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TMCNet:  EMCORE CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[December 13, 2012]

EMCORE CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included in Financial Statements and Supplementary Data under Item 8 within this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.



Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Risk Factors under Item IA .

Business Overview EMCORE Corporation and its subsidiaries (the "Company", "we", "our", or "EMCORE") offers a broad portfolio of compound semiconductor-based products for the broadband, fiber optics, satellite, and solar power markets. We were established in 1984 as a New Jersey corporation and we have two reporting segments: Fiber Optics and Photovoltaics. EMCORE's Fiber Optics business segment provides optical components, subsystems and systems for high-speed telecommunications, Cable Television (CATV) and Fiber-To-The-Premise (FTTP) networks, as well as products for satellite communications, video transport and specialty photonics technologies for defense and homeland security applications.

Solar Photovoltaics business segment provides products for space power applications including high-efficiency multi-junction solar cells, Covered Interconnect Cells (CICs) and complete satellite solar panels, and terrestrial applications, including high-efficiency GaAs solar cells for concentrating photovoltaic (CPV) power systems.

Our headquarters and principal executive offices are located at 10420 Research Road, SE, Albuquerque, New Mexico, 87123, and our main telephone number is (505) 332-5000. For specific information about us, our products, or the markets we serve, please visit our website at http://www.emcore.com. The information contained in or linked to our website is not a part of, nor incorporated by reference into, this Annual Report on Form 10-K or a part of any other report or filing with the Securities and Exchange Commission (SEC).

See Note 18 - Suncore Joint Venture in the notes to the consolidated financial statements for disclosures related to the definitive agreement which consolidated the Company's terrestrial CPV system engineering and development efforts into the Company's joint venture.

Impact from Thailand Flood In October 2011, we announced that flood waters had severely impacted the inventory and production operations of our primary contract manufacturer in Thailand. The impacted areas included certain product lines for the Telecom and Cable Television (CATV) market segments. This has had a significant impact on our operations and our ability to meet customer demand for certain of our fiber optics products in the near term. Our Photovoltaics segment was not affected by the Thailand floods.

Since that announcement, we have developed and implemented a plan to rebuild the impacted production lines at other locations, including an alternate facility of our contract manufacturer in Thailand, as well as our own manufacturing facilities in the United States and China. Our production line for ITLAs (Integrable Tunable Laser Assemblies) for 40 and 100 Gb/s (Gigabit per second) coherent telecom applications has been up and running since April 2012 at our contract manufacturer in Thailand. Production line qualification has been completed and most customers have successfully completed full-line audits and started taking shipments in April. As of September 2012, our ITLA line is operating at pre-flood capacity production levels. The CATV laser module and transmitter production lines at our manufacturing facility in China reached pre-flood capacity production levels as of September 2012. See Note 11 - Impact from Thailand Flood in the notes to the consolidated financial statements for additional disclosures related to the impact of the Thailand flood on our operations.

45-------------------------------------------------------------------------------- Table of Contents Sale of Fiber Optics-related Assets On March 27, 2012, we entered into a Master Purchase Agreement with a subsidiary of Sumitomo Electric Industries, LTD (SEI), pursuant to which we agreed to sell certain assets and transfer certain obligations associated with our Fiber Optics segment. On May 7, 2012, we completed the sale of these assets to SEI and recorded a gain of approximately $2.8 million. The assets sold included inventory, fixed assets, and intellectual property which enabled approximately $9.2 million of revenue from sales of datacom, parallel optical devices and EMCORE Connects Cable products during the fiscal year ended September 30, 2012.

Under the terms of the Master Purchase Agreement, we have agreed to indemnify SEI for up to $3.4 million of potential claims and expenses for the two-year period following the sale, and we have recorded this amount as a deferred gain on our balance sheet as of September 30, 2012 as a result of these contingencies. SEI paid $13.1 million in cash and deposited approximately $2.6 million into escrow as security for indemnification obligations and any purchase price adjustments. Payment of escrow amounts occurs over a two-year period and is subject to claim adjustments. In total, we have deferred approximately $4.9 million of the total paid by SEI as a gain on sale until the indemnification obligation of $3.4 million and purchase price adjustment contingencies are resolved. See Note 1 - Description of Business in the notes to the consolidated financial statements for additional disclosures related to this asset sale.

Critical Accounting Policies The preparation of consolidated financial statements in conformity with U.S.

GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. The accounting estimates that require our most significant, difficult, and/or subjective judgments include: • the valuation of inventory, goodwill, intangible assets, warrants, and stock-based compensation; • assessment of recovery of long-lived assets; • asset retirement obligations and litigation contingencies; • revenue recognition associated with the percentage of completion method; • the allowance for doubtful accounts and warranty accruals; and, • estimation of losses associated with the Thailand Flood.

We develop estimates based on historical experience and on various assumptions about the future that are believed to be reasonable based on the best information available to us. Our reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. A listing and description of our critical accounting policies includes the following: Accounts Receivable We regularly evaluate the collectability of our accounts receivable and maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to meet their financial obligations to us. The allowance is based on the age of receivables and a specific identification of receivables considered at risk of collection. We classify charges associated with the allowance for doubtful accounts as sales, general, and administrative expense. If the financial condition of our customers were to deteriorate, impacting their ability to pay us, additional allowances may be required. See Note 5 - Receivables in the notes to the consolidated financial statements for additional information related to our receivables.

46-------------------------------------------------------------------------------- Table of Contents Inventory Inventory is stated at the lower of cost or market, with cost being determined using the standard cost method that includes material, labor, and manufacturing overhead costs, which approximates weighted average cost. We write-down inventory once it has been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete based on our forecasted future revenue. The charge related to inventory write-downs is recorded as a cost of revenue. The majority of the inventory write-downs are related to estimated allowances for inventory whose carrying value is in excess of net realizable value and on excess raw material components resulting from finished product obsolescence. In most cases where we sell previously written down inventory, it is typically sold as a component part of a finished product. The finished product is sold at market price at the time resulting in higher average gross margin on such revenue. We do not track the selling price of individual raw material components that have been previously written down or written off, since such raw material components usually are only a portion of the finished products and related sales price. We evaluate inventory levels at least quarterly against sales forecasts on a significant part-by-part basis, in addition to determining its overall inventory risk. We have incurred, and may in the future incur charges to write-down our inventory. See Note 6 - Inventory, net in the notes to the consolidated financial statements for additional information related to our inventory.

Goodwill The Company's goodwill of approximately $20.4 million is associated with our Photovoltaics segment. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. As required by ASC 350, Intangibles - Goodwill and Other, we evaluate our goodwill for impairment on an annual basis, or whenever events or changes in circumstances indicate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Pursuant to ASC 350, circumstances that could trigger an interim impairment test include but are not limited to: • Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; • Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for an entity's products or services, or a regulatory or political development; • Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows; • Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; • Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation; • Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and, • If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers).

47-------------------------------------------------------------------------------- Table of Contents In performing goodwill impairment testing, we are able to review qualitative factors in accordance with ASU 2011-08 to determine if it is more likely than not that the fair value is less than the carrying value. If it is assessed that the fair value is more likely than not less than the carrying value, we then determine the fair value of each reporting unit using a weighted combination of a market-based approach and a discounted cash flow (DCF) approach. The market-based approach relies on values based on market multiples derived from comparable public companies. In applying the DCF approach, management forecasts cash flows over the remaining useful life of its primary asset using assumptions of current economic conditions and future expectations of earnings. This analysis requires the exercise of significant judgment, including judgments about appropriate discount rates based on the assessment of risks inherent in the amount and timing of projected future cash flows. The derived discount rate may fluctuate from period to period as it is based on external market conditions. All of these assumptions are critical to the estimate and can change from period to period. Updates to these assumptions in future periods, particularly changes in discount rates, could result in different results of goodwill impairment tests. See Note 8 - Goodwill in the notes to the consolidated financial statements for additional disclosures related to our goodwill.

