FINISAR CORP, S-1/A, 1999-10-25

FINISAR CORP
S-1/A, 1999-10-25
SEMICONDUCTORS & RELATED DEVICES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1999

REGISTRATION NO. 333-87017
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------

AMENDMENT NO. 2
TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

FINISAR CORPORATION
(Exact name of Registrant as specified in its charter)
--------------------------

<TABLE>
<S> <C> <C>
CALIFORNIA 3674 94-3038428
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code number) Identification
incorporation or organization) No.)
</TABLE>

1308 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-1000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------------

JERRY S. RAWLS
CHIEF EXECUTIVE OFFICER
FINISAR CORPORATION
1308 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------

PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:

DENNIS C. SULLIVAN, ESQ. PETER E. WILLIAMS III, ESQ.
JOHN M FOGG, ESQ. BRIAN D. MCALLISTER, ESQ.
ANDREW M. JACOBSON, ESQ. TIMOTHY J. HARRIS, ESQ.
GRAY CARY WARE & FREIDENRICH LLP MORRISON & FOERSTER LLP
400 HAMILTON AVENUE 755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94301-1825 PALO ALTO, CALIFORNIA 94304-1018
(650) 328-6561 (650) 813-5600

--------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------

If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / / _________

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / _________

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / _________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /

------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8

(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8

(a), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED OCTOBER 25, 1999

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
PROSPECTUS

7,700,000 SHARES

[FINISAR LOGO]

COMMON STOCK

--------------

This is Finisar Corporation's initial public offering.

We expect the public offering price to be between $12.00 and $14.00 per
share. Currently, no public market exists for the shares. After pricing of this
offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "FNSR."

INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.

-----------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------
<S> <C> <C>
Public offering price.................................................... $ $

Underwriting discount.................................................... $ $

Proceeds, before expenses, to Finisar Corporation........................ $ $
</TABLE>

The underwriters may also purchase up to an additional 1,155,000 shares
from some of our stockholders at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. We will not receive any of the proceeds from any shares that
may be sold by the selling stockholders.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The shares will be ready for delivery on or about , 1999.

------------------

MERRILL LYNCH & CO.

J.P. MORGAN & CO.

DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED

MORGAN KEEGAN & COMPANY, INC.

SOUNDVIEW TECHNOLOGY GROUP

------------------

The date of this prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER]

[FINISAR LOGO]

FIBER OPTIC SOLUTIONS FOR GIGABIT ETHERNET AND FIBRE CHANNEL

<TABLE>
<S> <C> <C>
OPTICAL DATA LINKS OPTICAL LINK EXTENDERS

[Picture of Finisar's Optical Data Links.] [Picture of Finisar's Optical Link Extenders.]

- - Transmitters, Receivers, and Transceivers for Switches, - Extending the Distance of High-Speed Data Links
Hubs, Servers and Storage Arrays - Up to 120 km
- - Built-in Diagnostics - Built-in Self Test and Link Test
- - Multi-mode and Single-mode for Multiple Transmission
Distances

OPTICITY NETWORK PERFORMANCE TEST SYSTEMS

[Picture of Finisar's Opticity 3000.] [Picture of a Finisar Network Performance Test System.]

- - Extending the Capacity of Fiber Optic Rings and - Testing and Monitoring of High-Speed Networking Systems
Point-to-Point Links - Multiple High-Speed Protocols
- - Multiple Channels up to 10 Gbps - Multiple Applications
- - SNMP Compatible
</TABLE>

[Diagram of optical networking system, including Gigabit Ethernet Local Area
network, Gigabit Ethernet Remote Campus LAN, Multi-Protocol Internet Service
Provider, Fibre Channel Remote SAN BackUp Site, Fibre Channel Storage Area
network and pictures of four Finisar Corporation products.]
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Forward-Looking Statements................................................................................. 17
Use of Proceeds............................................................................................ 18
Dividend Policy............................................................................................ 18
Capitalization............................................................................................. 19
Dilution................................................................................................... 20
Selected Financial Data.................................................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 31
Management................................................................................................. 47
Related Party Transactions................................................................................. 54
Principal and Selling Stockholders......................................................................... 55
Description of Capital Stock............................................................................... 57
Shares Eligible for Future Sale............................................................................ 60
Underwriting............................................................................................... 61
Legal Matters.............................................................................................. 64
Experts.................................................................................................... 64
Where You Can Find More Information........................................................................ 64
Index to Financial Statements.............................................................................. F-1
</TABLE>

INFORMATION IN PROSPECTUS

Unless specifically stated, the information in this prospectus:

- reflects the automatic conversion of all outstanding shares of our
convertible redeemable preferred stock into an aggregate of 8,981,897
shares of our common stock and 12,039,486 shares of our redeemable
preferred stock and the redemption of such shares of redeemable preferred
stock for $2,640,260 upon the closing of this offering;

- assumes no exercise of the underwriters' over-allotment option;

- assumes the reincorporation of our company in Delaware prior to the
closing of this offering; and

- reflects the creation of a new class of preferred stock and an increase in
the number of authorized shares of common stock to 200,000,000 upon the
closing of this offering.

Beginning in fiscal 2000, our financial records have been maintained on the
basis of a fiscal year ending on April 30, with fiscal quarters ending on the
Sunday closest to the end of the period (thirteen week periods). For ease of
comparison, all references to period end dates in this prospectus have been
presented as though the period ended on the last day of the calendar month. The
first quarter of fiscal 2000 ended on August 1, 1999.

You should rely only on the information contained in this prospectus.
Neither we nor the underwriters have authorized any person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We and the underwriters are not making
an offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this
prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects may
have changed since that date.

Finisar is a registered trademark of Finisar Corporation. This prospectus
contains product names, trade names and trademarks of Finisar and other
organizations.
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK
FACTORS" AND THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT
DECISION.

FINISAR CORPORATION

We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over Gigabit
Ethernet-based local area networks, or LANs, and Fibre Channel-based storage
area networks, or SANs. Our optical subsystems convert electrical signals into
optical signals for reliable, high-speed data transmission over varying
distances, speeds and transmission mediums. We sell our optical subsystems to
manufacturers of networking and storage equipment that develop and market
systems based on Gigabit Ethernet and Fibre Channel, which are advanced
transmission protocols used in high-speed LAN and SAN applications. LANs
interconnect computer users within an organization and allow users to share
common computer resources. SANs allow storage to be networked among users and
provide high-speed interconnections between storage systems and servers. We also
provide unique network performance test systems which assist networking and
storage equipment manufacturers in the efficient design of reliable, high-speed
networking systems and the testing and monitoring of the performance of these
systems.

The growing number of users accessing networks, the increasing need to
accommodate data traffic which requires greater transmission capacity, or
bandwidth, and the increasingly important role that data communication networks
play within corporations and other organizations has created the need for a new
generation of high-speed, high-performance networking and storage systems that
rely on fiber optic transmission technology. Many of these systems operate over
Gigabit Ethernet-based LANs, Fibre Channel-based SANs or extended versions of
these networks. These systems utilize fiber optic subsystems which enable them
to transmit data at very high speeds with high accuracy, often over long
distances. In addition to creating a need for optical subsystems, complex
transmission protocols such as Gigabit Ethernet and Fibre Channel have resulted
in a demand for advanced network performance test systems. As these protocols
have emerged, system testing has become more difficult, requiring increasingly
sophisticated and specialized test systems capable of capturing data at high
speeds, filtering the data and identifying various types of intermittent errors
and other network problems.

The development and manufacture of high quality, cost-effective fiber optic
subsystems for LANs and SANs present a number of significant technical
challenges. Data integrity, reliability and standards compliance become
increasingly difficult at high transmission speeds. Additionally, manufacturers
require optical subsystems which support a broad range of network applications.
To date, we believe that only a limited number of companies have developed the
specialized expertise required to engineer fiber optic subsystems and network
performance test systems which meet the requirements of manufacturers of
high-speed data networking and storage systems. Our optical subsystems and
network performance test systems are designed to provide the following key
benefits to systems manufacturers:

VALUE-ADDED FUNCTIONS AND INTELLIGENCE. Our high-speed fiber optic
subsystems are engineered to provide our customers with value-added
functionality beyond the basic capability of enabling high-speed data
transmission. Many of our optical subsystems include:

- a microprocessor containing specially developed software that allows
customers to monitor the optical performance of each port on their systems
in real time; and

- features that automatically recognize different versions of the Fibre
Channel protocol and enable our subsystems to interoperate with older,
installed networking systems.

Our test systems also contain value-added software functions that permit users
to simulate and track errors.

1
<PAGE>
HIGH LEVEL OF DATA INTEGRITY. Through the use of advanced packaging and
circuit design, our optical subsystems deliver data at very high speeds over
varying distances with very low error rates. This high level of data integrity
allows our subsystems to operate reliably over a wide range of temperatures and
other field conditions which we believe enables our customers to design and
deliver more robust systems.

HIGH RELIABILITY. We design all of our optical subsystems to provide the
high reliability required for data networking and storage applications that are
critical to an enterprise. Our products have very low failure rates. Using
standard statistical methodology and testing, we have been able to predict that
some of our products can be expected to operate reliably for up to 40 million
hours. In addition, because our subsystems are designed to emit lower levels of
electromagnetic interference, or EMI, than the standards set by the Federal
Communications Commission, we offer manufacturers greater flexibility in the
design of their systems and integration of other components and subsystems.

BROAD TEST SYSTEM PRODUCT LINE. We offer a broad line of test systems to
assist our customers in efficiently designing reliable, high-speed networking
systems and testing and monitoring the performance of these systems. We believe
our test systems enable our customers to focus their attention on the
development of new products, reduce overall development costs and speed time to
market.

Our goal is to be the optical subsystem and network performance test system
provider of choice for multiple protocols and network applications. We intend to
maintain our technological leadership through continual enhancement of our
existing products and the development of new products as evolving technology
permits higher speed transmission of data, with greater capacity, over longer
distances. We plan to leverage our relationships with our existing customers as
they enter new, high-speed data communications markets and to expand our sales
and marketing organization in order to establish new relationships with other
key data and storage networking manufacturers. We intend to capitalize on our
customers' satisfaction and our service-oriented approach to take advantage of
cross-selling opportunities. We also plan to expand our international sales
efforts.

We sell our products to leading networking and storage equipment
manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge Networks and Sun
Microsystems, as well as emerging manufacturers such as Brocade Communications
and Extreme Networks. For the fiscal year ended April 30, 1999, we had revenues
of $35.5 million and net income of $3.0 million. For the quarter ended July 31,
1999, we had revenues of $13.9 million and net income of $1.3 million.

CORPORATE INFORMATION

Finisar was incorporated in California in April 1987. Our principal
executive offices are located at 1308 Moffett Park Drive, Sunnyvale, California
94089, our telephone number is (408) 548-1000 and our website is located at
www.finisar.com. Information on our website is not a part of this prospectus.

2
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common stock offered......................... 7,700,000 shares
Common stock to be outstanding after this
offering................................... 49,707,462 shares
Use of proceeds.............................. To repay outstanding indebtedness and redeem
our redeemable preferred stock and for
general corporate purposes, principally
working capital and capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol....... FNSR
</TABLE>

The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of September 30, 1999 and excludes:

- 2,036,740 shares of common stock issuable upon exercise of options
outstanding at September 30, 1999 under our 1989 and 1999 stock option
plans, with a weighted average exercise price of $1.2054 per share,
268,000 shares issuable upon exercise of options granted between October
1, 1999 and October 15, 1999, with an exercise price of $10.20 per share,
and an additional 5,065,000 shares reserved for issuance under our 1999
stock option plan as of October 15, 1999; and

- 250,000 shares of common stock reserved for issuance under our 1999
employee stock purchase plan.

3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The statement of operations data for the fiscal
years ended April 30, 1997, 1998 and 1999 are derived from, and are qualified by
reference to, our audited financial statements included elsewhere in this
prospectus. The statement of operations data for the fiscal years ended
April 30, 1995 and 1996 are derived from unaudited financial statements not
included in this prospectus. The statement of operations data for the three
month periods ended July 31, 1998 and 1999 and the balance sheet data as of
July 31, 1999 are derived from, and are qualified by reference to, our unaudited
financial statements included elsewhere in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 2,684 $ 5,660 $ 8,457 $ 22,067 $ 35,471 $ 6,794 $ 13,879
Gross profit......................... 1,822 2,538 5,019 13,362 19,957 4,128 7,627
Income from operations............... 654 700 1,374 7,094 5,221 1,603 2,199
Net income........................... 433 463 947 4,358 3,045 1,053 1,253

Net income per share (1):
Basic.............................. $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
Diluted............................ $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
Shares used in per share calculations
(1):
Basic.............................. 44,000 44,000 44,000 43,753 36,860 41,800 29,464
Diluted............................ 44,000 44,000 44,000 43,753 44,938 41,800 42,610
</TABLE>

<TABLE>
<CAPTION>
JULY 31, 1999
---------------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
---------- ----------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 5,404 $ 5,404 $ 83,642
Working capital.............................................. 14,007 14,007 92,245
Total assets................................................. 24,459 24,459 102,697
Long-term debt............................................... 11,019 11,019 4
Convertible redeemable preferred stock....................... 26,260 -- --
Total stockholders' equity (deficit)(4)...................... (19,950) 3,669 95,562
</TABLE>

- ------------------------

(1) See Note 1 to our financial statements for a description of the computation
of the number of shares and net income per share.

(2) The pro forma amounts give effect to the conversion of all outstanding
shares of our convertible redeemable preferred stock into 8,981,897 shares
of our common stock and 12,039,486 shares of our redeemable preferred stock.

(3) The pro forma as adjusted amounts reflect the pro forma amounts, as further
adjusted to reflect the sale of 7,700,000 shares of common stock by Finisar
in this offering, at an assumed initial public offering price of $13.00 per
share after deducting the estimated underwriting discount and estimated
offering expenses, and our receipt and application of the net proceeds,
including the repayment of our term loan and redemption of all outstanding
shares of redeemable preferred stock upon the closing of this offering. See
"Use of Proceeds" and "Capitalization."

(4) Total stockholders' equity (deficit) reflects retained earnings of
$10.6 million without giving effect to the repurchase of shares of our
common stock for $31.7 million in November 1998.

4
<PAGE>
RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A
DECISION TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS COULD BE HARMED, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.

OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY

Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of factors,
some of which are outside of our control. Accordingly, we believe that
period-to-period comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance. Some of the
factors that could cause our quarterly or annual operating results to fluctuate
include market acceptance of our products and the Gigabit Ethernet and Fibre
Channel standards, product development and production, competitive pressures and
customer retention.

We may experience a delay in generating or recognizing revenues for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenues for that quarter and are generally cancelable at any time.
Accordingly, we depend on obtaining orders in a quarter for shipment in that
quarter to achieve our revenue objectives. Failure to ship these products by the
end of a quarter may adversely affect our operating results. Furthermore, our
customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty. Because we base our operating expenses on anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term, any delay in generating or recognizing forecasted revenues could
significantly harm our business.

It is likely that in some future quarters our operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of our common stock would significantly decline.

OUR SUCCESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE EMERGING HIGH-SPEED
LAN, SAN AND EXTENDED NETWORK MARKETS

Our optical subsystem and network performance test system products are used
exclusively in high-speed local area networks, or LANs, storage area networks,
or SANs, and extended networks. Accordingly, widespread adoption of high-speed
LANs, SANs and extended networks is critical to our future success. The markets
for high-speed LANs, SANs and extended networks have only recently begun to
develop and are rapidly evolving. Because these markets are new and evolving, it
is difficult to predict their potential size or future growth rate. Potential
end-user customers who have invested substantial resources in their existing
data storage and management systems may be reluctant or slow to adopt a new
approach, like high-speed LANs, SANs or extended networks. Our success in
generating revenue in these emerging markets will depend, among other things, on
the growth of these markets. There is significant uncertainty as to whether
these markets ultimately will develop or, if they do develop, that they will
develop rapidly. If the markets for high-speed LANs, SANs or extended networks
fail to develop or develop more slowly than expected, or if our products do not
achieve widespread market acceptance in these markets, our business would be
significantly harmed.

5
<PAGE>
WE WILL FACE CHALLENGES TO OUR BUSINESS IF OUR TARGET MARKETS ADOPT ALTERNATE
STANDARDS TO FIBRE CHANNEL AND GIGABIT ETHERNET TECHNOLOGY OR IF OUR PRODUCTS
FAIL TO COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS

We have based our product offerings principally on Fibre Channel and Gigabit
Ethernet standards and our future success is substantially dependent on the
continued market acceptance of these standards. If an alternative technology is
adopted as an industry standard within our target markets, we would have to
dedicate significant time and resources to redesign our products to meet this
new industry standard. For example, manufacturers have begun to develop
networking systems with per-port transmission speeds of 10 gigabits per second,
or Gbps, ten times faster than Gigabit Ethernet. We cannot assure you that we
will be successful in re-designing our products or developing new products to
meet this new standard or any other standard that may emerge. Our products
comprise only a part of an entire networking system, and we depend on the
companies that provide other components to support industry standards as they
evolve. The failure of these companies, many of which are significantly larger
than we are, to support these industry standards could negatively impact market
acceptance of our products. Moreover, if we introduce a product before an
industry standard has become widely accepted, we may incur significant expenses
and losses due to lack of customer demand, unusable purchased components for
these products and the diversion of our engineers from future product
development efforts. In addition, because we may develop some products prior to
the adoption of industry standards, we may develop products that do not comply
with the eventual industry standard. Our failure to develop products that comply
with industry standards would limit our ability to sell our products. Finally,
if new standards evolve, we may not be able to successfully design and
manufacture new products in a timely fashion, if at all, that meet these new
standards.

In the United States, our products must comply with various regulations and
standards defined by the Federal Communications Commission and Underwriters
Laboratories. Internationally, products that we develop also will be required to
comply with standards established by local authorities in various countries.
Failure to comply with existing or evolving standards established by regulatory
authorities or to obtain timely domestic or foreign regulatory approvals or
certificates could significantly harm our business.

WE DEPEND ON LARGE PURCHASES FROM A FEW SIGNIFICANT CUSTOMERS, AND ANY LOSS,
CANCELLATION, REDUCTION OR DELAY IN PURCHASES BY THESE CUSTOMERS COULD HARM OUR
BUSINESS

A small number of customers have accounted for a significant portion of our
revenues. Our success will depend on our continued ability to develop and manage
relationships with significant customers. Sales to Newbridge Networks
Corporation and EMC Corporation represented 34.9% and 19.0% of our revenues
during the three month period ended July 31, 1999, 25.1% and 20.8% of our
revenues for fiscal 1999 and 43.9% and 14.6% of our revenues for fiscal 1998.
Although we are attempting to expand our customer base, we expect that
significant customer concentration will continue for the foreseeable future.

The markets in which we sell our products are dominated by a relatively
small number of systems manufacturers, thereby limiting the number of our
potential customers. Our dependence on large orders from a relatively small
number of customers makes our relationship with each customer critically
important to our business. We cannot assure you that we will be able to retain
our largest customers, that we will be able to attract additional customers or
that our customers will be successful in selling their products which
incorporate our products. We have in the past experienced delays and reductions
in orders from some of our major customers. In addition, our customers have in
the past sought price concessions from us and will continue to do so in the
future. Further, some of our customers may in the future shift their purchases
of products from us to our competitors or to joint ventures between these
customers and our competitors. The loss of one or more of our largest customers,
any reduction or delay in sales to these customers, our inability to
successfully develop relationships with additional customers or future price
concessions that we may make could significantly harm our business.

6
<PAGE>
BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR CUSTOMERS MAY
CEASE PURCHASING OUR PRODUCTS AT ANY TIME IF WE FAIL TO MEET OUR CUSTOMERS'
NEEDS

We do not have long-term contracts with our customers. As a result, our
agreements with our customers do not provide any assurance of future sales.
Accordingly:

- our customers can stop purchasing our products at any time without
penalty;

- our customers are free to purchase products from our competitors; and

- our customers are not required to make minimum purchases.

Sales are typically made pursuant to individual purchase orders, often with
extremely short lead times. If we are unable to fulfill these orders in a timely
manner, we will lose sales and customers.

OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY,
WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE

The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies will emerge as
competition and the need for higher and more cost effective bandwidth increases.
Our future performance will depend on the successful development, introduction
and market acceptance of new and enhanced products that address these changes as
well as current and potential customer requirements. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing
products. We have in the past experienced delays in product development and such
delays may occur in the future. Therefore, to the extent customers defer or
cancel orders in the expectation of a new product release or there is any delay
in development or introduction of our new products or enhancements of our
products, our operating results would suffer. We also may not be able to develop
the underlying core technologies necessary to create new products and
enhancements, or to license these technologies from third parties. Product
development delays may result from numerous factors, including:

- changing product specifications and customer requirements;

- difficulties in hiring and retaining necessary technical personnel;

- difficulties in reallocating engineering resources and overcoming resource
limitations;

- difficulties with contract manufacturers;

- changing market or competitive product requirements; and

- unanticipated engineering complexities.

The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely basis. Further, we cannot assure you
that our new products will gain market acceptance or that we will be able to
respond effectively to product announcements by competitors, technological
changes or emerging industry standards. Any failure to respond to technological
change would significantly harm our business.

