalized r & D expenses in 2007 is in respect of
                                                                                                             ADVA North America.
                             the amortization of purchased technology regards MPS, ADVA rich-
                             ardson and ADVA North America and amounts of Eur 649 thou-                      the methodology for calculating impairment is the same as the one
                             sand, Eur 1,094 thousand and Eur 6,144 thousand, respectively.                  used for goodwill impairment testing. the key assumptions and key
                             the amortization of trademarks is related to the trademark “Ether-              sensitivities are also the same.
                             jack®” from the acquisition of ADVA richardson and the trade-
                             mark “rAy rOADM” from the acquisition of ADVA North America at                  if allocated to functional areas, impairment on purchased techno-
                             amounts of Eur 41 thousand and Eur 144 thousand, respectively.                  logy and in-process r & D projects would belong to research and
                             in-process r & D projects are solely related to the acquisition of              development expenses.
                             ADVA North America.

                             if allocated to functional areas, amortization on purchased tech-
                             nology and in-process r & D projects would belong to cost of goods
                             sold. Amortization on trademark would belong to selling and mar-
                             keting expenses.




110
(14) Financial liabilities                                                 bonded loans mature on March 20, 2012, and November 20, 2010,
                                                                                                                                                                WElcOME
                                                                           respectively.
The	 table	 below	 summarizes	 the	 Group’s	 financial	 liabilities	 at	
December 31:                                                               in 2007, ADVA Optical Networking took out an additional Eur 5.0
                                                                           million loan with ikB Deutsche industriebank Ag (ikB). the primary
                                                                           purpose of this loan is to fund the group's capital requirements.                   MANAgEMENt
 (in thousands of Eur)                           2007          2006                                                                                              BOArD
                                                                           the interest rate of the ikB loan is based on the three-month Euri-
 Current financial liabilities                                             BOr plus a credit margin. the loan matures on June 30, 2011, and
                                                                           is redeemable in quarterly installments of Eur 555 thousand from
 Bank loans                                        530         5,374       June	30,	2009.	In	2007,	a	EUR	5.0	million	floating	rate	loan	with	                  SuPErViSOry

 loan from the city of Meiningen                     31            31      ikB, which was due at the end of 2007, was extended by two years                       BOArD
                                                                           until December 15, 2009. the interest rate on this loan is based on
 Other short-term liabilities to banks                0        8,461       the three-month EuriBOr, plus a credit margin. Additionally, the
                                                                           nominal	 value	 of	 two	 fixed	 rate	 loans	 received	 from	 IKB	 in	 2006	
                                                   561       13,866        amounts to a total of Eur 5.0 million. the loans mature on March                     cOrPOrAtE
                                                                                                                                                               gOVErNANcE
                                                                           31, 2016. redemptions are due in bi-annual installments from Sep-
 Non-current financial liabilities
                                                                           tember 30, 2008, and from September 30, 2013, respectively. total
 Bank loans                                     35,407        15,938       long-term loans with ikB amount to Eur 14.8 million at December
                                                                           31, 2007. the ikB loans are secured by a charge of Eur 5.6 million
 loan from Meiningen city council                    32            63      on the production and development site in Meiningen.                                  StOck


                                               35,439        16,001
                                                                           The	 loan	 from	 the	 City	 of	 Meiningen	 was	 granted	 to	 finance	 the	
                                               36,000        29,867        purchase of land for the group’s production, administration and
                                                                           research & development facility in Meiningen. the loan is interest-                  iNVEStOr
                                                                                                                                                                rElAtiONS
Additionally, the current bank loans include the short-term portion        free and is repayable in ten equal annual installments of Eur 31
of	a	loan	from	UniCredit	that	was	granted	in	2000	for	financing	the	       thousand each. repayment commenced in 2000.
expansion of the production and development site in Meiningen,
Germany.	At	December	31,	2007	and	2006	the	floating	rate	loan	             The	fair	value	of	the	financial	liabilities	is	stated	in	note	(29).	The	             BuSiNESS
from HVB amounted to Eur 938 thousand and Eur 1,312 thou-                  fair value of the loans has been calculated based on future cash                     OVErViEW
sand, respectively. the interest rate is based on the six-month Eu-        flows	and	by	using	arm’s-length	interest	rates.
riBOr, plus a credit margin. this loan matures on March 31, 2010,
and has to be redeemed in bi-annual installments starting from             the group incurred commission expenses to banks of Eur 158 thou-
March 31, 2005.                                                            sand (2006: Eur 197 thousand).                                                      MANAgEMENt
                                                                                                                                                                 rEPOrt

Other current liabilities to banks largely included current accounts       (15) trade accounts payable and other current and non-current
due to Deutsche Bank and unicredit at December 31, 2007. credit                 liabilities
lines with these banks are unchanged compared to the prior year
                                                                                                                                                                FiNANciAl
and each added up to Eur 4.0 million at December 31, 2007. At De-          the trade accounts payable are non-interest-bearing and generally                   StAtEMENtS
cember 31, 2007, no funds were drawn under these credit lines.             due within 30 to 60 days.

Apart from the long-term portion of the unicredit loan, non-cur-           Other current liabilities primarily include liabilities due to emplo-
rent	bank	loans	include	two	fixed-rate	bonded	loans	with	Deutsche	         yees and are related to payroll, bonus, accumulated vacation and                     ADDitiONAl
                                                                                                                                                               iNFOrMAtiON
Bank of Eur 10.0 million each, drawn in 2006 and 2007. these               option bonds issued.




                                                                                                                                                         111
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             (16) Provisions

                             the table below lists changes in the composition of the group’s provisions in the reporting period:


                                                                                                                                             currency
                                                                             changes in scope                                              translation     Dec. 31,
                              (in thousands of Eur)         Jan. 1, 2007      of consolidation      usage     release     Appropriation     difference       2007
                              short-term provisions


                              Warranty provisions                   1,768                      0       697         166               973            -93       1,785

                              Personnel provisions                  1,666                      0     1,559          16               593            -32         652

                              Other short-term provisions           1,471                      1     1,381         316             4,091            -99       3,767

                                                                   4,905                       1     3,637         498             5,657          -224       6,204


                              long-term provisions

                              Warranty provisions and
                              other provisions related
                              to deliveries                           654                      0       565           1              634              -6         716

                                                                   5,559                       1     4,202         499             6,291          -230       6,920


                             Estimates of the costs likely to be incurred under product warran-      (17) Deferred revenues
                             ties	reflect	both	past	experience	and	current	developments	and	are	
                             based on a percentage of sales revenues. Any differences between        Deferred revenues include deferred service revenues, where the
                             actual amounts and anticipated amounts are treated as changes           contracted payments are recognized as revenues over the duration
                             in accounting estimates and affect earnings in the period in which      of the respective contracts. Some of the service revenues have a
                             changes occur. the estimated residual maturity for long-term pro-       contractual maintenance period of 36 months and therefore incor-
                             visions	is	five	years.                                                  porate a long term element.

                             Personnel provisions primarily include employees’ bonus provi-          Deferred revenues also include revenues from product sales that
                             sions.                                                                  have not been recognized because one or more of the recognition
                                                                                                     criteria has not been met.
                             Other provisions primarily include provisions for outstanding in-
                             voices of uncertain amount and timing.




112
(18) Stockholders’ equity                                             Authorized capital
                                                                                                                                                     WElcOME
                                                                      According to the company's by-laws, the Management Board is au-
common stock and subscribed capital                                   thorized, subject to the consent of the Supervisory Board, to in-
the company and group had 45,992,443 no par value bearer shares       crease subscribed capital only once or in successive tranches by a
(hereinafter “common shares”) in issue at December 31, 2007 (pre-     maximum of Eur 15,621 thousand by issuing new common shares in
vious year: 45,363,539).                                              return for cash or non-cash contributions (authorized capital i) un-          MANAgEMENt
                                                                                                                                                      BOArD
                                                                      til June 13, 2011. Subject to the consent of the Supervisory Board,
the common shares entitle the holder to vote at the Annual gen-       the Management Board is further authorized to decide whether to
eral meeting and to receive dividends in case of a distribution. No   exclude stockholders' subscription rights. Stockholders' subscrip-
restrictions are attached to the common shares.                       tion rights can be excluded up to the amount of Eur 2,341 thou-               SuPErViSOry
                                                                      sand to enable new shares to be issued for cash at an issue price                BOArD
in 2007, 628,904 shares (previous year: 531,951 shares) were is-      that	is	not	significantly	lower	than	the	stock	market	price.	More-
sued out of conditional capital with a nominal value of Eur 628       over, stockholders' subscription rights can be excluded up to the
thousand. the premium of Eur 1,142 thousand (previous year:           amount of Eur 13,280 thousand to enable new shares to be issued
Eur 1,078 thousand) on the capital increases realized in 2007 was     for the purpose of acquiring companies or equity interests in com-             cOrPOrAtE
                                                                                                                                                    gOVErNANcE
appropriated to the capital reserve.                                  panies in return for non-cash contributions.

in January 2007 ADVA Ag Optical Networking converted share op-        On June 13, 2007, the annual shareholders’ meeting resolved to re-
tions from D6 shares issued to an employee (refer to note (35)). As   duce authorized capital ii to Eur 156,894 according to the number
a result, the capital reserve increased by Eur 59 thousand.           of exercisable option bonds at that point in time. in 2007, 156,894             StOck

                                                                      option bonds have been exercised. the capital increase has not yet
in March 168,867 (prior year: 0) shares from the exercise of option   been registered as of December 31, 2007. At December 31,2007,
bonds were issued. the premium of Eur 308 thousand was appro-         subscribed capital ii thus stood unchanged at Eur 156,894.
priated to the capital reserve.                                                                                                                      iNVEStOr
                                                                                                                                                     rElAtiONS
                                                                      the annual shareholders' meeting on June 13, 2007, resolved to
                                                                      form a new authorized capital (authorized capital iii) for the issu-
                                                                      ance of a warrant-linked bond. Subject to the approval of the Su-
                                                                      pervisory Board, the Management Board is authorized to increase                BuSiNESS
                                                                      subscribed capital only once or in successive tranches by a maxi-              OVErViEW
                                                                      mum of Eur 1,300 thousand by issuing new common shares in re-
                                                                      turn for cash contributions. this authorized capital may be used only
                                                                      in conjunction with the exercise of convertible subscription right
                                                                      bonds. Stockholders' subscription rights are excluded.                        MANAgEMENt
                                                                                                                                                      rEPOrt




                                                                                                                                                     FiNANciAl
                                                                                                                                                    StAtEMENtS




                                                                                                                                                     ADDitiONAl
                                                                                                                                                    iNFOrMAtiON




                                                                                                                                              113
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             conditional capital                                                      capital transactions
                             On June 13, 2007, the annual shareholders’ meeting resolved the          in connection with the exercise of stock options, a total of 243,688
                             following changes to conditional capital:                                common shares were issued out of conditional capital iii and
                                                                                                      216,349 common shares out of conditional capital Viii to employ-
                             •	 conditional capital i, ii and Vi ceased as the issued option rights   ees of the company and its associates and / or to members of the
                                could	not	be	exercised	by	the	beneficiaries.                          Company’s	Supervisory	Board	in	fiscal	2007.

                             •	 conditional capital Viii rose to Eur 4,100 thousand                   capital reserve
                                                                                                      the capital reserve includes premium payments from issuance of
                             in 2007, these subscription rights were exercised for 460,037 stock      shares, as well as additional contributions to the company’s equity
                             options (prior year: 531,951). At December 31, 2007, conditional cap-    associated with the exercise of stock options and option bonds. Ad-
                             ital thus stood at Eur 4,042,937 (previous year: Eur 3,267,610).         ditionally, the capital reserve contains the correspondent compen-
                                                                                                      sation expenses from stock options programs for employees and
                             the table below shows the composition of the company’s and               members of the Management Board, the Supervisory Board and the
                             group’s conditional capital at December 31:                              Advisory Board amounting to Eur 8,152 thousand and Eur 4,966
                                                                                                      thousand at December 31, 2007 and 2006, respectively.
                              (in Eur)                                 2007                2006
                                                                                                      Accumulated other comprehensive income
                              conditional capital i                         0              7,000      Accumulated other comprehensive income (loss) is used to record
                                                                                                      exchange	differences	arising	from	the	translation	of	the	financial	
                              conditional capital ii                        0            15,500       statements of foreign subsidiaries. it is also used to record the in-
                                                                                                      effective	portion	of	cash	flow	hedging.
                              conditional capital iii                 49,286            290,724

                              conditional capital iV                        0              3,500      changes in stockholders’ equity are outlined in the consolidated
                                                                                                      statement of changes in stockholders’ equity.
                              conditional capital V                   60,000             60,000

                              conditional capital Vi                        0                  0

                              conditional capital Vii                 50,000             50,000

                              conditional capital Viii             3,883,651          2,840,886

                                                                 4,042,937            3,267,610




114
Voting rights
                                                                                                                                           WElcOME
According to section 21 paragraph 1 of the german Securities trading Act (Wertpapier-Handelsgesetz, WpHg)
the company published the following information:
                                                                                                                         Share of
Date of change        Name of                                                                               threshold      voting         MANAgEMENt
in investment         investment owner                                                                           limit     rights           BOArD


December 31, 2007     Morgan Stanley & co. incorporated / Morgan Stanley, the corporation trust company     under 3%      2.96%
December 27, 2007     uBS Ag                                                                                  over 3%     3.49%
                                                                                                                                          SuPErViSOry
December 24, 2007     Morgan Stanley & co. incorporated / Morgan Stanley, the corporation trust company       over 3%     3.87%              BOArD