Valuation of Long-lived Assets Long-lived assets consist primarily of property, plant, and equipment and intangible assets. Because most of our long-lived assets are subject to amortization, we review these assets for impairment in accordance with the provisions of ASC 360, Property, Plant, and Equipment. We review long-lived assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Our impairment testing of long-lived assets consists of determining whether the carrying amount of the long-lived asset (asset group) is recoverable, in other words, whether the sum of the future undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group) exceeds its carrying amount. The determination of the existence of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future results and cash flows related to an asset or group of assets. In making this determination, we use certain assumptions, including estimates of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, the length of service that assets will be used in our operations, and estimated salvage values. See Note 7 - Property, Plant, and Equipment , net and Note 9 - Intangible Assets in the notes to the consolidated financial statements for additional disclosures related to our long-lived assets.

Revenue Recognition Revenue is recognized upon shipment, provided persuasive evidence of a contract exists, the price is fixed, the product meets our customer's specifications, title and ownership have transferred to the customer, and there is reasonable assurance of collection of the sales proceeds. The majority of our products have shipping terms that are free on board or free carrier alongside (FCA) shipping point, which means that we fulfill our delivery obligation when the goods are handed over to the freight carrier at our shipping dock. This means the buyer typically bears all costs and risks of loss or damage to the goods from that point. In certain cases, we ship our products cost insurance and freight. Under this arrangement, revenue is recognized under FCA shipping point terms, but we pay (and invoice the customer) for the cost of shipping and insurance to the customer's designated location. We account for shipping and related transportation costs by recording the charges that are invoiced to customers as revenue, with the corresponding cost recorded as cost of revenue. In those instances where inventory is maintained at a consigned location, revenue is recognized only when our customer pulls product for use and after title and ownership has transferred to the customer. Revenue from time and material contracts is recognized at contractual rates as labor hours and direct expenses are incurred. Any warranty cost and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.

Distributors. We use a number of distributors around the world and recognize revenue upon shipment of product to these distributors. Title and risk of loss pass to the distributors upon shipment, and our distributors are contractually obligated to pay us on standard commercial terms, just like our other direct customers. We do not sell to our distributors on consignment and, except in the event of product discontinuance, do not give distributors a right of return.

Solar Panel Contracts. Pursuant to ASC 605-35, Revenue Recognition - Construction-Type and Production, we record revenue on long-term solar panel contracts using either the percentage-of-completion method or the completed contract method. In general, the performance of these types of contracts involves the design, development, and manufacture of complex aerospace or electronic equipment to our customer's specifications. The percentage-of-completion method is used in circumstances in which all the following conditions exist: 48-------------------------------------------------------------------------------- Table of Contents • the contract includes enforceable rights regarding goods or services to be provided to the customer, the consideration to be exchanged, and the manner and terms of settlement; • both the Company and the customer are expected to satisfy all of the contractual obligations; and, • reasonably reliable estimates of total revenue, total cost, and the progress towards completion can be made.

The percentage-of-completion method recognizes estimates for contract revenue and costs in progress as work on the contract continues. Estimates are revised as additional information becomes available. If estimates of costs to complete a contract indicate a loss, a provision is made at that time for the total loss anticipated on the contract.

We use the completed contract method if reasonably dependable estimates cannot be made or for which inherent hazards make estimates doubtful. Under the completed contract method, contract revenue and costs in progress are deferred as work on the contract continues. If a loss becomes evident on the contract, a provision is made at that time for the total loss anticipated on the contract.

Total contract revenue and related costs are recognized upon the completion of the contract.

Government Research and Development Contracts. Revenue from research and development contracts represents reimbursement by various U.S. government entities, or their contractors, to aid in the development of new technology. The applicable contracts generally provide that we may elect to retain ownership of inventions made in performing the work, subject to a non-exclusive license retained by the U.S. government to practice the inventions for governmental purposes. The research and development contract funding may be based on a cost-plus, cost reimbursement, or a firm fixed price arrangement. The amount of funding under each research and development contract is determined based on cost estimates that include both direct and indirect costs. Cost-plus funding is determined based on actual costs plus a set margin. As we incur costs under cost reimbursement type contracts, revenue is recorded. Contract costs include material, labor, special tooling and test equipment, subcontracting costs, as well as an allocation of indirect costs. A research and development contract is considered complete when all significant costs have been incurred, milestones have been reached, and any reporting obligations to the customer have been met.

These contracts may be modified or terminated at the convenience of the U.S.

government and may be subject to governmental budgetary fluctuations.

We also participate in cost-sharing research and development arrangements. Under such arrangements in which the actual costs of performance are split between the U.S. government and us on a best efforts basis, no revenue is recorded and our research and development expense is reduced for the amount of the cost-sharing receipts.

Multiple-Element Arrangements. Contracts with our customers usually relate to either the delivery of product or the completion of technology or engineering research and development contracts. In a very limited number of cases, a research contract may involve the creation and delivery of a customer-designed product sample based upon the research and development efforts completed.

Pursuant to ASC 605-25-25-5, Revenue Recognition - Multiple-Element Arrangements, we have concluded that product revenue should not be considered a unit of accounting separate from the service revenue for these types of research contracts.

Contract Manufacturers. In our Fiber Optics segment, prior to certain customers accepting product that is manufactured at one of our contract manufacturers, these customers require that they first qualify the product and manufacturing processes at our contract manufacturer. The customers' qualification process determines whether the product manufactured at our contract manufacturer achieves their quality, performance, and reliability standards. After a customer completes the initial qualification process, we receive approval to ship qualified product to that customer. As part of the manufacturing process at our contract manufacturers, the finished product is tested prior to shipment to the customer using the same criteria that our customer uses to test product it receives. Revenue is recognized upon shipment of customer-qualified product, provided persuasive evidence of a contract exists, the price is fixed, the product meets our customer's specifications, title and ownership have transferred to the customer, and there is reasonable assurance of collection of the sales proceeds.

49-------------------------------------------------------------------------------- Table of Contents Product Warranty Reserves We provide our customers with limited rights of return for non-conforming shipments and warranty claims for certain products. Pursuant to ASC 450, Contingencies, we make estimates of product warranty expense using historical experience rates as a percentage of revenue and/or costs of revenue and accrue estimated warranty expense as a cost of revenue. We estimate the costs of our warranty obligations based on historical experience of known product failure rates and anticipated rates if warranty claims, use of materials to repair or replace defective products, and service delivery costs incurred in correcting product issues. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than needed, we may reverse a portion of such provisions in future periods. See Note 10 - Accrued Expenses and Other Current Liabilities in the notes to the consolidated financial statements for additional disclosures related to our product warranty reserves.