CONTINUED COMPETITION IN OUR MARKETS MAY LEAD TO A REDUCTION IN OUR PRICES,
REVENUES AND MARKET SHARE

The markets for optical subsystems and network performance test systems for
use in LANs, SANs and extended networks are highly competitive. Our current
competitors include a number of domestic and international companies, many of
which have substantially greater financial, technical, marketing, distribution
resources and brand name recognition than we have. We expect that more
companies, including some of our customers, will enter the market for optical
subsystems and network performance

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test systems. We may not be able to compete successfully against either current
or future competitors. Increased competition could result in significant price
erosion, reduced revenue, lower margins or loss of market share, any of which
would significantly harm our business. For optical subsystems, we compete
primarily with Agilent Technologies, Inc., Cielo Communications, Inc.,
International Business Machines Corporation and Vixel Corporation. For network
performance test systems, we compete primarily with Ancot Corporation, I-Tech
Corporation and Xyratex International. Our competitors continue to introduce
improved products with lower prices, and we will have to do the same to remain
competitive. In addition, some of our current and potential customers may
attempt to integrate their operations by producing their own optical subsystems
and network performance test systems or acquiring one of our competitors,
thereby eliminating the need to purchase our products. Furthermore, larger
companies in other related industries, such as the telecommunications industry,
may develop or acquire technologies and apply their significant resources,
including their distribution channels and brand name recognition, to capture
significant market share.

WE EXPECT AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE
GROSS MARGINS OR REVENUES, AND, AS A RESULT, WE MUST CONTINUE TO REDUCE OUR
PRODUCT COSTS IN ORDER TO PRICE OUR PRODUCTS COMPETITIVELY

The market for optical subsystems is characterized by declining average
selling prices resulting from factors such as increased competition, the
introduction of new products and increased unit volumes as manufacturers
continue to deploy network and storage systems. We have in the past experienced
and in the future may experience, substantial period-to-period fluctuations in
operating results due to declining average selling prices. We anticipate that
average selling prices will decrease in the future in response to product
introductions by competitors or us, or by other factors, including price
pressures from significant customers. Therefore, we must continue to develop and
introduce on a timely basis new products that incorporate features that can be
sold at higher average selling prices. Failure to do so could cause our revenues
and gross margins to decline, which would significantly harm our business.

We may be unable to reduce the cost of our products sufficiently to enable
us to compete with others. Our cost reduction efforts may not allow us to keep
pace with competitive pricing pressures or lead to improved gross margins. In
order to remain competitive, we must continually reduce the cost of
manufacturing our products through design and engineering changes. We may not be
successful in redesigning our products or delivering our products to market in a
timely manner. We cannot assure you that any redesign will result in sufficient
cost reductions to allow us to reduce the price of our products to remain
competitive or improve our gross margin.

WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING

In April 1999, Methode Electronics, a manufacturer of electronic component
devices, filed a lawsuit against us and another manufacturer alleging that our
optoelectronic products infringe four patents held by Methode. The original
complaint seeks monetary damages and injunctive relief. On October 18, 1999,
Methode filed a motion seeking leave to file an amended complaint. The proposed
amended complaint alleges infringement of a fifth Methode patent and also
alleges that we breached our obligations under a license and supply agreement
with Methode by failing to provide Methode with unspecified information
regarding new technology related to the products licensed under the agreement.
The proposed amended complaint purports to seek compensatory damages of at least
$224,280,000 plus interest for the alleged breach of contract. We believe that
we have strong defenses against Methode's lawsuit, and we have filed a
counterclaim against Methode. We intend to defend Methode's lawsuit and pursue
our counterclaim vigorously. However, the litigation is in the preliminary
stage, and we cannot predict its outcome with certainty. The litigation process
is inherently uncertain and we may not prevail. Patent litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. In connection with the
Methode litigation,

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we have incurred, and expect to continue to incur, substantial legal fees and
expenses. The Methode litigation has also diverted, and is expected to continue
to divert, the efforts and attention of some of our key management and technical
personnel. As a result, our defense of this litigation, regardless of its
eventual outcome, has been, and will likely continue to be, costly and time
consuming. Should the outcome of the litigation be adverse to us, we could be
required to pay significant monetary damages to Methode and could be enjoined
from selling those of our products found to infringe Methode's patents unless
and until we are able to negotiate a license from Methode. In the event that we
obtain a license from Methode, we would likely be required to make royalty
payments with respect to sales of our products covered by the license. Any such
royalty payments would increase our cost of revenues and reduce our gross
profit. If we are required to pay significant monetary damages, are enjoined
from selling any of our products or are required to make substantial royalty
payments pursuant to any such license agreement, our business would be
significantly harmed. See "Business--Pending Legal Proceeding."

OUR CUSTOMERS OFTEN EVALUATE OUR PRODUCTS FOR LONG AND VARIABLE PERIODS WHICH
CAUSES THE TIMING OF PURCHASES AND OUR RESULTS OF OPERATIONS TO BE UNPREDICTABLE

The period of time between our initial contact with a customer and the
receipt of an actual purchase order may span a year or more. During this time,
customers may perform, or require us to perform, extensive and lengthy
evaluation and testing of our products before purchasing and using them in their
equipment. Our customers do not typically share information on the duration or
magnitude of these qualification procedures. The length of these qualification
processes also may vary substantially by product and customer, and, thus, cause
our results of operations to be unpredictable. While our potential customers are
qualifying our products and before they place an order with us, we may incur
substantial sales and marketing expenses and expend significant management
effort. Even after incurring such costs we ultimately may not sell any products
to such potential customers. In addition, these qualification processes often
make it difficult to obtain new customers, as customers are reluctant to expend
the resources necessary to qualify a new supplier if they have one or more
existing qualified sources. Once our products have been qualified, our
agreements with our customers have no minimum purchase commitments. Failure of
our customers to incorporate our products into their systems would significantly
harm our business.

WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR ASSEMBLY
REQUIREMENTS AND IF THESE MANUFACTURERS FAIL TO PROVIDE US WITH ADEQUATE
SUPPLIES OF HIGH-QUALITY PRODUCTS, OUR COMPETITIVE POSITION, REPUTATION AND
BUSINESS COULD BE HARMED

We currently rely on three contract manufacturers for substantially all of
our assembly requirements. We do not have long term contracts with any of these
manufacturers. We have experienced delays in product shipments from contract
manufacturers in the past, which in turn delayed product shipments to our
customers. We may in the future experience similar delays or other problems,
such as inferior quality and insufficient quantity of product, any of which
could significantly harm our business. We cannot assure you that we will be able
to effectively manage our contract manufacturers or that these manufacturers
will meet our future requirements for timely delivery of products of sufficient
quality and quantity. We intend to regularly introduce new products and product
enhancements, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract manufacturers.
The inability of our contract manufacturers to provide us with adequate supplies
of high-quality products or the loss of any of our contract manufacturers would
cause a delay in our ability to fulfill orders while we obtain a replacement
manufacturer and would significantly harm our business.

If the demand for our products grows, we will need to increase our material
purchases, contract manufacturing capacity and internal test and quality
assurance functions. Any disruptions in product

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flow could limit our revenue, adversely affect our competitive position and
reputation and result in additional costs or cancellation of orders under
agreements with our customers.

In addition, we are considering sourcing a significant portion of our
contract manufacturing internationally. Additional risks associated with
international contract manufacturing include:

- unexpected changes in regulatory requirements;

- legal uncertainties regarding liability, tariffs and other trade barriers;

- inadequate protection of intellectual property in some countries;

- greater incidence of shipping delays;

- limited oversight of manufacturing operations;

- potential political and economic instability; and

- currency fluctuations.

Any of these factors could significantly impair our ability to source our
contract manufacturing requirements internationally.

WE MAY LOSE SALES IF OUR SUPPLIERS FAIL TO MEET OUR NEEDS

We currently purchase several key components used in the manufacture of our
products from single or limited sources. We depend on these sources to meet our
needs. Moreover, we depend on the quality of the products supplied to us over
which we have limited control. We have encountered shortages and delays in
obtaining components in the past and expect to encounter shortages and delays in
the future. If we cannot supply products due to a lack of components, or are
unable to redesign products with other components in a timely manner, our
business will be significantly harmed. We have no long-term or short-term
contracts for any of our components. As a result, a supplier can discontinue
supplying components to us without penalty. If a supplier discontinued supplying
a component, our business may be harmed by the resulting product manufacturing
and delivery delays.

We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for particular
components. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers. Any of these
occurrences would significantly harm our business.

WE ARE DEPENDENT ON WIDESPREAD MARKET ACCEPTANCE OF TWO PRODUCT FAMILIES, AND
OUR REVENUES WILL DECLINE IF THE MARKET DOES NOT CONTINUE TO ACCEPT EITHER OF
THESE PRODUCT FAMILIES

We currently derive substantially all of our revenue from sales of our
optical subsystems and network performance test systems. We expect that revenue
from these products will continue to account for substantially all of our
revenue for the foreseeable future. Accordingly, widespread acceptance of these
products is critical to our future success. If the market does not continue to
accept either our optical subsystems or our network performance test systems,
our revenues will decline significantly. Factors that may affect the market
acceptance of our products include the continued growth of the markets for LANs,
SANs and extended versions of these networks and, in particular, Gigabit
Ethernet and Fibre Channel-based technologies as well as the performance, price
and total cost of ownership of our products and the availability, functionality
and price of competing products and technologies. Many of these factors are
beyond our control. In addition, in order to achieve widespread market
acceptance, we must differentiate ourselves from the competition through product
offerings and brand name recognition. We cannot assure you that we will be
successful in making this differentiation or achieving

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widespread acceptance of our products. Failure of our existing or future
products to maintain and achieve widespread levels of market acceptance will
significantly impair our revenue growth.

BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL

We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, technical, sales and marketing,
finance and manufacturing personnel. In particular, we will need to increase the
number of technical staff members with experience in high-speed networking
applications as we further develop our product lines. Competition for these
highly skilled employees in our industry is intense. Our failure to attract and
retain these qualified employees could significantly harm our business. The loss
of the services of any of our qualified employees, the inability to attract or
retain qualified personnel in the future or delays in hiring required personnel
could hinder the development and introduction of and negatively impact our
ability to sell our products. In addition, employees may leave our company and
subsequently compete against us. Moreover, companies in our industry whose
employees accept positions with competitors frequently claim that their
competitors have engaged in unfair hiring practices. We have been subject to
claims of this type and may be subject to such claims in the future as we seek
to hire qualified personnel. Some of these claims may result in material
litigation. We could incur substantial costs in defending ourselves against
these claims, regardless of their merits.

CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS
TO UPGRADE OUR INFRASTRUCTURE

We have experienced a period of rapid growth, which has placed a significant
strain on our resources. Unless we manage our growth effectively, we may make
mistakes in operating our business, such as inaccurate sales forecasting,
material planning and financial reporting, which may result in fluctuations in
our operating results and cause the price of our stock to decline. We plan to
continue to expand our operations significantly. This anticipated growth will
continue to place a significant strain on our management and operational
resources. In order to manage our growth effectively, we must implement and
improve our operational systems, procedures and controls on a timely basis. If
we cannot manage growth effectively, our business could be significantly harmed.

OUR PRODUCTS MAY CONTAIN DEFECTS WHICH MAY CAUSE US TO INCUR SIGNIFICANT COSTS,
DIVERT OUR ATTENTION FROM PRODUCT DEVELOPMENT EFFORTS AND RESULT IN A LOSS OF
CUSTOMERS

Networking products frequently contain undetected software or hardware
defects when first introduced or as new versions are released. Our products are
complex and defects may be found from time to time. In addition, our products
are often embedded in or deployed in conjunction with our customers' products
which incorporate a variety of components produced by third parties. As a
result, when problems occur, it may be difficult to identify the source of the
problem. These problems may cause us to incur significant damages or warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relation problems or
loss of customers, all of which would harm our business.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
BUSINESS

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adequately protect our proprietary rights could result in our competitors
offering similar products, potentially resulting in loss of a competitive
advantage and decreased revenues. Despite our efforts to protect our proprietary
rights, existing patent, copyright, trademark and trade secret laws afford only
limited protection. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. Attempts may be made to copy or reverse engineer aspects of our products
or to obtain and use information that we regard as proprietary. Accordingly, we
may not be able to prevent misappropriation of our technology or deter others
from developing similar technology. Furthermore, policing the unauthorized use
of our products is difficult. Litigation may be necessary in the future to
enforce our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. This litigation could result in substantial
costs and diversion of resources and could significantly harm our business.

CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS

The networking industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
We are currently involved in a patent infringement lawsuit. See "Risk
Factors--We are subject to a pending legal proceeding." In addition, from time
to time, other parties may assert patent, copyright, trademark and other
intellectual property rights to technologies and in various jurisdictions that
are important to our business. Any claims asserting that our products infringe
or may infringe proprietary rights of third parties, if determined adversely to
us, could significantly harm our business. Any claims, with or without merit,
could be time-consuming, result in costly litigation, divert the efforts of our
technical and management personnel, cause product shipment delays or require us
to enter into royalty or licensing agreements, any of which could significantly
harm our business. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. In addition, our agreements with
our customers typically require us to indemnify our customers from any expense
or liability resulting from claimed infringement of third party intellectual
property rights. In the event a claim against us was successful and we could not
obtain a license to the relevant technology on acceptable terms or license a
substitute technology or redesign our products to avoid infringement, our
business would be significantly harmed.

IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION AND RESELLER DISTRIBUTION
CHANNELS OR SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION, OUR ABILITY TO
INCREASE OUR REVENUES WILL BE HARMED

Historically, we have relied primarily on a limited direct sales
organization, supported by third party manufacturers' representatives, to sell
our products domestically and on indirect distribution channels to sell our
products internationally. Our distribution strategy focuses primarily on
developing and expanding our direct sales organization in North America and our
indirect distribution channels internationally. We may not be able to
successfully expand our direct sales organization and the cost of any expansion
may exceed the revenue generated. To the extent that we are successful in
expanding our direct sales organization, we cannot assure you that we will be
able to compete successfully against the significantly larger and well-funded
sales and marketing operations of many of our current or potential competitors.
In addition, if we fail to develop relationships with significant international
resellers or domestic manufacturers' representatives, of if these resellers or
representatives are not successful in their sales or marketing efforts, sales of
our products may decrease and our business would be significantly harmed. We
have granted exclusive rights to substantially all of our resellers to sell our
product and to our representatives to market our products in their specified
territories. Our resellers and representatives may not market our products
effectively or continue to devote the resources necessary to provide us with
effective sales, marketing and technical support. Our inability to effectively
manage the expansion of our domestic sales and support staff or maintain
existing or establish new relationships with domestic manufacturer
representatives and international resellers would harm our business.

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IF WE OR OUR SUPPLIERS, MANUFACTURERS, CUSTOMERS OR SERVICE PROVIDERS FAIL TO BE
YEAR 2000 COMPLIANT, OUR BUSINESS MIGHT BE SEVERELY DISRUPTED

The risk that software or hardware inaccurately process dates following the
year 2000 presents several risks for our business. In particular, we are subject
to:

- costs associated with the failure of our products to be year 2000
compliant, including potential warranty or other claims from our
customers, which may result in significant expense to us;

- business shutdowns or slowdowns as a result of a failure of the internal
management systems we use to run our business, which could disrupt our
business operations;

- interruption of product or component supplies, or a reduction in product
quality, as a result of the failure of systems used by our manufacturers
or suppliers; and

- reductions or deferrals in sales activities as a result of year 2000
compliance issues of our customers.

Our internal year 2000 compliance review is focused on reviewing our
internal computer information and security systems for year 2000 compliance, and
developing and implementing remedial programs to resolve year 2000 issues in a
timely manner; however, we have not tested our products in every possible
computer environment, and therefore such products may not be fully year 2000
compliant. Additionally, we are contacting our third party suppliers and
manufacturers and requesting their written assurances that their systems are
year 2000 compliant. To date, our year 2000 costs have been primarily driven by
the cost of our personnel conducting the year 2000 compliance review. We
estimate such costs to date have been $100,000.

If our suppliers, manufacturers, vendors, major distributors and partners
fail to correct their year 2000 problems, these failures could result in an
interruption in, or a failure of, our normal business activities or operations.
In particular, the failure of a sole or limited source supplier or contract
manufacturer to be year 2000 compliant could seriously interrupt our
manufacturing process, which could substantially reduce our revenues. If a year
2000 problem occurs, it may be difficult to determine which vendor's products
have caused the problem. These failures could interrupt our operations and
damage our relationships with our customers. Due to the general uncertainty
inherent in the year 2000 problem resulting from the readiness of third-party
suppliers and vendors, we are unable to determine at this time whether any year
2000 failures will harm us.

Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems. This
situation may reduce funds available to purchase our products. Therefore, some
customers may wait to purchase our products until after the year 2000, which may
reduce our revenue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."

ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS

We expect to review opportunities to buy other businesses or technologies
that would complement our current products, expand the breadth of our markets or
enhance our technical capabilities, or that may otherwise offer growth
opportunities. While we have no current agreements or negotiations underway, we
may buy businesses, products or technologies in the future. If we make any
future acquisitions, we could issue stock that would dilute existing
stockholders' percentage ownership, incur substantial debt or assume contingent
liabilities. Our experience in acquiring other business and technologies is
limited. Potential acquisitions also involve numerous risks, including:

- problems assimilating the purchased operations, technologies or products;

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<PAGE>
- unanticipated costs associated with the acquisition;

- diversion of management's attention from our core business;

- adverse effects on existing business relationships with suppliers and
customers;

- risks associated with entering markets in which we have no or limited
prior experience; and

- potential loss of key employees of purchased organizations.

We cannot assure you that we would be successful in overcoming problems
encountered in connection with such acquisitions, and our inability to do so
could significantly harm our business.

OUR EXECUTIVE OFFICERS AND DIRECTORS AND ENTITIES AFFILIATED WITH THEM WILL
CONTINUE TO OWN A LARGE PERCENTAGE OF OUR VOTING STOCK AFTER THE OFFERING, WHICH
WILL ALLOW THEM TO CONTROL ALL MATTERS REQUIRING STOCKHOLDER APPROVAL

Upon completion of this offering, our executive officers, directors and 5%
or greater stockholders will beneficially own 33,503,887 shares or approximately
66.5% of the outstanding shares of common stock, or shares or %, assuming
the full exercise of the underwriters' over-allotment option. These
stockholders, acting together, would be able to control all matters requiring
approval by stockholders, including the election or removal of directors and the
approval of mergers or other business combination transactions. This
concentration of ownership could have the effect of delaying or preventing a
change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have an adverse effect
on the market price of our common stock or prevent our stockholders from
realizing a premium over the market price for their shares of common stock. See
"Principal and Selling Stockholders."

IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS OR MANAGE THEM
EFFECTIVELY, OUR BUSINESS WOULD BE SIGNIFICANTLY HARMED

Historically, substantially all of our sales have been made to customers in
North America. To address expanding international markets, we have recently
established relationships with distributors in Japan, the United Kingdom and
Israel. The growth of our distribution channels outside of North America will be
subject to a number of risks and uncertainties, including:

- the difficulties and costs of obtaining regulatory approvals for our
products;

- unexpected changes in regulatory requirements;

- legal uncertainties regarding liability, tariffs and other trade barriers;

- inadequate protection of intellectual property in some countries;

- increased difficulty in collecting delinquent or unpaid accounts;

- potentially adverse tax consequences;

- adoption of different local standards; and

- potential political and economic instability.

Any of these factors could significantly harm our existing international
operations and business or significantly impair our ability to expand into
international markets.

Our international sales currently are U.S. dollar-denominated. As a result,
an increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets. In the future, we
may elect to invoice some of our international customers in

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<PAGE>
local currency. Doing so will subject us to fluctuations in exchange rates
between the U.S. dollar and the particular local currency.

DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL
TO OUR STOCKHOLDERS

Some provisions of our Certificate of Incorporation and Bylaws, as well as
provisions of Delaware law, may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable. These provisions include:

- authorizing the board to issue additional preferred stock;

- prohibiting cumulative voting in the election of directors;

- limiting the persons who may call special meetings of stockholders;

- prohibiting stockholder actions by written consent;

- creating a classified Board of Directors pursuant to which our directors
are elected for staggered three-year terms; and

- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.

For a more detailed discussion of such anti-takeover provisions, see
"Description of Capital Stock."

OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS

Net proceeds of this offering are not allocated for a specific purpose. Our
management will have broad discretion in determining how to spend the net
proceeds from this offering and may spend the proceeds in a manner that our
stockholders may not deem desirable. We cannot assure you that our investments
and use of the net proceeds of this offering will yield favorable returns or
results.

OUR HEADQUARTERS AND CONTRACT MANUFACTURERS ARE ALL LOCATED IN NORTHERN
CALIFORNIA WHERE NATURAL DISASTERS MAY OCCUR

Currently, our corporate headquarters and contract manufacturers are located
in Northern California. Northern California historically has been vulnerable to
natural disasters and other risks, such as earthquakes, fires and floods, which
at times have disrupted the local economy and posed physical risks to our and
our manufacturers' property. We presently do not have redundant, multiple site
capacity in the event of a natural disaster. In the event of such disaster, our
business would suffer.