December 20, 2007     uBS Ag                                                                                under 3%      2.70%
December 19, 2007     uBS Ag                                                                                  over 3%     3.01%
                                                                                                                                           cOrPOrAtE
                                                                                                                                          gOVErNANcE
December 18, 2007     uBS Ag                                                                                under 3%      2.29%
December 17, 2007     uBS Ag                                                                                  over 3%     3.32%
December 13, 2007     uBS Ag                                                                                 under 3%     2.31%
                                                                                                                                            StOck
December 11, 2007     uBS Ag                                                                                  over 3%     3.95%
November 30, 2007     kingdon capital Management, llc                                                        under 3%     2.80%
                      Quantum Partners lDc / Soros Fund Management llc /
November 7, 2007                                                                                              over 3%     3.47%            iNVEStOr
                      Quantum Emerging growth Partners c.V. / Quantum Endowment Fund N.V.                                                  rElAtiONS

November 6, 2007      glg technology Fund                                                                     over 3%     3.72%
October 1, 2007       FMr llc. as successor entity of FMr corporation                                         over 3%     3.35%
                                                                                                                                           BuSiNESS
May 11, 2007          Fidelity Management research corporation / FMr corporation                              over 3%     3.03%            OVErViEW


February 27, 2007     DWS investment gmbH                                                                     over 5%     5.71%
February 9, 2007      DWS investment gmbH                                                                    under 5%     4.44%
                                                                                                                                          MANAgEMENt
February 8, 2007      kingdon capital Management, llc                                                         over 3%     3.43%             rEPOrt


November 24, 2006     glg Partner lP                                                                        under 10%     9.67%
October 3, 2006       Fidelity Management research corporation                                               under 5%     4.93%
                                                                                                                                           FiNANciAl
                                                                                                                                          StAtEMENtS
August 17, 2006       Bank of New york company inc.                                                          under 5%     4.32%
August 9, 2006        DWS investment gmbH                                                                     over 5%     5.21%
                                                                                                                under
February 16, 2006     JDS uniphase corporation                                                                                             ADDitiONAl
                                                                                                             10% / 5%     0.00%           iNFOrMAtiON




                                                                                                                                    115
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             (19) revenues                                                        (22) interest income and expenses

                             in 2007 and 2006 revenues included Eur 14,796 thousand and Eur       interest income (expense), net is comprised as follows:
                             11,901 thousand for services, respectively.
                                                                                                   (in thousands of Eur)                            2007      2006
                             A summary of revenues by geographic region is provided in the sec-
                             tion on segment reporting under note (28).                            interest and similar income                       782           370

                             (20) income from capitalization of development expenses, net          interest and similar expenses                   -1,635      -860
                                  of amortization for capitalized development projects
                                                                                                                                                    -853       -490

                              (in thousands of Eur)                          2007      2006
                                                                                                  (23)	 Losses	from	financial	investments	accounted	for	by	the	
                              capitalization of r & D expenses              10,039     5,854            equity method

                              Amortization of capitalized r & D expenses    -3,136     -1,165     A 31.0% share in Olympus Microsystems America, inc, San Jose,
                                                                                                  california, uSA (OMi) was held through the subsidiary ADVA North
                              impairment of capitalized r & D expenses      -4,588        -56     America	from	its	first	time	consolidation	on	July	12,	2006	until	the	
                                                                            2,315      4,633      disposal of OMi on September 28, 2007. the investment was ac-
                                                                                                  counted for by the equity-method up to the date of disposal. the
                                                                                                  group’s share of losses in 2007 amounted to Eur 740 thousand
                             (21) Other operating income and expenses                             (2006: Eur 296 thousand). A gain of Eur 328 thousand arose on
                                                                                                  the disposal.
                             Other operating income (expense), net is comprised as follows:
                                                                                                  (24)	 Other	financial	gains	(losses)
                               (in thousands of Eur)                         2007      2006
                                                                                                  Other	financial	gains	(losses),	net,	are	comprised	as	follows:
                               Other operating income                          765       216
                                                                                                   (in thousands of Eur)                            2007      2006
                               Other operating expenses                       -679        -31
                                                                                                   Foreign currency exchange gains                  4,389     3,028
                                                                                86       185
                                                                                                   Foreign currency exchange losses                -4,978     -4,175
                             Other operating income represents mainly income from the re-
                             lease of provisions.                                                  gains from hedging transactions                     91            0

                                                                                                   losses from hedging transactions                  -827            0
                             Other operating expenses represent mainly impairment on trade
                             accounts receivable.                                                  gain from short term investments
                                                                                                                                                        3            0
                                                                                                   and securities

                                                                                                                                                  -1,322     -1,147




116
(25) income taxes                                                        A	reconciliation	of	income	taxes	based	on	the	accounting	profit	and	
                                                                                                                                                       WElcOME
                                                                         the expected domestic income tax rate of 37.1% (2006: 37.1%) to
income taxes in germany consist of corporate income tax, the sol-        actual income tax expense is presented below.
idarity surcharge and trade taxes. the tax calculation in foreign
countries is based on the applicable local tax rates. they vary be-
                                                                          (in thousands of Eur)                            2007      2006
tween 15% to 41% (in prior year 15% to 41%).                                                                                                          MANAgEMENt
                                                                                                                                                        BOArD
                                                                          Accounting loss before tax                     -21,301    -1,018
the table below shows the components of the group’s total income
tax expenses:                                                             Expected statutory tax expense                   -7,903     -377
                                                                                                                                                      SuPErViSOry
                                                                          tax rate adjustments                                 58        0               BOArD
 (in thousands of Eur)                               2007     2006
                                                                          tax for prior periods                            -2,062     -478
 current taxes
                                                                          Foreign tax rate differential                        82      -43
   current income tax charge                           256    6,411                                                                                    cOrPOrAtE
                                                                          investment grants                                    61        0            gOVErNANcE

   Adjustments in respect of current
                                                    -2,062     -478       Non-tax-deductible stock option expenses          1,181    1,459
   income tax for previous years

                                                    -1,806    5,933       Non-tax-deductible amortization on
                                                                                                                           6,244         0              StOck
                                                                          investments
 Deferred taxes
                                                                          Other non-tax-deductible expenses                  182        99
   relating to origination and reversal of
                                                     8,073    3,392
   temporary differences                                                  Amortization charges based solely on                                         iNVEStOr
                                                                                                                                0   -1,831
                                                                          tax provisions                                                               rElAtiONS
   relating to changes in tax rates                    -58         0

   relating to write-down of a deferred                                   income exclusively relevant for tax purposes     3,390    14,289
                                                     1,945         0
   tax asset
                                                                          Adjustments to recognition of deferred                                       BuSiNESS
                                                                                                                           6,720    -3,902
                                                     9,960    3,392       tax assets                                                                   OVErViEW



 income tax expense                                 8,154     9,325       Other differences                                  201       109

                                                                          income tax expense                               8,154    9,325             MANAgEMENt
                                                                                                                                                        rEPOrt
Deferred tax expenses primarily relate to lower deferred tax as-
                                                                          effective tax rate                                 n.a.     n.a.
sets for tax-loss carry-forwards and for goodwill on acquisitions fol-
lowing an adjustment made resulting from the ongoing tax audit in
ADVA Ag Optical Networking.                                              the income exclusively relevant for tax purposes results primarily
                                                                                                                                                       FiNANciAl
                                                                         from the reversal of only tax effective recognition of investments           StAtEMENtS
                                                                         as well as from amortization of capitalized r & D expenses.


                                                                                                                                                       ADDitiONAl
                                                                                                                                                      iNFOrMAtiON




                                                                                                                                                117
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             the deferred tax assets and deferred tax liabilities at December 31       the foreign tax loss carry-forward at December 31 can be ana-
                             relate to the following:                                                  lyzed as follows:


                              (in thousands of Eur)                            2007         2006        (in thousands of Eur)                            2007      2006

                              Deferred tax assets                                                       ADVA Optical Networking inc.,
                                                                                                                                                         5,164     2,172
                                                                                                        Mahwah, New Jersey, uSA
                                  german tax-loss carry-forward                  715        4,775
                                                                                                        ADVA Optical Networking AS,
                                  Foreign tax-loss carry-forward               1,029        2,770                                                        3,060     2,996
                                                                                                        Oslo, Norway
                                  Fair value adjustments                         428          694
                                                                                                        Metro Packet Systems inc.,
                                                                                                                                                         1,523     1,523
                                  intangible assets                                0        4,290       Palo Alto, california, uSA

                                gross deferred tax assets                      2,172       12,529       ADVA Optical Networking North America,
                                                                                                                                                       102,728   40,845
                                                                                                        inc., Norcross, georgia, uSA
                              Deferred tax liabilities
                                  Accelerated depreciation for                                          ADVA Optical Networking ltd,
                                                                                   0             0                                                       2,105         0
                                  tax purposes                                                          york, united kingdom

                                  revaluation to fair value                   -1,957       -3,152                                                     114,580    47,536

                                  intangible assets                           -3,527       -2,975
                                                                                                       Deferred tax assets have not been recognized in respect of the tax
                                  gross deferred tax liabilities              -5,484       -6,127      losses in ADVA North America, as these tax losses may not be used
                                                                                                       to	offset	against	future	taxable	profits	elsewhere	in	the	Group	and	
                              Deferred tax (liabilities) assets, net         -3,312        6,402
                                                                                                       there is a history of losses. Pursuant to the u.S. tax Act, federal
                                                                                                       tax losses carried forward in the u.S. expire after twenty years.
                             temporary differences are differences between the carrying amount         tax losses carried forward on New Jersey, california and georgia
                             of an asset or liability in the balance sheet according to iFrS and its   state	tax	expire	after	five	to	ten	years.	
                             tax base. At December 31, 2007, the deductible temporary differ-
                             ences primarily related to intangible assets. Deferred tax liabilities    Deferred tax assets in ADVA inc. and MPS inc. amounting to
                             were recorded for taxable temporary differences primarily relating        Eur 912 thousand and Eur 634 thousand respectively were
                             to capitalized development cost and inventories.                          derecognized in 2007 due to anticipated restructuring of the
                                                                                                       u.S. legal entities. Deferred tax assets in ADVA AS amounting to
                                                                                                       Eur 399 thousand were derecognized as the probability of realiza-
                                                                                                       tion is assessed as uncertain.




118
ADVA Optical Networking assumes that deferred tax assets will be         Other notes
                                                                                                                                                            WElcOME
realized in cases where the probability of realization is greater than
50%. Whether or not deferred tax assets are realized depends on          (26)	 Notes	to	the	consolidated	cash	flow	statement	
the generation of future taxable income during periods in which
these temporary differences are deductible. the group has consid-        The	consolidated	cash	flow	statement	has	been	prepared	in	accor-
ered the scheduled reversal of deferred tax liabilities and projected    dance with iAS 7.                                                                 MANAgEMENt
                                                                                                                                                             BOArD
future taxable income in making this assessment.
                                                                         Cash	and	cash	equivalents	disclosed	in	the	cash	flow	statement	co-
As of December 31, 2007 and 2006 no deferred tax liabilities on          incide with the position “cash and cash equivalents” presented in
retained earnings of subsidiaries have been recognized. ADVA Op-         the balance sheet.                                                                SuPErViSOry
tical Networking committed that there will be no distribution of                                                                                              BOArD
currently undistributed earnings from the subsidiaries in the fore-      Cash	flows	from	investing	and	financing	activities	are	determined	
seeable future.                                                          on	the	basis	of	payments,	whereas	the	cash	flow	from	operating	
                                                                         activities is derived indirectly from the consolidated income (loss)
tax assets of Eur 4,355 thousand (2006: Eur 671 thousand) pri-           before	tax.	When	the	cash	flow	from	operating	activities	is	calcu-                 cOrPOrAtE
                                                                                                                                                           gOVErNANcE
marily include reimbursement claims for input tax credits.               lated, the changes in assets and liabilities are adjusted for the ef-
                                                                         fects of currency translation and changes in scope of consolidation.
tax liabilities can be analyzed as follows:                              As	a	result,	it	is	not	possible	to	reconcile	the	figures	to	the	differ-
                                                                         ences in the published consolidated balance sheet.
                                                                                                                                                             StOck
 (in thousands of Eur)                        2007            2006
                                                                         In	 2007	 and	 2006,	 non-cash	 transactions	 due	 to	 additions	 to	 fi-
 income tax liabilities                       4,341           5,287      nance leases amount to Eur 241 thousand and Eur 678 thousand,
                                                                         respectively.
 Other tax liabilities                        1,101             889                                                                                         iNVEStOr
                                                                                                                                                            rElAtiONS
                                                                         cash and cash equivalents to which the group only has restricted
                                           5,442              6,176      access are explained under note (8).