Stock-Based Compensation Stock-based compensation expense is measured at the stock option grant date, based on the fair value of the award, and is recorded to cost of sales, sales, general, and administrative, and research and development expense based on an employee's responsibility and function over the requisite service period. We use the Black-Scholes option-pricing model and the straight-line attribution approach to determine the fair value of stock-based awards in accordance with ASC 718, Compensation. This option-pricing model requires the input of highly subjective assumptions, including the option's expected life, the price volatility of the underlying stock, and expected forfeitures. Expected term represents the period that stock-based awards are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. The expected stock price volatility is based on our historical stock prices. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If we use different assumptions for estimating stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change in our non-cash stock-based compensation expense could adversely affect our results of operations. See Note 16 - Equity in the notes to the consolidated financial statements for additional disclosures related to our stock-based compensation.

Litigation Contingencies We are subject to various legal proceedings, claims, and litigation, either asserted or unasserted that arise in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect the resolution of these matters will have a material adverse effect on our business, financial position, results of operations, or cash flows. However, the results of these matters cannot be predicted with certainty. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially affected. See Note 15 - Commitments and Contingencies in the notes to our consolidated financial statements for disclosures related to our legal proceedings.

Warrant Valuation As of September 30, 2012 and 2011, warrants representing 750,011 shares of our common stock were outstanding. All of our warrants are classified as a liability since the warrants meet the classification requirements for liability accounting pursuant to ASC 815, Derivatives and Hedging. Each quarter, we expect an impact on our statement of operations when we record the change in fair value of our outstanding warrants using the Monte Carlo option valuation model. The Monte Carlo option valuation model is used since it allows the valuation of each warrant to factor in the value associated with our right to affect a mandatory exercise of each warrant. The valuation model requires the input of highly subjective assumptions, including the warrant's expected life and the price volatility of the underlying stock. The change in the fair value of the warrants is primarily due to the change in the closing price of our common stock. See Note 4 - Fair Value Accounting in the notes to the consolidated financial statements for additional disclosures related to our valuation of our outstanding warrants.

50 -------------------------------------------------------------------------------- Table of Contents Asset Retirement Obligations Pursuant to ASC 410, Asset Retirement and Environmental Obligations, an asset retirement obligation is recorded when there is a legal obligation associated with the retirement of a tangible long-lived asset and the fair value of the liability can reasonably be estimated. Upon initial recognition of an asset retirement obligation, a company increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the liabilities are accreted for the change in their present value through charges to operations costs. The initial capitalized costs are depleted over the useful lives of the related assets through charges to depreciation, depletion, and/or amortization.

If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated timing of settling asset retirement obligations.

We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future. During the three months ended September 30, 2011, we completed a review of our asset retirement and environmental obligations and we recorded an asset retirement obligation with an offset to fixed assets totaling $4.8 million. See Note 15 - Commitments and Contingencies in the notes to the consolidated financial statements for additional disclosures related to our asset retirement obligations.

Insurance Recoveries Insurance recoveries related to impairment losses previously recorded and other recoverable expenses will be recognized up to the amount of our related loss or expense in the period that recoveries become realizable. Insurance recoveries under business interruption coverage and insurance gains in excess of amounts previously written off related to impaired inventory and equipment or in excess of other recoverable expenses previously recognized will be recognized when they become realizable and all contingencies have been resolved. The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates. As of September 30, 2012, we have not recorded any estimated amounts relating to potential future insurance recoveries in our consolidated statement of operations.

*** The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, U.S. GAAP specifically dictates the accounting treatment of a particular transaction. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. For a complete discussion of our accounting policies, recently adopted accounting pronouncements, and other required U.S.

GAAP disclosures, we refer you to the accompanying footnotes to our consolidated financial statements in this Annual Report.

51-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue.

For the Fiscal Years Ended September 30, 2012 2011 2010 Revenue 100.0 % 100.0 % 100.0 % Cost of revenue 89.1 78.7 73.5 Gross profit 10.9 21.3 26.5 Operating expense (income): Selling, general, and administrative 21.3 17.7 22.3 Research and development 13.6 16.4 15.4 Impairment 0.9 4.0 - Litigation settlements, net 0.6 (0.6 ) - Flood-related loss 3.4 - - Flood-related insurance proceeds (5.5 ) - - Gain on sale of assets (1.7 ) - - Total operating expense 32.6 37.5 37.7 Operating loss (21.7 ) (16.2 ) (11.2 ) Other income (expense): Interest expense, net (0.4 ) (0.3 ) (0.2 ) Foreign exchange gain (loss) - 0.4 (0.5 ) Loss from equity method investment (0.8 ) (0.9 ) - Change in fair value of financial instruments - - (0.3 ) Other expense - - (0.2 ) Total other income (expense) (1.2 ) (0.8 ) (1.2 ) Loss before income tax expense (22.9 ) (17.0 ) (12.4 ) Foreign income tax expense on capital distributions (1.0 ) - - Net loss (23.9 )% (17.0 )% (12.4 )% 52-------------------------------------------------------------------------------- Table of Contents Comparison of financial results: Revenue: (in thousands, except Fiscal 2011 vs Fiscal percentages) For the Fiscal Years Ended September 30, Fiscal 2012 vs Fiscal 2011 2010 2012 2011 2010 $ Change % Change $ Change % Change Fiber Optics revenue $ 96,153 $ 125,659 $ 121,724 $ (29,506 ) (23.5)% $ 3,935 3.2% Photovoltaics revenue 67,628 75,269 69,554 (7,641 ) (10.2)% 5,715 8.2% Total revenue $ 163,781 $ 200,928 $ 191,278 $ (37,147 ) (18.5)% $ 9,650 5.0% Fiber Optics Revenue Our Fiber Optics reporting segment provides optical components, subsystems, and systems for high-speed telecommunications, cable television (CATV), and fiber-to-the-premise (FTTP) networks, as well as products for satellite communications, video transport, and specialty photonics technologies for defense and homeland security applications. Our Fiber Optics segment is broken out into two distinct product lines: • Broadband products, which includes cable television products, fiber-to-the-premises products, satellite communication products, and defense and homeland security products; and, • Digital products, which include telecom optical products.

Broadband product revenue: • For the fiscal year ended September 30, 2012, revenue from broadband products decreased 27% from the prior year which was primarily driven by decreased unit shipments of our CATV-related products primarily due to the impact of the Thailand flood.

• Fiscal 2011 revenue from broadband products increased approximately 12% from fiscal 2010 which was primarily driven by increased unit shipments of our CATV and video transport products. The increase in CATV unit shipments was primarily driven by our quadrature amplitude modulation (QAM) transmitters and receivers.

Digital product revenue: • Fiscal 2012 revenue from digital products decreased 32% from the prior year which was primarily due to the impact of the Thailand flood on the telecom product lines. Our enterprise digital product lines were sold to SEI in May 2012.

• Fiscal 2011 revenue from digital products decreased approximately 8% from fiscal 2010 which was primarily due to a reduction of approximately $13.7 million of revenue associated with sales of parallel optics device products primarily as a result of the U.S. International Trade Commission (ITC) ruling. See Note 15 - Commitments and Contingencies in the notes to the consolidated financial statements for additional information related to the ITC ruling. This was partially offset by increased shipments of telecom optical-related products, which includes tunable XFP, tunable 300-pin transponders, and integrated tunable laser assemblies (ITLAs), when compared to fiscal 2010. Our telecom optical-related product line represents the second largest percentage of our total fiber optics-related revenue.

Our Fiber Optics segment accounted for 59%, 63% and 64% of our consolidated revenue for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

53 -------------------------------------------------------------------------------- Table of Contents Photovoltaics Revenue: Our Photovoltaics reporting segment provides products for both space and terrestrial solar power applications. For space solar power applications, we offer high-efficiency multi-junction solar cells, covered interconnect cells (CICs), and complete satellite solar panels. For terrestrial powers applications, we offer high-efficiency GaAs solar cells fro concentrating photovoltaic (CPV) power systems.