SUBSTANTIAL NUMBERS OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE
IN THE PUBLIC MARKET SIMULTANEOUSLY, WHICH COULD CAUSE THE MARKET PRICE OF OUR
STOCK TO DECLINE

Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of shares is
available for sale, could cause the market price of our common stock to decline.
The number of shares of common stock available for sale in the public market
will be limited by lock-up agreements under which the holders of substantially
all of our outstanding shares of common stock and options and warrants to
purchase common stock will agree not to sell or otherwise dispose of any of
their shares for a period of 180 days after the date of this prospectus without
the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Upon the expiration of these lock-up agreements and assuming the full exercise
of all vested options to purchase common stock outstanding on October 15, 1999,
approximately 39,807,829 shares of common

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<PAGE>
stock will become eligible for sale simultaneously. Moreover, Merrill Lynch may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. In addition to the
adverse effect a price decline could have on holders of common stock, that
decline would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities. See "Shares
Eligible for Future Sale" and "Underwriting."

YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE

The initial public offering price of our common stock will be substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock immediately after the offering. Therefore, based on an assumed
initial public offering price of $13.00 per share, if you purchase our common
stock in this offering you will suffer immediate dilution of approximately
$11.06 per share. If additional shares are sold by the underwriters following
exercise of their over-allotment option, or if outstanding options or warrants
for our common stock are exercised, there will be further dilution. See
"Dilution."

OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT
OR ABOVE THE OFFERING PRICE

There previously has not been a public market for our common stock. We
cannot predict the extent to which investor interest in us will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for our common stock will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. For a
discussion of the factors to be considered in determining the initial public
offering price, see "Underwriting."

In addition, the stock market in general, and the Nasdaq National Market and
stocks of technology companies in particular, have experienced extreme price and
volume fluctuations. This volatility is often unrelated or disproportionate to
the operating performance of these companies. Broad market and industry factors
may adversely affect the market price of our common stock, regardless of our
actual operating performance. In the past, following periods of volatility in
the market price of a company's securities, securities class-action litigation
has often been initiated against these companies. This litigation, if initiated,
could result in substantial costs and a diversion of management's attention and
resources, which would significantly harm our business.

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. We use words like
"anticipates," "believes," "plans," "expects," "future," "intends" and similar
expressions to identify these forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including:

- uncertainty regarding the commercial acceptance of high-speed networking
and storage technologies;

- uncertainty regarding our future operating results;

- our ability to introduce new products;

- delays or losses of sales due to long sales and implementation cycles for
our products;

- the possibility of lower prices, reduced gross margins and loss of market
share due to increased competition; and

- increased demands on our resources due to anticipated growth.

In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information or future events.

17
<PAGE>
USE OF PROCEEDS

We estimate our net proceeds from the sale of the 7,700,000 shares of common
stock offered by Finisar in this offering to be approximately $91.9 million,
based on an assumed initial public offering price of $13.00 per share and after
deducting the estimated underwriting discount and offering expenses. We will not
receive any of the proceeds from any shares that may be sold by the selling
stockholders upon exercise of the underwriters' over-allotment option.

We intend to use the net proceeds of this offering:

- to repay outstanding indebtedness of approximately $11.0 million under our
bank credit facility;

- to redeem all outstanding shares of our redeemable preferred stock for
$2,640,260; and

- for general corporate purposes, including capital expenditures and working
capital.

We may also use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. However, we have no current commitments or agreements with respect
to any of these types of acquisitions or investments. Pending these uses, we
intend to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities.

Borrowings under our credit facility bear interest at our election at the
time of borrowing at either the London Interbank Offering Rate or the bank's
prime rate. The interest rate on our credit facility was 7.38% per annum as of
September 30, 1999.

DIVIDEND POLICY

We have never paid cash dividends on our capital stock. We currently intend
to retain future earnings to finance the growth and development of our business,
and we do not anticipate paying any cash dividends in the foreseeable future. In
addition, the terms of our bank credit agreement currently prohibit the payment
of dividends on our capital stock.

18
<PAGE>
CAPITALIZATION

The following table sets forth our short-term debt and total capitalization
as of July 31, 1999:

- on an actual basis;

- on a pro forma basis, giving effect to the conversion of all outstanding
shares of convertible redeemable preferred stock into 8,981,897 shares of
common stock and 12,039,486 shares of redeemable preferred stock; and

- on a pro forma basis, as further adjusted to reflect the sale of 7,700,000
shares of common stock by Finisar in this offering, at an assumed initial
public offering price of $13.00 per share after deducting the estimated
underwriting discount and estimated offering expenses, and our receipt and
application of the net proceeds.

<TABLE>
<CAPTION>
JULY 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of capital lease obligations.................................. $ 51 $ 51 $ 51
========= ========= =========

Long-term portion of note payable and capital lease obligations............... $ 11,019 $ 11,019 $ 4

Convertible redeemable preferred stock, no par value: 12,100,000 shares
authorized, 12,039,486 shares issued and outstanding, actual; 12,100,000
shares authorized, no shares issued or outstanding, pro forma; no shares
authorized, issued or outstanding, proforma as adjusted..................... 26,260 -- --

Redeemable preferred stock, no par value: 12,100,000 shares authorized, no
shares issued or outstanding, actual; 12,100,000 shares authorized,
12,039,486 issued and outstanding, pro forma; no shares authorized, issued
or outstanding, pro forma as adjusted....................................... -- 2,640 --

Stockholders' equity (deficit):

Preferred stock, $0.001 par value; no shares authorized, issued or
outstanding, actual and pro forma; 5,000,000 shares authorized, no
shares issued or outstanding, pro forma as adjusted..................... -- -- --

Common stock, no par value; 75,000,000 shares authorized, 32,512,365
shares issued and outstanding, actual; 75,000,000 shares authorized,
41,494,262 shares issued and outstanding, pro forma; Common Stock,
$0.001 par value; 200,000,000 shares authorized, 49,194,262 shares
issued and outstanding, pro forma as adjusted (1)....................... 4,469 28,088 119,981

Deferred stock compensation............................................... (1,689) (1,689) (1,689)

Notes receivable from stockholders........................................ (1,671) (1,671) (1,671)

Retained earnings (accumulated deficit) (2)............................... (21,059) (21,059) (21,059)
--------- --------- ---------

Total stockholders' equity (deficit) (2)................................ $ (19,950) $ 3,669 $ 95,562
========= ========= =========

Total capitalization.................................................. $ 17,329 $ 17,328 $ 95,566
========= ========= =========
</TABLE>

- ------------------------------

(1) Excludes:

- 1,356,540 shares of common stock issuable upon exercise of options
outstanding at July 31, 1999 under our 1989 and 1999 stock option plans,
with a weighted average exercise price of $0.50 per share, 1,470,000
shares of common stock issuable upon exercise of options granted between
August 1, 1999 and October 15, 1999, with a weighted average exercise
price of $3.5347 per share, and an additional 5,065,000 shares reserved
for issuance under our 1999 stock option plan as of October 15, 1999; and

- 250,000 shares of common stock reserved for issuance under our 1999
employee stock purchase plan.

See "Management--Stock Plans," "Description of Capital Stock" and Note 6 to
our financial statements.

(2) Reflects retained earnings of $10.6 million without giving effect to the
repurchase of shares of our common stock for $31.7 million in November 1998.

19
<PAGE>
DILUTION

The pro forma net tangible book value of our common stock as of July 31,
1999 was approximately $3.6 million, or $0.09 per share. Pro forma net tangible
book value per share represents the amount of our total assets, excluding net
intangible assets, less our total liabilities, divided by the total number of
shares of common stock outstanding, after giving effect to the conversion of all
outstanding shares of convertible redeemable preferred stock into an aggregate
of 8,981,897 shares of common stock and 12,039,486 shares of redeemable
preferred stock, and the redemption of all outstanding shares of redeemable
preferred stock. Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by investors in this
offering and the pro forma net tangible book value per share of our common stock
immediately after the offering. After giving effect to the sale of the 7,700,000
shares of common stock by us in this offering, at an assumed initial public
offering price of $13.00 per share, and after deducting the estimated
underwriting discount and estimated offering expenses payable by us, the pro
forma net tangible book value of our common stock would have been
$95.5 million, or $1.94 per share. This represents an immediate increase in net
tangible book value of $1.85 per share to existing stockholders and an immediate
dilution of $11.06 per share to new investors. The following table illustrates
this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $ 13.00
---------
Pro forma net tangible book value per share as of July 31,
1999........................................................ $ 0.09
Increase per share attributable to new investors.............. $ 1.85
---------
Pro forma net tangible book value per share after this
offering...................................................... $ 1.94
---------
Dilution per share to new investors............................. $ 11.06
=========
</TABLE>

The following table summarizes, on a pro forma basis, as of July 31, 1999:

- the number of shares of common stock purchased from us;

- the total consideration paid to us;

- the average price per share paid by existing stockholders; and

- the average price per share paid by new investors, before deducting the
estimated underwriting discount and offering expenses payable by us.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................... 41,494,262 84.3% $ 26,799,005 21.1% $ 0.65
New investors................................... 7,700,000 15.7 100,100,000 78.9 13.00
------------- --------- -------------- ---------
Total....................................... 49,194,262 100.0% $ 126,899,005 100.0%
============= ========= ============== =========
</TABLE>

In the event that the underwriters exercise in full their over-allotment
option, sales by the selling stockholders in this offering will reduce the
number of shares of common stock held by existing stockholders to 40,339,262, or
approximately 82.0% of the total number of shares of common stock outstanding
after this offering, and will increase the number of shares held by new
investors to 8,855,000, or approximately 18.0% of the total number of shares of
common stock outstanding after this offering. See "Principal and Selling
Stockholders."

The information in the above table excludes 1,356,540 shares of common stock
issuable upon exercise of options outstanding at July 31, 1999 under our 1989
and 1999 stock option plans, with a weighted average exercise price of $0.50 per
share, and 1,470,000 shares of common stock issuable upon exercise of options
granted between August 1, 1999 and October 15, 1999, with a weighted average
exercise price of $3.5347 per share. Giving effect to the full vesting and
exercise of all options outstanding as of October 15, 1999, the pro forma net
tangible book value per share as of July 31, 1999 would be $1.95, the dilution
per share to the new investors would be $11.05, and the consideration paid by
the existing stockholders and the new investors would represent 24.6% and 75.4%,
respectively, of the total consideration paid for all shares. See
"Management--Stock Plans" and Note 6 to our financial statements.

20
<PAGE>
SELECTED FINANCIAL DATA

You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The statement of operations data set forth below
for the years ended April 30, 1997, 1998 and 1999 and the balance sheet data as
of April 30, 1998 and 1999 are derived from, and are qualified by reference to,
our audited financial statements included elsewhere in this prospectus. The
balance sheet data as of April 30, 1997 are derived from audited financial
statements not included in this prospectus. The statement of operations data set
forth below for the years ended April 30, 1995 and 1996 and the balance sheet
data as of April 30, 1995 and 1996 are derived from unaudited financial
statements not included in this prospectus. The statement of operations data set
forth below for the three month periods ended July 31, 1998 and 1999 and the
balance sheet data as of July 31, 1999 are derived from, and are qualified by
reference to, our unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all normal recurring
adjustments that we consider necessary for a fair presentation of our financial
position and results of operations. The results of operations for the three
months ended July 31, 1999 are not necessarily indicative of the results that
may be expected for the full fiscal year ending April 30, 2000, or any other
future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 2,684 $ 5,660 $ 8,457 $ 22,067 $ 35,471 $ 6,794 $ 13,879
Cost of revenues................................ 862 3,122 3,438 8,705 15,514 2,666 6,252
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................................... 1,822 2,538 5,019 13,362 19,957 4,128 7,627
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development...................... 745 1,442 2,536 3,806 7,864 1,394 2,840
Sales and marketing........................... 144 116 645 1,629 4,145 833 1,542
General and administrative.................... 279 280 464 833 2,299 298 759
Amortization of deferred compensation......... -- -- -- -- 428 -- 287
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................... 1,168 1,838 3,645 6,268 14,736 2,525 5,428
--------- --------- --------- --------- --------- --------- ---------
Income from operations.......................... 654 700 1,374 7,094 5,221 1,603 2,199
Interest income (expense), net.................. 1 10 13 4 (274) (7) (89)
Other income (expense), net..................... -- -- -- (25) (28) 25 (28)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes...................... 655 710 1,387 7,073 4,919 1,621 2,082
Provision for income taxes...................... 222 247 440 2,715 1,874 568 829
--------- --------- --------- --------- --------- --------- ---------
Net income...................................... $ 433 $ 463 $ 947 $ 4,358 $ 3,045 $ 1,053 $ 1,253
========= ========= ========= ========= ========= ========= =========
Net income per share:
Basic......................................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
========= ========= ========= ========= ========= ========= =========
Diluted....................................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
========= ========= ========= ========= ========= ========= =========
Shares used in per share calculations:
Basic......................................... 44,000 44,000 44,000 43,753 36,860 41,800 29,464
========= ========= ========= ========= ========= ========= =========
Diluted....................................... 44,000 44,000 44,000 43,753 44,938 41,800 42,610
========= ========= ========= ========= ========= ========= =========
</TABLE>

<TABLE>
<CAPTION>
APRIL 30,
----------------------------------------------------- JULY 31,
1995 1996 1997 1998 1999 1999
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 474 $ 772 $ 422 $ 722 $ 5,044 $ 5,404
Working capital................................. 757 856 1,685 5,729 13,011 14,007
Total assets.................................... 1,277 1,948 2,987 7,761 20,955 24,459
Long-term debt.................................. -- -- -- 416 11,032 11,019
Convertible redeemable preferred stock.......... -- -- -- -- 26,260 26,260
Total stockholders' equity (deficit)............ 678 1,141 2,088 6,447 (21,503) (19,950)
</TABLE>

21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ substantially from
those anticipated in these forward-looking statements as a result of many
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read together with our financial
statements and related notes thereto included elsewhere in this prospectus.

OVERVIEW

We were incorporated in 1987 and funded our initial product development
efforts largely through revenues derived under research and development
contracts. After shipping our first product in 1991, we continued to finance our
operations principally through internal cash flow and periodic bank borrowings
until November 1998. At that time we raised $5.6 million of net proceeds from
the sale of equity securities and bank borrowings to fund the continued growth
and development of our business.

Our revenues are derived principally from sales of our optical subsystems
and network performance test systems to networking and storage systems
manufacturers. Sales to our two largest customers accounted for 45.9% of our
revenues for the fiscal year ended April 30, 1999 and 53.5% of our revenues for
the three months ended July 31, 1999. Although we are attempting to expand our
customer base, we expect that significant customer concentration will continue
for the foreseeable future.

We sell our products through our direct sales force, with the support of our
manufacturers' representatives, directly to domestic customers and indirectly
through distribution channels to international customers. We recognize revenues
at the time of shipment. The evaluation and qualification cycle prior to the
initial sale for our optical subsystems may span a year or more, while the sales
cycle for our test systems is usually considerably shorter. Historically,
substantially all of our sales have been made to customers in North America. To
address expanding international markets, we have recently established
relationships with distributors in Japan, the United Kingdom and Israel.

Our cost of revenues consists of materials, salaries and related expenses
for manufacturing personnel, manufacturing overhead and warranty expense. We
outsource the majority of our assembly operations, and we conduct manufacturing
engineering, supply chain management, quality assurance and documentation
control at our facility in Sunnyvale, California. Accordingly, a significant
portion of our cost of revenues consists of payments to our contract
manufacturers. There can be no assurance

22
<PAGE>
that we will be able to reduce our cost of revenues to keep pace with
anticipated decreases in average selling prices.

Our gross profit margins vary among our product families, and our gross
margins are generally higher on our network performance test systems than on our
optical subsystems. We expect that our overall gross margins will fluctuate from
period to period as a result of shifts in product mix, anticipated decreases in
average selling prices and our ability to reduce product costs.

Research and development expenses consist primarily of salaries and related
expenses for design engineers and other technical personnel, the cost of
developing prototypes and fees paid to consultants. We charge all research and
development expenses to operations as incurred. We believe that continued
investment in research and development is critical to our long-term success.
Accordingly, we expect that our research and development expenses will increase
in future periods.

Sales and marketing expenses consist primarily of commissions paid to
manufacturers' representatives, salaries and related expenses for personnel
engaged in sales, marketing and field support activities and other costs
associated with the promotion of our products. We intend to pursue aggressive
selling and marketing campaigns and to expand our direct sales organization. We
therefore expect that our sales and marketing expenses will increase in future
periods.

General and administrative expenses consist primarily of salaries and
related expenses for administrative, finance and human resources personnel,
professional fees and other corporate expenses. We expect that, in support of
our continued growth and our operations as a public company, general and
administrative expenses will continue to increase for the foreseeable future.
General and administrative expenses are also likely to be affected in future
periods by significant legal fees and expenses incurred in connection with
pending patent litigation.

In connection with the grant of stock options to employees between
August 1, 1998 and April 30, 1999, we recorded deferred stock compensation of
$2.4 million in fiscal 1999, representing the difference between the deemed
value of our common stock for accounting purposes and the option exercise price
of these options at the date of grant. Deferred compensation is presented as a
reduction of stockholder's equity, with accelerated amortization recorded over
the vesting period which is typically five years. We amortized $428,000 and
$287,000 of deferred compensation during fiscal 1999 and the three months ended
July 31, 1999. In connection with stock options granted between August 1, 1999
and October 15, 1999, we will record additional deferred compensation of
approximately $13.0 million in the three months ending October 31, 1999. We
expect to record amortization expense relating to deferred stock compensation
approximately as follows: $5.2 million during the remainder of fiscal 2000,
$4.4 million during fiscal 2001, $2.7 million during fiscal 2002, $1.5 million
during fiscal 2003 and $851,000 thereafter. The amount of deferred compensation
expense to be recorded in future periods could decrease if options for which
accrued but unvested compensation has been recorded are forfeited.

23
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................. 40.7 39.4 43.7 39.2 45.0
--------- --------- --------- --------- ---------
Gross profit................................................. 59.3 60.6 56.3 60.8 55.0
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................... 30.0 17.2 22.2 20.5 20.5
Sales and marketing........................................ 7.6 7.4 11.7 12.3 11.1
General and administrative................................. 5.5 3.8 6.5 4.4 5.5
Amortization of deferred compensation...................... -- -- 1.1 -- 2.1
--------- --------- --------- --------- ---------
Total operating expenses................................. 43.1 28.4 41.5 37.2 39.2
--------- --------- --------- --------- ---------
Income from operations....................................... 16.2 32.2 14.8 23.6 15.8
Interest income (expense), net............................... 0.2 0.0 (0.8) (0.1) (0.6)
Other income (expense), net.................................. -- (0.1) (0.1) 0.4 (0.2)
--------- --------- --------- --------- ---------
Income before income taxes................................... 16.4 32.1 13.9 23.9 15.0
Provision for income taxes................................... 5.2 12.3 5.3 8.4 6.0
--------- --------- --------- --------- ---------
Net income................................................... 11.2% 19.8% 8.6% 15.5% 9.0%
========= ========= ========= ========= =========
</TABLE>

COMPARISON OF THREE MONTHS ENDED JULY 31, 1999 AND JULY 31, 1998

REVENUES. Revenues increased 104% from $6.8 million for the three months
ended July 31, 1998 to $13.9 million for the three months ended July 31, 1999.
This increase was primarily due to increased unit sales of our optical
subsystems and, to a lesser extent, increased unit sales of our network
performance test systems. Sales of optical subsystems and test systems accounted
for 68.3% and 31.7%, respectively, of revenues for the three months ended
July 31, 1999, compared to 54.0% and 46.0%, respectively, for the three months
ended July 31, 1998. Sales to Newbridge Networks and EMC Corporation accounted
for 34.9% and 19.0%, respectively, of revenues for the three months ended
July 31, 1999, compared to 14.9% and 32.0%, respectively, for the three months
ended July 31, 1998.

GROSS PROFIT. Gross profit increased from $4.1 million for the three months
ended July 31, 1998 to $7.6 million for the three months ended July 31, 1999. As
a percentage of revenues, gross profit decreased from 60.8% for the three months
ended July 31, 1998 to 55.0% for the three months ended July 31, 1999. This
decrease in gross profit margin was primarily related to a shift in product mix,
with a greater proportion of revenues being generated by sales of optical
subsystems, compared to sales of network performance test systems.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 104% from $1.4 million for the three months ended July 31, 1998 to
$2.8 million for the three months ended July 31, 1999. This increase was
primarily related to an increase in the number of research and development
personnel and increased expenditures for materials purchased for development
projects currently in process. Despite this increase, research and development
expenses remained constant as a percentage of revenues at 20.5% in the three
months ended July 31, 1998 and 1999.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 85%
from $833,000 for the three months ended July 31, 1998 to $1.5 million for the
three months ended July 31, 1999. This

24
<PAGE>
increase was primarily related to an increase in commissions paid to
manufacturers' representatives associated with the increase in revenues and an
increase in the number of sales and marketing personnel. Sales and marketing
expenses declined as a percentage of revenues from 12.3% in the three months
ended July 31, 1998 to 11.1% in the three months ended July 31, 1999.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 155% from $298,000 for the three months ended July 31, 1998 to
$759,000 for the three months ended July 31, 1999. This increase was primarily
the result of increased legal expenses, most of which were incurred in
connection with pending patent litigation, increased expenses for other
professional services, and an increase in the number of general and
administrative personnel. General and administrative expenses increased as a
percentage of revenues from 4.4% in the three months ended July 31, 1998 to 5.5%
in the three months ended July 31, 1999.