                                                                                                                                                            BuSiNESS
                                                                                                                                                            OVErViEW




                                                                                                                                                           MANAgEMENt
                                                                                                                                                             rEPOrt




                                                                                                                                                            FiNANciAl
                                                                                                                                                           StAtEMENtS




                                                                                                                                                            ADDitiONAl
                                                                                                                                                           iNFOrMAtiON




                                                                                                                                                     119
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             (27) Earnings per share                                                   The	tables	below	show	a	selection	of	key	financial	data	by	region:

                             in accordance with iAS 33, basic earnings per share are calculated
                                                                                                        (in thousands of Eur)                         2007        2006
                             by dividing consolidated net income by the weighted average num-
                             ber of shares outstanding.                                                 revenues

                             In	the	fiscal	year	under	review,	there	were	no	effects	that	diluted	       germany                                     38,666       22,875
                             net losses. Diluted earnings per share are calculated by adjusting
                             the average number of shares outstanding by the number of po-              rest of Europe, Middle East and Africa     120,175     102,398
                             tential shares arising from granted and exercisable stock options          Americas                                    82,887       62,589
                             and convertible bonds at the record date.
                                                                                                        Asia-Pacific                                  9,758       4,847
                             (28) Segment reporting
                                                                                                                                                  251,486      192,709
                             the segment information provided below has been prepared in ac-
                                                                                                        capital expenditures
                             cordance with iAS 14. the internal organizational and management
                             structure	and	the	structure	of	internal	financial	reporting	activities	    germany                                       9,360      14,089
                             are the key factors in determining what information is reported.
                             the ADVA Optical Networking group operates in one business seg-            rest of Europe, Middle East and Africa        5,771         399
                             ment only, namely the development, marketing and sale of opti-
                                                                                                        Americas                                      6,059       3,987
                             cal network products.
                                                                                                        Asia-Pacific                                    527         400

                                                                                                                                                    21,717      18,875

                                                                                                        Depreciation / amortization

                                                                                                        germany                                       8,666       6,723

                                                                                                        rest of Europe, Middle East and Africa        2,269         620

                                                                                                        Americas                                    15,923        8,022

                                                                                                        Asia-Pacific                                    267         186

                                                                                                                                                    27,125      15,551




120
                                                            revenues are attributed to the countries in which shipments are
(in thousands of Eur)       Dec. 31, 2007   Dec. 31, 2006                                                                                   WElcOME
                                                            made. inter-segment revenues are economically non-relevant and
segment assets                                              are therefore not reported separately.

germany                           131,508         119,777   Segment assets, segment liabilities, capital expenditures in prop-
                                                            erty, plant and equipment and depreciation / amortization are at-              MANAgEMENt
rest of Europe,                                                                                                                              BOArD
                                   33,898          47,671   tributed on the basis of their physical location.
Middle East and Africa
Americas                           38,255          60,844   capital expenditures and depreciation refer to property, plant
                                                                      m
                                                            and	 equip	 ent,	 finance	 leases	 and	 intangible	 assets	 excluding	
Asia-Pacific                        1,740           1,359   goodwill.
                                                                                                                                           SuPErViSOry
                                                                                                                                              BOArD

segment assets                   205,401         229,651

investments accounted
                                       0            3,034
for by the equity method                                                                                                                    cOrPOrAtE
                                                                                                                                           gOVErNANcE

total assets                     205,401         232,685


                                                                                                                                             StOck
segment liabilities

germany                            35,300          34,969
rest of Europe,
                                    5,891           7,487                                                                                   iNVEStOr
Middle East and Africa                                                                                                                      rElAtiONS

Americas                           15,785          19,518

Asia-Pacific                         675             289
                                                                                                                                            BuSiNESS
segment liabilities               57,651          62,263                                                                                    OVErViEW


Financial liabilities and
                                   37,119          32,100
finance	lease	obligations
                                                                                                                                           MANAgEMENt
total liabilities                 94,770          94,363                                                                                     rEPOrt




                                                                                                                                            FiNANciAl
                                                                                                                                           StAtEMENtS




                                                                                                                                            ADDitiONAl
                                                                                                                                           iNFOrMAtiON




                                                                                                                                     121
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             (29)	 Additional	disclosures	on	financial	instruments                (in thousands of Eur,         At amortized       At   At fair
                                                                                                  as at December 31, 2006)              cost     cost    value
                             (a)	 Valuation	of	categories	of	financial	instruments
                                                                                                  cash and cash equivalents           32,181
                             The	tables	below	analyze	the	relationship	between	the	classifica-
                             tion	and	the	valuation	of	financial	instruments	based	on	the	rele-
                                                                                                  trade accounts receivable                    53,639
                             vant balance sheet positions:

                                                                                                  tax assets                                      671
                              (in thousands of Eur,         At amortized          At   At fair
                              as at December 31, 2007)              cost        cost    value     Other assets
                                                                                                                                                2,331
                                                                                                  (current and non-current)
                              cash and cash equivalents            41,576
                                                                                                  investments accounted for
                                                                                                                                                         3,034
                              trade accounts receivable                       49,366              by the equity method

                                                                                                  Total financial assets             32,181    56,641   3,034
                              tax assets                                       4,355
                                                                                                  Finance lease obligations
                              Other assets                                                                                             2,233
                                                                                                  (current and non-current)
                              (current and non-current)                        1,266
                                                                                                  Financial liabilities               29,867
                              Total financial assets              41,576     54,987         0

                              Finance lease obligations                                           trade accounts payable                       22,826
                                                                    1,119
                              (current and non-current)
                                                                                                  Total financial liabilities        32,100    22,826        0
                              Financial liabilities                36,000
                                                                                                  thereof aggregated into
                              trade accounts payable                          18,661              the categories according
                                                                                                  to iAs 39:
                              Total financial liabilities         37,119     18,661         0     loans and receivables               32,181   56,641
                              thereof aggregated
                              into the categories                                                 Held-to-maturity
                                                                                                                                                         3,034
                              according to iAs 39:                                                investments

                              loans and receivables                41,576     54,987              Financial liabilities
                                                                                                  measured at                         32,100   22,826
                              Financial liabilities                                               amortized cost
                              measured at                          37,119     18,661
                              amortized cost




122
The	 Group	 has	 not	 used	 the	 option	 to	 designate	 financial	 assets	
as	“at	fair	value	through	profit	or	loss”	on	recognition	of	those	as-         (in thousands of Eur,                       carrying             fair          WElcOME

sets.	The	Group	has	neither	used	the	option	to	designate	financial	           as at December 31, 2006)                       value            value
liabilities	as	“at	fair	value	through	profit	or	loss”	on	recognition	of	      cash and cash equivalents                      32,181          32,181
those liabilities.
                                                                              Total financial assets                                                        MANAgEMENt
                                                                                                                                                              BOArD
(b)	 Fair	values	of	financial	instruments	valued	at	amortized	cost            at amortized cost                             32,181           32,181
                                                                              Finance lease obligations
The	tables	below	analyze	the	fair	values	of	financial	assets	and	li-                                                             2,233        2,233
                                                                              (current and non-current)
abilities	valued	at	amortized	cost.	The	carrying	values	of	financial	                                                                                       SuPErViSOry
instruments not valued at amortized cost agree to the fair values             Financial liabilities                          29,867          29,129            BOArD
of those instruments.                                                         Total financial liabilities
                                                                              at amortized cost                             32,100           31,362
 (in thousands of Eur,                           carrying         fair        thereof aggregated into the                                                    cOrPOrAtE
 as at December 31, 2007)                           value        value        categories according to iAs 39:                                               gOVErNANcE


 cash and cash equivalents                           41,576     41,576        loans and receivables                          32,181          32,181

 Total financial assets                                                       Financial liabilities measured at
 at amortized cost                                  41,576     41,576         amortized cost                                 32,100          31,362           StOck

 Finance lease obligations
 (current and non-current)                            1,119      1,119       Gains	and	losses	from	financial	instruments	are	analyzed	in	the	ta-
                                                                             ble below:
 Financial liabilities                              36,000     34,340                                                                                        iNVEStOr
                                                                                                                                                             rElAtiONS
 Total financial liabilities                                                  (in thousands of Euro)                              2007        2006
 at amortized cost                                  37,119     35,459
                                                                              loans and receivables                                -213        -152
 thereof aggregated into the                                                                                                                                 BuSiNESS
 categories according to iAs 39:                                              Held-to-maturity investments                         -412        -296          OVErViEW

 loans and receivables                               41,576     41,576        Financial liabilities measured at amortized cost           0        0
 Financial liabilities measured at
 amortized cost                                      37,119     35,459       interest income and expense is explained in note (22). refer to note           MANAgEMENt
                                                                                                                                                              rEPOrt
                                                                             (10) for details of depreciation on trade accounts receivable.



                                                                                                                                                             FiNANciAl
                                                                                                                                                            StAtEMENtS




                                                                                                                                                             ADDitiONAl
                                                                                                                                                            iNFOrMAtiON




                                                                                                                                                      123
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             (30) Financial risk management                                              Foreign currency risk sensitivity: Had the Eur been valued 10%
                                                                                                         higher (lower) compared to the uSD at December 31, 2007, accu-
                             The	goal	of	ADVA	Optical	Networking’s	financial	risk	management	            mulated other comprehensive income in stockholders’ equity would
                             is	to	provide	sufficient	funds	to	ensure	ongoing	operations	and	to	         have been Eur 2.3 million lower (higher). Had the Eur been valued
                             support the group’s projected growth. Financial instruments and             10% higher (lower) compared to the gBP at December 31, 2007,
                             financial	 assets	 primarily	 include	 bank	 loans,	 overdrafts,	 bonded	   accumulated other comprehensive income in stockholders’ equity
                             loans and trade payables as well as trade receivables and cash. De-         would have been Eur 2.8 million lower (higher).
                             rivative	financial	instruments	are	used	exclusively	for	hedging	pur-
                             poses, not for trading or speculation.                                      Interest rate risk
                                                                                                         ADVA Optical Networking is subject to interest rate risk mainly in
                             Financial risks in essence arise from the potential loss of bad debt,       EUR,	GBP	and	USD.	The	Group	uses	only	EUR	denominated	finan-
                             failure	 to	 discharge	 payment	 obligations,	 fluctuations	 in	 interna-   cial liabilities to meet its funding requirements.
                             tional currencies and changes in interest rate levels.
                                                                                                         risks of changes in money market interest rates arising from exist-
                             Foreign currency risk                                                       ing	floating-rate	loans	are	hedged	with	derivative	financial	instru-
                             Because a major portion of the group’s revenues and costs are               ments. the group uses standardized instruments like interest rate
                             generated in foreign currencies, the group is particularly subject          swaps and interest rate caps for this purpose.
                             to	fluctuations	of	the	EUR	against	the	USD	and	GBP.
                                                                                                         interest rate sensitivity: Had market interest rates been 100 ba-
                             to hedge operating risks and risks associated with the funding of           sis points higher (lower) during 2007, net income would have been
                             planned investments, the ADVA Optical Networking group makes                Eur 136 thousand higher (lower).
                             limited	use	of	derivative	instruments	as	far	as	cash	flow	risks	are	
                             concerned. Foreign currency risks that have no impact on the                Credit risk
                             Group’s	cash	flows	(i.e.	risks	resulting	from	the	translation	of	as-        ADVA Optical Networking is exposed to credit risk in its operations.
                             sets and liabilities of subsidiaries into the group reporting cur-          Credit	 risk	 is	 controlled	 and	 managed	 through	 centrally	 defined	
                             rency) are not hedged. Derivative instruments are used essentially          credit limits, which are based on the recommendations of an exter-
                             to hedge the following risks:                                               nal rating agency. credit risks are accounted for as depreciation or
                                                                                                         impairment of individual assets. the group does not use any credit
                             •	 Exchange risks arising from sales and payment obligations in             derivatives to hedge credit risk. the maximum risk of loss is the
                                foreign currencies                                                       carrying value of trade accounts receivable as per note (10).

                             the group uses standard instruments such as foreign exchange rate           Liquidity risk
                             forward transactions. the use of these instruments is governed by           the group is exposed to liquidity risk, which is the risk that the
                             the uniform guidelines applied within the framework of the group’s          group will not be able to meet its obligations as the fall due. the
                             risk management system.                                                     group manages this risk through the forecasting of cash and work-
                                                                                                         ing capital requirements.
                             Changes	in	the	value	of	cash	flow	hedges,	i.e.,	financial	derivatives	
                             whose	purpose	is	to	hedge	future	cash	flows,	are	initially	appropri-
                             ated to accumulated other comprehensive income and do not af-
                             fect earnings. they only affect earnings when the projected cash
                             flow	is	realized.




124
(31)	 Derivative	financial	instruments                                  (32) Auditor’s fees
                                                                                                                                                   WElcOME

At December 31, 2007, only one interest rate cap whose purpose is       in 2007 and 2006, the following fees charged by the legal auditor
to	impose	a	ceiling	on	a	floating-rate	loan	was	outstanding.	This	de-   were agreed and stated as expenses:
rivative instrument expires on March 31, 2010. At the closing date,
its fair value stood at Eur 9 thousand, while the nominal value of                                                                                MANAgEMENt
                                                                         (in thousands of Eur)                        2007        2006              BOArD
the derivative stood at Eur 0.9 million. At December 31, 2006, the
fair value of the derivative stood at Eur 7 thousand, while the nom-     year-end audit                                 382        240
inal value stood at Eur 1.3 million. At December 31, 2007, no fur-
ther derivatives were outstanding.                                       Other audit opinions and
                                                                                                                          62         21           SuPErViSOry
                                                                         consulting services                                                         BOArD
in this context the nominal volume is the accounting value from          tax advice                                        0          0
which payments are derived. Since the nominal volume itself is not
at risk, it is the potential for changes in interest rates and prices    Other services rendered to the
                                                                                                                           3          6
that are hedged.                                                         company or its subsidiaries                                               cOrPOrAtE
                                                                                                                                                  gOVErNANcE

the fair value is the amount that ADVA Optical Networking would                                                         447        267
have to pay or would receive if it canceled the hedge at the closing
date. Since the group only uses standard, marketable instruments
for its hedges, the fair value is determined from market prices and                                                                                 StOck

is not netted against any contrary trend in the value of underly-
ing transactions.