For the fiscal year ended September 30, 2012, revenue from satellite applications decreased approximately 9% from the prior year. The decrease was primarily driven by lower volume sales of space solar cell CIC products. Sales of our satellite solar cells and CICs products represents the largest percentage of our total photovoltaics-related revenue. Historically, our Photovoltaics revenue has fluctuated significantly due to timing of program completions and product shipments of major orders. Revenue from our terrestrial-related products was not significant as a percentage of total photovoltaics-related revenue.

Our Photovoltaics segment accounted for 41%, 37% and 36% of our consolidated revenue for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Gross Profit: (in thousands, except For the Fiscal Years Ended percentages) September 30, Fiscal 2012 vs Fiscal 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change Fiber Optics gross profit (loss) $ 4,322 $ 23,221 $ 28,174 $ (18,899 ) (81.4)% $ (4,953 ) 17.6% Photovoltaics gross profit 13,504 19,542 22,487 (6,038 ) (30.9)% (2,945 ) (13.1)% Total gross profit (loss) $ 17,826 $ 42,763 $ 50,661 $ (24,937 ) (58.3)% $ (7,898 ) 15.6% Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue, as a percentage of revenue, has fluctuated largely due to inventory and product warranty charges. Our gross margins are also affected by product mix, manufacturing yields and volumes, and timing related to the completion of long-term contracts.

Consolidated gross margins were 10.9%, 21.3% and 26.5% for the fiscal year ended September 30, 2012, 2011 and 2010, respectively.

Stock-based compensation expense within cost of revenue totaled approximately $1.6 million, $1.4 million and $2.1 million during the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Fiber Optics Gross Profit: Fiber Optics gross margin was 4.5%, 18.5% and 23.1% during the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Inventory excess and obsolescence expense totaled approximately $5.7 million, $4.2 million and $3.4 million during the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Instead of completely rebuilding all flood-damaged manufacturing lines in Thailand, management has decided to realign the Company's fiber optics product portfolio and focus on business areas with strong technology differentiation and growth opportunities. Management identified certain inventory on order related to manufacturing product lines that were destroyed by the Thailand flood and will not be replaced. This expense, which totaled $1.6 million for the fiscal year ended September 30, 2012, was recorded within cost of revenue on our statement of operations and comprehensive loss.

54-------------------------------------------------------------------------------- Table of Contents For the fiscal year ended September 30, 2012, gross margins decreased from both our broadband and digital product lines when compared to the prior year. During the period, lower revenues due to the impact from the Thailand flood resulted in higher manufacturing overhead as a percentage of revenue. Manufacturing of certain fiber optics-related components was moved to Company-owned facilities which involved higher labor and other related costs. In fiscal 2011, gross margins decreased from both our broadband and digital product lines when compared to fiscal 2010 primarily due to an increase in expense associated with excess and obsolete inventories.

Photovoltaics Gross Profit: Photovoltaics gross margin was 20.0%, 26.0% and 32.3% for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

For the fiscal year ended September 30, 2012, gross margins decreased from our satellite application product lines when compared to the prior year primarily due to lower revenues with unfavorable product mix changes, as well as lower manufacturing yields. In fiscal 2011, gross margins decreased from our satellite application product lines when compared to fiscal 2010 primarily due to product mix and lower manufacturing yields.

Sales, General and Administrative (SG&A): (in thousands, except For the Fiscal Years Ended Fiscal 2012 vs Fiscal percentages) September 30, 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change SG&A expense $ 34,861 $ 35,582 $ 42,549 $ (721 ) (2.0)% $ (6,967 ) (16.4)% SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, amortization expense on intangible assets, legal and patent-related costs, and other corporate-related expenses.

Stock-based compensation expense within SG&A totaled approximately $3.9 million, $3.9 million and $5.9 million during the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

The decrease in SG&A expense for the fiscal year ended September 30, 2012 when compared to the prior year was attributable to cost reduction measures implemented which include a reduction of discretionary spending on staffing and infrastructure and due to the sale of our vertical cavity surface emitting lasers (VCSEL)-based and enterprise-related product lines in May 2012.

The decrease in SG&A expense in fiscal 2011 when compared to fiscal 2010 is attributable to less accounts receivable reserves and corporate charges incurred during the period. In fiscal 2011, we recorded approximately $30,000 related to accounts receivable reserves. During fiscal 2010, we recorded a $2.4 million reserve on accounts receivable related to a solar power system contract and we also incurred a $2.8 million termination fee related to a then-planned joint venture. In fiscal 2011 and 2010, we incurred $0.6 million and $4.7 million related to legal expenses associated with certain patent and other litigation, excluding legal settlement amounts discussed below.

As a percentage of revenue, SG&A expenses were 21.3%, 17.7% and 22.3% for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Research and Development (R&D): (in thousands, except For the Fiscal Years Ended Fiscal 2011 vs Fiscal percentages) September 30, Fiscal 2012 vs Fiscal 2011 2010 2012 2011 2010 $ Change % Change $ Change % Change R&D expense $ 22,338 $ 32,853 $ 29,538 $ (10,515 ) (32.0)% $ 3,315 11.2% 55-------------------------------------------------------------------------------- Table of Contents R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.

Stock-based compensation expense within R&D totaled $2.3 million, $2.1 million and $1.9 million during the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

The decrease in R&D expense for the fiscal year ended September 30, 2012 when compared to the prior year was attributable to cost reduction measures discussed above, as well as lower expense incurred related to our development of our TXFP transceiver when compared to the prior year, and due to the sale of our vertical cavity surface emitting lasers (VCSEL)-based and enterprise-related product lines in May 2012. In August 2011, we signed a solar rooftop CPV development agreement with our Suncore joint venture pursuant to which we collaborated on the development and application of the current 500X and next-generation 1000X rooftop CPV systems. With the sale of the product lines to Suncore in September 2012, we will no longer be collaborating on these efforts. During the fiscal year ended September 30, 2012, we billed Suncore approximately $1.0 million for research and developments costs incurred.

The increase in R&D expense in fiscal 2011 when compared to fiscal 2010 is attributable to higher expenses incurred related to our development of our tunable XFP (TXFP) transceiver in our Fiber Optics segment and increased R&D expense incurred in our Photovoltaics segment related to our acquisition of Soliant Energy which was completed in March 2011.

As a percentage of revenue, R&D expenses were 13.6%, 16.4% and 15.4% for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Other Operating Expense (Income): (in thousands, except For the Fiscal Years Ended September percentages) 30, Fiscal 2012 vs Fiscal 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change Impairment $ 1,425 $ 8,000 $ - $ (6,575 ) (82.2)% $ 8,000 N/A Litigation settlements, net $ 1,050 $ (1,145 ) $ - $ 2,195 (191.7)% $ (1,145 ) N/A Flood-related loss $ 5,519 $ - $ - $ 5,519 N/A $ - N/A Flood-related insurance proceeds $ (9,000 ) $ - $ - $ (9,000 ) N/A $ - N/A Gain on sale of assets $ (2,742 ) $ - $ - $ (2,742 ) N/A $ - N/A Impairment: As of June 30, 2012, we performed an evaluation of an asset group within our Photovoltaics segment for impairment of long-lived assets. The impairment test was triggered by a determination that it was more likely than not those assets would be sold or otherwise disposed of before the end of their previously estimated useful lives. As a result of the evaluation, we determined that impairment existed and a charge of approximately $1.4 million was recorded to write down the long-lived assets to an estimated fair value. Of the total impairment charge, approximately $1.1 million related to equipment and $0.3 million related to intangible assets. See Note 18 - Suncore Joint Venture in the notes to the consolidated financial statements for disclosures related to the recently signed definitive agreement which will consolidate the Company's terrestrial CPV system engineering and development efforts into the Company's joint venture.