INTEREST INCOME (EXPENSE), NET. Interest income (expense), net decreased
from an expense of $7,000 for the three months ended July 31, 1998 to an expense
of $89,000 for the three months ended July 31, 1999. The increase in interest
expense reflected additional interest associated with a term loan of
$11.0 million beginning in November 1998.

PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$568,000 for the three months ended July 31, 1998 based on an effective rate of
35.0% to $829,000 for the three months ended July 31, 1999 based on a projected
annual effective tax rate of 35.0%, excluding the impact of deferred stock
compensation charges of 3.9%. The projected 1999 annual effective tax rate
differs from the statutory rate primarily due to state taxes offset by research
and development credits and projected benefits from a foreign sales corporation.
See Note 7 to our financial statements.

COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1997, 1998 AND 1999

REVENUES. Revenues increased from $8.5 million in fiscal 1997 to
$22.1 million in fiscal 1998 and $35.5 million in fiscal 1999. The 161% increase
from fiscal 1997 to fiscal 1998 reflected increased unit sales across both of
our product lines, with sales of optical subsystems and network performance test
systems representing 75.8% and 24.2% of revenues, respectively, in fiscal 1998,
compared to 71.9% and 28.1% in fiscal 1997. The 61% increase from fiscal 1998 to
fiscal 1999 was primarily due to increased unit sales of test systems which
accounted for 40.1% of revenues in fiscal 1999, while optical subsystems
accounted for 59.9%. Sales to our two principal customers during fiscal 1997,
1998 and 1999 were as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
SALES (IN MILLIONS)
------------------------------- -------------------------------
1997 1998 1999 1997 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Newbridge Networks................................ $ 3.5 $ 9.7 $ 8.9 41.4% 43.9% 25.1%
EMC............................................... $ 0.1 $ 3.2 $ 7.4 1.2% 14.6% 20.8%
</TABLE>

GROSS PROFIT. Gross profit increased from $5.0 million in fiscal 1997 to
$13.4 million in fiscal 1998 and $20.0 million in fiscal 1999. With product mix
remaining relatively unchanged between fiscal 1997 and 1998, our gross profit
margin remained relatively constant at 59.3% in fiscal 1997 and 60.6% in fiscal
1998. Our gross profit margin decreased to 56.3% in fiscal 1999 reflecting
startup costs associated with the introduction of new optical subsystem products
and lower average selling prices for some optical subsystems which more than
offset the shift in product mix toward a greater percentage of higher-margin
test system sales.

25
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $2.5 million in fiscal 1997 to $3.8 million in fiscal 1998 and
$7.9 million in fiscal 1999. The 50% increase from fiscal 1997 to fiscal 1998
was primarily due to an increase in the number of research and development
personnel. The 107% increase from fiscal 1998 to fiscal 1999 was primarily
related to an increase in the number of research and development personnel and
increased expenditures related to prototype development. Research and
development expenses declined as a percentage of revenues from 30.0% in fiscal
1997 to 17.2% in fiscal 1998 reflecting the 161% increase in revenues, but
increased to 22.2% in fiscal 1999.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$645,000 in fiscal 1997 to $1.6 million in fiscal 1998 and $4.1 million in
fiscal 1999. The 153% increase from fiscal 1997 to fiscal 1998 and the 154%
increase from fiscal 1998 to fiscal 1999 were each primarily due to increases in
commissions paid to manufacturers' representatives as a result of increased
sales and increases in the number of direct sales and marketing personnel. Sales
and marketing expenses as a percentage of revenues remained relatively unchanged
at 7.6% in fiscal 1997 compared to 7.4% in fiscal 1998, but increased to 11.7%
in fiscal 1999.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $464,000 in fiscal 1997 to $833,000 in fiscal 1998 and
$2.3 million in fiscal 1999. The 80% increase in fiscal 1998 was primarily
related to an increase in the number of administrative personnel. The 176%
increase in fiscal 1999 was primarily related to an expense of $397,000 in
connection with the relocation of our primary operations from Mountain View,
California to our new facility in Sunnyvale, California as well as increased
expenditures for legal and other professional services. General and
administrative expenses declined as a percentage of revenues from 5.5% in fiscal
1997 to 3.8% in fiscal 1998 and increased to 6.5% in fiscal 1999.

INTEREST INCOME (EXPENSE), NET. Interest income (expense), net remained
relatively unchanged from fiscal 1997 to fiscal 1998. In fiscal 1999, interest
expense of $274,000 reflected borrowings under our $11.0 million term loan
beginning in November 1998.

PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$440,000 in fiscal 1997 to $2.7 million in fiscal 1998 and decreased to
$1.9 million in fiscal 1999. The provision for income taxes is based on annual
effective tax rates of 31.7%, 38.4% and 35.0%, excluding the impact of deferred
stock compensation charges of 2.8%. The annual effective tax rates differ from
the statutory rate primarily due to state taxes, offset by research and
development tax credits. See Note 7 to our financial statements.

26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly statement of operations
data for the five quarters ended July 31, 1999, and such data expressed as a
percentage of revenues. This information reflects all normal non-recurring
adjustments that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results that may be
expected for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1998 1998 1999 1999 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $ 6,794 $ 7,402 $ 8,985 $ 12,290 $ 13,879
Cost of revenues............................................. 2,666 3,058 4,171 5,619 6,252
--------- --------- --------- --------- ---------
Gross profit................................................. 4,128 4,344 4,814 6,671 7,627
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................... 1,394 1,764 1,890 2,816 2,840
Sales and marketing........................................ 833 871 1,160 1,281 1,542
General and administrative................................. 298 421 484 1,096 759
Amortization of deferred compensation...................... -- 99 120 209 287
--------- --------- --------- --------- ---------
Total operating expenses................................. 2,525 3,155 3,654 5,402 5,428
--------- --------- --------- --------- ---------
Income from operations....................................... 1,603 1,189 1,160 1,269 2,199
Interest income (expense), net............................... (7) 17 (141) (143) (89)
Other income (expense), net.................................. 25 -- (21) (32) (28)
--------- --------- --------- --------- ---------
Income before income taxes................................... 1,621 1,206 998 1,094 2,082
Provision for income taxes................................... 568 458 384 464 829
--------- --------- --------- --------- ---------
Net income................................................... $ 1,053 $ 748 $ 614 $ 630 $ 1,253
========= ========= ========= ========= =========
AS A PERCENTAGE OF REVENUES:
Revenues..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................. 39.2 41.3 46.4 45.7 45.0
--------- --------- --------- --------- ---------
Gross profit................................................. 60.8 58.7 53.6 54.3 55.0
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................... 20.5 23.8 21.1 22.9 20.5
Sales and marketing........................................ 12.3 11.8 12.9 10.4 11.1
General and administrative................................. 4.4 5.7 5.4 8.9 5.5
Amortization of deferred compensation...................... -- 1.3 1.3 1.7 2.1
--------- --------- --------- --------- ---------
Total operating expenses................................. 37.2 42.6 40.7 43.9 39.2
--------- --------- --------- --------- ---------
Income from operations....................................... 23.6 16.1 12.9 10.4 15.8
Interest income (expense), net............................... (0.1) 0.2 (1.6) (1.2) (0.6)
Other income (expense), net.................................. 0.4 -- (0.2) (0.3) (0.2)
--------- --------- --------- --------- ---------
Income before income taxes................................... 23.9 16.3 11.1 8.9 15.0
Provision for income taxes................................... 8.4 6.2 4.3 3.8 6.0
--------- --------- --------- --------- ---------
Net income................................................... 15.5% 10.1% 6.8% 5.1% 9.0%
========= ========= ========= ========= =========
</TABLE>

Revenues increased steadily over the last five quarters as a result of
increased unit sales to an expanding customer base. The 37% increase in revenues
for the three months ended April 30, 1999 was primarily due to substantial
increases in shipments to several of our major customers and the introduction of
a new optical subsystem product.

Gross profit margins fluctuated over the five-quarter period, principally as
a result of a shift in product mix toward a greater percentage of lower margin
optical subsystem products and a lower percentage of higher margin test systems.
Gross margins were also negatively impacted in the second

27
<PAGE>
half of fiscal 1999 by start-up costs associated with the introduction of new
optical subsystem products and lower average selling prices for some optical
subsystems.

Quarterly increases in operating expenses reflected the continued expansion
of our operations throughout the five-quarter period. An expense of $397,000 in
connection with the relocation of our primary operations to our new facility was
included in general and administrative expenses for the fourth quarter ended
April 30, 1999. Net interest expense increased significantly beginning in the
three months ended January 31, 1999 as a result of the $11.0 million term loan
in November 1998.

We may experience a delay in generating or recognizing revenues for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenues for that quarter and are generally cancelable at any time.
Accordingly, we depend on obtaining orders in a quarter for shipment in that
quarter to achieve our revenue objectives. In addition, the timing of product
releases, purchase orders and product availability could result in significant
product shipments at the end of a quarter. Failure to ship these products by the
end of a quarter may adversely affect our operating results. Furthermore, our
customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty.

Most of our expenses, such as employee compensation and lease payments for
facilities and equipment are relatively fixed in the near term. In addition, our
expense levels are based in part on our expectations regarding future revenues.
As a result, any shortfall in revenues relative to our expectations could cause
significant changes in our operating results from quarter to quarter. Our
quarterly and annual operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
some of which are outside of our control. Due to the foregoing factors, you
should not rely on our quarterly revenues and operating results to predict our
future performance.

LIQUIDITY AND CAPITAL RESOURCES

From our inception through November 1998, we financed our operations
primarily through internal cash flow and periodic bank borrowings. In
November 1998, we raised $5.6 million of net proceeds from the sale of preferred
stock and bank borrowings to fund the continued growth and development of our
business.

As of July 31, our principal sources of liquidity were $5.4 million in cash
and cash equivalents, and $6.5 million available under a revolving loan
facility. Borrowings under the facility are collateralized by substantially all
of our assets and bear interest at our election at the time of borrowing at
either the London Interbank Offering Rate or the bank's prime rate. The interest
rate on our facility was 7.04% as of July 31, 1999.

Net cash provided by operating activities was $742,000 in fiscal 1998,
$1.1 million in fiscal 1999 and $913,000 in the three months ended July 31,
1999. Cash provided by operations for these periods was primarily due to
continued growth in revenues and net income offset in part by an increase in
related assets and liabilities for working capital purposes.

Net cash used in investing activities was $855,000 in fiscal 1998,
$2.1 million in fiscal 1999 and $550,000 in the three months ended July 31,
1999. Net cash used in investing activities consisted primarily of purchases of
equipment.

Net cash provided by financing activities was $413,000 in fiscal 1998 and
$5.4 million in fiscal 1999, and $2,000 was used in the three months ended
July 31, 1999. Net cash provided by financing activity in fiscal 1999 primarily
consisted of net proceeds of $26.3 million from the sale of preferred stock and
$11.0 million in bank borrowings under a term loan, offset by $31.7 million used
to repurchase shares of our outstanding common stock.

We had no material commitments for capital expenditures at July 31, 1999,
but we expect such expenditures to total approximately $5.0 million in fiscal
2000. These expenditures will primarily be for equipment, furniture and
leasehold improvements. We also have total minimum lease obligations of

28
<PAGE>
$8.7 million from July 31, 1999 through April 30, 2007, under non-cancelable
operating and capital leases.

We believe that our existing balances of cash and cash equivalents, together
with the net proceeds of this offering, our available credit facilities and cash
flow expected to be generated from our future operations, will be sufficient to
meet our cash needs for working capital and capital expenditures for at least
the next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. Our future capital requirements will
depend on many factors, including the rate of revenue growth, the extent to
which we utilize subcontractors, the timing and extent of spending to support
product development efforts and the expansion of our sales and marketing
efforts. There can be no assurance that additional equity or debt financing, if
required, will be available on terms that are acceptable or at all.

IMPACT OF YEAR 2000

Many currently installed computer systems and software products are coded to
accept only two-digit entries in date code fields. Beginning in the year 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. Computer programs or hardware that
have date-sensitive software or embedded chips and have not been upgraded to
comply with these "year 2000" requirements may recognize a date using "00" as
the year 1900 rather that the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.

GENERAL READINESS ASSESSMENT. The year 2000 problem can affect the
computers, software and other equipment that we use in our operations. As a
result, we have instituted a year 2000 compliance plan, implemented by a team of
our internal information technology staff responsible for monitoring the
assessment and remediation of our year 2000 projects and reporting that status
to our executive staff. This project team is continuing to assess the potential
effect and costs of remediating the year 2000 problem for our internal systems.
To date, we have not obtained verification or validation from any independent
third parties of our processes to assess and correct any of our year 2000
problems or the costs associated with these activities.

ASSESSMENT OF FINISAR'S PRODUCTS. We have assessed the ability of our
products to operate properly in the year 2000. We believe that our current
products are year 2000 compliant. Accordingly, we do not believe that the year
2000 issue presents a material exposure as it relates to our products.

ASSESSMENT OF INTERNAL INFRASTRUCTURE. We believe that we have identified
most of the major computers, software applications and related equipment used in
connection with our internal operations that need to be evaluated to determine
if they must be modified, upgraded or replaced to minimize the possibility of a
material disruption to our business. Based on a review of these computer
systems, we have determined that, except for a limited number of computers that
run under the Microsoft Windows95 operating system, our computer systems and
applications are compliant with the year 2000 format. We expect to remediate any
remaining year 2000 problems prior to December 31, 1999.

SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices, may
be affected by the year 2000 problem. We have assessed the potential effect of
the year 2000 problem on our office and facilities equipment and have determined
that no problems exist that cannot be remediated by the replacement of
relatively inexpensive equipment.

COSTS OF REMEDIATION. We estimate the total cost to us of completing any
required modifications, upgrades or replacements of our internal systems will
not exceed $100,000, most of which we expect to incur during calendar year 1999.
Based on the activities described above, we do not believe that the year 2000
problem will have a material adverse effect on our business or operating
results.

29
<PAGE>
SUPPLIERS. As part of our review of the year 2000 problem, we have
contacted third-party suppliers of components and key contractors used in the
assembly of our products to identify and, to the extent possible, resolve issues
involving the year 2000 problem. However, we have limited or no control over the
actions of these third-party suppliers and subcontractors. Thus, while we expect
that we will be able to resolve any significant year 2000 problems with these
third parties, there can be no assurance that these suppliers will resolve any
or all year 2000 problems before the occurrence of a material disruption to the
operation of our business. Any failure on the part of these third parties to
timely resolve year 2000 problems with their systems in a timely manner could
have a material adverse effect on our business. We expect to complete this
process before December 31, 1999.

MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business operations before December 31, 1999. However, we believe that it is not
possible to determine with complete certainty that all year 2000 problems
affecting us have been identified or corrected. The number of devices and
systems that could be affected and the interactions among these devices and
systems are too numerous to address. In addition, no one can accurately predict
whether failures will occur as a result of the year 2000 problem or the
severity, timing, duration or financial consequences of these potential
failures. As a result, we believe that the following consequences are possible:

- a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;

- possible business disputes and claims, including claims under product
warranty, due to year 2000 problems experienced by our customers and
incorrectly attributed to our products, which we believe will be resolved
in the ordinary course of business; and

- a few serious business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance, some of which
could result in litigation or contract termination.

CONTINGENCY PLANS. While we have not yet fully developed a comprehensive
contingency plan to address situations that may result if we are is unable to
achieve year 2000 readiness of our critical operations, such a plan is likely to
include the accelerated replacement of affected equipment or software which
could have a material adverse impact on our financial results and operations.

DISCLAIMER. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year 2000
compliance, and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of contract
personnel and external resources, third-party suppliers' ability to modify
proprietary software and unanticipated problems not identified in the ongoing
compliance review.

30
<PAGE>
BUSINESS

We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over local area
networks, or LANs, and storage area networks, or SANs. We are focused on
providing high-performance, reliable, value-added optical subsystems, which
convert electrical signals into optical signals, for networking and storage
equipment manufacturers that develop and market systems based on Gigabit
Ethernet and Fibre Channel, which are advanced transmission protocols used in
LAN and SAN applications. Our line of optical subsystems supports a wide range
of network applications, transmission speeds, distances and mediums. We also
provide unique network performance test systems which assist networking and
storage equipment manufacturers in the efficient design of reliable, high-speed
networking systems and the testing and monitoring of the performance of these
systems. We sell our products to leading networking and storage equipment
manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge Networks and Sun
Microsystems, as well as emerging manufacturers such as Brocade Communications
and Extreme Networks. For the fiscal year ended April 30, 1999, we had revenues
of $35.5 million and net income of $3.0 million. For the quarter ended July 31,
1999, we had revenues of $13.9 million and net income of $1.3 million.

INDUSTRY BACKGROUND

The ubiquity of computing by businesses, organizations and individuals
worldwide and the need to interconnect multiple computing and storage devices to
enable widespread communications has given rise to the multi-billion dollar
computer networking and storage industries. There has been a rapid growth in the
number of corporate and residential users accessing communications networks.
This growth has resulted in large-scale equipment expenditures by enterprises
and service providers to develop and expand their network and storage
infrastructures. Networking and storage equipment expenditures are also
accelerating due to the need to upgrade equipment to reliably accommodate data
traffic which requires greater transmission capacity, or bandwidth, such as
e-commerce and online transaction processing-related traffic, multimedia file
transfers and movement of large blocks of stored data across networks. The
transmission and storage of data has become increasingly mission-critical as
enterprises increasingly rely on data-intensive applications to support a wider
range of functions over a geographically dispersed employee and customer base.
The continuing expansion of the network infrastructure, the growing number of
users accessing networks, the need to accommodate higher bandwidth, and the
increasingly mission-critical nature of data networking and storage networking
have created the need for a new generation of high-speed, high-performance
networking and storage systems that rely on fiber optic transmission technology.

EVOLUTION OF NETWORKS, NETWORKING SYSTEMS AND NETWORKING PROTOCOLS

GIGABIT ETHERNET AND LOCAL AREA NETWORKS. Early LANs were implemented to
connect a limited number of users within relatively close proximity. Most of
these LANs used the Ethernet transmission protocol which was developed to allow
users to access the LAN and share basic common services such as file servers and
printers. Because these early LANs had relatively limited performance
requirements, short connection distances and low transmission speeds, systems on
these LANs were generally connected by copper cabling.

As deployment of LANs increased, Ethernet became the predominant LAN
technology, with a greater than 95% market share in 1998 in terms of port
shipments according to the Dell'Oro Group. As bandwidth needs and server
processing power increased and larger numbers of users strained the early LAN
infrastructure, Ethernet technology evolved from the original 10 megabits per
second, or Mbps, version to 100 Mbps Fast Ethernet. In response to continually
increasing bandwidth and performance requirements, Gigabit Ethernet technology,
which operates at 1,000 Mbps, was introduced in 1998. Dataquest estimates that
sales of Gigabit Ethernet switches will increase from $364 million in 1998 to
over $3.7 billion in 2002, representing a compound annual growth rate of 79%.
These switches

31
<PAGE>
contain varying numbers of ports which serve as the connection to the network.
According to Dataquest, the number of Gigabit Ethernet port shipments is
projected to grow from 211,000 in 1998 to over 6 million in 2002, representing a
compound annual growth rate of 130%. Most of these Gigabit Ethernet ports will
rely on fiber optic subsystems, which allow data to be transmitted accurately,
at very high speeds and over long distances. Although the transmission speeds
currently offered by Gigabit Ethernet are expected to meet the increasing
bandwidth needs of enterprise and service provider networks for the near future,
manufacturers have begun to develop networking systems with per-port
transmission speeds of 10 gigabits per second, or Gbps, ten times faster than
Gigabit Ethernet. Because of the scalability and migration capacity built into
the Gigabit Ethernet protocol, manufacturers developing these systems are able
to leverage this standard much as they did when they migrated from 100 Mbps Fast
Ethernet to 1,000 Mbps Gigabit Ethernet. This next generation of high-speed
networking systems will require even higher performance fiber optic subsystems.

FIBRE CHANNEL AND STORAGE AREA NETWORKS. Like data networking technology,
data storage technology has evolved rapidly over the past decade. Traditionally,
storage devices were connected to a single server and LAN in close proximity
using a standard interface protocol known as the Small Computer Systems
Interface, or SCSI. SCSI currently allows storage devices and servers to
communicate at a maximum speed of 80 megabytes per second, over a maximum
transmission distance of 12 meters and supports a maximum of 15 devices on a
single bus. Although these distances and speeds were sufficient for early
storage applications, SCSI has become a limiting technology for emerging storage
applications, which require networking at high speeds over long distances and
need to interconnect large numbers of users.

In recent years, demand has increased for faster, more efficient
interconnection of data storage systems with servers and LANs. Contributing to
this demand are:

- the need to connect increasing numbers of storage devices and servers to a
growing number of users;

- the need to interconnect servers and storage systems supplied by multiple
vendors;

- the increasingly mission-critical nature of stored data and the need for
rapid access to this data; and

- the expense and complexity associated with managing increasingly large
amounts of data storage.