                                                                                                                                                   iNVEStOr
                                                                                                                                                   rElAtiONS




                                                                                                                                                   BuSiNESS
                                                                                                                                                   OVErViEW




                                                                                                                                                  MANAgEMENt
                                                                                                                                                    rEPOrt




                                                                                                                                                   FiNANciAl
                                                                                                                                                  StAtEMENtS




                                                                                                                                                   ADDitiONAl
                                                                                                                                                  iNFOrMAtiON




                                                                                                                                            125
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             (33)	 Contingent	assets,	contingent	liabilities	and	other	financial	         (34) leases
                                   obligations
                                                                                                          The	Group	has	financial	obligations	arising	from	a	variety	of	finance	
                             in the normal course of business, claims may be asserted or lawsuits         lease agreements for certain technical equipment and machinery,
                             filed	against	the	Company	and	its	subsidiaries	from	time	to	time.	As	        as	well	as	factory	and	office	equipment.	These	obligations	will	ex-
                             of December 31, 2007, ADVA Optical Networking does not expect                pire at varying times over the next three years.
                             that potential titles or litigations in detail or in total will have a ma-
                             terial	impact	on	its	financial	position	or	operating	performance.            Finance lease contracts generally carry a purchase option and no
                                                                                                          restrictions on further funding for the group.
                             At December 31, 2007, the group had purchase commitments to-
                             taling Eur 15,064 thousand (prior year Eur 19,093 thousand) in               the group also has operating leases, primarily for buildings and
                             respect of suppliers. At the same date, the group also had future            cars that cannot be cancelled.
                             obligations to pay license fees totaling Eur 5,223 thousand (prior
                             year Eur 75 thousand) for patent infringements.                              leasing payments for buildings including parking spaces amount
                                                                                                          to Eur 2,697 thousand and Eur 2,449 thousand in 2007 and 2006,
                             in September 2006 the Free State of thuringia assured Eur 3.0 mil-           respectively. leasing payments for the cars consist of monthly in-
                             lion in earmarked investment grants to be paid to ADVA Ag Optical            stallments plus servicing charges and road tax, and totaled Eur 795
                             Networking. resulting payments of Eur 2.0 million and Eur 1.0 mil-           thousand and Eur 714 thousand in 2007 and 2006, respectively.
                             lion	are	foreseen	for	2008	and	2009,	respectively.	The	cash	inflows	
                             will then reduce the acquisition cost of the building.                       The	future	minimum	lease	payments	due	on	operating	and	finance	
                                                                                                          leases at December 31, 2007, are listed in the table below:


                                                                                                                                under
                                                                                                           (in thousands          one         One to          Over
                                                                                                           of Eur)               year     five years    five years      total

                                                                                                           Operating leases      3,099         5,439         2,983    11,521

                                                                                                           Finance leases          931           228              0    1,159


                                                                                                          Excluding interest of Eur 40 thousand (thereof Eur 39 thousand
                                                                                                          short-term	 portion),	 minimum	 lease	 payments	 for	 finance	 leases	
                                                                                                          have a fair value of Eur 1,119 thousand, of which Eur 892 thou-
                                                                                                          sand	is	classified	as	a	short-term	liability.	There	are	no	sub-lease	
                                                                                                          agreements.




126
(35) Stock option programs
                                                                                                                                                         WElcOME

to date, the company has issued stock options (Plan ix), option         Subject to the conditions under which option rights are issued, each
bonds for employees (Plan x) as well as convertible bonds for the       option right entitles the individual to purchase one common share
Supervisory Board (Plan Vii) and stock appreciation rights (SArs)       in the company. the stock appreciation rights entitle the recipient
for employees (Plan xi) and for the Management Board (Plan xii).        to receive a bonus in the amount of the difference between the de-              MANAgEMENt
                                                                                                                                                          BOArD
Additionally, so-called D6 shares were issued during the course of      fined	strike	price	and	the	stock	market	price	at	the	date	of	exercise	
the acquisition of ADVA North America. At December 31, 2007, six        (cash settlement). the options from D6 shares entitle the recipi-
stock-based compensation programs for the Management Board,             ent to receive a corresponding number of shares of ADVA Ag Opti-
employees of the company and its subsidiaries, the Supervisory          cal Networking free of charge. the conditions of issue specify the              SuPErViSOry
Board and the technical Advisory council were still in existence.       term, the exercise price (strike price), any qualifying periods and                BOArD
                                                                        the	defined	exercise	periods.
All rights arising from Plans iV and Vi were exercised or expired
in 2007. With the exception of Plans ix, x and xi, all stock option     Option rights issued under Plans ix, x, xi and xii can be exercised
programs are now closed, i.e., no more new options will be granted      over a total period of seven years. the calculation of the strike                cOrPOrAtE
                                                                                                                                                        gOVErNANcE
pursuant to these plans. Plans ix and x authorized the issuance of      price and exercise conditions for Plans ix and x has been modi-
options or parts of option bonds for the last time at December 31,      fied	as	per	July	1,	2007.	According	to	this	modification,	the	strike	
2010, and at December 31, 2008. Pursuant to a resolution by the         price for options granted after this date equals the average stock
annual shareholders’ meeting, Plan x was issued in 2005.                price of the last ten trading days prior to the grant date. to exercise
                                                                        the options, certain exercise hurdles per tranche are to be consid-               StOck

All option rights are non-transferable. they may only be exercised      ered. the strike price for Plans xi and xii is calculated by adding
as long as the entitled person is employed on a permanent con-          a 20% markup to the average price of the company's share over
tract by the company or by a company that ADVA Ag Optical Net-          the ten trading days prior to the grant date. the minimum strike
working has direct or indirect interest in. Option rights issued to     price	is	defined	as	the	final	auction	price	on	the	day	when	the	op-              iNVEStOr
                                                                                                                                                         rElAtiONS
apprentices may only be exercised if the apprentices are hired by       tion rights are issued. One-third of the option rights granted pur-
the	Company	or	by	an	affiliated	company	on	a	permanent	contract.	       suant to Plan ix, xi and xii may not be exercised until two years
All option rights expire upon termination of the employment con-        after the grant date, another third three years after the grant date
tract. in the event that the person entitled dies, becomes unable       and	the	final	third	four	years	after	the	grant	date.	50%	of	the	op-              BuSiNESS
to work or retires, special provisions come into force.                 tion rights granted pursuant to Plan x may not be exercised until                OVErViEW
                                                                        two years after the grant date and the remaining 50% three years
The	group	of	people	to	whom	option	rights	can	be	issued	is	defined	     after the grant date.
separately for each stock option program. 39% of option rights au-
thorized pursuant to Plan ix can be issued to members of the Man-       Exercise periods are regularly linked to key business events in the             MANAgEMENt
                                                                                                                                                          rEPOrt
agement	 Board,	 2%	 to	 the	 management	 of	 affiliated	 companies,	   Company’s	calendar	and	each	have	a	defined	term.	Certain	other	
43.5%	to	Company	employees,	and	15.5%	to	employees	of	affili-           business events can lead to blocking periods, during which op-
ated companies. 70% of the option bond rights authorized under          tion rights cannot be exercised. insofar as regular exercise peri-
Plan x may be issued to employees of the company, 27% to em-            ods overlap with such blocking periods, the exercise deadline shall
                                                                                                                                                         FiNANciAl
ployees	of	affiliated	companies	and	3%	to	the	management	of	af-         be extended by the corresponding number of exercise days imme-                  StAtEMENtS
filiated	companies.	The	options	for	D6	shares	have	been	issued	in	      diately after the end of such a blocking period. Option rights may
line with acquisitions of companies. in each case solely employees      be exercised only on days on which commercial banks are open in
of the acquired companies were entitled to receive those shares.        Frankfurt am Main.
the Management Board shall specify the exact group of people en-                                                                                         ADDitiONAl
                                                                                                                                                        iNFOrMAtiON
titled to exercise rights and the scope of each offer.




                                                                                                                                                  127
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             the fair value of stock options, option bonds, convertible bonds and           For the calculation of the fair value of options and option bonds
                             stock appreciation rights is estimated using the Black-Scholes op-             ADVA Optical Networking assumed that no dividends have been
                             tion pricing model. the following computation parameters were as-              paid to stockholders.
                             sumed for option rights outstanding at December 31, 2007:
                                                                                                            changes in the number of option rights outstanding are detailed in
                                                                                                            the tables below.
                                                         plan iX      plan X    plan Xi plan Xii

                              Weighted average                                                              stock option program 2001 (plan iV)1
                                                             5.64        7.29       6.52         5.79
                              share price (in Eur)
                                                                                                                                                                                   Weighted
                              Weighted average
                                                             6.36        8.53        7.56        7.17                                                       no. of            average strike
                              strike price (in Eur)
                                                                                                                                                           options             price (in Eur)
                              Expected volatility
                                                            61.11       55.70      54.67        54.67           Options outstanding
                              (in % per year)                                                                                                             429,767                            1.74
                                                                                                                at Dec. 31, 2005
                              term (in years)                    7          7           7            7
                                                                                                                granted options                                      0                            -
                              risk-free interest                                                                Exercised options                          192,462                            2.02
                                                             3.60        3.57       4.00         4.00
                              rate (in % per year)
                                                                                                                Forfeited options                              3,833                          1.43

                             to calculate the fair value of option rights granted in 2007 and 2006,             Expired options                              22,200                          2.59
                             expected volatility from 54.67% to 56.57% per year and risk-free
                             interest rates from 3.2% to 4.4% per year were assumed.                            Options outstanding
                                                                                                                                                          211,272                            1.41
                                                                                                                at Dec. 31, 2006
                             the fair value of options from D6 shares matches the stock mar-
                                                                                                                granted options 1                            44,650                          2.99
                             ket price at the date of issuance (= registration of capital increase
                             in the context of the Movaz acquisition).                                          Exercised options                          243,688                           1.64

                             the fair value of options is calculated based on the assumed strat-                Forfeited options                              3,834                          1.41
                             egy for the exercise (earliest possible date) using an adapted sim-
                                                                                                                Expired options                                8,400                         3.08
                             ulation program (Monte carlo method).
                                                                                                                Options outstanding
                             iFrS 2 has been applied to all option rights granted after Novem-                                                                      0                             -
                                                                                                                at Dec. 31, 2007
                             ber 7, 2002. Option rights granted prior to this date are still calcu-
                             lated in accordance with SFAS 123.                                                 Of which exercisable                                 0                            -

                             The	 volatility	 is	 specified	 as	 fluctuation	 of	 the	 share	 price	 com-
                             pared to the average share price of the period. in each case, ex-              For options exercised in the current period, the average share price
                             pected volatility is calculated on the basis of historic share prices          on the exercise date was Eur 6.80.
                             (historic	volatility).	The	term	is	specified	in	the	underlying	option	         1
                                                                                                                in Plans i and iV, 44,650 stock options have been reported as expired in 2005 and
                             rights agreement. the risk-free interest rate is based on informa-                 2006 in error. A review of the contracts in 2007 showed that all of those options
                             tion about risk-free investments with correspondent terms.                         belong to Plan iV, and that they will only expire in 2007. in the above table, those
                                                                                                                options are reported as options granted in 2007.




128
Option bonds for employees, 2001 (plan Vi)                            convertible bonds for the supervisory Board, 2001
                                                                                                                                                  WElcOME
                                                                      (plan Vii)
                                                      Weighted
                                        no. of          average                                                             Weighted
                                        option      strike price                                               no. of         average
                                                                                                                                                 MANAgEMENt
                                        bonds            (in Eur)                                         convertible     strike price             BOArD
                                                                                                              bonds            (in Eur)
 Option bonds
 outstanding at Dec. 31, 2005         327,285              2.95        convertible bonds
                                                                       outstanding at Dec. 31, 2005            35,000             7.05           SuPErViSOry
 granted option bonds                        0                 -                                                                                    BOArD
                                                                       convertible bonds granted                     0                -
 Exercised option bonds               168,867               2.94
                                                                       convertible bonds exercised                   0                -
 Forfeited option bonds                    700              2.96
                                                                                                                                                  cOrPOrAtE
                                                                       convertible bonds forfeited                   0                -          gOVErNANcE
 Expired option bonds                        0                 -
                                                                       convertible bonds expired                     0                -
 Option bonds
 outstanding at Dec. 31, 2006         157,718              2.96        convertible bonds
                                                                       outstanding at Dec. 31, 2006            35,000             7.05             StOck
 granted option bonds                        0                 -
                                                                       convertible bonds granted                     0                -
 Exercised option bonds               156,894               2.96
                                                                       convertible bonds exercised                   0                -
 Forfeited option bonds                    824              2.96                                                                                  iNVEStOr
                                                                                                                                                  rElAtiONS
                                                                       convertible bonds forfeited                   0                -
 Expired option bonds                        0                 -
                                                                       convertible bonds expired                     0                -
 Option bonds
 outstanding at Dec. 31, 2007                0                 -       convertible bonds                                                          BuSiNESS
                                                                                                                                                  OVErViEW
                                                                       outstanding at Dec. 31, 2007            35,000             7.05
 Of which exercisable                        0                 -
                                                                       Of which exercisable                     35,000            7.05

For option bonds exercised in the current period, the average share                                                                              MANAgEMENt
                                                                                                                                                   rEPOrt
price on the exercise date was Eur 7.15.                              the weighted average remaining contractual life for option rights
                                                                      outstanding at December 31, 2007, was 0.40 years. the strike price
                                                                      of all convertible bonds is Eur 7.05.
                                                                                                                                                  FiNANciAl
                                                                                                                                                 StAtEMENtS




                                                                                                                                                  ADDitiONAl
                                                                                                                                                 iNFOrMAtiON




                                                                                                                                           129
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             stock option program 2003 (plan iX) 2                                                      stock option program for employees of
                                                                                                                        ADVA north America (D6 shares)
                                                                                                  Weighted
                                                                               no. of        average strike             As part of the acquisition of Movaz, a total of 247,529 options on
                                                                              options         price (in Eur)            D6 shares were granted to select employees of ADVA North Ame-
                                                                                                                        rica on three issuance dates.
                                 Options outstanding at
                                 Dec. 31, 2005                               1,953,352                      4.42                                                              Weighted
                                                                                                                                                              no. of     average strike
                                 granted options                              1,018,916                      7.92
                                                                                                                                                             options      price (in Eur)
                                 Exercised options                                                          3.60
                                                                                 338,614                                 Options outstanding at
                                 Forfeited options                               279,700                    8.58         Dec. 31, 2006                       247,529                 6.69

                                 Expired options                                         0                       -       granted options                             0                   -

                                 Options outstanding at                                                                  Exercised options                    229,529                6.69
                                 Dec. 31, 2006                              2,353,954                       5.46
                                                                                                                         Forfeited options                           0                   -
                                 granted options                              1,511,700                      7.51
                                                                                                                         Expired options                             0                   -
                                 Exercised options                               216,349                    3.78
                                                                                                                         Options outstanding at
                                 Forfeited options                              340,900                      7.37        Dec. 31, 2007                        18,000                 6.69

                                 Expired options                                         0                       -       Of which exercisable                        0                   -

                                 Options outstanding at
                                 Dec. 31, 2007                              3,308,405                       6.36        the average fair value of options granted in 2007 is Eur 6.69.
                                                                                                                        the share price equals the stock market price at the date of issu-
                                 Of which exercisable                         1,028,617                     4.07        ance (= registration of capital increase in the context of the Movaz
                                                                                                                        acquisition).