As of September 30, 2011, we performed an impairment test of long-lived assets associated with our digital fiber optics product lines. The impairment test was triggered by a change in long-term financial and cash flow forecasts. The changes in financial and cash forecasts were not a result of the flooding in Thailand. The financial impact from this natural disaster was considered a fiscal year 2012 event. As a result of our evaluation we determined that impairment existed and a charge of $8.0 million was recorded to write down long-lived assets to an estimated fair value which was determined using both the guideline public company valuation method and the discounted cash flow method.

See Note 9 - Intangible Assets in the notes to the consolidated financial statements for additional information related to this impairment charge.

56-------------------------------------------------------------------------------- Table of Contents Litigation Settlements, net: In May 2012, we reached a confidential settlement regarding certain outstanding litigation in exchange for a release of all related claims. The settlement resulted in a charge of approximately $1.0 million in our statement of operations and comprehensive loss and was paid during the three months ended June 30, 2012.

In March 2011, we received a cash payment of approximately $2.6 million in satisfaction of a judgment for damages, net of legal fees which were incurred on a contingency basis, associated with a lawsuit against Optium Corporation, currently part of Finisar Corporation, for patent infringement of certain patents related to our Fiber Optics segment. In June 2011, we recorded $1.5 million for legal settlements considered probable, which was later settled in September 2011 and paid in October 2011 for the amount accrued.

Flood-related Loss (Recovery): During the fiscal year 2012, we recorded estimated flood-related losses associated with damaged inventory and equipment of approximately $3.7 million and $1.8 million, respectively. We continue to evaluate our estimates of flood-related losses, and in future quarters we may record additional adjustments for damaged inventory and equipment. See Note 11 - Impact from Thailand Flood in the notes to the consolidated financial statements for additional disclosures related to the impact of the Thailand flood on our operations.

Flood-related Insurance Proceeds: We claimed damages and received proceeds of $5.0 million under our own comprehensive insurance policy relating to business interruption and we recorded this amount as flood-related insurance proceeds during the fiscal year 2012. No additional business interruption insurance proceeds associated with this event are anticipated. In September 2012, we received flood recoveries of $4.0 million from our contract manufacturer. We expect to receive an additional $6 million in cash proceeds as well as liability offsets of approximately $13 million by March 31, 2013 to cover the direct damages to our assets that were impacted by the flood. Flood recoveries related to inventory and equipment destroyed by the Thailand flood will be recognized when they become realized. We were not a named beneficiary of our contract manufacturer's insurance policy.

Gain from sale of assets: On March 27, 2012, we entered into a Master Purchase Agreement with a subsidiary of Sumitomo Electric Industries, LTD (SEI), pursuant to which we agreed to sell certain assets and transfer certain obligations associated with our Fiber Optics segment. On May 7, 2012, we completed the sale of these assets to SEI and recorded a gain of approximately $2.8 million. Under the terms of the Master Purchase Agreement, we agreed to indemnify SEI for up to $3.4 million of potential claims and expenses for the two-year period following the sale and we have recorded this amount as a deferred gain on our balance sheet as of September 30, 2012 as a result of these contingencies. SEI paid $13.1 million in cash and deposited approximately $2.6 million into escrow as security for indemnification obligations and any purchase price adjustments.

Payment of escrow amounts occurs over a two-year period and is subject to claim adjustments. We deferred approximately $4.9 million of the gain on sale until the indemnification obligation and purchase price adjustment contingencies are resolved. See Note 1 - Description of Business in the notes to the consolidated financial statements for additional disclosures related to this asset sale.

Operating Loss: (in thousands, except percentages) For the Fiscal Years Ended September 30, Fiscal 2012 vs Fiscal 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change Fiber Optics operating loss $ (26,684 ) $ (30,276 ) $ (19,888 ) $ 3,592 11.9% $ (10,388 ) (52.2)% Photovoltaics operating loss (8,941 ) (2,251 ) (1,538 ) (6,690 ) (297.2)% (713 ) (46.4)% Total operating loss $ (35,625 ) $ (32,527 ) $ (21,426 ) $ (3,098 ) (9.5)% $ (11,101 ) (51.8)% Income (loss) from operations represents revenue less the cost of revenue and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared service departments. Income (loss) from operations is a measure of profit and loss that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating loss was (21.7)%, (16.2)% and (11.2)% for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

57-------------------------------------------------------------------------------- Table of Contents Other Income (Expense): (in thousands, except Fiscal 2011 vs Fiscal percentages) For the Fiscal Years Ended September 30, Fiscal 2012 vs Fiscal 2011 2010 2012 2011 2010 $ Change % Change $ Change % Change Interest expense, net $ (677 ) $ (640 ) $ (415 ) $ (37 ) (5.8)% (225 ) (54.2)% Foreign exchange gain (loss) 45 735 (1,008 ) (690 ) (93.9)% 1,743 172.9% Loss from equity method investment (1,201 ) (1,842 ) - 641 (34.8)% (1,842 ) N/A Change in fair value of financial instruments (69 ) 70 (475 ) (139 ) (198.6)% 545 114.7% Other expense - (15 ) (370 ) 15 (100.0)% 355 95.9% Total other expense $ (1,902 ) $ (1,692 ) $ (2,268 ) $ (210 ) 12.4% $ 576 25.4% Foreign Exchange We recognize gains and losses due to the effect of exchange rate changes on foreign currency primarily due to our operations in Spain, the Netherlands, and in China. The assets and liabilities of our foreign operations are translated from their respective functional currencies into U.S. dollars at the rates in effect at the consolidated balance sheet dates, and the revenue and expense amounts are translated at the average rate during the applicable periods reflected on the consolidated statements of operations and comprehensive loss.

Foreign currency translation adjustments are recorded as accumulated other comprehensive income. Gains and losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive loss. A majority of the gain or losses recorded relates to the change in value of the euro and yuan renminbi relative to the U.S. dollar.

Loss from Equity Method Investment We entered into a joint venture agreement in fiscal 2010 with San'an Optoelectronics Co., Ltd. (San'an) for the purpose of engaging in the development, manufacturing, and distribution of CPV receivers, modules, and systems for terrestrial solar power applications under a technology license from us. The joint venture, Suncore Photovoltaic Technology Co., Ltd. (Suncore) was established in January 2011. We have accounted for our investment in Suncore using the equity method of accounting. Pursuant to the joint venture agreement, San'an and EMCORE share the profits, losses, and risks of Suncore in proportion to and, in the event of losses, to the extent of their respective contributions to the registered capital of Suncore. We continue to hold a 40% registered ownership in Suncore and we recorded a loss associated with our Suncore joint venture totaling $1.2 million for the fiscal year ended September 30, 2012. As of September 30, 2012, our cumulative proportionate loss in Suncore has exceeded our net investment in Suncore by approximately $3.1 million. Pursuant to ASC 323-10, Investments-Equity Method and Joint Ventures - Overall, we stopped recording our proportionate share of Suncore's loss after our investment declined to a zero value since we have no obligation or intent to fund the deficit balance. We will resume applying the equity method only after our share of net income in Suncore equals the share of net losses not recognized during the period we suspended using the equity method. See Note 18 - Suncore Joint Venture in the notes to the consolidated financial statements for additional information related to our Suncore joint venture.