Although advances in technology, including the recent development of Gigabit
Ethernet, increased LAN transmission speeds by more than 1,000 times during the
1990s, storage-to-server data transmission speeds on SCSI-based systems
increased by less than ten times during this period. This speed disparity
created a bottleneck between storage systems and servers and the LANs connected
to those servers. Recently, the Fibre Channel interconnect protocol has been
standardized to address the speed, distance and connectivity limitations of
SCSI-based storage while maintaining backward compatibility with the installed
base of SCSI-based storage systems. Fibre Channel allows up to 126 devices to
communicate at rates up to 1.062 Gbps over distances of up to 10 kilometers. The
Fibre Channel protocol has enabled the development of high-speed storage area
networks, or SANs, which provide the interconnection between storage systems and
servers.

Fibre Channel-based SANs provide many benefits, including transmission
speeds comparable to high-speed LANs and transmission distances which allow
broader sharing of resources. SANs also enable enhanced network applications
such as storage backup, and better overall storage management achievable through
centralized storage resources. IDC projects that the market for Fibre Channel
systems will grow from $2.2 billion in 1998 to over $19.6 billion in 2002,
representing a compound annual growth rate of 73%. In addition, emf Associates
forecasts the number of Fibre Channel port shipments will grow from 2.2 million
in 1998 to over 46.7 million in 2002, representing a compound annual growth rate
of 115%. Most of these ports will rely on fiber optic subsystems to transmit and
receive data at very high speeds with high accuracy, and often over long
distances. Like manufacturers

32
<PAGE>
of Gigabit Ethernet-based LAN systems, Fibre Channel-based SAN system
manufacturers are already developing the next generation of SAN products with
speeds of 2.125 Gbps, twice as fast as current Fibre Channel speeds. Like
Gigabit Ethernet, the Fibre Channel protocol is scalable, allowing for the
potential development of systems with speeds of over 8 Gbps. The speeds
contemplated by future generation SAN systems will require even higher
performance fiber optics subsystems.

In addition to SANs, Fibre Channel technology is being used in other
high-speed data communications applications including the interconnection of
clusters of switches based on the asynchronous transfer mode, or ATM, protocol.
ATM switches are often used in service provider network cores to switch traffic
between multiple networks. In these core networks, multiple switches are often
grouped together in a service provider's central office. The interconnections
between these systems are often provided by Fibre Channel-based subsystems which
allow high-speed, cost-effective communication links between these switches.

EXTENDED LANS AND SANS. As technologies such as Gigabit Ethernet and Fibre
Channel have enabled transmission of data at higher speeds over longer distances
than previous networking technologies permitted, they have allowed the
geographic extension of LANs and SANs over installed but unused fiber optic
cable, known as "dark" fiber lines. Enterprises have recently begun to lease
dark fiber from service providers to implement these extended networks. These
extended LANs and SANs can interconnect network systems throughout a corporate
campus or metropolitan area rather than only within a single building. Extended
networks enable organizations to use their networks for enhanced applications
such as real-time backup storage at distances of up to 120 kilometers for
disaster protection. In addition, by using dark fiber lines, extended data
networks can offer organizations a potentially cost-effective way to address
increased bandwidth requirements. We believe that future extended networks will
incorporate both Fibre Channel and Gigabit Ethernet transmission protocols. As
with shorter-distance LANs and SANs, these extended networks will require
high-performance fiber optic subsystems.

DEMAND FOR HIGH-SPEED DATA COMMUNICATION TEST SYSTEMS

The design and development of data and storage networking systems require
extensive testing to ensure system performance and reliability. As new, highly
complex transmission protocols such as Gigabit Ethernet and Fibre Channel have
emerged, system testing has become more difficult, requiring increasingly
sophisticated and specialized test systems capable of capturing data at high
speeds, filtering the data and identifying various types of intermittent errors
and other network problems. Other new technologies are continually being
developed, such as the System Input/Output, or SIO, transmission protocol, which
is being engineered to interconnect clusters of computer devices. In the past,
many systems manufacturers designed their own test equipment each time they
developed a new product. However, as the pace of technological change has
accelerated, the performance requirements of data communications systems have
increased and competition has afforded shorter market windows within which
manufacturers can develop and introduce new products. Thus, system manufacturers
have increasingly focused on the design and development of their own products
and turned to specialized independent suppliers for state-of-the-art test
equipment. As Ethernet and Fibre Channel-based systems reach even higher
transmission speeds and new standards like SIO emerge, the internal development
of test equipment by systems manufacturers will become more challenging, further
increasing the demand for high performance, easy-to-use test systems from
independent suppliers.

EVOLUTION OF FIBER OPTIC SUBSYSTEMS FOR NETWORKING

Fiber optic transmission technology was originally developed for use in long
distance telecommunications networks to increase capacity and speed. In
contrast, early LANs and storage systems, with their relatively limited
performance requirements, short connection distances and low transmission
speeds, did not require the performance capabilities of fiber optics. Systems on
these networks were generally interconnected using copper cabling.

33
<PAGE>
As the bandwidth, storage capacity and transmission distance requirements of
enterprises and service providers have increased, it has become necessary to
utilize the superior transmission capabilities of fiber optics to build
practical, high-speed LANs based on Gigabit Ethernet technology and high-speed
SANs based on Fibre Channel. As these fiber optic LANs and SANs are being
deployed, fiber optics is becoming the dominant transmission technology for
high-speed data networking and storage applications. Systems connected with
fiber optics require optical subsystems to convert electrical signals into
optical signals and back into electrical signals at high speeds.

The development and manufacture of high quality, cost-effective fiber optic
subsystems for LANs and SANs present a number of significant technical
challenges, including the following:

- As data rates increase, it becomes significantly more difficult to
maintain data integrity because high speed signals can be degraded unless
subsystem components such as lasers, detectors and integrated circuits are
properly integrated and packaged;

- The increasingly mission-critical nature of data transmission and storage
has magnified the impact of system failures, increasing the need for
system reliability and the importance of real-time performance monitoring;

- Manufacturers of high speed networking equipment require optical
subsystems that support a wide range of transmission distances, protocols
and applications; and

- Compliance with standards set by the Federal Communications Commission, or
FCC, for electromagnetic interference emissions, or EMI, is significantly
more difficult to achieve at higher data rates.

To date, we believe that only a limited number of companies have developed
the specialized expertise required to engineer fiber optic subsystems and test
systems which meet the requirements of manufacturers of high-speed data
networking and storage systems.

THE FINISAR SOLUTION

We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over LANs and SANs. We
are focused on providing high-performance, reliable, value-added optical
subsystems for networking and storage equipment manufacturers that develop and
market systems based on Gigabit Ethernet and Fibre Channel protocols. Our line
of optical subsystems supports a wide range of network applications,
transmission speeds, distances and mediums. We also provide unique network
performance test systems which assist networking and storage equipment
manufacturers in the efficient design of reliable, high-speed networking systems
and the testing and monitoring of the performance of these systems. Our products
provide the following key benefits to manufacturers of high-speed data
networking and storage systems:

VALUE-ADDED FUNCTIONS AND INTELLIGENCE. Our high-speed fiber optic
subsystems are engineered to deliver value-added functionality and intelligence.
For example, many of our optical subsystems include a microprocessor containing
specially-developed software that allows customers to monitor the optical
performance of each port on their systems in real time. In addition, many of our
subsystems are engineered to automatically recognize different versions of the
Fibre Channel protocol and to interoperate with our customers' older, installed
networking systems, often referred to as legacy systems. Real-time monitoring
and interoperability are particularly important in the Gigabit Ethernet LAN and
Fibre Channel SAN markets where reliability and time to market are critical. Our
test systems also contain value-added software functions that permit users to
simulate and track errors.

HIGH LEVEL OF DATA INTEGRITY. Through the use of advanced packaging and
circuit design, our optical subsystems deliver data at very high speeds over
varying distances with very low error rates. We engineer our subsystems to
exceed the industry standard error rate of 1 bit per trillion bits transmitted.
This degree of data integrity allows our subsystems to operate reliably over a
wide range of

34
<PAGE>
temperatures and other field conditions which we believe enables our customers
to design and deliver more robust systems.

HIGH RELIABILITY. We design all of our subsystems to provide the high
reliability required for data networking and storage applications that are
critical to an enterprise. Using standard statistical methodology and testing,
we have been able to predict that some of our products can be expected to
operate reliably for up to 40 million hours. Our subsystems are engineered to
operate with minimal power requirements thereby increasing product life, and to
function across a wide range of temperatures and voltages. This reliability and
flexibility have allowed our subsystems to be designed into the products of
manufacturers who provide systems for a variety of mission-critical
applications. In addition, because our subsystems emit lower levels of EMI than
the standards set by the FCC standards, we offer manufacturers greater
flexibility in the design of their systems and integration of other components
and subsystems.

BROAD OPTICAL SUBSYSTEM PRODUCT LINE. We offer a broad line of optical
subsystems which operate at varying protocols, speeds, fiber types, voltages,
wavelengths and distances and are available in a variety of industry standard
packaging configurations, or form factors. Our optical subsystems are designed
to comply with key networking protocols such as Fibre Channel and Gigabit
Ethernet and to plug directly into standard port configurations used in our
customers' products. The breadth of our optical subsystems product line is
important to many of our customers who manufacture a wide range of networking
products for diverse applications.

BROAD TEST SYSTEM PRODUCT LINE. We believe that we are a leading provider
of network performance test systems for Fiber Channel-based networks. We offer a
broad line of test systems to assist our customers in efficiently designing
reliable, high-speed networking systems and testing and monitoring the
performance of these systems. We believe our test systems enable our customers
to focus their attention on the development of new products, reduce overall
development costs and speed time to market.

STRATEGY

Our objective is to be the leading provider of fiber optic subsystems and
test systems to manufacturers of high-speed data networking and storage systems.
Key elements of our strategy include the following:

MAINTAIN TECHNOLOGY LEADERSHIP IN HIGH-SPEED FIBER OPTIC TRANSMISSION. We
have been focused on the development of fiber optic subsystems since 1988.
Current Finisar employees were actively involved in the original development of
the Fibre Channel standard and, more recently, in the development and
implementation of Gigabit Ethernet and the emerging SIO protocol. Our years of
engineering experience, our multi-disciplinary technical expertise and our
participation in the development of industry standards have enabled us to become
a leader in the design and development of fiber optic subsystems and test
systems. We intend to maintain our technological leadership through continual
enhancement of our existing products and the development of new products as
evolving technology permits higher speed transmission of data, with greater
capacity, over longer distances. For example, we are designing flexible hardware
and software architectures to support emerging technologies such as 10 Gbps
Ethernet, 2 Gbps Fibre Channel, wavelength division multiplexing, or WDM, and
the SIO protocol. We also intend to focus on increased product integration to
enhance the price/performance capabilities of our products.

LEVERAGE CORE COMPETENCIES ACROSS MULTIPLE, HIGH-GROWTH MARKETS. We believe
that fiber optic technology will increasingly become the transmission technology
of choice for multiple high-growth data communication markets, including Gigabit
Ethernet-based LANs, Fibre Channel-based SANs and extended LANs and SANs. These
markets are characterized by differentiated applications with unique design
criteria such as product function, performance, cost, in-system monitoring, size
limitations and

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<PAGE>
software. We intend to target opportunities where our core competencies in
high-speed data transmission protocols such as Gigabit Ethernet, Fibre Channel
and SIO can be leveraged into leadership positions as these technologies are
extended across multiple markets and applications. Our goal is to be the optical
subsystem and network performance test system provider of choice for multiple
protocols and network applications.

STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. Over the past 11 years, we
have established valuable relationships and a loyal base of customers by
providing high-quality products and superior service. Our service-oriented
approach has allowed us to work closely with leading data and storage network
system manufacturers, understand and address their current needs and anticipate
their future requirements. We intend to leverage our relationships with our
existing customers as they enter new, high-speed data communications markets. We
have recently established new customer relationships with several emerging
Gigabit Ethernet and Fibre Channel networking equipment manufacturers. We intend
to expand our sales and marketing organization in order to establish new
relationships with other key data communications network manufacturers.

CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. Many manufacturers of high-speed
data networking and storage systems purchase both optical subsystems and test
systems from third-party providers. Frequently, however, different groups or
departments within a manufacturer's organization are responsible for qualifying
and purchasing subsystems and test equipment. We are increasingly able to
capitalize on our customers' satisfaction with one of our product lines and our
service-oriented approach to gain valuable introductions that lead to sales of
our other product line. As this trend develops, we intend to leverage our unique
expertise in both optical subsystems and test systems. In particular, the
widespread acceptance of our Fibre Channel test systems is providing
opportunities to develop new customers for our optical subsystems.

EXPAND INTERNATIONAL OPERATIONS. Historically, substantially all of our
sales have been made to system manufacturers located in North America. In the
fiscal year ended April 30, 1999, sales to customers outside North America
represented less than 3% of our total revenues. Recently, manufacturers in other
parts of the world have developed and introduced high-speed networking products
based on the Gigabit Ethernet and Fibre Channel protocols and international
markets for our products are beginning to expand. To better address these
expanding international markets, we have recently established relationships with
distributors in Japan, the United Kingdom and Israel. We intend to further
extend our international operations by expanding our network of distributors and
sales representatives in key international markets. As international Fibre
Channel and Gigabit Ethernet standards are substantially the same as those in
North America, we do not expect that we will require substantial product
development efforts to enter international markets.

PRODUCTS

We provide a broad line of complementary optical subsystems and test systems
for high-speed data communications over Gigabit Ethernet LANs and Fibre Channel
SANs.

OPTICAL SUBSYSTEMS

Our optical subsystems product line consists of three product
families--optical data links, optical link extenders and Opticity 3000. Our
optical data links are integrated into our customers' systems and used for both
short- and long-distance fiber optic communications. Our optical link extenders
are external subsystems used for fiber optic communications over long distances.
Our Opticity 3000 is an external link extender subsystem which also includes
multiplexer functionality that permits multi-channel data transmission over long
distances.

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<PAGE>
OPTICAL DATA LINKS

Our family of optical data link products consists of transmitters, receivers
and transceivers based on the Gigabit Ethernet and Fibre Channel protocols. A
transmitter converts electrical signals into optical signals for transmission
over fiber optics. A receiver converts incoming optical signals into electric
signals. A transceiver combines both transmitter and receiver functions. Our
optical data link products perform these functions with high reliability and
data integrity and support a wide range of protocols, transmission speeds, fiber
types, wavelengths, transmission distances, form factors and software
enhancements. As illustrated below, an optical data link is plugged into a port
on a switch, hub, server or storage array and provides the physical connection
from that system to the LAN, SAN or extended network.

[Diagram of optical data link using Finisar Corporation products.]

Our high-speed fiber optic subsystems are engineered to deliver value-added
functionality and intelligence. Most of our optical data link products include a
microprocessor with proprietary embedded software that allows customers to
monitor transmitted and received optical power, temperature, drive current and
other link parameters of each port on their systems in real time. In addition,
our intelligent optical data links are used by many enterprise networking and
storage system manufacturers to enhance the ability of their systems to diagnose
and correct abnormalities in fiber optic networks.

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<PAGE>
The following table describes our principal optical data link products:

<TABLE>
<CAPTION>
TRANSMISSION TRANSMISSION FORM SOFTWARE
PROTOCOLS SPEED (GBPS) FIBER TYPES WAVELENGTHS(NM) DISTANCES FACTORS ENHANCEMENTS
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
TRANSMITTERS

Fibre Channel 1.062 Multimode 850 500 m 17-pin Built-in
diagnostics

Gigabit Ethernet 1.25 Singlemode 1310 10 km
1550 30 km
80 km
- ----------------------------------------------------------------------------------------------------------------------
RECEIVERS

Fibre Channel 1.062 Multimode 850 500 m 17-pin Reports on received
optical power
levels

Gigabit Ethernet 1.25 Singlemode 1310 10 km
1550 30 km
80 km
- ----------------------------------------------------------------------------------------------------------------------
TRANSCEIVERS

Fibre Channel 1.062 Multimode 850 500 m 28-pin Built-in
diagnostics

Gigabit Ethernet 1.25 Singlemode 1310 10 km 9-pin OFC auto-sense
1550 30 km GBIC Serial
identification
80 km RJ-45
</TABLE>

OPTICAL LINK EXTENDERS

Our FLX-2000 family of optical link extenders allows enterprises to extend
the distance of fiber optic links in Gigabit Ethernet and Fibre Channel-based
networks while preserving data integrity and reliability. Using our optical link
extenders, Gigabit Ethernet networks can be extended from the maximum standard
distance of 5 kilometers to up to 120 kilometers, and Fibre Channel networks can
be extended from the maximum standard distance of 10 kilometers to up to 120
kilometers. Our optical link extenders enable new network applications such as
remote storage and real-time backup, as well as geographic extensions of a
network. In addition, our optical link extenders provide a value-added
diagnostic function by measuring the bit error rate on data links and monitoring
and reporting system status.

OPTICITY 3000

Introduced in September 1999, our Opticity 3000 combines link extender and
basic, cost-effective wavelength division multiplexing functions that allow
enterprises and service providers to extend the distance of transmission and
increase the amount of data transmitted over fiber optic data links. The
Opticity 3000 is able to multiplex up to eight channels of Fibre Channel or
Gigabit Ethernet traffic on a single fiber pair, providing aggregate full-duplex
bandwidth of up to 10 Gbps. The Opticity 3000 can be remotely managed using
standard network management protocols such as the Simple Network Management
Protocol. Opticity 3000 also has features such as redundant power supply
designed to maximize reliability and uptime in case of failures.

NETWORK PERFORMANCE TEST SYSTEMS

Our GT and GLA family of network performance test systems assist networking
and storage system manufacturers in the efficient design of reliable, high-speed
networking systems and the testing and monitoring of the performance of these
systems. We believe we are the leading supplier of test equipment for the Fibre
Channel protocol used in enterprise SANs. We also offer Gigabit Ethernet test
systems. Our test systems allow engineers, service technicians and network
managers to capture data at

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<PAGE>
high speeds, filter the data and identify various types of intermittent errors
and other network problems.

We recently contracted with Intel Corporation to provide test systems to
support its new NGIO protocol. NGIO is a peripheral component interconnect, or
PCI, bus replacement technology developed by Intel for use in all platforms from
the desktop to clustered enterprise level systems. We recently completed
development of a new family of test systems for use in the development and
commercialization of products based on NGIO technology and we delivered our
first NGIO test system, a data analyzer, to Intel in September 1999. More
recently, Intel has announced that it has combined its NGIO development effort
with the efforts of IBM and others who had been supporting a competing
specification called Future IO. The combined effort has been re-designated
System Input/ Output, or SIO. The SIO standard, as announced, is similar in most
respects to NGIO. We have been requested by Intel to refocus our NGIO
development efforts on test equipment for products based on the new SIO
standard. Based on our relationship with Intel and our unique experience with
the predecessor NGIO standard, we believe that we are well positioned to become
a leading supplier of test equipment for products based on the emerging SIO
standard.

Our GT and GLA family of test system products includes data generators, data
analyzers, error injector/data jammers and low-cost, real-time link monitors.
The following table describes our GT and GLA family of products:

<TABLE>
<CAPTION>
INTRODUCTION PROTOCOL TRANSMISSION
PRODUCT DESCRIPTION DATE SUPPORTED SPEED APPLICATION CONFIGURATION
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
GIGABIT LINK ANALYZERS
GLA-2100 5/94 Fibre Channel 1.062 Gbps Physical Layer PC-Hosted
Testing
GLA-3100ES 10/96 ESCON 200 Mbps R&D Service PC-Hosted
GLA-3100FC 1/97 Fibre Channel 1.062 Gbps R&D Service PC-Hosted
- ---------------------------------------------------------------------------------------------------------------
GT FIBRE CHANNEL GIGABIT TRAFFIC SYSTEM
GT-A 1/98 Fibre Channel 1.062 Gbps R&D Portable, Desk
Protocol and Top, High
Performance Analysis Perf. Tower
Card Set
GT-G 1/98 Fibre Channel 1.062 Gbps Inter-operability Portable, Desk
Data Generator Card Top, High
Perf. Tower
GT-J 2/99 Fibre Channel 1.062 Gbps Error Recovery Portable, Desk
Error Injector Module Top, High
Perf. Tower
- ---------------------------------------------------------------------------------------------------------------
GT FIBRE CHANNEL GIGABIT TRAFFIC JAMMER
Full Duplex 2/99 Fibre Channel 1.062 Gbps Error Recovery Portable, Desk
Error Injector System Top, High
Perf. Tower
- ---------------------------------------------------------------------------------------------------------------
GT GIGABIT TRAFFIC CHECK
GT-C-FC 5/98 Fibre Channel 1.062 Gbps Field Service Hand Held
Link Monitor
GT-C-GE 5/98 Gigabit 1.25 Gbps Field Service Hand Held
Link Monitor Ethernet
</TABLE>

39
<PAGE>
CUSTOMERS

The following table is a list of our customers who have purchased more than
$75,000 of our products during the 12-month period ended July 31, 1999:

<TABLE>
<S> <C> <C>
3Com Corporation Essential Communications Mitsui & Co. Ltd.
Alcatel Extreme Networks, Inc. Mylex Corporation
Amdahl Corporation Fermi National Accelerator Lab Network Appliance, Inc.
Atl Products, Incorporated. Fibre Technologies Ltd. Newbridge Networks Corporation
Boeing Corporation Fujitsu Computer Products Qlogic Corporation
Brocade Communications Systems, Inc. Gadzoox Networks, Inc. Quantum Corporation
Bull Electronics GCH Test & Computer Services Ltd. Raytheon Corporation
Comdisco, Incorporated Hewlett-Packard Corporation Seagate Technology Inc.
Compaq Computer Corporation Hitachi Sequent Computer Systems, Inc.
ConvergeNet Technologies Inc. Hy-Line Computer Components Storage Networks Inc.
Crossroads Systems, Incorporated International Business Machines Storagetek, Inc.
Corp.
Data General Corporation Inrange Technologies Corp. Sun Microsystems Inc.
Dell Computers Corporation Intel Corporation The Shure Group
Digital Equipment Corporation Jaycor Networks Inc. Thomas & Betts Corporation
Dolch Computer Systems Lockheed Martin Corporation Vixel Corporation
EG&G Incorporated LSI Logic Corporation VME Microsystems International
EMC Corporation McData Corporation W J Hughes Research Center
Emulex Corporation McDonnell Douglas Corporation Western Digital Corporation
</TABLE>

Sales to our two principal customers, Newbridge Networks and EMC
Corporation, accounted for 43.9% and 14.6% of our revenues in fiscal 1998, 25.1%
and 20.8% in fiscal 1999 and 34.9% and 19.0% in the three months ended July 31,
1999.