                             the average fair value of options granted in 2007 is Eur 3.22.                             the weighted average remaining contractual life for option rights
                                                                                                                        outstanding at December 31, 2007, was 1.87 years.
                             For options exercised in the current period, the average share price
                             on the exercise date was Eur 6.54.

                             the weighted average remaining contractual life for option rights
                             outstanding at December 31, 2007, was 5.12 years. the strike price
                             for those options is between Eur 3.55 and Eur 11.37.
                             2
                                 During the Annual general Meeting on June 13, 2007, it was decided to change the
                                 strike price for options granted under Plans ix and x after this date. the relevant
                                 strike price is now based on the 10-day-average market price without an additional
                                 add-on.	During	the	exercise	of	the	options,	specific	performance	conditions	must	be	
                                 met.




130
Option bonds for employees, 2005 (plan X) 3                                                stock appreciation rights (plan Xi)
                                                                                                                                                                        WElcOME


                                                    no. of           Weighted                                                                     Weighted
                                                    option      average strike                                                                     average
                                                    bonds        price (in Eur)                                                    no. of stock      strike            MANAgEMENt
                                                                                                                                  appreciation     price (in             BOArD
    Option bonds
                                                                                                                                         rights        Eur)
    outstanding at Dec. 31, 2005                     9,000                    6.98
                                                                                            stock appreciation rights
    granted option bonds                           491,500                     7.28
                                                                                            outstanding at Dec. 31, 2005                      0            -           SuPErViSOry
                                                                                                                                                                          BOArD
    Exercised option bonds                                 0                        -
                                                                                            granted stock appreciation rights          191,900          7.47
    Forfeited option bonds                          25,000                     7.28
                                                                                            Exercised stock appreciation rights               0            -
    Expired option bonds                                   0                        -                                                                                   cOrPOrAtE
                                                                                            Forfeited stock appreciation rights         28,900          9.16           gOVErNANcE

    Option bonds
                                                                                            Expired stock appreciation rights                 0            -
    outstanding at Dec. 31, 2006                 475,500                       7.27
                                                                                            stock appreciation rights
    granted option bonds                           456,750                     9.65
                                                                                            outstanding at Dec. 31, 2006              163,000           7.17             StOck

    Exercised option bonds                                 0                        -
                                                                                            granted stock appreciation rights           96,400          7.88
    Forfeited option bonds                          96,000                     7.64
                                                                                            Exercised stock appreciation rights               0            -
                                                                                                                                                                        iNVEStOr
    Expired option bonds                                   0                        -                                                                                   rElAtiONS
                                                                                            Forfeited stock appreciation rights         27,000          7.73
    Option bonds
                                                                                            Expired stock appreciation rights                 0            -
    outstanding at Dec. 31, 2007                 836,250                      8.53
                                                                                            stock appreciation rights                                                   BuSiNESS
    Of which exercisable                              4,500                    6.98                                                                                     OVErViEW
                                                                                            outstanding at Dec. 31, 2007              232,400          7.56

                                                                                            Of which exercisable                        15,230          6.98
the average fair value of option bonds granted in 2007 is
Eur 3.20.                                                                                                                                                              MANAgEMENt
                                                                                                                                                                         rEPOrt
                                                                                           the average fair value of stock appreciation rights granted in 2007
the weighted average remaining contractual life for option bonds                           is Eur 0.46.
outstanding at December 31, 2007, was 5.62 years. the strike price
for those options is between Eur 6.98 and Eur 9.79.                                        the weighted average remaining contractual life for stock apprecia-
                                                                                                                                                                        FiNANciAl
                                                                                           tion rights outstanding at December 31, 2007, was 5.84 years. the           StAtEMENtS
                                                                                           strike price for those options is between Eur 6.06 and Eur 11.37.
3
    During the Annual general Meeting on June 13, 2007, it was decided to change the
    strike price for options granted under Plans ix and x after this date. the relevant
                                                                                                                                                                        ADDitiONAl
    strike price is now based on the 10-day-average market price without an additional
                                                                                                                                                                       iNFOrMAtiON
    add-on.	During	the	exercise	of	the	options,	specific	performance	conditions	must	be	
    met.




                                                                                                                                                                 131
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             stock appreciation rights for the management Board                    compensation expenses arising from stock option programs and
                             (plan Xii)                                                            stated under the result from ordinary activities were as follows:

                                                                                    Weighted        (in thousands of Eur)                          2007      2006
                                                                  no. of stock        average
                                                                 appreciation     strike price      Plan iV                                            1        33
                                                                        rights         (in Eur)
                                                                                                    Plan Vi                                            0        31
                              stock appreciation rights
                                                                                                    Plan Viii                                          0         0
                              outstanding at Dec. 31, 2006                   0                -
                                                                                                    Plan ix                                        1,496       872
                              granted stock
                                                                       420,000            5.81
                              appreciation rights                                                   Plan x                                           854       424

                              Exercised stock                                                       Plan xi                                          -18        80
                                                                              0               -
                              appreciation rights
                                                                                                    Plan xii                                          17         0
                              Forfeited stock
                                                                              0               -     class c shares for employees
                              appreciation rights                                                                                                      0     1,856
                                                                                                    of ADVA richardson
                              Expired stock
                                                                              0               -     D6 shares for employees
                              appreciation rights                                                                                                    836      639
                                                                                                    of ADVA North America
                              stock appreciation rights
                                                                                                                                                  3,186     3,935
                              outstanding at Dec. 31, 2007            420,000            5.81

                              Of which exercisable                            0               -


                             the average fair value of stock appreciation rights granted in 2007
                             is Eur 0.85.

                             the weighted average remaining contractual life for stock apprecia-
                             tion rights outstanding at December 31, 2007, was 6.96 years. the
                             strike price for those options is between Eur 5.73 and Eur 5.88.

                             As of December 31, 2007, a liability of Eur 79 thousand has been
                             recognized for stock appreciation rights.




132
(36) Employees                                                      Retirement benefit schemes
                                                                                                                                                    WElcOME
                                                                    The	Group	operates	various	defined	contribution	retirement	bene-
in 2007 and 2006, respectively, the ADVA Optical Networking group   fit	schemes	in	several	subsidiaries.	The	assets	of	the	schemes	are	
had an average of 953 and 724 permanent employees and 17 and        held separately from those of the group in funds under the control
15 apprentices on its payroll. the employee breakdown by depart-    of trustees. the only obligation of ADVA Optical Networking with
ment at December 31 is listed below:                                respect	to	the	retirement	benefit	scheme	is	to	make	the	specified	             MANAgEMENt
                                                                                                                                                     BOArD
                                                                    contributions.	Payments	to	defined	contribution	retirement	bene-
                                                                    fit	schemes	are	charged	as	an	expense	as	they	fall	due.	Payments	
                                               2007       2006
                                                                    made	to	state-managed	retirement	benefit	schemes	are	dealt	with	
 research and development                        355        243     as	 payments	 to	 defined	 contribution	 schemes	 where	 the	 Group’s	         SuPErViSOry
                                                                    obligations under the schemes are equivalent to those arising in a                BOArD
 Purchasing and production                       221        191     defined	contribution	retirement	benefit	scheme.	

 Quality management                               15         13     (37) relationships to related parties
                                                                                                                                                    cOrPOrAtE
 Sales, marketing and technical support          232        172                                                                                    gOVErNANcE
                                                                    EgOrA Holding gmbH, Martinsried / Munich, and its subsidiaries (the
 Management and administration                   130        105     EgOrA group), linklaters, Munich, Flextronics international ltd.,
                                                                    Singapore, and its subsidiaries (the Flextronics group) and all mem-
 Apprentices                                      17         15     bers of the company’s governing bodies are deemed to be related
                                                                    parties to ADVA Optical Networking in the sense used in iAS 24.                  StOck
                                                 970       739
                                                                    Due to the membership of David gudmundson on the Supervisory
                                                                    Board of ADVA Ag Optical Networking JDS uniphase corp., Milpi-
A further 25 and 28 people were employed on a temporary basis       tas, california, uSA, has been considered a related party through
effective December 31, 2007 and 2006, respectively.                 August 31, 2006.                                                                iNVEStOr
                                                                                                                                                    rElAtiONS

Personnel expenses for 2007 and 2006 totaled Eur 77.3 million and   the EgOrA group held a 13.8% equity stake in ADVA Optical Net-
Eur 58.4 million, respectively:                                     working at December 31, 2007. Albert rädler, chairman of ADVA
                                                                    Optical Networking’s Supervisory Board, is a tax consultant at lin-             BuSiNESS
                                                                    klaters. thomas Smach, Vice chairman of ADVA Optical Network-                   OVErViEW
 (in thousands of Eur)                         2007       2006
                                                                    ing’s Supervisory Board since June 14, 2005, is chief Financial
 Wages and salaries                           63,280     46,210     Officer	of	Flextronics	International	Ltd.

 Social security costs                         9,796      7,559     All transactions with said related parties are conducted on the same           MANAgEMENt
                                                                                                                                                     rEPOrt
                                                                    terms that are normally also used with respect to unrelated third
 Expenses	for	defined	contribution	plans         796        536     parties.
 Post-employment	benefits	other	than	
 pensions                                        217        176     in 2007 and 2006, the ADVA Optical Networking group sold products
                                                                                                                                                    FiNANciAl
                                                                    to companies in the EgOrA group and to companies in the Flex-                  StAtEMENtS
 Expense of share-based payments               3,186      3,935     tronics group. During the same period, the group acquired com-
                                             77,275     58,416      ponents from the EgOrA group, from the Flextronics group and
                                                                    from JDS uniphase corp.
                                                                                                                                                    ADDitiONAl
                                                                                                                                                   iNFOrMAtiON




                                                                                                                                             133
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             the group has entered into several agreements with the EgOrA         the table below lists the group's trade receivables and trade pay-
                             group under which the group is entitled to make use of certain fa-   ables with respect to related parties at December 31:
                             cilities and services of the EgOrA group. Additionally ADVA Op-
                             tical Networking makes use of legal and consulting services from
                                                                                                   (in thousands of Eur)                      2007           2006
                             linklaters.
                                                                                                   trade receivables
                             A summary of transactions with related parties in 2007 and 2006
                             is provided in the table below:                                         EgOrA group                              1,496            254

                                                                                                     Flextronics group                           40             40
                              (in thousands of Eur)                         2007       2006
                                                                                                                                             1,536            294
                              Sales to related parties
                                                                                                   trade payables
                                EgOrA group                                 3,394        779
                                                                                                     EgOrA group                                  19            59
                                Flextronics group                                0         46
                                                                                                     Flextronics group                          549            540
                                                                            3,394        825
                                                                                                     linklaters                                    0            23
                              Purchases from related parties
                                                                                                                                                568           622
                                EgOrA group                                    60        135

                                JDS uniphase (until August 31, 2006)             0       213
                                                                                                  All of the transactions referred to above arose in the normal course
                                Flextronics group                          23,415      5,044      of the group’s business, and are to be cash-settled. None of these
                                                                                                  transactions entail any guarantees or provisions and expenses for
                                                                          23,475       5,392      bad and doubtful debts.
                              Services provided by related parties
                                                                                                  See note (38) for detailed information about compensation of the
                                EgOrA group                                    25          59     Management Board and the Supervisory Board.