Change in Fair Value of Financial Instruments As of September 30, 2012 and September 30, 2011, warrants representing 750,011 shares of our common stock were outstanding.

All of our warrants meet the classification requirements for liability accounting pursuant to ASC 815, Derivatives and Hedging. Each quarter, we expect an impact on our statement of operations and comprehensive loss when we record the change in fair value of our outstanding warrants using the Monte Carlo option valuation model. The Monte Carlo option valuation model is used since it allows the valuation of each warrant to factor in the value associated with our right to affect a mandatory exercise of each warrant. The valuation model requires the input of highly subjective assumptions, including the warrant's expected life and the price volatility of the underlying stock. The change in the fair value of our warrants has been primarily due to the change in the closing price of our common stock. See Note 4 - Fair Value Accounting in the notes to the consolidated financial statements for additional information related to our valuation of our outstanding warrants.

58-------------------------------------------------------------------------------- Table of Contents Foreign Income Tax Expense on Capital Distributions During the fiscal year ended September 30, 2012, Suncore increased its registered capital by recording a deemed capital distribution of $37.0 million which was distributed and reinvested in proportion to each entity's registered capital, of which San'an was allocated $22.2 million and EMCORE was allocated $14.8 million. During this same period, Suncore also recorded a cash dividend of approximately $4.1 million in proportion to each entity's registered capital of which San'an received $2.5 million and EMCORE received $1.6 million. We recorded the cash dividend as a reduction in our investment in Suncore. We incurred foreign income tax of approximately $1.6 million associated with these capital distributions which is presented under the caption 'foreign income tax expense on capital distributions' on our statement of operations and comprehensive loss.

EMCORE's cash dividend was equal to the foreign income tax expense incurred on these capital distributions. See Note 18 - Suncore Joint Venture in the notes to the consolidated financial statements for additional information related to our Suncore joint venture.

Net Loss: (in thousands, except percentages) For the Fiscal Years Ended September 30, Fiscal 2012 vs Fiscal 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change Net loss $ (39,171 ) $ (34,219 ) $ (23,694 ) $ (4,952 ) (14.5)% $ (10,525 ) (44.4)% Net loss per basic and diluted share was $(1.66), $(1.54) and $(1.14) for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Order Backlog: As of September 30, 2012, order backlog for our Photovoltaics segment totaled $43.3 million, a negligible decrease from $43.5 million reported as of September 30, 2011. The backlog as of September 30, 2012 and 2011 included $1.9 million and $0, respectively, of terrestrial solar cell orders from our Suncore joint venture. Order backlog is defined as purchase orders or supply agreements accepted by us with expected product delivery and/or services to be performed within the next twelve months. From time to time, our customers may request that we delay shipment of certain orders and our order backlog could also be adversely affected if our customers unexpectedly cancel purchase orders that we have previously accepted.

Product sales from our Fiber Optics segment are made pursuant to purchase orders, often with short lead times. These orders are subject to revision or cancellation and often are made without deposits. Fiber optics products typically ship within the same quarter in which a purchase order is received; therefore, our order backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period.

59-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Historically, we have consumed cash from operations and incurred significant net losses. We have managed our liquidity position through a series of cost reduction initiatives, borrowings from our credit facility, capital markets transactions, and the sale of assets.

As of September 30, 2012, cash and cash equivalents totaled $9.0 million and working capital totaled approximately $4.0 million. Working capital, calculated as current assets minus current liabilities, is a financial metric we use which represents available operating liquidity. For the fiscal year ended September 30, 2012, we incurred a net loss of $39.2 million. Net cash used in operating activities for the fiscal year ended September 30, 2012 totaled $15.0 million.

With respect to measures taken to improve liquidity: • Credit Facility: In November 2010, we entered into a Credit and Security Agreement (credit facility) with Wells Fargo Bank (Wells Fargo). The credit facility provides us with a revolving credit of up to $35 million through November 2013 that can be used for working capital requirements, letters of credit, and other general corporate purposes. The credit facility was initially secured by the Company's assets and is subject to a borrowing base formula based on the Company's eligible accounts receivable and inventory accounts.

Our credit facility contains customary representations and warranties, and affirmative and negative covenants, including, among other things, cash balance and excess availability requirements, minimum tangible net worth and EBITDA covenants, and limitations on liens and certain additional indebtedness and guarantees. The covenants are written such that as long as we maintain the minimum cash balance and excess availability requirement, the other covenants are not required to be met. As of September 30, 2012, we were in compliance with the financial covenants contained in the credit facility since cash on deposit and excess availability exceeded the $3.5 million financial covenant.

Our credit facility also contains certain events of default, including a subjective acceleration clause. Under this clause, Wells Fargo may declare an event of default if it believes in good faith that our ability to pay all or any portion of our indebtedness with Wells Fargo or to perform any of our material obligations under the credit facility has been impaired, or if it believes in good faith that there has been a material adverse change in the business or financial condition of the Company. If an event of default is not cured within the grace period (if applicable), then Wells Fargo may, among other things, accelerate repayment of amounts borrowed under the credit facility, cease making advances under the credit facility, or take possession of the Company's assets that secure its obligations under the credit facility. We do not anticipate at this time any change in the business or financial condition of the Company that could be deemed a material adverse change by Wells Fargo. Wells Fargo has confirmed that they do not consider the flooding at our contract manufacturer's facility in Thailand in 2011 to be a material adverse change in the business or financial condition of the Company.

On December 21, 2011, we entered into a First Amendment to the credit facility which increased our eligible borrowing base by up to $10 million by adding to the borrowing base formula 85% of the appraised value of the Company's equipment and 50% of the appraised value of the Company's real estate. In addition, Wells Fargo reduced our restrictions under the excess availability financial covenant requirement from $7.5 million to $3.5 million through December 2012. The interest rate on outstanding borrowings was increased to LIBOR rate plus four percent. The credit facility will return to its previous agreement terms on the earlier of (i) December 31, 2012, or (ii) the date that we receive insurance proceeds of not less than $30.0 million in the aggregate applicable to the flooding of our primary contract manufacturer in Thailand.

On June 14, 2012, we entered into a Second Amendment to the credit facility, which amended among other things, the borrowing base increase under the First Amendment, which is subject to automatic reductions to (i) $8.1 million on July 1, 2012; and to (ii) $3.1 million on January 1, 2013. The Second Amendment automatically reduces the $8.1 million and $3.1 million thresholds referenced above to $5 million and $0, respectively, if the sale of certain assets does not occur. The amended credit facility no longer includes certain assets in the potential borrowing base including certain machinery and equipment and real estate.

60-------------------------------------------------------------------------------- Table of Contents As of September 30, 2012, we had a $19.3 million LIBOR rate loan outstanding under our credit facility, with an interest rate of 4.38%. As of November 30, 2012, the outstanding balance under this credit facility totaled approximately $13.5 million. As of September 30, 2012, the credit facility also had $2.4 million reserved for eight outstanding stand-by letters of credit, leaving a remaining $5.2 million borrowing availability balance under this credit facility. We now expect at least 70% of the $35 million credit facility to be available for use over the next year.