CUSTOMER CASE STUDIES

The following are representative examples of how our customers have used our
products:

STORAGE ARRAY MANUFACTURER. A manufacturer of storage arrays required a
Fibre Channel optical subsystem for a new, high-performance storage array. The
manufacturer specified high reliability and the ability to tolerate relatively
large variances in system temperature and voltage. We supplied a unique Fibre
Channel transceiver that operates over ranges of -10 DEG.C to +85 DEG.C and
5Vplus or minus10%, compared to industry standard ranges of 0 DEG.C to 50 DEG.C
and 5Vplus or minus5%. In addition, the diagnostic and communications
microprocessor incorporated into our transceiver allows the manufacturer's
storage arrays to automatically monitor their optical network connections and
set alarms when abnormal conditions are detected. We currently are the sole
source supplier of Fibre Channel optical transceivers used in the manufacturer's
storage arrays.

The same manufacturer was faced with the challenge of demonstrating to its
customers that its storage systems could reliably recover from error conditions
and move data over a Fibre Channel link between the customer's storage array and
computer systems. Errors in computer storage networks are typically random and
difficult to reproduce and track to their source. Because of the relationship we
had built supplying transceivers, the manufacturer contacted us about its
problem. We supplied our GT-J Error Injector Module, which the manufacturer used
to inject errors into its network systems in a controlled and repeatable manner.
This test system also allowed the manufacturer to capture detailed information
about each injected error and the behavior of the storage system as it attempted
to detect the error and correct the problem. With this information, the
manufacturer was able to modify its storage system software to ensure that
errors were automatically recognized and corrected, increasing the reliability
of its storage systems and satisfying its customers. Because of the successful
application of this test system, the manufacturer subsequently began using other
Finisar test systems in multiple levels of its product verification, from
low-level software and hardware testing to systems integration.

40
<PAGE>
TELECOMMUNICATIONS SWITCH MANUFACTURER. A telecommunications switch
manufacturer required high-speed links to connect clusters of switches within
its customers' central offices. The customer desired the high level of
reliability of a core telecommunications system, delivered over mulitmode
optical fiber. We developed unique transmitter and receiver subsystems
incorporating a long-wavelength, telecommunications-grade laser to accommodate
the customer's specification. These subsystems have operated reliably for an
aggregate of more than a billion operating hours over a two and one-half year
period. Recently, the customer also began using our singlemode optical
subsystems to connect switch frames over longer distances between multiple
offices. The customer ships its switches throughout the world, and we are
currently the single source supplier of optical subsystems for these
inter-switch links.

GIGABIT ETHERNET SWITCH MANUFACTURER. A Gigabit Ethernet switch
manufacturer required optical transceivers that could operate at a wider
temperature range (-10 DEG.C to +85 DEG.C) with lower electromagnetic
interference emissions than other available products. After six months of
testing, the customer qualified our GBIC optical transceivers, initially for use
in its newest switch product and, more recently in all its switch platforms
which support the GBIC form factor. The customer has designated Finisar as its
single source supplier for GBIC optical transceivers. As a result of the
performance of our GBIC transceivers, the customer has qualified other Finisar
optical subsystems for use in some of its other high-speed switches.

MERCHANT BANK. A merchant bank required long distance storage backup for
trading floor applications on servers at two sites located in the same city but
beyond the standard distance supported by the Fibre Channel protocol. These
applications contain critical data on equity trades and currency conversion
rates that require real-time backup. The customer selected our Fibre Channel
link extenders to allow the two sites to be connected over two different routes
of leased single-mode fiber cable. One route is 14 kilometers in length, and the
other is 37 kilometers. The two routes use different ducts installed in
different parts of the city. Each server has access to local and remote data
storage systems. The network is configured so that all points in the network are
linked to all other points, allowing all disks to be mirrored in real-time and
for a data path in operation to remain operational in the event of a major
outage. This configuration provides disaster protection in case either fiber
cable is damaged.

TECHNOLOGY

The development of high quality fiber optic subsystems and test systems for
high-speed data communications requires multidisciplinary expertise in the
following six technology areas:

HIGH FREQUENCY SEMICONDUCTOR DESIGN. Our fiber optic subsystems development
efforts are supported by an engineering team that specializes in analog/digital
integrated circuit design. This group works in both silicon and gallium
arsenide, or GaAs, semiconductor technologies where circuit element frequencies
are very fast and can be as high as 60 GHz. We have designed proprietary
circuits including laser drivers and receiver pre- and post-amplifiers. Our
designs allowed us to be early entrants in the 1.0 Gbps data communications
market and more recently in the 2.5 Gbps data communications market. These
advanced semiconductor devices provide significant cost advantages and will be
critical in the development of future products capable of even faster data
rates.

OPTICAL SUBSYSTEM DESIGN. Finisar has established itself as a low-cost
design leader beginning with its initial Gbps optical subsystems in 1992. From
that base we have developed new singlemode laser alignment approaches and
low-cost, all-metal packaging techniques for improved EMI performance and
environmental tolerance. We develop our own component and packaging and designs
and integrate these designs with proprietary manufacturing processes that allow
our products to be manufactured in high volume.

41
<PAGE>
COMPLEX LOGIC DESIGN. Our test equipment designs are based on field
programmable gate arrays, or FPGAs. In recent customer trials, our newest
products are being used to operate with clock frequencies of up to 125 MHz and
logic densities up to 1 million gates per chip. Our test systems use FPGAs that
are programmed by the host PC and therefore can be configured differently for
different tests. All of our logic design is done in the VHDL hardware
description language which will enable migration to ASICs as volumes warrant. We
develop VHDL code in a modular fashion for reuse in logic design which comprises
a critical portion of our intellectual property. This re-usable technology base
of logic design is available for use in both our test system and optical
subsystem product lines and allows us to reduce the time to market for our new
and enhanced products.

SOFTWARE TECHNOLOGY. We devote substantial engineering resources to the
development of software technology for use in all of our product lines. We have
developed software to control our test systems, analyze data collected by our
test systems, and monitor, maintain, test and calibrate our optical subsystems.
A majority of our software technology and expertise is focused on the use of
object-oriented development techniques to develop software subsystems that can
be reused across multiple product lines. We have created substantial
intellectual property in the area of data analysis software for our Fibre
Channel test equipment. This technology allows us to rapidly sort, filter and
analyze large amounts of data using a proprietary database format. This database
format is both hardware platform-independent and protocol-independent. This
independence allows all of the software tools developed for our existing test
products to be utilized in all of our new test products that collect data
traces. Because the database format is also protocol-independent, new protocols
can be added quickly and easily. Another important component of our intellectual
property is our graphical user interface, or GUI, design. Many years of customer
experience with our test products have enabled us to define a simple yet
effective method to display complex protocols in clear and concise GUIs for
intuitive use by engineers.

SYSTEM DESIGN. The design of all of our products requires a combination of
sophisticated technical competencies--optical engineering, high-speed digital
and analog design, ASIC design and software engineering. We have built an
organization of people with skills in all of these areas. It is the integration
of these technical competencies that enables us to produce products that meet
the needs of our customers. Our combination of these technical competencies has
enabled us to design and manufacturer optical subsystems with built-in optical
test multiplexing, and network monitoring, as well as test systems that
integrate optical and protocol testing with user interface software.

MANUFACTURING SYSTEM DESIGN. The design skills gained in our test systems
group are also used in the manufacturing of our optical subsystems. We utilize
our high-speed FPGA design blocks and concepts and GUI software elements to
provide specialized manufacturing test systems for our internal use. These test
systems are optimized for test capacity and broad test coverage. We use
automated, software-controlled testing to enhance the field reliability of all
Finisar products. All of our products are subjected to temperature testing of
powered systems as well as full functional tests.

COMPETITION

The market for optical subsystems and network performance test systems for
use in LANs, SANs and extended networks are highly competitive. We believe the
principal competitive factors in the optical subsystem and test system markets
are:

- product performance, features, functionality and reliability;

- price/performance characteristics;

- timeliness of new product introductions;

- adoption of emerging industry standards;

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<PAGE>
- service and support;

- size and scope of distribution network;

- brand name;

- access to customers; and

- size of installed customer base.

We believe we compete favorably with our competitors with respect to most of
the foregoing factors. However, we cannot assure you that we will be able to
compete successfully against either current or future competitors.

SALES, MARKETING AND TECHNICAL SUPPORT

We sell our products in North America through our direct sales force and a
network of independent manufacturers' representatives. Our direct sales
force maintains close contact with our customers and provides technical support
to our manufacturers' representatives. In our international markets, our direct
sales force works with local resellers who assist us in providing support and
maintenance to the territories they cover. We have recently established
relationships with distributors in Japan, the United Kingdom and Israel.

Both our optical subsystems and our network performance test systems are
often sold to the same customer. We are increasingly able to capitalize on our
customers' satisfaction with one of our product lines and our service-oriented
approach to gain valuable introductions that can lead to sales of our other
product line. We anticipate that we will continue to benefit from these trends
in the future.

Our marketing efforts are focused on increasing awareness of our optical
subsystems and test systems product lines and our brand name. Key components of
our marketing efforts include:

- continuing our active participation in industry associations and standards
committees to promote and further enhance Gigabit Ethernet and Fibre
Channel technologies, promote standardization in the LAN and SAN markets,
and increase our visibility as industry experts; and

- leveraging major trade show events and LAN and SAN conferences to promote
our broad product lines.

In addition, our marketing group provides marketing support services for our
executive staff, our direct sales force and our manufacturers' representatives
and resellers. Through our marketing activities, we provide technical and
strategic sales support to our direct sales personnel and resellers including
in-depth product presentations, technical manuals, sales tools, pricing,
marketing communications, marketing research, trademark administration and other
support functions.

A high level of continuing service and support is critical to our objective
of developing long-term customer relationships. We emphasize customer service
and technical support in order to provide our customers and their end users with
the knowledge and resources necessary to successfully utilize our product line.
Our customer service utilizes a technical team of field and factory applications
engineers, technical marketing personnel and, when required, product design
engineers. We provide extensive customer support throughout the qualification
and sale process. In addition, we also provide many resources through our World
Wide Web site, including product documentation and technical information. We
intend to continue to provide our customers with comprehensive product support
and believe it is critical to remaining competitive.

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<PAGE>
MANUFACTURING

We outsource the majority of our assembly operations, and we conduct
manufacturing engineering, supply chain management, quality assurance and
documentation control operations at our facility in Sunnyvale, California. This
approach enables us to focus on our design strengths, reduce fixed costs and
capital expenditures and provide flexibility in meeting market demand.

We currently rely on three U.S.-based contract manufacturers for
substantially all of our assembly operations. We do not have long-term contracts
with any of our contract manufacturers, and none of them are obligated to
perform assembly services for us for any specific period or at any specified
price, except as may be provided in a particular purchase order. We are
currently considering the use of contract manufacturers in Asia for a portion of
our assembly requirements.

We design and develop a number of the key components of our products,
including ASICs, printed circuit boards and software. In addition, our
manufacturing team works closely with our engineers to manage the supply chain.
Product testing and burn-in are performed at our facility. We also use
inspection, testing and statistical process controls to assure the quality and
reliability of our products. In addition, most of our optical subsystems have an
intelligent interface that allows us to monitor product quality during the
manufacturing process.

Although we use standard parts and components for our products where
possible, we currently purchase a few key components used in the manufacture of
our products from single or limited sources. Our principal single source
components include ASICs and lasers. Generally, purchase commitments with our
single or limited source suppliers are on a purchase order basis. Any
interruption or delay in the supply of any of these components, or the inability
to procure these components from alternate sources at acceptable prices and
within a reasonable time, would substantially harm our business. In addition,
qualifying additional suppliers can be time-consuming and expensive and may
increase the likelihood of errors.

We use a rolling twelve-month forecast based on anticipated product orders
to determine our material requirements. Lead times for materials and components
we order vary significantly, and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. It is our
practice to maintain a 12-month inventory of sole source components to decrease
the risk of a component shortage.

RESEARCH AND DEVELOPMENT

In fiscal 1998 and fiscal 1999, our research and development expenses were
$3.8 million and $7.9 million, respectively. We believe that our future success
depends on our ability to continue to enhance our existing products and to
develop new products that maintain technological competitiveness. We focus our
product development activities on addressing the evolving needs of our customers
within the LAN, SAN and extended network markets. We work closely with our
original equipment manufacturers and system integrators to monitor changes in
the marketplace. We design our products around current industry standards and
will continue to support emerging standards that are consistent with our product
strategy. Our research and development groups are aligned with our different
product lines and we have specific groups devoted to ASIC design and test,
gigabit per second subsystem design, test equipment hardware and software
design. In addition, our research and development also includes manufacturing
engineer efforts whereby we examine each product for its manufacturability,
predicted reliability, expected lifetime and manufacturing costs.

We are currently undertaking development efforts for our product lines with
emphasis on increasing reliability, integrity and performance, as well as
value-added functions. Some examples of products that we are working on are 10
Gbps Ethernet and 2.125 Gbps Fibre Channel optical subsystems. We also intend to
focus on increased product integration to enhance the price/performance
capabilities of our products. We believe that our research and development
efforts are key to our

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<PAGE>
ability to maintain technical competitiveness and to deliver innovative products
that address the needs of the market. However, there can be no assurance that
our product development efforts will result in commercially successful products,
or that our products will not be rendered obsolete by changing technology or new
product announcements by other companies.

INTELLECTUAL PROPERTY

Our success and ability to compete is dependent in part on our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. To date, we have relied
primarily on proprietary processes and know-how to protect our intellectual
property. Although we have filed for several patents, some of which have issued,
we cannot assure you that any patents will issue as a result of pending patent
applications or that our issued patents will be upheld. Any infringement of our
proprietary rights could result in significant litigation costs, and any failure
to adequately protect our proprietary rights could result in our competitors
offering similar products, potentially resulting in loss of a competitive
advantage and decreased revenues. Despite our efforts to protect our proprietary
rights, existing patent, copyright, trademark and trade secret laws afford only
limited protection. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. Attempts may be made to copy or reverse engineer aspects of our products
or to obtain and use information that we regard as proprietary. Accordingly, we
may not be able to prevent misappropriation of our technology or deter others
from developing similar technology. Furthermore, policing the unauthorized use
of our products is difficult. Litigation may be necessary in the future to
enforce our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. This litigation could result in substantial
costs and diversion of resources and could significantly harm our business.

The networking industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark and
other intellectual property rights to technologies and in various jurisdictions
that are important to our business. Any claims asserting that our products
infringe or may infringe proprietary rights of third parties, if determined
adversely to us, could signifiantly harm our business. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the
efforts of our technical and management personnel, cause product shipment delays
or require us to enter into royalty or licensing agreements, any of which could
significantly harm our business. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us, if at all. In addition, our
agreements with our customers typically require us to indemnify our customers
from any expense or liability resulting from claimed infringement of third party
intellectual property rights. In the event a claim against us was successful and
we could not obtain a license to the relevant technology on acceptable terms or
license a substitute technology or redesign our products to avoid infringement,
our business would be significantly harmed.

PENDING LITIGATION

In April 1999, Methode Electronics, a manufacturer of electronic component
devices, filed a lawsuit against us and another manufacturer, Hewlett-Packard
Co., in the United States District Court for the Northern District of Illinois
alleging that our optoelectronic products infringe four patents held by Methode.
The original complaint seeks monetary damages and injunctive relief. In July
1999, we and Hewlett-Packard filed a motion, which was opposed by Methode, to
transfer the case to the United States District Court for the Northern District
of California. In August 1999, the Court granted our motion. On October 18,
1999, Methode filed a motion seeking leave to file an amended complaint. The
proposed amended complaint alleges infringement of a fifth Methode patent and
also alleges that we breached our obligations under a license and supply
agreement with Methode by failing to provide Methode with unspecified
information regarding new technology related to the products licensed under

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<PAGE>

the agreement. The proposed amended complaint purports to seek compensatory
damages of at least $224,280,000 plus interest for the alleged breach of
contract. Based on consultation with our counsel, it is our position that the
Methode patents are invalid, unenforceable and/or not infringed by our products.
The United States Patent and Trademark Office has determined that all of the
claims asserted by Methode in one of the patents are invalid, although this
determination is not final and is subject to further administrative review. We
also believe, based on consultation with our counsel, that the breach of
contract claim that Methode seeks to include in the amended complaint is without
merit and that, in any event, the proposed amended complaint grossly overstates
the amount of damages that Methode could possibly have suffered as a result of
any such breach. We believe that we have strong defenses against Methode's
lawsuit. In addition, we have filed a counterclaim against Methode asserting,
among other things, that one of our founders, Frank H. Levinson, is the primary
inventor of the technology that is the subject of all five patents, that Methode
improperly obtained the patents based on our disclosure of the technology to
Methode and that we are the rightful owner or co-owner of the patents. We intend
to defend Methode's lawsuit and pursue our counterclaim vigorously. However, the
litigation is in the preliminary stage, and we cannot predict its outcome with
certainty. The litigation process is inherently uncertain. Patent litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. In connection with the
Methode litigation, we have incurred, and expect to continue to incur,
substantial legal fees and expenses. The Methode litigation has also diverted,
and is expected to continue to divert, the efforts and attention of some of our
key management and technical personnel. As a result, our defense of this
litigation, regardless of its eventual outcome, has been, and will likely
continue to be, costly and time consuming. Should the outcome of the litigation
be adverse to us, we could be required to pay significant monetary damages to
Methode and could be enjoined from selling those of our products found to
infringe Methode's patents unless and until we are able to negotiate a license
from Methode. In the event we obtain a license from Methode, we would likely be
required to make royalty payments with respect to sales of our products covered
by the license. Any such payments would increase our cost of revenues and reduce
our gross profit. If we are required to pay significant monetary damages, are
enjoined from selling any of our products or are required to make substantial
royalty payments pursuant to any such license agreement, our business would be
significantly harmed.

FACILITIES

Our facility is located in Sunnyvale, California. We lease approximately
50,000 square feet for our corporate headquarters which includes research and
development, sales and marketing, general and administrative and manufacturing
operations. This lease expires in July 2006. We believe our current facilities
will be adequate to meet our needs for the foreseeable future. In addition, we
have an option to lease approximately 25,000 additional square feet at the same
location to accommodate our future space requirements. We may exercise this
option upon the expiration of a third-party lease with a maximum term of three
years.

In addition, we continue to lease our prior facility in Mountain View,
California under a lease expiring in May 2002. We intend to continue subleasing
this 20,000 square foot facility through the expiration of the lease term.

EMPLOYEES

As of September 30, 1999, we employed a total of 186 full-time employees. We
also from time to time employ part-time employees and hire contractors. Our
employees are not represented by any collective bargaining agreement, and we
have never experienced a work stoppage. We believe that our employee relations
are good.

46
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors, and their ages as of September 30,
1999, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- --------------------------------------------- ----------- ------------------------------------------------------------
<S> <C> <C>
Jerry S. Rawls............................... 55 President, Chief Executive Officer and Director
Frank H. Levinson............................ 46 Chairman of the Board and Chief Technical Officer
Mark J. Farley............................... 37 Vice President, Digital Systems Engineering
Jan Lipson................................... 48 Vice President, Optical Engineering
Stephen K. Workman........................... 48 Vice President, Finance, Chief Financial Officer
and Secretary
Michael C. Child............................. 44 Director
Roger C. Ferguson............................ 56 Director
</TABLE>

JERRY S. RAWLS has served as a member of our Board of Directors since
March 1989, as our President since April 1989 and as our Chief Executive Officer
since August 1999. From September 1968 to February 1989, Mr. Rawls was employed
by Raychem Corporation, a materials science and engineering company, where he
held various management positions including Division General Manager of the
Aerospace Products Division and Interconnection Systems Division. Mr. Rawls
holds a B.S. in Mechanical Engineering from Texas Tech University and an M.S. in
Industrial Administration from Purdue University.