                                linklaters                                    139      1,288

                                Flextronics group                             682          49

                                                                              846      1,396




134
(38) governing boards and compensation
                                                                                                                              WElcOME

management Board


                                      resident in              external mandates                                             MANAgEMENt
                                                                                                                               BOArD
 Brian Protiva                        Berg, germany            •	 	
                                                                  Member of the Board of Directors of
 Chief	Executive	Officer                                          xambala, San Jose, cA, uSA

                                                                                                                             SuPErViSOry
                                                                                                                                BOArD
 Jürgen Hansjosten                    krailling, germany       •	 Member of the Supervisory Board of
 Deputy	Chief	Executive	Officer                                   AMS technologies Ag, Martinsried / Munich, germany
 and	Chief	Operating	Officer
                                                                                                                              cOrPOrAtE
 christoph glingener                  Jade, germany            •	 Member of the Advisory Board of                            gOVErNANcE

 Chief	Technology	Officer                                         telent gmbH, Backnang, germany
 (since January 1, 2007)

                                                                                                                               StOck
 ron Martin                           Prosper, texas, uSA      •	 Member of the technical Advisory Board of
 Chief	Marketing	&	Strategy	Officer                               Optium corporation, Horsham, PA, uSA
 (since November 15, 2007)

                                                                                                                              iNVEStOr
 Jaswir Singh                         Marietta, georgia, uSA                                                                  rElAtiONS
 Chief	Financial	Officer
 (since November 7, 2007)


 christian unterberger                taufkirchen, germany                                                                    BuSiNESS
                                                                                                                              OVErViEW
 Chief	Sales	Officer
 (since October 1, 2007)


                                                                                                                             MANAgEMENt
                                                                                                                               rEPOrt




                                                                                                                              FiNANciAl
                                                                                                                             StAtEMENtS




                                                                                                                              ADDitiONAl
                                                                                                                             iNFOrMAtiON




                                                                                                                       135
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             supervisory Board


                                                   resident in                  external mandates

                              Albert rädler        Vaterstetten, germany       •	 tax consultant at linklaters, Munich, germany
                              chairman                                         •	 chairman of the Supervisory Board of AMS technologies Ag, Martinsried / Munich,
                                                                                  germany
                                                                               •	 Member of the Supervisory Board of teragate Ag, Munich, germany

                              Anthony Maher        Munich, germany             •	 chairman of the Board of Directors of Broadlight, inc., Mountain View, california
                              Vice chairman                                    •	 chairman of the Board of Directors of Alvarion ltd., tel Aviv, israel
                                                                               •	 chairman of Board of Directors of xtellus, New Jersey, uSA
                                                                               •	 Member of the Board of Wavecom ltd., Paris, France
                                                                               •	 Member of the Board of Directors of Verivue, inc., Westford, Massachussetts, uSA

                              Edward glassmeyer    Darien, connecticut, uSA    •	 general Partner of Oak investment Partners, Westport, connecticut, uSA
                              (since January 23,                               •	 Member of the Board of Directors at cBOrD group, inc., ithaca, New york, uSA
                              2007)                                            •	 Member of the Board of Directors at Equaterra, inc., Houston, texas, uSA
                                                                               •	 Member of the Board of Directors at geotrace technologies, inc., Houston, texas,
                                                                                  uSA
                                                                               •	 Member of the Board of Directors at Major league gaming, inc., New york,
                                                                                  New york, uSA
                                                                               •	 Member of the Board of Directors at onegci, inc., Morristown, New Jersey, uSA
                                                                               •	 Member of the Board of Directors at xiotech corporation., Eden Prairie, Minnesota,
                                                                                  uSA

                              Bernd Jäger          Bonn, germany               •	 Managing Director of Dr. Jäger Beteiligungs gmbH, Bonn, germany
                                                                               •	 Managing Director of Dr. Jäger consulting gmbH, Bonn, germany


                              Eric Protiva         Atherton, california, uSA   •	 Managing Director of EgOrA Holding gmbH, Martinsried / Munich, germany
                                                                               •	 	
                                                                                  Member of the Supervisory Board of AMS technologies Ag, Martinsried / Munich,
                                                                                  germany
                                                                               •	 	
                                                                                  Member of the Supervisory Board of teragate Ag, Munich, germany
                                                                               •	 Member of the Board of Directors of Elforlight ltd., Daventry, united kingdom

                              thomas Smach         Manlius, New york, uSA      •	 Chief	Financial	Officer	at	Flextronics	International	Ltd.,	Singapore
                                                                               •	 Member of the Board of Directors of crocs inc., Niwot, colorado, uSA
                                                                               •	 Member of the Board of Directors of BMc Software, Houston, texas, uSA
                                                                               •	 Member of the Board of Directors for two subsidiaries of Flextronics international
                                                                                  ltd. in Stockholm, Sweden and Houston, texas, uSA




136
compensation of the management Board
                                                                                                                                                 WElcOME

the total Management Board compensation was Eur 1,797 thou-        the preliminary variable compensation relates to the performance-
sand in 2007 and Eur 1,558 thousand in 2006. this amount is ana-   based bonus for 2007, which was included in other liabilities at De-
lyzed across the individual Board members as follows:              cember 31, 2007. As of that date, there were no related amounts
                                                                   accrued for retired members of the Management Board.                         MANAgEMENt
                                                                                                                                                  BOArD

                                                   total   total   the two u.S. Management Board members newly appointed in 2007
 (in thousands of Eur)          fixed   Variable   2007    2006    qualify for sign-on bonuses of uSD 280 thousand (Jaswir Singh) and
                                                                   uSD 420 thousand (ron Martin), respectively, each of which are call-
 Brian Protiva                   262        128     390     503                                                                                 SuPErViSOry
                                                                   able pro rata temporis in case of contract termination within the               BOArD
 Chief	Executive	Officer
                                                                   first	18	months	of	their	tenures.	While	the	sign-on	bonus	for	Jas-
 Jürgen Hansjosten               196        116     312     402    wir Singh will only be paid out during 2008, the sign-on bonus for
 Deputy chief Executive                                            ron Martin was already fully paid out in 2007. the ron Martin bo-
 Officer	and	Chief	Operating	                                      nus fraction not yet expensed in 2007, uSD 408 thousand, is shown             cOrPOrAtE
                                                                                                                                                gOVErNANcE
 Officer                                                           as receivable in the group’s 2007 year-end balance sheet. No fur-
                                                                   ther loans or advance payments were granted to the members of
 Brian Mccann                    186         78     264     315    the Management Board.
 chief Marketing & Strategy
 Officer                                                           the group paid insurance premiums on behalf of members of the                  StOck

                                                                   Management Board totaling Eur 29 thousand and Eur 10 thousand
 Andreas rutsch                  198         98     296     338    in 2007 and 2006, respectively.
 Chief	Financial	Officer	
 (until December 31, 2007)                                                                                                                       iNVEStOr
                                                                                                                                                 rElAtiONS
 christoph glingener             199         94     293        -
 Chief	Technology	Officer	
 (since January 1, 2007)
                                                                                                                                                 BuSiNESS
 christian unterberger            50         40      90        -                                                                                 OVErViEW

 Chief	Sales	Officer	
 (since October 1, 2007)

 Jaswir Singh                     54         22      76        -                                                                                MANAgEMENt
 Chief	Financial	Officer                                                                                                                          rEPOrt

 (since November 7, 2007)

 ron Martin                       47         29      76        -
 chief Marketing & Strategy                                                                                                                      FiNANciAl
                                                                                                                                                StAtEMENtS
 Officer	(since	November	15,	
 2007)


                                                                                                                                                 ADDitiONAl
                                                                                                                                                iNFOrMAtiON




                                                                                                                                          137
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             At December 31, 2007, the members of the Management Board             the options to members of the Management Board were granted out
                             held the following shares and / or had been granted the following     of Plan ix. these option rights authorize the Management Board to
                             stock options:                                                        purchase the said number of common shares in the company once
                                                                                                   the qualifying period has elapsed.
                                                               shares          stock options
                                                                                                   the strike price for these option rights is Eur 3.55 for 490,000 op-
                                                            2007      2006      2007    2006       tions granted on July 1, 2003, Eur 7.24 for 210,000 options granted
                                                                                                   on October 1, 2006, and Eur 6.06 for 130.000 options granted on
                              Brian Protiva               294,030   294,030   270,000 270,000
                                                                                                   October 1, 2007, respectively. the fair value of the total of 830,000
                              Chief	Executive	Officer
                                                                                                   granted options is Eur 1,539 thousand and is expensed over the
                              Jürgen Hansjosten                0         0    170,000 170,000      vesting period of four years beginning at the grant date.
                              Deputy chief Executive
                              Officer	and	Chief	                                                   Additionally,	in	November	2007	two	new	Chief	Officers	have	been	
                              Operating	Officer                                                    granted 220,000 and 200,000 stock appreciation rights, which en-
                                                                                                   title to a cash settlement based on the stock price development.
                              Brian Mccann                164,018   164,018   130,000 130,000      the strike prices amount to Eur 5.88 and Eur 5.73 respectively.
                              chief Marketing &                                                    the fair value of the granted stock appreciation rights is Eur 356
                              Strategy	Officer                                                     thousand per December 31, 2007 and is expensed over the vesting
                                                                                                   period of four years beginning at the grant date. At every balance
                              Andreas rutsch                    -        0          - 133,333      sheet date the stock appreciation rights are reassessed based on
                              Chief	Financial	Officer	                                             the latest stock price development.
                              (until December 31,
                              2007)

                              christoph glingener              0          -   130,000          -
                              Chief	Technology	Officer	
                              (since January 1, 2007)



                              christian unterberger            0          -   130,000          -
                              Chief	Sales	Officer	
                              (since October 1, 2007)



                              Jaswir Singh                     0          -   220,000          -
                              Chief	Financial	Officer	
                              (since November 7,
                              2007)

                              ron Martin                       0          -   200,000          -
                              chief Marketing &
                              Strategy	Officer	(since	
                              November 15, 2007)




138
compensation of the supervisory Board
                                                                                                                                           WElcOME

compensation to be paid to the Supervisory Board for 2007 and      the group paid insurance premiums on behalf of members of the
2006 totaled Eur 358 thousand and Eur 138 thousand, respec-        Supervisory Board totaling Eur 17 thousand and Eur 14 thousand
tively. this amount breaks down across the individual Board mem-   in 2007 and 2006, respectively.
bers as follows:                                                                                                                          MANAgEMENt
                                                                                                                                            BOArD



                                                total    total
 (in thousands of Eur)       fixed   Variable   2007     2006
                                                                                                                                          SuPErViSOry
                                                                                                                                             BOArD
 Albert rädler                 80           0      80       35
 chairman

 Anthony Maher                 80           0      80       26
                                                                                                                                           cOrPOrAtE
 Vice chairman                                                                                                                            gOVErNANcE


 thomas Smach                  80           0      80       33
 Vice chairman

 David gudmundson                -          -       -        9                                                                              StOck

 (through August 31, 2006)



 Bernd Jäger                   40           0      40       20                                                                             iNVEStOr
                                                                                                                                           rElAtiONS


 Edward glassmeyer             38           0      38        -
 (since January 23, 2007)
                                                                                                                                           BuSiNESS
                                                                                                                                           OVErViEW

 Eric Protiva                  40           0      40       15


                                                                                                                                          MANAgEMENt
                                                                                                                                            rEPOrt




                                                                                                                                           FiNANciAl
                                                                                                                                          StAtEMENtS




                                                                                                                                           ADDitiONAl
                                                                                                                                          iNFOrMAtiON




                                                                                                                                    139
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS




                             At December 31, 2007, members of the Supervisory Board held          the outstanding options were granted at April 18, 2001. the strike
                             the following shares and / or had been granted the following con-    price for these options is Eur 7.05 and the total vesting period is
                             vertible bond rights:                                                seven years.


                                                       shares              convertible bonds
                                                    2007        2006       2007        2006

                              Albert rädler
                              chairman             156,297     146,297     20,000     20,000

                              Anthony Maher
                              Vice chairman          3,000       3,000            0           0

                              thomas Smach
                              Vice chairman                0           0          0           0

                              Bernd Jäger           10,000      10,000            0           0
                              Edward
                              glassmeyer
                              (since January 23,
                              2007)                        0           -          0           -

                              Eric Protiva         320,000     320,000     15,000     15,000




140
(39) Subsequent events
                                                                                                                                                       WElcOME

A	 lawsuit	 was	 filed	 against	 the	 Company	 after	 the	 balance	 sheet	   On March 5, 2008, Deutsche Boerse decided on the exclusion of
date.	 The	 Group	 does	 not	 expect	 any	 financial	 risks	 beyond	 the	    ADVA Optical Networking from the tecDAx equity index. this deci-
amount already accrued as at December 31, 2007.                              sion will become effective on March 25, 2008.
                                                                                                                                                      MANAgEMENt
                                                                                                                                                        BOArD
in December 2007, ADVA Optical Networking launched a restruc-
turing initiative, which will be implemented until Q3 2008. As a con-
sequence, the group’s headcount will be reduced by 7%, mainly
in the areas of r & D and operations, and select r & D sites will be                                                                                  SuPErViSOry
closed. ADVA Optical Networking expects one-off restructuring ex-                                                                                        BOArD
penses of around Eur 3 million between Q1 and Q3 2008, mainly
driven by severance payments and exit costs from real estate rental
contracts.
                                                                                                                                                       cOrPOrAtE
                                                                                                                                                      gOVErNANcE




                                                                                                                                                        StOck




                                                                                                                                                       iNVEStOr
                                                                                                                                                       rElAtiONS




                                                                                                                                                       BuSiNESS
                                                                                                                                                       OVErViEW




                                                                                                                                                      MANAgEMENt
                                                                                                                                                        rEPOrt




                                                                                                                                                       FiNANciAl
                                                                                                                                                      StAtEMENtS




                                                                                                                                                       ADDitiONAl
                                                                                                                                                      iNFOrMAtiON




                                                                                                                                                141
 NOtES tO tHE cONSOliDAtED
 FiNANciAl StAtEMENtS
 AFFirMAtiVE DEclArAtiON OF
 tHE MANAgEMENt BOArD




                              Declaration of compliance with the
                              german corporate governance code

                              Pursuant to Section 161 of the german Stock corporation law (Ak-
                              tiengesetz, Aktg), the Management Board and the Supervisory
                              Board have issued a declaration of compliance with the german
                              corporate governance code. this declaration is published on the
                              group’s website (www.advaoptical.com).

                              More details of corporate governance at ADVA Optical Networking
                              are provided in the “the stock and corporate governance” section
                              of this annual report.


                              Meiningen, March 11, 2008




                              Brian Protiva                    Jürgen Hansjosten




                              christoph glingener              ron Martin




                              Jaswir Singh                     christian unterberger




142
Affirmative declaration of the
                                                                                WElcOME
management Board

We, the members of the Management Board of ADVA Ag Optical
Networking,	to	the	best	of	our	knowledge	affirm	that,	in	accordance	           MANAgEMENt
                                                                                 BOArD
with the applicable reporting principles, the management report and
the	consolidated	financial	statements	of	the	ADVA	Optical	Network-
ing	Group	represent	a	true	and	fair	view	of	the	net	assets,	financial	
position	and	profitability	of	the	Group,	together	with	a	description	          SuPErViSOry
of the principal opportunities and risks associated with the expected             BOArD
development of the group.