• October 2012 Stock Sale: On October 3, 2012 we sold to an Underwriter 1,832,410 shares of common stock for net proceeds of $9.5 million. See Note 20 - Subsequent Event for additional disclosures related to the stock sale.

• Equity Facility: In August 2011, we entered into a committed equity line financing facility (equity facility) with Commerce Court Small Cap Value Fund, Ltd. (Commerce Court) whereby Commerce Court has committed, upon issuance of a draw-down request by us, to purchase up to $50 million worth of our common stock over a two-year period, subject to our common stock trading above $4 per share, as adjusted for the reverse stock split, during the draw down period, unless a waiver is received. As of September 30, 2012, there have been no draw down transactions completed under this equity facility.

• Impact From Thailand Flood: In November 2011, we entered into an agreement with our contract manufacturer in Thailand whereby they agreed to purchase equipment to rebuild certain manufacturing lines damaged by flood waters and we agreed to reimburse them for the cost of the equipment out of insurance proceeds that we expect to receive. We were not a named beneficiary of our contract manufacturer's insurance policy. During the fiscal year ended September 30, 2012, we capitalized the cost of our new manufacturing lines of approximately $5.2 million and recorded an equipment capital lease obligation of $4.4 million, net of equipment deposits. Additionally, we restructured our outstanding payables owed to our contract manufacturer, which delayed payments to future dates to coincide with expected timing of insurance proceeds. In September 2012, we received flood recoveries of $4 million. We expect to receive an additional $6 million in cash proceeds as well as liability offsets of approximately $13 million by March 31, 2013 to cover the direct damages to our assets that were impacted by the flood. Flood recoveries related to inventory and equipment destroyed by the Thailand flood will be recognized when they become realized. See Note 11 - Impact from Thailand Flood for additional disclosures related to the impact of the Thailand flood on our operations.

We believe that our existing balances of cash and cash equivalents, the agreement with our contract manufacturer to delay payment terms and purchase equipment on our behalf, benefits expected from insurance proceeds, and amounts expected to be available under our credit and equity facilities will provide us with sufficient financial resources to meet our cash requirements for operations, working capital, and capital expenditures for the next twelve months.

However, in the event of unforeseen circumstances, unfavorable market or economic developments, unfavorable results from operations, any failure to receive expected proceeds from insurance, material claims made under the indemnification provisions of our Master Purchase Agreement with SEI, or if Wells Fargo declares an event of default on the credit facility, we may have to raise additional funds or reduce expenditures by any one or a combination of the following: issuing equity, debt or convertible debt, selling certain product lines and/or portions of our business, furloughs, or reduction of discretionary spending. There can be no assurance that we will be able to raise additional funds on terms acceptable to us, or at all. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if or when it is required, especially if we experience negative operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition, results of operations, and cash flows may be adversely affected.

Cash Flow: Net Cash Used In Operating Activities Operating Activities (in thousands, except percentages) For the Fiscal Years Ended September 30, Fiscal 2012 vs Fiscal 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change Net cash provided by (used in) operating activities $ (15,002 ) $ (6,289 ) $ 3,411 $ (8,713 ) 138.5% $ (9,700 ) 284.4% 61-------------------------------------------------------------------------------- Table of Contents Fiscal 2012: Our operating activities consumed cash of $15.0 million in fiscal 2012. Our net loss of $39.2 million, which included an approximately $2.7 million gain from the sale of assets and $2.6 million of insurance proceeds on equipment was partially offset by flood-related losses of approximately $5.5 million, depreciation, amortization, and accretion expense of $9.4 million, stock-based compensation expense of approximately $7.8 million, provision for losses on inventory purchase commitments of $2.3 million, and losses from our Suncore joint venture totaling $1.2 million. The change in our current assets and liabilities of $1.8 million was primarily the result of an increase in accounts payable of approximately $10.6 million and accrued expenses and other current liabilities of approximately $6.6 million; largely offset by an increase in inventory of $9.8 million, other assets of $3.9 million and accounts receivable of approximately $1.7 million.

Fiscal 2011: Our operating activities consumed cash of $6.3 million in fiscal 2011. Our net loss of $34.2 million was offset by the net change in our current assets and liabilities of $2.5 million and our non-cash expenses which included depreciation and amortization expense of $12.0 million, stock-based compensation expense of $7.4 million, provision for doubtful accounts of $0.0 million, and the provision for product warranty of $1.0 million. The change in our current assets and liabilities of $2.5 million was primarily the result of an increase in accrued expense and other current liabilities of $2.8 million, an increase in accounts payable of $0.4 million; partially offset by an increase in accounts receivable of $3.3 million, and increase in prepaid and other assets of $2.5 million, and an increase in inventory of $0.9 million.

Fiscal 2010: Our operating activities provided cash of $3.4 million in fiscal 2010. Our net loss of $23.7 million was offset by the net change in our current assets and liabilities of $0.4 million and our non-cash expenses which included depreciation and amortization expense of $12.3 million, stock-based compensation expense of $9.9 million, provision for doubtful accounts of $2.2 million, and the provision for product warranty of $1.2 million. The change in our current assets and liabilities of $0.4 million was primarily the result of an increase in accrued expense and other current liabilities of $3.8 million, an increase in accounts payable of $1.2 million; partially offset by an increase in accounts receivable of $3.3 million, and increase in prepaid and other assets of $0.9 million, and an increase in inventory of $0.4 million.

Working Capital Components: Accounts Receivable: We generally expect the level of accounts receivable at any given quarter to reflect the level of sales in that quarter. Our accounts receivable balances have fluctuated historically due to the timing of account collections, timing of product shipments, and/or change in customer credit terms.

Inventory: We generally expect the level of inventory at any given quarter to reflect the change in our expectations of forecasted sales. Our inventory balances have fluctuated historically due to the timing of customer orders and product shipments, changes in our internal forecasts related to customer demand, as well as adjustments related to excess and obsolete inventory.

Accounts Payable: The fluctuation of our accounts payable balances is primarily driven by changes in inventory purchases as well as changes related to the timing of actual payments to vendors.

Accrued Expenses: Our largest accrued expense typically relates to compensation.

Historically, fluctuations of our accrued expense accounts have primarily related to changes in the timing of actual compensation payments, receipt or application of advanced payments, adjustments to our warranty accrual, and accruals related to professional fees.

Net Cash Provided By (Used In) Investing Activities Investing Activities (in thousands, except For the Fiscal Years Ended September percentages) 30, Fiscal 2012 vs Fiscal 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change Net cash provided by (used in) investing activities $ 5,274 $ (15,286 ) $ (316 ) $ 20,560 134.5% $ (14,970 ) 4,737.3% 62-------------------------------------------------------------------------------- Table of Contents Fiscal 2012: Our investing activities provided $5.3 million of cash primarily due to $13.1 million received from the sale of assets to a subsidiary of SEI, $2.6 million of flood-related insurance proceeds from equipment and a net distribution of capital related to our Suncore joint venture of $1.6 million; largely offset by $12.2 million related to capital expenditures and $0.4 million deposits on equipment orders. See Note 1 - Description of Business in the notes to the consolidated financial statements for additional disclosures related to the SEI asset sale.

We anticipated that we would need to repair or replace equipment that was damaged by the Thailand flooding. Capital expenditures have increased sharply compared to fiscal 2011 as we rebuild our production capacity. We expect our capital expenditures will be funded primarily by insurance proceeds that we expect to receive.