FRANK H. LEVINSON founded Finisar in April 1987 and has served as a member
of our Board of Directors since February 1988 and as our Chairman of the Board
and Chief Technical Officer since August 1999. Mr. Levinson also served as our
Chief Executive Officer from February 1988 to August 1999. From September 1980
to December 1983, Mr. Levinson was a Member of Technical Staff at AT&T Bell
Laboratories. From January 1984 to July 1984, he was a Member of Technical Staff
at Bellcore, a provider of services and products to the communications industry.
From April 1985 to December 1985, Mr. Levinson was the principal optical
scientist at Raychem Corporation, and from January 1986 to February 1988, he was
Optical Department Manager at Raynet, Inc., a fiber optic systems company.
Mr. Levinson holds a B.S. in Mathematics/Physics from Butler University and an
M.S. and Ph.D. in Astronomy from the University of Virginia.

MARK J. FARLEY has served as our Vice President, Digital Systems Engineering
since April 1996. From August 1991 to April 1996, Mr. Farley was a consulting
design engineer. During that time, Mr. Farley was heavily involved in the design
of Finisar's early products. From September 1986 to August 1991, Mr. Farley was
a hardware design manager with Raynet, Inc. From September 1984 to
September 1986, he was a hardware design manager at Tandem Computers.
Mr. Farley holds a B.S. in Electrical Engineering from the Massachusetts
Institute of Technology.

JAN LIPSON has served as our Vice President, Optical Engineering since
April 1998. From June 1995 to April 1998, Mr. Lipson was Vice-President,
Advanced Technology for Ortel Corporation, a fiber optic components supplier to
the cable television industry. From March 1982 to June 1995, Mr. Lipson was
employed by AT&T Bell Laboratories, and most recently held the position of
Department Head and Development Manager for the Subsystems Development Group in
the Lightwave Communications Area. From October 1978 to March 1982, Mr. Lipson
was a member of the technical staff at Los Alamos National Labs. Mr. Lipson
holds a B.S. in Physics from the California Institute of Technology, a Ph.D. in
Physics from the University of California at San Diego and an M.B.A. from the
University of Pittsburgh.

STEPHEN K. WORKMAN has served as our Vice President, Finance and Chief
Financial Officer since March 1999 and as our Secretary since August 1999. From
November 1989 to March 1999, Mr. Workman served as Chief Financial Officer at
Ortel Corporation. Mr. Workman holds a B.S. in Engineering Science and an M.S.
in Industrial Administration from Purdue University.

47
<PAGE>
MICHAEL C. CHILD has been a member of our Board of Directors since
November 1998. Mr. Child has been employed by TA Associates, Inc., a venture
capital investment firm, since July 1982 where he currently serves as a Managing
Director. Mr. Child holds a B.S. in Electrical Engineering from the University
of California at Davis and an M.B.A. from the Stanford Graduate School of
Business.

ROGER J. FERGUSON has been a member of our Board of Directors since
August 1999. Mr. Ferguson has served as Chief Executive Officer of Semio Inc.,
an early stage software company, since July 1999 and as a principal in
VenCraft, LLC, a venture capital partnership, since July 1997. From 1993 to
1997, Mr. Ferguson was Chief Executive Officer of DataTools, Inc., a database
software company. From 1987 to 1993, Mr. Ferguson served as Chief Operating
Officer for Network General Inc., a network analysis company. Mr. Ferguson also
serves on the Boards of Directors of Microtest, Inc. and several other private
companies. Mr. Ferguson holds a B.A. in Psychology from Dartmouth College and an
M.B.A. from the Amos Tuck School at Dartmouth.

Our President, Secretary and Chief Financial Officer are elected by the
Board of Directors, all other executive officers are elected by the Board of
Directors or appointed by the President, and all officers serve at the
discretion of the Board of Directors. Each of our officers and directors, other
than nonemployee directors, devotes his full time to the affairs of Finisar.

COMPOSITION OF THE BOARD OF DIRECTORS

Our Board of Directors is currently fixed at four directors. Mr. Child was
elected to serve on our Board of Directors pursuant to a voting agreement
entered into in November 1998 in connection with the sale of our convertible
redeemable preferred stock. This agreement will terminate upon the closing of
this offering. Upon the closing of this offering, our certificate of
incorporation will provide that the terms of office of the members of the Board
of Directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 2000, Class II, whose term
will expire at the annual meeting of stockholders to be held in 2001 and Class
III, whose term will expire at the annual meeting of stockholders to be held in
2002. The Class I director will be Mr. Ferguson, the Class II director will be
Mr. Levinson, and the Class III directors will be Messrs. Child and Rawls. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following their election. Our nonemployee directors devote such time to our
affairs as is necessary to discharge their duties. There are no family
relationships among any of our directors, officers or key employees.

BOARD COMMITTEES

The audit committee of our Board of Directors recommends the appointment of
our independent auditors, reviews our internal accounting procedures and
financial statements and consults with and reviews the services provided by our
independent auditors, including the results and scope of their audit. The audit
committee currently consists of Messrs. Child and Ferguson.

The compensation committee of our Board of Directors reviews and recommends
to the Board of Directors the compensation and benefits of all executive
officers of Finisar and establishes and reviews general policies relating to
compensation and benefits of Finisar employees. The compensation committee
currently consists of Messrs. Child and Ferguson.

COMPENSATION OF DIRECTORS

Directors of Finisar do not receive cash compensation for their services as
directors or members of committees of the Board of Directors. However,
non-employee directors are eligible to receive stock options. We do reimburse
directors for their reasonable expenses incurred in attending meetings of the
Board of Directors.

48
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION INFORMATION

The following table sets forth information regarding compensation received
during the fiscal year ended April 30, 1999 by our Chief Executive Officer and
each of our other executive officers whose total salary and bonus earned during
the fiscal year ended April 30, 1999 exceeded $100,000:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM AND OTHER
COMPENSATION
-------------------------
ANNUAL COMPENSATION NUMBER OF
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- ----------------------------------------------- --------- --------- ----------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Jerry S. Rawls (2) ............................ $ 190,000 $ 106,192 $ 4,677 -- $ --
President
Frank H. Levinson (2) ......................... 190,000 106,192 3,581 -- --
Chief Executive Officer
Mark J. Farley ................................ 160,000 64,731 2,857 -- --
Vice President, Digital Systems Engineering
Jan Lipson .................................... 140,000 44,077 162 300,000 (3) --
Vice President, Optical Engineering
</TABLE>

- ------------------------------

(1) Represents contributions to each executive officer's 401(k) plan account.

(2) In August 1999, Mr. Rawls was elected to the additional office of Chief
Executive Officer, and Mr. Levinson became Chairman of the Board and Chief
Technical Officer.

(3) This option is immediately exercisable, subject to a right of repurchase in
favor of Finisar which lapses at the rate of 20% per year over a period of
five years.

OPTION GRANTS

The following table sets forth information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table above
during the fiscal year ended April 30, 1999. All of these options were granted
under our 1989 stock option plan. The percentage of total options set forth
below is based on an aggregate of 2,900,000 options granted during the fiscal
year. All options were granted at the fair market value of our common stock, as
determined by the Board of Directors on the date of grant. Potential realizable
values are net of exercise price, but before taxes associated with exercise.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are provided in accordance with rules of the SEC and do not
represent Finisar's estimate or projection of the future common stock price.

49
<PAGE>
OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 30, 1999

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
--------------------------------------------- DEEMED RATES OF
NUMBER OF % OF TOTAL VALUE PER STOCK PRICE
SECURITIES OPTIONS SHARE AT APPRECIATION
UNDERLYING GRANTED TO EXERCISE DATE OF FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT --------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE ($/SHARE)(2) 5% 10%
- ------------------------- ----------- ----------------- ------------- ------------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Jerry S. Rawls........... -- -- -- -- -- -- --
Frank H. Levinson........ -- -- -- -- -- -- --
Mark J. Farley........... -- -- -- -- -- -- --
Jan Lipson............... 300,000(1) 10.3 0.15 8/6/08 1.50 $ 283,002 $ 717,184
</TABLE>

- ------------------------------

(1) This option is immediately exercisable, subject to a right of repurchase in
favor of Finisar which lapses at the rate of 20% per year over a period of
five years.

(2) Based on the deemed value of the common stock for accounting purposes.

OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS

The following table sets forth the number of shares of common stock acquired
and the value realized upon exercise of stock options during the fiscal year
ended April 30, 1999 and the number of shares of common stock subject to
exercisable and unexercisable options held as of April 30, 1999 by each of the
executive officers named in the Summary Compensation Table above.

AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND VALUES AT APRIL 30, 1999

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED
IN-THE-MONEY
NUMBER OF OPTIONS AT 4/30/99 OPTIONS AT 4/30/99 (2)
SHARES VALUE
ACQUIRED ON REALIZED ------------------------ ----------------------
NAME EXERCISE (1) VESTED UNVESTED VESTED UNVESTED
- ------------------------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jerry S. Rawls........... -- -- -- -- -- --
Frank H. Levinson........ -- -- -- -- -- --
Mark J. Farley........... 1,538,460 $2,107,690 -- 661,540 -- $1,362,772
Jan Lipson............... 300,000 405,000 -- -- -- --
</TABLE>

- ------------------------------

(1) The value realized upon exercise is based on the value of the underlying
common stock on the date of exercise of $1.50 per share (the deemed value of
the common stock for accounting purposes), minus the per share exercise
price ($0.13 in the case of Mr. Farley and $0.15 in the case of
Mr. Lipson), multiplied by the number of shares acquired upon exercise.

(2) The value of unexercised options set forth above is calculated based on the
value of the common stock on April 30, 1999 of $2.19 per share (the deemed
value of the common stock for accounting purposes), minus the exercise price
of $0.13 per share.

STOCK PLANS

1999 STOCK OPTION PLAN

Finisar's 1999 stock option plan was adopted by the Board of Directors and
approved by the stockholders in April 1999. Finisar is authorized to issue up to
7,000,000 shares of common stock under this plan. This number of shares will be
increased on May 1, 2001 and each subsequent May 1 during the term of the plan
by 5% of the number of shares of common stock issued and outstanding on the
immediately preceding April 30. The 1999 stock option plan is currently being
administered by the Board of Directors. The plan allows grants of incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code,
to employees, including officers and employee directors. In addition, it allows
grants of nonstatutory options to employees, non-employee directors and
consultants. The plan expires in April 2009, but may be terminated sooner by the
Board of Directors.

50
<PAGE>
The exercise price of incentive stock options granted under the 1999 stock
option plan must not be less than the fair market value of a share of the common
stock on the date of grant. In the case of nonstatutory stock options, the
exercise price must not be less than 85% of the fair market value of a share of
the common stock on the date of grant. With respect to an incentive stock option
granted to any optionee who owns stock representing more than 10% of the voting
power of all classes of Finisar's outstanding capital stock, the exercise price
of the option must be equal to at least 110% of the fair market value of a share
of the common stock on the date of grant, and the term of the option may not
exceed five years. The terms of all other options may not exceed ten years. The
aggregate fair market value (determined as of the date of option grant) of the
common stock for which incentive stock options may become exercisable for the
first time by any optionee may not exceed $100,000 in any calendar year. The
Board of Directors has the discretion to determine vesting schedules and
exercise requirements, if any, of all options granted under the plan. However,
the plan provides that in connection with a change in control, if the acquiring
corporation fails to assume the plan's outstanding options or replace them with
substantially equivalent new options, all options will become immediately
exercisable in full. In addition, the plan allows the Board of Directors to
provide in any option agreement full acceleration of the exercisability of these
options if, within 12 months following a change in control, the optionee is
terminated without cause or resigns for "good reason," which includes:

- the assignment of any duties, or limitation of responsibilities, that are
substantially inconsistent with the optionee's status prior to the change
of control,

- the relocation of an optionee's principal work place more than fifty miles
from his work place prior to the change of control or the imposition of
substantially more demanding travel requirements, or

- any material reduction in base compensation, bonus or benefits.

As of September 30, 1999, under the 1999 stock option plan 672,800 shares of
common stock had been issued upon exercise of options outstanding, options to
purchase 994,200 shares of common stock, with a weighted average exercise price
of $2.1659, were outstanding, and 5,333,000 shares of common stock remained
available for future grants.

1989 STOCK OPTION PLAN

Finisar's 1989 stock option plan was adopted by the Board of Directors and
approved by the stockholders in April 1989. Prior to the expiration of its
ten-year term in April 1999, a total of 7,675,611 shares of common stock were
reserved for issuance under the 1989 stock option plan. Although no additional
options will be granted under this plan, the options for 1,042,540 shares of
common stock outstanding as of September 30, 1999 will remain subject to its
provisions and the plan will continue to be administered by the Board of
Directors.

The 1989 stock option plan allowed the grant of incentive stock options and
nonstatutory stock options. The exercise price of incentive stock options
granted under the plan was required to be not less than the fair market value of
a share of the common stock on the date of grant. The exercise price of
nonstatutory stock options granted under the plan was required to be not less
than 85% of the fair market value of a share of common stock on the date of
grant. With respect to any optionee who owned stock representing more than 10%
of the voting power of all classes of Finisar's outstanding capital stock, the
exercise price of any option was required to be equal to at least 110% of the
fair market value of a share of the common stock on the date of grant, the term
of any incentive stock option could not exceed five years and the term of any
nonstatutory stock option could not exceed five years and one day. The terms of
all other options could not exceed ten years. The aggregate fair market value
(determined as of the date of option grant) of the common stock for which
incentive stock options could become exercisable for the first time by any
optionee could not exceed $100,000 in any calendar year. The Board of Directors
had the discretion to determine vesting schedules and exercise requirements, if
any, of all option grants under this plan. However, the plan provided that in

51
<PAGE>
connection with a sale of all or substantially all of the assets of Finisar, or
a merger of Finisar with or into another corporation, if the acquiring
corporation fails to assume the plan's outstanding options or replace them with
equivalent new options, all options will become immediately vested and
exercisable in full.

As of September 30, 1999, under the 1989 stock option plan 6,618,660 shares
of common stock had been issued upon exercise of options outstanding and options
to purchase 1,042,540 shares of common stock, at a weighted average exercise
price of $0.285, were outstanding.

1999 EMPLOYEE STOCK PURCHASE PLAN

Finisar's 1999 employee stock purchase plan was adopted by the Board of
Directors and approved by the stockholders in September 1999. A total of 250,000
shares of common stock are reserved for issuance under the plan, cumulatively
increased by 250,000 shares on May 1, 2001 and each May 1 thereafter through
May 1, 2010. This plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be administered by the Board of Directors.
Employees, including officers and employee directors, are eligible to
participate in the plan if they are employed by Finisar for more than 20 hours
per week and more than five months in any calendar year. The plan will be
implemented during sequential 12-month offering periods, generally commencing on
or about December 1 of each year. However, the first such offering period will
commence on the effective date of this offering and will terminate on
November 30, 2000. In addition, a six-month offering period will generally
commence on June 1 of each year.

The employee stock purchase plan permits eligible employees to purchase our
common stock through payroll deductions, which may not exceed 20% of the
employee's total compensation. Stock may be purchased under the plan at a price
equal to 85% of the fair market value of our common stock on either the first or
the last day of the offering period, whichever is lower. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of a participant's employment
with Finisar. Participants may not purchase shares of common stock having a
value, measured at the beginning of the offering period, greater than $25,000 in
any calendar year or more than a number of shares in any offering period
determined by dividing $25,000 (or $12,500 with respect to a six-month offering
period) by the fair market value of a share of Finisar common stock determined
at the beginning of the offering period.

401(

k) PLAN

Our 401(k) retirement and deferred savings plan covers all eligible
employees and is intended to qualify as a tax-qualified plan under the Internal
Revenue Code. Employees are eligible to participate in the plan on the first day
of the month immediately following twelve months of service with Finisar. The
plan provides that each participant may contribute up to 12% of his or her
pre-tax gross compensation up to a statutory limit, which is $10,000 in calendar
year 1999. All amounts contributed by participants and earnings on participant
contributions are fully vested at all times. Finisar may contribute an amount
equal to one-half of the first 5% of each participant's contribution. Finisar's
contributions vest one-fifth per year over five years. Finisar's contributions
to the plan through July 31, 1999 totaled approximately $113,000.

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY

As permitted by the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation which provide that our directors
shall not be personally liable for monetary damages to Finisar or its
stockholders for a breach of fiduciary duty as a director, except liability for:

- a breach of the director's duty of loyalty to Finisar or its stockholders;

52
<PAGE>
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- an act related to our unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law; or

- transactions from which the director derived an improper personal benefit.

These limitations of liability do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable remedies
such as injunctive relief or rescission. Our certificate of incorporation also
authorizes us to indemnify our officers, directors and other agents to the
fullest extent permitted under Delaware law.

As permitted by the Delaware General Corporation Law, our bylaws provide
that:

- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions;

- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to limited
exceptions; and

- the rights provided in the bylaws are not exclusive.

We intend to enter into separate indemnification agreements with each of our
directors and officers which may be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. These
indemnification agreements may require us, among other things, to indemnify our
directors and officers against liabilities that may arise by reason of their
status or service as directors or officers, other than liabilities arising from
willful misconduct. These indemnification agreements also may require us to
advance any expenses incurred by the directors or officers as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance if available on reasonable terms.

At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification by us is
sought. In addition, we are not aware of any threatened litigation or proceeding
which may result in a claim for indemnification.

We intend to maintain directors' and officers' liability insurance.

53
<PAGE>
RELATED PARTY TRANSACTIONS

FINANCING TRANSACTION

In November 1998, we sold and issued an aggregate of 12,039,486 shares of
our convertible redeemable preferred stock at a price of $2.1932 per share. TA
Associates, Inc., of which Mr. Child is a Managing Director, and its affiliated
entities purchased 9,422,305 of such shares for an aggregate purchase price of
$20,665,000. Upon the closing of this offering, each share of convertible
redeemable preferred stock will be converted into 0.7460371 of a share of common
stock and one share of redeemable preferred stock, and all outstanding shares of
redeemable preferred stock will be redeemed for $0.2193 per share.

LOAN TO OFFICER

In August 1998, we loaned $225,000 to Mr. Lipson. This loan was evidenced by
a promissory note bearing interest at the rate of 2% per annum and
collateralized by a deed of trust owned by Mr. Lipson. Mr. Lipson repaid this
loan in full in December 1998.

CONTRIBUTIONS TO CAPITAL AND REPURCHASES OF COMMON STOCK

In March 1998, Mr. Levinson and his wife contributed 2,200,000 shares of our
common stock, having a fair market value of $0.13 per share, to the capital of
Finisar.

We used a portion of the proceeds of our convertible redeemable preferred
stock financing and related bank borrowings in November 1998 to repurchase
7,397,922 shares of our common stock from Mr. Levinson at a per share price of
$2.1932 for an aggregate purchase price of $16,225,123, 5,439,373 and 1,400,000
shares of our common stock from Mr. Rawls and a trust for the benefit of members
of his family, respectively, at a per share price of $2.1932 for aggregate
purchase prices of $11,929,633 and $3,070,480, respectively, and 220,000 shares
of our common stock from Mr. Farley at a per share price of $2.1932 for an
aggregate purchase price of $482,504. Giving effect to the repurchases of common
stock, the net proceeds from our sale of the convertible redeemable preferred
stock and the related bank borrowings were $5.6 million.

OPTION GRANTS AND EXERCISES

In March 1998, we granted Mr. Farley an option to purchase an aggregate of
2,200,000 shares of common stock, with an exercise price of $0.13 per share. Mr.
Farley exercised a portion of this option to purchase 1,538,460 shares. The
exercise price was paid by Mr. Farley by delivery to us of a promissory note in
the principal amount of $200,000, bearing interest at the rate of 6% per annum
and collateralized by shares of our common stock owned by Mr. Farley.
Mr. Farley repaid this loan in full in January 1999.

In March 1999, we granted Mr. Workman an option to purchase an aggregate of
200,000 shares of common stock, with an exercise price of $1.31 per share. Mr.
Workman exercised this option in full in April 1999. The exercise price was paid
by Mr. Workman by delivery to us of a promissory note in the principal amount of
$262,000 bearing interest at the rate of 6% per annum. This promissory note is
payable in full by April 2004 and is collateralized by shares of our common
stock owned by Mr. Workman.

OTHER TRANSACTIONS

We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require Finisar to
indemnify such individuals to the fullest extent permitted by Delaware law.