Meiningen, March 11, 2008                                                       cOrPOrAtE
                                                                               gOVErNANcE




                                                                                 StOck

Brian Protiva                       Jürgen Hansjosten


                                                                                iNVEStOr
                                                                                rElAtiONS




                                                                                BuSiNESS
christoph glingener                 ron Martin                                  OVErViEW




                                                                               MANAgEMENt
                                                                                 rEPOrt




Jaswir Singh                        christian unterberger
                                                                                FiNANciAl
                                                                               StAtEMENtS




                                                                                ADDitiONAl
                                                                               iNFOrMAtiON




                                                                         143
 iNDEPENDENt AuDitOr’S
 OPiNiON




                         independent auditor’s opinion


                         The following independent auditor’s opinion is a mere convenience   We	have	issued	the	following	opinion	on	the	consolidated	financial	
                         translation from the German language and hence does not bear the    statements and the group management report:
                         auditor’s seal and signatures. The German language version of the
                         independent auditor’s opinion only refers to the German language    “We	have	audited	the	consolidated	financial	statements	prepared	
                         version of the consolidated 2007 IFRS financial statements and      by the ADVA Ag Optical Networking, Meiningen, comprising the
                         Group management report of ADVA AG Optical Networking.              balance sheet, the income statement, statement of changes in eq-
                                                                                             uity,	cash	flow	statement	and	the	notes	to	the	consolidated	finan-
                                                                                             cial statements, together with the group management report for
                                                                                             the	 fiscal	 year	 from	 January	 1,	 2007	 to	 December	 31,	 2007.	 The	
                                                                                             preparation	of	the	consolidated	financial	statements	and	the	group	
                                                                                             management report in accordance with iFrSs as adopted by the
                                                                                             Eu, and the additional requirements of german commercial law
                                                                                             pursuant to section 315a (1) HgB [‘Handelsgesetzbuch’: ‘german
                                                                                             commercial code’] are the responsibility of the parent company’s
                                                                                             management. Our responsibility is to express an opinion on the
                                                                                             consolidated	financial	statements	and	on	the	group	management	
                                                                                             report based on our audit.




144
                                                                                                                                                         WElcOME



We	conducted	our	audit	of	the	consolidated	financial	statements	in	       Our audit has not led to any reservations.
accordance with section 317 HgB and german generally accepted
standards	for	the	audit	of	financial	statements	promulgated	by	the	       In	our	opinion,	based	on	the	findings	of	our	audit,	the	consolidated	         MANAgEMENt
                                                                                                                                                          BOArD
institut der Wirtschaftsprüfer [institute of Public Auditors in ger-      financial	statements	comply	with	IFRSs	as	adopted	by	the	EU,	the	
many] (iDW). those standards require that we plan and perform             additional requirements of german commercial law pursuant to sec-
the audit such that misstatements materially affecting the presen-        tion 315a (1) HgB and give a true and fair view of the net assets,
tation	of	the	net	assets,	financial	position	and	results	of	operations	   financial	position	and	results	of	operations	of	the	Group	in	accor-           SuPErViSOry
in	the	consolidated	financial	statements	in	accordance	with	the	ap-       dance with these requirements. the group management report is                    BOArD
plicable	financial	 reporting	 framework	and	in	the	group	manage-         consistent	with	the	consolidated	financial	statements	and	as	a	whole	
ment report are detected with reasonable assurance. knowledge             provides a suitable view of the group’s position and suitably pres-
of the business activities and the economic and legal environment         ents the opportunities and risks of future development.”
of the group and expectations as to possible misstatements are                                                                                           cOrPOrAtE
                                                                                                                                                        gOVErNANcE
taken into account in the determination of audit procedures. the          Munich, March 13, 2008
effectiveness of the accounting-related internal control system and
the	evidence	supporting	the	disclosures	in	the	consolidated	finan-        Ernst & young Ag
cial statements and the group management report are examined              Wirtschaftsprüfungsgesellschaft
primarily on a test basis within the framework of the audit. the au-      Steuerberatungsgesellschaft                                                     StOck

dit	includes	assessing	the	annual	financial	statements	of	those	en-
tities included in consolidation, the determination of entities to be
included in consolidation, the accounting and consolidation princi-
ples	used	and	significant	estimates	made	by	management,	as	well	                                                                                         iNVEStOr
                                                                                                                                                         rElAtiONS
as	evaluating	the	overall	presentation	of	the	consolidated	financial	
statements and the group management report. We believe that our
audit provides a reasonable basis for our opinion.                        Walbröl                             Marxer
                                                                          Wirtschaftsprüfer                   Wirtschaftsprüfer                          BuSiNESS
                                                                          (German Public Auditor)             (German Public Auditor)                    OVErViEW




                                                                                                                                                        MANAgEMENt
                                                                                                                                                          rEPOrt




                                                                                                                                                         FiNANciAl
                                                                                                                                                        StAtEMENtS




                                                                                                                                                         ADDitiONAl
                                                                                                                                                        iNFOrMAtiON




                                                                                                                                                  145
additional
inFormation
                      QuArterly ifrs incOme stAtements 2005-2007
                                                                                                                                                                                                                           WElcOME

                                                      --------------------- 2005 ---------------------    --------------------- 2006 ---------------------     --------------------- 2007 ---------------------
                       (in thousands of Eur,
                       except earnings per share)           Q1           Q2            Q3           Q4           Q1           Q2           Q3           Q4          Q1*          Q2 *           Q3           Q4

                       revenues                         29.132       32.680       33.667       35.813       37.140       41.185       53.063       61.321       68.679        67.535       61.460       53.812            MANAgEMENt
                                                                                                                                                                                                                            BOArD
                       Pro forma
                                                       -14.566      -17.835       -17.146      -18.008      -19.385      -21.332      -31.986      -36.927      -41.025      -39.533       -34.468      -36.024
                       cost of goods sold

                       Pro forma gross profit           14.566       14.845       16.521       17.805       17.755       19.853       21.077       24.394       27.654        28.002       26.992       17.788
Pro forma
                                                                                                                                                                                                                          SuPErViSOry
financial	numbers	     Pro forma selling and                                                                                                                                                                                 BOArD
are calculated                                           -3.985       -4.840       -4.659        -5.279      -4.851       -7.207       -7.246        -7.946      -8.168        -8.409       -7.510        -9.537
                       marketing expenses
prior to non-cash
                       Pro forma general and ad-
charges related                                          -3.176       -4.060       -3.750        -4.576      -4.229       -4.695       -5.325        -5.222      -5.641        -6.794       -6.531        -7.095
                       ministrative expenses
to the stock
option programs        Pro forma research and                                                                                                                                                                              cOrPOrAtE
                                                         -3.399       -3.666       -3.960        -4.213      -4.893       -5.332       -8.483        -9.346     -10.101        -9.763      -10.743      -10.765
and amortization       development expenses                                                                                                                                                                               gOVErNANcE
and impairment
                       income from capitalization
of goodwill and        of development expenses,
acquisition-related    net of amortization for              608        1.521        1.463         1.239       1.879          866          805         1.083         816         1.853        1.735        -2.089
intangible assets      capitalized development
                       projects                                                                                                                                                                                             StOck

                       Other operating
                                                              0            0             0           89          27            9           83            66         110           336           69          -429
                       income (expenses), net
                       pro forma
                                                         4.614        3.800         5.615        5.065       5.688        3.494           911        3.029        4.670        5.225         4.012      -12.127
                       operating income
                                                                                                                                                                                                                           iNVEStOr
                                                                                                                                                                                                                           rElAtiONS
                       Amortization of intangible
                                                           -169         -176         -182          -187        -374         -461       -4.046        -1.800      -2.439        -2.439       -1.992      -10.438
                       assets from acquisitions

                       Stock compensation
                                                           -343         -317         -273          -265        -407         -408         -583        -4.128        -905          -888         -735          -658
                       expenses
                                                                                                                                                                                                                           BuSiNESS
                       Operating                                                                                                                                                                                           OVErViEW
                                                         4.102        3.307         5.160        4.613       4.907        2.625        -3.718       -2.899        1.326        1.898         1.285      -23.223
                       income (loss)
                       interest income
                                                              6          -50           38           -20         -56          -15         -209          -210        -206          -245         -210          -192
                       (expense), net
                       Other income                                                                                                                                                                                       MANAgEMENt
                                                             50          201           67           -70        -205         -442           -85         -711        -156          -427       -1.294           143
                       (expense), net                                                                                                                                                                                       rEPOrt

                       income (loss)
                                                         4.158        3.458         5.265        4.523       4.646        2.168        -4.012       -3.820          964        1.226          -219      -23.272
                       before tax
                       Income	tax	benefit	
                                                         -1.457         -980       -1.685        -1.408      -1.676         -794         -254        -6.601      -1.812          -939         -968        -4.435
                       (expense), net                                                                                                                                                                                      FiNANciAl
                                                                                                                                                                                                                          StAtEMENtS
                       net income (loss)                 2.701        2.478         3.580        3.115       2.970        1.374        -4.266      -10.421         -848          287        -1.187      -27.707

                       Earnings per share
                       in Eur
                                                                                                                                                                                                                           ADDitiONAl
                         basic                             0.08         0.07         0.10          0.09        0.08         0.04        -0.10         -0.23        -0.02         0.01         -0.03        -0.60          iNFOrMAtiON


                         diluted                           0.08         0.07         0.10          0.09        0.08         0.04         -0.10        -0.23        -0.02         0.01         -0.03        -0.60



                      *	 Pro	forma	cost	of	goods	sold	and	therefore	pro	forma	gross	profit,	pro	forma	operating	income	(loss),	operating	income	(loss),	income	(loss)	before	tax,	net	income	(loss)	and	earnings	
                         per share originally were stated incorrectly and are re-stated as corrected in the Nine-Month report 2007.
                                                                                                                                                                                                                    147
 Multi-yEAr OVErViEW
 1997-2007
 glOSSAry




                                  multi-yeAr OVerVieW 1997-2007
                                                                                                                                                                                                                                    change
                                   (in thousands of Eur,                                     1997               1998       1999        2000        2001        2002        2003       2004      2005          2006       2007        2007
                                   except stated otherwise)
                                                                                          u.S. gAAP       u.S. gAAP      u.S. gAAP   u.S. gAAP   u.S. gAAP   u.S. gAAP   u.S. gAAP      iFrS      iFrS          iFrS       iFrS    vs. 2006
                                   incOme stAtement
                                   revenues                                                   2.425             11.441     20.629      59.539      90.017      88.059      90.440    102.136   131.292       192.709    251.486      31%

                                   Pro forma cost of goods sold                              -2.440             -7.048     -11.665     -40.950     -56.144     -48.829     -45.517   -51.387   -67.555       -109.630   -151.050     38%

                                   Pro forma gross profit                                       -15              4.393      8.964      18.589      33.873      39.230      44.923     50.749    63.737        83.079    100.436      21%

                                   Pro forma general, administrative,
                                                                                               -119             -2.597      -5.431     -17.891     -25.296     -23.396     -23.460   -26.542   -34.325        -46.721    -59.685     28%
                                   selling and marketing expenses

        Pro forma numbers          Pro forma research and development expenses                 -240             -1.157      -2.674      -9.426     -14.211     -11.594     -12.026   -12.088   -15.238        -28.054    -41.372     47%

        are calculated prior       income from capitalization of development
        to non-cash charges        expenses, net of amortization for                               0                 0          0           0           0           0           0        736     4.831         4.633      2.315      -50%
                                   capitalized development projects
        related to the stock
                                   Other operating income (expenses), net                          0                 0          0           0           0           0           0          0        89           185         86      -54%
        option programs and
        amortization and           pro forma
                                                                                               -374               639         859      -8.728      -5.634       4.240       9.437     12.855    19.094        13.122      1.780     -86%
        impairment of goodwill     operating income (loss)

        and acquisition-related    Amortization of intangible assets from
                                                                                                   0                 0          0      -10.543     -21.492      -5.212      -4.636    -3.084      -714         -6.681    -10.727     61%
        intangible assets          acquisitions excluding goodwill

                                   impairment of goodwill                                          0                 0          0      -21.910     -35.035          0           0          0         0             0      -6.581        -

                                   Stock compensation expenses                                     0                 0      -5.636     -22.386     25.562         199       -1.071    -1.284    -1.198         -5.526     -3.186     -42%

                                   Operating income (loss)                                     -374               639      -4.777     -63.567     -36.599        -773       3.730      8.487    17.182           915    -18.714         -

                                   interest income (expense), net                              -138               -215        274          -36      -1.159      -1.047       -769       -192       -26          -490       -853      74%

                                   Other income (expense), net                                    68               172         66        -354        -764        -423        -484       -531       248         -1.443     -1.734     20%

                                   income (loss) before tax                                    -444               596      -4.437     -63.957     -38.522      -2.243       2.477      7.764    17.404        -1.018    -21.301    1.992%

                                   Income	tax	benefit	(expense),	net                               0               -75      -1.016       2.128       3.454       3.315       2.354      -537    -5.530         -9.325     -8.154     -13%

                                   loss from discontinued
                                                                                                   0                 0          0      -30.569     -81.286       -144          46          0         0             0          0         -
                                   operations, after tax

                                   cumulative effect of changes
                                                                                                   0                 0          0           0           0       -2.231          0          0         0             0          0         -
                                   in accounting principles

                                   net income (loss)                                           -444               521      -5.453     -92.398    -116.354      -1.303       4.877      7.227    11.874       -10.343    -29.455     185%

                                   Earnings per share in Eur

                                    basic                                                      -0.09              0.10       -0.22       -2.95       -3.57       -0.04        0.15      0.22      0.35          -0.26      -0.64     146%

                                    diluted                                                    -0.09              0.10       -0.22       -2.95       -3.57       -0.04        0.15      0.21      0.34          -0.26      -0.64     146%

                                   BAlAnce sHeet (as of December 31)
                                    cash and cash equivalents                                      3                84     16.433        2.356       7.417     14.586      18.819     24.054    27.657        32.181     41.576      29%

                                    inventories                                               1.723              1.921       7.041     25.175      15.758        9.951       8.561    12.964    14.373        42.034     31.029      -26%

                                      goodwill                                                     0                 0          0     104.417      10.592        9.738       8.955    11.046    11.704        24.247     20.006      -17%