Fiscal 2011: Our investing activities consumed $15.3 million of net cash in fiscal 2011 primarily due to $1.4 million related to capital expenditures and $0.6 million related to investment in patents; partially offset by $1.3 million in proceeds from the sale of available-for-sale securities and $0.4 million related to the release of restricted cash.

Fiscal 2010: Our investing activities provided $0.3 million of net cash in fiscal 2010 primarily from $0.0 million received from the sale of an unconsolidated affiliate, $1.4 million received from the sale of available-for-sale securities, and $0.4 million related to the release of restricted cash; partially offset by $1.4 million related to capital expenditures.

Net Cash Provided By Financing Activities Financing Activities (in thousands, except percentages) For the Fiscal Years Ended September 30, Fiscal 2012 vs Fiscal 2011 Fiscal 2011 vs Fiscal 2010 2012 2011 2010 $ Change % Change $ Change % Change Net cash provided by financing activities $ 3,015 $ 17,887 $ 2,365 $ (14,872 ) (83.1)% $ 15,522 656.3% Fiscal 2012: Our financing activities provided $3.0 million of net cash primarily from $1.8 million of proceeds related to borrowings from our bank credit facility and $1.3 million of proceeds received from our stock plans. See Note 1 - Description of Business in the notes to the consolidated financial statements for information related to borrowings from our bank credit facility.

Fiscal 2011: Our financing activities provided $17.9 million of net cash in fiscal 2011 primarily from $9.7 million of proceeds from a private placement transaction, $7.0 million related to borrowings on our bank credit facility and $1.9 million of proceeds received from our stock plans; partially offset by $0.6 million of payments on our capital lease obligations.

Fiscal 2010: Our financing activities provided $2.4 million of net cash in fiscal 2010 primarily from $0.2 million related to borrowings on our bank credit facility, $1.0 million of proceeds received from our stock plans, and $0.8 million related to other short-term debt borrowings.

63-------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments Our contractual obligations and commitments over the next five years are summarized in the table below: (in thousands) For the Fiscal Years Ended September 30, 2018 Total 2013 2014 to 2015 2016 to 2017 and later Purchase obligations $ 27,456 $ 27,212 $ 157 $ 87 $ - Credit facility 19,316 19,316 - - - Asset retirement obligations 5,004 - 409 33 4,562 Operating lease obligations 4,566 877 792 426 2,471 Capital lease obligations 4,411 4,411 - - Total contractual obligations and commitments $ 60,753 $ 51,816 $ 1,358 $ 546 $ 7,033 Interest payments are not included in the contractual obligations and commitments table above since they are insignificant to our consolidated results of operations.

Purchase Obligations Our purchase obligations represent agreements to purchase goods or services that are enforceable and legally binding, that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions.

In November 2011, we entered into an agreement with our contract manufacturer that was affected by the floods in Thailand whereby our contract manufacturer will purchase equipment to rebuild our affected manufacturing lines.

Additionally, we restructured our outstanding payables owed to our contract manufacturer which delayed payments to future dates to coincide with expected timing of insurance proceeds.

Credit Facility As of September 30, 2012, we had a $19.3 million LIBOR rate loan outstanding, with an interest rate of 4.38%, and approximately $2.4 million reserved under eight outstanding standby letters of credit under the credit facility.

On December 21, 2011, we signed an amendment to our credit facility that increased our eligible borrowing base by up to $10 million by adding to the borrowing base formula 85% of the appraised value of the Company's equipment and 50% of the appraised value of the Company's real estate. In addition, Wells Fargo Bank reduced our restrictions under the excess availability financial covenant requirement from $7.5 million to $3.5 million through December 2012.

The interest rate on outstanding borrowings was increased to LIBOR rate plus four percent. See Note 12 - Credit Facilities for additional information related to our bank credit facility.

On June 14, 2012, we entered into a Second Amendment to the credit facility, which amended among other things, the borrowing base increase under the First Amendment, which is subject to automatic reductions to (i) $8.1 million on July 1, 2012; and to (ii) $3.1 million on January 1, 2013. The Second Amendment automatically reduces the $8.1 million and $3.1 million thresholds referenced above to $5.0 million and $0, respectively, if the sale of certain assets does not occur. The amended credit facility no longer includes certain assets in the potential borrowing base including certain machinery and equipment and real estate.

As of September 30, 2012, we had a $19.3 million LIBOR rate loan outstanding, with an interest rate of 4.38%, and approximately $2.4 million reserved for eight outstanding stand-by letters of credit under the credit facility. We now expect at least 70% of the total amount of credit under the credit facility to be available for use based on the revised borrowing base formula during fiscal year 2013.

64-------------------------------------------------------------------------------- Table of Contents Asset Retirement Obligations We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future. During the three months ended September 30, 2011, we completed a review of our asset retirement and environmental obligations and we recorded a long-term liability totaling $4.8 million. We increased the carrying amount of our long-lived assets by the same amount as the asset retirement obligation. The fair value was estimated by discounting projected cash flows over the estimated life of the related assets using credit adjusted risk-free rates which ranged from 3.25% to 5.78%. The asset retirement obligations in the table above includes assumptions related to renewal option periods where we expect to extend facility lease terms. In future periods, the asset retirement obligation is accreted for the change in its present value and capitalized costs are depreciated over the useful life of the related assets. If the fair value of the estimated asset retirement obligation changes, an adjustment will be recorded to both the asset retirement obligation and the asset retirement capitalized cost.

Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated timing of settling asset retirement obligations. No liabilities associated with asset retirements were settled in fiscal years 2010, 2011, and 2012. For the fiscal year 2012, we recorded accretion expense of $0.2 million. No accretion expense was incurred in fiscal years 2011 and 2010.

Operating and Capital Leases Operating leases include non-cancelable terms and exclude renewal option periods, property taxes, insurance and maintenance expenses on leased properties. There are no off-balance sheet arrangements other than our operating leases. Our capital lease obligation listed above includes $4.4 million of liability on our balance sheet as of September 30, 2012 as well as $1.4 million in commitments for additional equipment to be acquired under capital lease as of September 30, 2012. See Note 15 - Commitments and Contingencies in the notes to the consolidated financial statements for additional information related to our operating and capital lease obligations. See Note 11 - Impact from Thailand Flood for a discussion associated with the impact of the floods in Thailand on our equipment which includes those under capital lease.

Suncore Joint Venture The total registered capital of Suncore is $30 million, of which San'an has contributed $18 million in cash and EMCORE has contributed $12 million in cash.

We are not required to contribute additional funds in excess of our initial $12 million investment, and at this time, we do not anticipate contributing any additional funds to Suncore. The joint venture agreement provides for any working capital needs to be provided by San'an. See Note 18 - Suncore Joint Venture in the notes to the consolidated financial statements for additional information related to this joint venture.

Segment Data and Related Information See Note 17 - Segment Data and Related Information in the notes to the consolidated financial statements for disclosures related to business segment revenue, geographic revenue, significant customers, and operating loss by business segment.

Recent Accounting Pronouncements See Note 3 - Recent Accounting Pronouncements in the notes to the consolidated financial statements for disclosures related to recent accounting pronouncements.

Restructuring Accruals See Note 10 - Accrued Expenses and Other Current Liabilities in the notes to the consolidated financial statements for disclosures related to our severance and restructuring-related accrual accounts.

Executive Officer - Reuben F. Richards Jr. resigned as the Company's Executive Chairman effective September 30, 2012.

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