                                      capitalized r&D expenses                                     0                 0          0           0           0           0           0        736     5.567        10.198     12.238      20%

                                      Other intangible assets                                   307                264         34      49.851      16.713        7.902       2.434     2.930     3.132   *    28.107     19.783      -30%

                                    total intangible assets                                     307                264         34     154.268      27.305      17.640      11.389     14.712    20.403   *    62.552     52.027      -17%

                                    Other assets                                                649              3.166     15.544      29.684      40.453      40.089      38.646     47.474    62.634   *    95.918     80.769      -16%

                                   total assets                                               2.682              5.435     39.052     211.483      90.933      82.266      77.415     99.204   125.067   *   232.685    205.401      -12%

                                   total stockholders’ equity                                   198                725     32.197     177.045      47.469      45.099      49.920     63.543    79.681   *   138.322    110.631      -20%

                                   cAsH flOW stAtement
                                   Cash	flow	from	operating	activities                            96             1.959      -7.322     -16.357      -4.853     15.801      14.523      6.590    13.526         -7.899    25.150         -

                                   capital expenditures
                                                                                               -351             -1.948      -1.169      -6.990      -5.185      -1.988      -2.528    -3.007    -5.008        -10.245     -8.378     -18%
                                   for property, plant and equipment

148                                emplOyees (as of December 31)                                  24                75        132         398         396         401         428        496       561           853      1.040     +22%

                                  * 2006 other intangible assets and stockholders' equity have been restated.
glOssAry
                                                                                                                                             WElcOME




Atm (Asynchronous transfer mode)                                      DWDm (Dense Wavelength Division multiplexing)
ATM	 is	 a	 network	 protocol	 which	 encodes	 data	 traffic	 into	   DWDM is a standardized WDM technology that uses up to                 MANAgEMENt
                                                                                                                                              BOArD
small	fixed	sized	cells	instead	of	variable-sized	packets,	as	        160 different wavelengths for data transmission over a sin-
in packet-switched networks like Ethernet.                            gle	fiber.	DWDM	uses	a	“dense”	wavelength	grid	which	re-
                                                                      quires high-precision optical components, maximizing the
                                                                      bandwidth	per	fiber.	See	also	CWDM	and	WDM.                           SuPErViSOry
carriers                                                                                                                                       BOArD
carriers in general are companies that build and maintain
communications networks for commercial use. Beyond in-                Dsl (Digital subscriber line)
cumbent telephony companies these also include new alter-             DSl is a technology that provides fast digital data transmis-
native carriers, which were established with the deregulation         sion over the copper wires of a local telephone network. the           cOrPOrAtE
                                                                                                                                            gOVErNANcE
of the telecommunications market, and special service pro-            advantage of DSl is that broadband services like fast inter-
viders, which offer outsourced services (software applica-            net access and internet television signals can be delivered
tions, data storage, etc.) for enterprise customers.                  over the same twisted pair of copper wires that was origi-
                                                                      nally deployed for phone service only.
                                                                                                                                              StOck

control plane
Within a network, the control plane manages the es-                   etherjack®
tablishment, maintenance and termination of connections               this innovative ADVA Optical Networking technology al-
and services.                                                         lows carriers to deploy differentiated Ethernet services by            iNVEStOr
                                                                                                                                             rElAtiONS
                                                                      providing	the	industry’s	first	intelligent	Ethernet	demarca-
                                                                      tion	point,	which	includes	service	definition	toward	the	end-
cWDm (coarse Wavelength Division multiplexing)                        user and end-to-end quality of service assurance across
cWDM is a standardized WDM technology that uses up to                 any network.
                                                                                                                                             BuSiNESS
20 different wavelengths for data transmission over a sin-                                                                                   OVErViEW
gle	fiber.	In	contrast	to	DWDM,	CWDM	uses	only	a	‘coarse’	
wavelength grid, so the underlying optical component tech-            ethernet
nology is simpler. this makes cWDM systems very cost-ef-              Ethernet is a packet-based data transmission protocol with
fective, but also limits them in terms of total capacity. See         a data rate of 10Mbit/s. Fast Ethernet provides a data rate           MANAgEMENt
                                                                                                                                              rEPOrt
also DWDM and WDM.                                                    of 100Mbit/s, gigabit Ethernet 1gbit/s and 10 gigabit Ether-
                                                                      net 10gbit/s.


                                                                                                                                             FiNANciAl
                                                                                                                                            StAtEMENtS




                                                                                                                                             ADDitiONAl
                                                                                                                                            iNFOrMAtiON




                                                                                                                                      149
 glOSSAry




            fsp (fiber service platform)                                      isO 9001 / isO 14001
            the Fiber Service Platform is ADVA Optical Networking’s           iSO 9001 and 14001 are two of a series of standards de-
            comprehensive portfolio of Optical+Ethernet networking            veloped and published by the international Organization for
            products optimized for carrier and enterprise networks in         Standardization.	These	standards	define,	establish	and	main-
            metropolitan and regional areas.                                  tain effective quality assurance (iSO 9001) and environmen-
                                                                              tal management systems (iSO 14001) for the manufacturing
                                                                              and service industries.
            gbit/s (gigabit per second)
            Bits are binary symbols of zero or one and are the standard
            unit by which data is stored and processed by computers.          mpls (multiprotocol label switching)
            “giga” stands for one billion (1,000,000,000). Bit/s is the ba-   MPlS enables packet-switched transmission of data packets
            sic unit of a data rate, which describes how many bits per        in	a	connection-less	network	along	a	pre-configured	path.	
            second are being transmitted. One gbit/s is therefore a data      this data-carrying mechanism is mostly used by carriers
            rate that transmits one billion bits of data per second.          with large transport networks and internet protocol-based
                                                                              voice and data services.

            gfp (generic framing procedure)
            gFP allows mapping of variable-length signals over a SONEt/       msO (multiple service Operator)
            SDH network. See also SONEt / SDH.                                the term MSO emerged in the 1990s, when cable television
                                                                              companies, in particular in the u.S., started to offer telecom
                                                                              services in addition to their traditional television and video
            GMPLS (Generalized Multiprotocol Label Switching)                 offerings. technically, most telecom service providers today
            gMPlS extends MPlS to provide the control plane (signal-          could be called multiservice operators, but the term MSO still
            ing and routing) for devices that switch data. this common        implies the historical roots in the cable television space.
            control	plane	simplifies	network	operation	and	management	
            by automating end-to-end provisioning of connections, man-
            aging network resources and providing the quality of ser-
            vice level that is expected in advanced applications. See
            also MPlS.




150
OAm & p (Operations, Administration,                                pOn (passive Optical network)
                                                                                                                                             WElcOME
maintenance & provisioning) capabilities                            PON	is	a	concept	for	fiber-based	access	networks.	Using	un-
capabilities which control and manage data transport in car-        powered optical splitters, a point-to-multipoint topology is
rier networks. Enhanced OAM & P capabilities facilitate spe-        set	up,	enabling	the	efficient	connection	of	multiple	customer	
cific	 service	 level	 agreements	 between	 carriers	 and	 their	   end points to one network node.
customers detailing data signal quality and speed.                                                                                          MANAgEMENt
                                                                                                                                              BOArD

                                                                    protocol
Oem (Original equipment manufacturer)                               A	protocol	defines	the	way	in	which	elements	in	networks	
OEM partners purchase products from other companies to              communicate with each other.                                            SuPErViSOry
fill	in	gaps	in	their	portfolio	to	offer	an	end-to-end	solution.	                                                                              BOArD
they typically re-label and market the products under their
own brand name.                                                     rAycontrol®
                                                                    this innovative ADVA Optical Networking gMPlS-based con-
                                                                    trol	plane	technology	greatly	simplifies	the	management	of	              cOrPOrAtE
                                                                                                                                            gOVErNANcE
Otn (Optical transport network)                                     optically	switched	networks	and	offers	unparalleled	flexibil-
OtN is an advanced transport network technology based on            ity in service delivery, protection and restoration capabili-
the OtH (Optical transport Hierarchy) standard. OtH is de-          ties. See also control plane and gMPlS.
fined	by	the	International	Telecommunication	Union	and	rep-
resents a further evolution of the well-established SONEt/                                                                                    StOck

SDH standard. See also SONEt/SDH.


                                                                                                                                             iNVEStOr
                                                                                                                                             rElAtiONS




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                                                                                                                                             OVErViEW




                                                                                                                                            MANAgEMENt
                                                                                                                                              rEPOrt




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                                                                                                                                            StAtEMENtS




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                                                                                                                                      151
 glOSSAry




            ROADM (Reconfigurable Optical Add / Drop multiplexing)        sOnet (synchronous Optical network) /
            rOADM is an innovative functionality in optical networks      sDH (synchronous Digital Hierarchy)
            which enables cost-effective switching of wavelengths.        SONEt and SDH are methods for communicating digital in-
                                                                          formation. these methods were developed to replace the Ple-
                                                                          siochronous Digital Hierarchy system for transporting large
            RoHS (Restriction of Hazardous Substances)                    amounts	of	telephone	and	data	traffic	and	to	allow	for	in-
            A directive issued by the European union regarding the re-    teroperability between equipment from different vendors.
            striction	of	specific	hazardous	substances	used	for	produc-   While SONEt is a u.S. standard, SDH is dominant in Europe
            tion and processing of electronic devices and components.     and also widely used in the rest of the world.


            sAn (storage Area network)                                    triple play services
            A SAN establishes direct connections between storage de-      triple play services refer to bundled offerings of data, voice
            vices and network servers, enabling such devices to be        and video services to end customers. these services may
            shared as peer resources and increasing the capacity and      include	Internet	use,	e-mail	traffic,	Internet	telephony,	In-
            performance of storage hardware.                              ternet television and video-on-demand.




152
umts (universal mobile telecommunications system)                 Weee (Waste electrical and electronic equipment)
                                                                                                                                          WElcOME
uMtS is one of the third-generation cell phone technolo-          A directive issued by the European union regarding the re-
gies that support high-bandwidth applications on mobile           turn and the recycling of waste electrical and electronic
devices.                                                          equipment.

                                                                                                                                         MANAgEMENt
                                                                                                                                           BOArD
VAr (Value Added reseller)                                        WimAX
VAr partners combine products from a number of different          (Worldwide interoperability for microwave Access)
vendors together with their own services to offer custom-         WiMAx is a technology enabling the delivery of last mile wire-
ers a complete and comprehensive solution (e.g., extension        less	broadband	access	as	an	alternative	to	fixed-line	tech-            SuPErViSOry
of	solution	offerings	for	specific	industries).                   nologies like cable and DSl. See also DSl.                                BOArD




WDm (Wavelength Division multiplexing)
WDM expands the capacity of networks by allowing a greater                                                                                cOrPOrAtE
                                                                                                                                         gOVErNANcE
number	of	signals	to	be	transmitted	over	a	single	fiber,	which	
occurs as numerous channels of data are multiplexed into
unique color bands, combined and transmitted over a single
fiber	and	de-multiplexed	at	the	other	end.
                                                                                                                                           StOck




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                                                                                                                                          rElAtiONS




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                                                                                                                                           rEPOrt




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                                                                                                                                   153
 cOrPOrAtE iNFOrMAtiON




                         cOrpOrAte infOrmAtiOn


                         corporate Headquarters                        ADVA Optical networking on the web
                         ADVA Ag Optical Networking                    More information about ADVA Optical Networking, including
                         campus Martinsried                            solutions, technologies and products, can be found on our
                         Fraunhoferstrasse 9 a                         website at www.advaoptical.com.
                         82152 Martinsried / Munich
                         germany                                       PDF	 files	 of	 this	 annual	 report,	 as	 well	 as	 quarterly	 re-
                                                                       ports, presentations and general investor information, are
                         t +49 89 89 06 65 0                           also located on our website and can be downloaded in both
                         info@advaoptical.com                          English and german. Quarterly conference calls are con-
                                                                       ducted on the day of earnings announcements via web-
                                                                       cast.	 Related	 PDF,	 audio	 and	 transcript	 files	 are	 available	
                         Registered head office                        for download in the investor relations section of our website,
                         Maerzenquelle 1-3                             www.advaoptical.com.
                         98617 Meiningen-Dreissigacker
                         germany

                         t +49 3693 450 0


                         Americas office
                         ADVA Optical Networking North America, inc.
                         One technology Parkway South
                         Norcross, georgia 30092
                         uSA

                         t +1 678 728 8600


                         Asia-Pacific office
                         ADVA Optical Networking (Shenzhen) ltd.
                         room 901-917, xi Hai Ming Zhu, Building F
                         taoyuan road
                         Nanshan District
                         Shenzhen 518059
                         china

                         t +86 755 8621 7400




154
                                                                                                                                  WElcOME




investor communication                                            Auditors
to receive an investor packet, request other information,         Ernst & young Ag Wirtschaftsprüfungsgesellschaft               MANAgEMENt
                                                                                                                                   BOArD
ask	specific	questions,	or	be	placed	on	the	distribution	list,	   Steuerberatungsgesellschaft, Munich, germany
please contact our investor relations team:

Wolfgang guessgen                                                 legal counsels                                                 SuPErViSOry
Director investor relations                                                                                                         BOArD
82152 Martinsried / Munich                                        •	 linklaters, Munich, germany
germany
t +49 89 89 06 65 940                                             •	 lovells, Munich, germany
                                                                                                                                  cOrPOrAtE
                                                                                                                                 gOVErNANcE
karin tovar
Manager investor relations
Mahwah, New Jersey 07495                                          tax advisers
uSA
t +1 201 258 8302                                                 •	 Deloitte, Munich, germany and Atlanta, georgia, uSA           StOck



investor-relations@advaoptical.com

                                                                                                                                  iNVEStOr
                                                                                                                                  rElAtiONS




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                                                                                                                                  OVErViEW




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                                                                                                                           155
www.advaoptical.com

								
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