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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of September 30, 1999, and as
adjusted to reflect the sale of the common stock offered hereby, by:

- each stockholder who is known by us to beneficially own more than 5% of
common stock;

- each of our executive officers listed on the Summary Compensation Table
under "Management;"

- each of our directors; and

- all of our executive officers and directors as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
NUMBER OF SHARES ----------------------------
BENEFICIALLY OWNED BEFORE AFTER
BENEFICIAL OWNER (1)(2) OFFERING OFFERING (2)
- --------------------------------------------------------------- ----------------------- ----------- ---------------
<S> <C> <C> <C>
SIGNIFICANT STOCKHOLDERS:
Entities affiliated with TA Associates, Inc. (3)............... 7,029,388 16.7% 14.1%
Entities affiliated with Summit Partners (4)................... 1,843,660 4.4 3.7
EXECUTIVE OFFICERS AND DIRECTORS:
Jerry S. Rawls................................................. 8,470,627 20.2 17.0
Frank H. Levinson (5).......................................... 15,598,872 37.1 31.4
Mark J. Farley (6)............................................. 1,885,000 4.4 3.7
Jan Lipson (7)................................................. 300,000 * *
Michael C. Child (8)........................................... 7,029,388 16.7 14.1
Roger C. Ferguson (9).......................................... 20,000 * *
All executive officers and directors as a group
(7 persons)(10).............................................. 33,503,887 78.5 66.5
</TABLE>

- ------------------------

* Less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. All shares of common stock subject to options exercisable within
60 days following September 30, 1999 are deemed to be outstanding and
beneficially owned by the person holding those options for the purpose of
computing the number of shares beneficially owned and the percentage of
ownership of that person. They are not, however, deemed to be outstanding
and beneficially owned for the purpose of computing the percentage ownership
of any other person. Accordingly, percent ownership is based on: (i) before
the offering, 42,007,462 shares of Common Stock outstanding as of
September 30, 1999 plus any shares issuable pursuant to options held by the
person or group in question which may be exercised within 60 days of
September 30, 1999; and (ii) after the offering, an additional 7,700,000
shares to be issued by the Company in the offering. Except as indicated in
the other footnotes to the table and subject to applicable community
property laws, based on information provided by the persons named in the
table, these persons have sole voting and investment power with respect to
all shares of the common stock shown as beneficially owned by them.

(2) Assumes no exercise of the underwriters' over-allotment option. If the
underwriters exercise their over-allotment option in full, the selling
stockholders will sell an aggregate of 1,155,000 shares of Common Stock. In
such event, (i) entities affiliated with TA Associates, Inc. will sell
between 910,456 and 1,147,751 shares and will beneficially own between
5,881,637 and 6,118,932 shares, or between 11.8% and 12.3% of the
outstanding common stock, after completion of this offering, and (ii) other
selling shareholders will sell between 7,249 and 244,544 shares.

55
<PAGE>
(3) Includes 1,699,095 shares held by Advent Atlantic and Pacific III L.P.,
5,097,285 shares held by TA/ Advent VIII, L.P., 102,047 shares held by TA
Investors LLC and 130,961 shares held by TA Executives Fund LLC. TA/Advent
VIII L.P., Advent Atlantic & Pacific III L.P., TA Executives Fund LLC and TA
Investors LLC are part of an affiliated group of investment partnerships.
The general partner of TA/Advent VIII L.P. is TA Associates VIII LLC. The
general partner of Advent Atlantic and Pacific III L.P. is TA Associates AAP
III Partners L.P. TA Associates, Inc. is the general partner of TA
Associates AAP III Partner L.P. and is the sole manager of TA Advent VIII
LLC, TA Executives Fund LLC and TA Investors LLC. In such capacity, TA
Associates, Inc., through an executive committee, exercises sole voting and
investment power with respect to all shares held of record by the named
investment partnerships; individually, no stockholder, director or officer
of TA Associates, Inc., is deemed to have or share such voting or investment
power. The address of TA Associates, Inc. is 125 High Street, High Street
Tower, Suite 2500, Boston, MA 02110.

(4) Includes 1,408,567 shares held by Summit Ventures V, L.P., 250,728 shares
held by Summit Ventures V Companion Fund L.P., 95,083 shares held by Summit
V Advisors Fund (QP), L.P., 29,057 shares held by Summit V Advisors Fund,
L.P. and 60,225 shares held by Summit Investors III, L.P., each of which is
an affiliate of Summit Partners, L.P. Summit Partners V, L.P. is the general
partner of each of Summit Ventures V, L.P., Summit Ventures V Companion
Fund, L.P., Summit Ventures V Advisors Fund (QP), L.P. and Summit V Advisors
Fund, L.P. Summit Partners, LLC is the general partner of Summit Partners V,
L.P. Summit Partners, LLC, through an investment committee, exercises sole
voting and investment power with respect to the shares owned by the Summit
Funds; individually no member of Summit Partners LLC is deemed to have or
share such voting or investment power. The address of Summit Partners, LLC
is c/o Walter Kortschak, 499 Hamilton Avenue, Suite 200, Palo Alto, CA
94301.

(5) Includes 14,098,872 shares held by the Frank H. & Wynnette Levinson 1998
Revocable Trust, 500,000 shares held by the Rose Wynnette Levinson 1998 Gift
Trust, 500,000 shares held by the Alana Marie Levinson 1998 Gift Trust and
500,000 shares held by the Frank Henry Levinson 1998 Gift Trust.

(6) Includes 661,540 shares issuable upon exercise of options exercisable within
60 days following September 30, 1999 and 300,000 shares held by the Julia
Christine Farley Irrevocable Trust.

(7) Includes 240,000 shares subject to a right of repurchase in favor of Finisar
which lapses over time.

(8) Mr. Child disclaims beneficial ownership of all shares held by affiliates of
TA Associates, Inc. of which Mr. Child is a Managing Director, except to the
extent of 14,454 shares of common stock in which he has an ownership
interest through TA Investors LLC and 2,551 shares of common stock in which
the Child Childrens Trust has an ownership interest through TA Investors
LLC.

(9) All 20,000 shares are subject to a right of repurchase in favor of Finisar
which lapses over time.

(10) Including 7,012,383 shares held by TA Associates, Inc. and its affiliates
as to which Mr. Child disclaims beneficial ownership. See Note 3 above.

56
<PAGE>
DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, our authorized capital stock will consist
of 200,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of preferred stock, $0.001 par value per share.

The following is a summary of the material terms of our common stock and
preferred stock. Please see our certificate of incorporation, filed as an
exhibit to the registration statement of which this prospectus is a part, for
more detailed information.

COMMON STOCK

As of September 30, 1999, there were 33,025,565 shares of our common stock
outstanding held of record by 140 stockholders. The holders of our common stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of stockholders. Upon the closing of this offering, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Subject to
preferences applicable to any outstanding preferred stock, holders of common
stock are entitled to receive ratably any dividends declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of Finisar, holders of common
stock are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preferences of any outstanding preferred stock.
Holders of our common stock have no preemptive, conversion or redemption rights.
Each outstanding share of common stock is, and all shares of common stock to be
outstanding upon the closing of this offering will be, fully paid and
non-assessable.

PREFERRED STOCK

Upon the closing of this offering, all shares of our convertible redeemable
preferred stock outstanding will be converted into an aggregate of 8,981,897
shares of common stock and 12,039,486 shares of redeemable preferred stock, and
all outstanding shares of redeemable preferred stock will be redeemed.
Thereafter, up to 5,000,000 shares of undesignated preferred stock will be
authorized for issuance. Our Board of Directors has the authority, without
further action by its stockholders, to issue preferred stock in one or more
series. In addition, the Board of Directors may fix the rights, preferences and
privileges of any preferred stock it determines to issue. Any or all of these
rights may be superior to the rights of the common stock. Preferred stock could
thus be issued quickly with terms calculated to delay or prevent a change in
control of Finisar or to make removal of management more difficult.
Additionally, the issuance of preferred stock may decrease the market price of
our common stock. At present, we have no plans to issue any shares of preferred
stock.

REGISTRATION RIGHTS

Under the Securities Purchase Agreement dated as of November 6, 1998, the
purchasers of our convertible redeemable preferred stock have various
registration rights with respect to the 8,981,897 shares of common stock into
which their convertible redeemable preferred stock will be converted upon the
closing of this offering.

Beginning 180 days after the date of this prospectus, these holders have the
right to require Finisar, on not more than two occasions, to file a registration
statement under the Securities Act to register their shares at our expense.
Demand for this registration must be made by holders of at least 20% of the
shares that are entitled to this registration. The underwriters of the offering
have the right, subject to some limitations, to limit the number of shares
included.

If we propose to register any of our securities under the Securities Act for
our own account or for the account of other security holders, the purchasers of
our convertible redeemable preferred stock are entitled to notice of that
registration and have the right to include some or all of their shares of common
stock in that registration, at our expense, subject to marketing and other
limitations.

57
<PAGE>
The purchasers of our convertible redeemable preferred stock have the right
to require Finisar, no more frequently than twice during any nine month period,
to file a registration statement on Form S-3 under the Securities Act to
register their shares at Finisar's expense. Demand for this registration must be
made by the holders of at least 20% of the shares that are entitled to this
registration. The underwriters of this offering have the right, subject to some
limitations, to limit the number of shares included.

ANTITAKEOVER PROVISIONS

DELAWARE LAW

Finisar will be subject to Section 203 of the Delaware General Corporation
Law regulating corporate takeovers, which prohibits a Delaware corporation from
engaging in any business combination with an "interested stockholder," unless:

- prior to the date of the transaction, the Board of Directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;

- the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding (a) shares
owned by persons who are directors and also officers, and (b) shares owned
by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or

- on or subsequent to the date of the transaction, the business combination
is approved by the board and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.

Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include (a) any person that is the owner of 15% or more of the
outstanding voting securities of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the date of determination and (b) the affiliates and associates of any such
person.

CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS

Provisions of our certificate of incorporation and bylaws, which will become
effective upon the closing of this offering, may have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of Finisar. These provisions could cause the
price of our common stock to decrease. Some of these provisions allow us to
issue preferred stock without any vote or further action by the stockholders,
eliminate the right of stockholders to act by written consent without a meeting
and eliminate cumulative voting in the election of directors. These provisions
may make it more difficult for stockholders to take specific corporate actions
and could have the effect of delaying or preventing a change in control of
Finisar.

Our certificate of incorporation provides that, upon the closing of this
offering, the Board of Directors will be divided into three classes of
directors, with each class serving a staggered three-year term. See
"Management--Composition of the Board of Directors." The classification system
of electing directors may discourage a third party from making a tender offer or
otherwise attempting to obtain control of us and may maintain the incumbency of
the Board of Directors, because the classification of the Board of Directors
generally increases the difficulty of replacing a majority of the directors.

58
<PAGE>
TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company.

LISTING

Finisar has applied to have its common stock approved for listing on the
Nasdaq National Market under the trading symbol "FNSR."

59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales, could adversely affect the trading
price of the common stock.

Upon completion of this offering, we will have outstanding 49,707,462 shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options to purchase common stock after
September 30, 1999. Of these shares, the 7,700,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of Finisar, as
defined in Rule 144 under the Securities Act, which would be subject to the
limitations and restrictions described below.

The remaining 42,007,462 shares of common stock outstanding upon completion
of this offering will be "restricted securities" as defined in Rule 144. These
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144 or 701 under the
Securities Act, which are summarized below. Sales of these restricted securities
in the public market, or the availability of these shares for sale, could
adversely affect the trading price of our common stock.

Holders of approximately 39,807,829 of these restricted securities,
including all of our officers and directors and the entities affiliated with
them, have entered into lock-up agreements providing that, subject to limited
exceptions, they will not sell, directly or indirectly, any common stock without
the prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for a
period of 180 days from the date of this prospectus.

All of these restricted securities will be eligible for sale in the public
market, subject in some cases to the volume limitations and other restrictions
of Rule 144, beginning 180 days after the date of this prospectus upon
expiration of the lock-up agreements described above.

Shares issued upon exercise of options granted by us prior to the date of
this prospectus will be available for sale in the public market under Rule 701
of the Securities Act. Rule 701 permits resales of these shares in reliance upon
Rule 144 but without compliance with various restrictions, including the holding
period requirement, imposed under Rule 144. In general, under Rule 144,
beginning 90 days after the date of this prospectus, a person (or persons whose
shares are aggregated) who has beneficially owned restricted securities for at
least one year would be entitled to sell within any three-month period a number
of shares not to exceed the greater of (1) one percent of the then outstanding
shares of common stock or (2) the average weekly trading volume of our common
stock during the four calendar weeks preceding the filing of a Form 144 with
respect to the sale. Sales under Rule 144 are also subject to manner of sale and
notice requirements, as well as to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
an affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

As of September 30, 1999, options to purchase an aggregate of
2,036,740 shares of common stock were outstanding under our stock option plans.
We intend to file registration statements on Form S-8 under the Securities Act
approximately 90 days after the date of this prospectus to register an aggregate
of 7,614,740 shares of common stock issued or reserved for issuance under our
stock option plans and employee stock purchase plan. Shares of common stock
issued under the foregoing plans, after the filing of related registration
statements, will be freely tradable in the public market, subject in the case of
the holders to the Rule 144 limitations applicable to Finisar affiliates,
lock-up agreements with the underwriters and vesting restrictions imposed by
Finisar.

60
<PAGE>
UNDERWRITING

GENERAL

Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Morgan
Keegan & Company, Inc. and SoundView Technology Group, Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement, we have agreed to sell to each
of the underwriters, and each of the underwriters, severally and not jointly,
has agreed to purchase, the number of shares of our common stock set forth
opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................................................
J.P. Morgan Securities Inc. ...............................................................
Dain Rauscher Wessels......................................................................
Morgan Keegan & Company, Inc. .............................................................
SoundView Technology Group, Inc. ..........................................................

----------

Total............................................................................ 7,700,000
==========
</TABLE>

Subject to the terms and conditions set forth in the purchase agreement,
each of the underwriters is committed to purchase all of the shares of our
common stock being sold pursuant to the purchase agreement if any shares of our
common stock are purchased. Under certain circumstances, under the terms of the
purchase agreement, the commitments of the non-defaulting underwriters may be
increased or the purchase agreement may be terminated. We and the selling
stockholders have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.

The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.

COMMISSIONS AND DISCOUNTS

The representatives have advised us that they propose initially to offer the
shares of our common stock to the public at the initial public offering price
set forth on the cover page of this prospectus, and to certain dealers at such
price less a concession not in excess of $ per share of common stock.
The underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of common stock on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The following table shows the per share and total public offering price, the
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to

61
<PAGE>
us and the selling stockholders. This information is presented assuming either
no exercise or full exercise by the underwriters of their over-allotment
options.

<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
---------- ---------- ----------
<S> <C> <C> <C>
Public offering price.............................................. $ $ $
Underwriting discount.............................................. $ $ $
Proceeds, before expenses, to Finisar.............................. $ $ $
Proceeds to the selling stockholders............................... $ $ $
</TABLE>

The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ and are payable by us.

OVER-ALLOTMENT OPTION

The selling stockholders have granted to the underwriters an option,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 1,155,000 additional shares of common stock from the selling
stockholders at the public offering price less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.

RESERVED SHARES

At our request, the underwriters have reserved approximately shares of
our common stock for sale at the public offering price to our directors,
consultants and other persons with relationships to Finisar. The number of
shares of our common stock available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares which are not orally confirmed for purchase within one day of the pricing
of the offering will be offered by the underwriters to the general public on the
same basis as the other shares offered by this prospectus.

NO SALES OF SIMILAR SECURITIES

We, our executive officers and directors, and most of our existing
stockholders have agreed, with certain exceptions, not to directly or
indirectly:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, or otherwise dispose of or transfer any shares
of our common stock or any securities convertible into or exchangeable or
exercisable for our common stock, whether now owned or later acquired by
the person executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition, or file
any registration statement under the Securities Act relating to any shares
of our common stock for a period of 180 days after the date of this
prospectus; or

- enter into any swap or other agreement that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of our
common stock, whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or otherwise,

without the prior written consent of Merrill Lynch for a period of 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale."

62
<PAGE>
NASDAQ NATIONAL MARKET LISTING

Before this offering, there has been no public market for our common stock.
The public offering price will be determined through negotiations among us and
the representatives. In addition to prevailing market conditions the factors to
be considered by us and the representatives in determining the public offering
price of our common stock are:

- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;

- certain aspects of our financial information;

- the history of, and the prospects for, our company and the industry in
which we compete;

- an assessment of our management, our past and present operations, the
prospects for, and timing of, our future revenue;

- the present state of our development;

- the percentage interest of Finisar being sold as compared to the valuation
for the entire company; and

- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.

There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market subsequent
to the offering at or above the public offering price.

We have applied for a listing of our common stock on the Nasdaq National
Market under the symbol "FNSR."

The underwriters have advised us that they do not expect sales to accounts
over which the underwriters exercise discretionary authority to exceed 5% of the
total number of shares of our common stock offered by them.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in certain
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.

If the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might be in the absence of
such purchases.

The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that, if the representatives purchase
shares of our common stock in the open market to reduce the underwriters' short
position or to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group members
that sold those shares as part of the offering. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.

63
<PAGE>
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal
matters relating to the offering will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at April 30, 1998 and 1999 and for the fiscal years
ended April 30, 1997, 1998 and 1999, as set forth in their report. We have
included our financial statements and schedule in this prospectus and elsewhere
in the registration statement in reliance on Ernst & Young LLP's reports, given
on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1, including
the exhibits and schedules thereto, under the Securities Act with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
about us and the shares to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance please refer to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by this reference.

You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the SEC at the SEC's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
can request copies of these documents upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement will also be available to you on the SEC's
Web site. The address of this site is http://www.sec.gov.

64
<PAGE>
FINISAR CORPORATION

FINANCIAL STATEMENTS

INDEX

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Audited Financial Statements
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statement of Convertible Redeemable Preferred Stock and Changes in Stockholders'
Equity (Deficit).................................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Finisar Corporation

We have audited the accompanying balance sheets of Finisar Corporation as of
April 30, 1998 and 1999, and the related statements of operations, convertible
redeemable preferred stock and changes in stockholders' equity (deficit), and
cash flows for each of the three years in the period ended April 30, 1999. These
financial statements are the responsibility of Finisar Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finisar Corporation at
April 30, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended April 30, 1999, in conformity
with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Palo Alto, California

June 25, 1999

F-2
<PAGE>
FINISAR CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
APRIL 30, JULY 31,
---------------------- JULY 31, 1999 (NOTE
1998 1999 1999 1)
--------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 721,675 $ 5,043,796 $ 5,403,638
Accounts receivable (net of allowance for doubtful
accounts of $16,538, $265,138 and $407,318 at April 30,
1998, 1999 and July 31, 1999)........................... 2,787,515 6,656,148 7,561,823
Inventories............................................... 2,731,323 5,236,328 6,959,246
Deferred income taxes..................................... 387,200 1,047,442 1,047,442
Prepaid expenses.......................................... -- 193,505 164,550
--------- ----------- -----------
Total current assets........................................ 6,627,713 18,177,219 21,136,699
Income taxes receivable..................................... 81,385 -- --
Other assets................................................ -- 295,976 465,692
Property and equipment, net................................. 1,052,241 2,481,735 2,856,145
--------- ----------- -----------
Total assets................................................ $7,761,339 $20,954,930 $24,458,536
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 265,276 $ 1,394,461 $ 2,514,526
Accrued compensation...................................... 116,108 1,498,811 1,402,862
Other accrued liabilities................................. 372,972 1,476,408 1,949,588
Income tax payable........................................ -- 742,669 1,211,669
Note payable, current portion............................. 100,000 -- --
Capital lease obligations, current portion................ 44,047 53,539 50,952
--------- ----------- -----------
Total current liabilities................................... 898,403 5,165,888 7,129,597
--------- ----------- -----------
Long-term liabilities:
Note payable, long-term portion........................... 350,000 11,015,000 11,015,000
Capital lease obligations, long-term portion.............. 66,244 17,462 4,381
--------- ----------- -----------
Total long-term liabilities................................. 416,244 11,032,462 11,019,381
--------- ----------- -----------
Commitments and contingent liabilities
Convertible redeemable preferred stock:
No par value, 12,100,000 shares authorized: no shares
issued and outstanding at April 30, 1998; 12,039,486
shares issued and outstanding at April 30, 1999 and
July 31, 1999; no shares issued and outstanding pro
forma; liquidation preference $26,405,000 at April 30,
1999 and July 31, 1999.................................. -- 26,259,664 26,259,664 $ --
Redeemable preferred stock:
No par value, 12,100,000 shares authorized; no shares
issued and outstanding at April 30, 1998, 1999 or
July 31, 1999; 12,039,486 shares issued and outstanding
pro forma............................................... -- -- -- 2,640,260
Stockholders' equity (deficit):
Common stock:
No par value, 75,000,000 shares authorized; 41,800,000,
32,382,365, 32,512,365 and 41,494,262 shares issued
and outstanding at April 30, 1998 and 1999, July 31,
1999 and pro forma, respectively...................... 95,200 4,304,554 4,468,554 28,087,958
Deferred stock compensation............................... -- (1,975,378) (1,688,699) (1,688,699)
Notes receivable from stockholders........................ -- (1,520,788) (1,671,437) (1,671,437)
Retained earnings (accumulated deficit)................... 6,351,492 (22,311,472) (21,058,524) (21,058,524)
--------- ----------- ----------- ----------
Total stockholders' equity (deficit)........................ 6,446,692 (21,503,084) (19,950,106) $3,669,298
--------- ----------- ----------- ==========
Total liabilities and stockholders' equity (deficit)........ $7,761,339 $20,954,930 $24,458,536
========= =========== ===========
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>
FINISAR CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30, THREE MONTHS ENDED JULY 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 8,457,000 $ 22,066,942 $ 35,471,114 $ 6,793,507 $ 13,879,459
Cost of revenues....................... 3,438,000 8,704,928 15,513,930 2,665,500 6,252,055
------------ ------------- ------------- ------------ -------------
Gross profit........................... 5,019,000 13,362,014 19,957,184 4,128,007 7,627,404
------------ ------------- ------------- ------------ -------------
Operating expenses:
Research and development............. 2,536,000 3,806,132 7,863,646 1,393,903 2,840,391
Sales and marketing.................. 645,000 1,629,451 4,145,370 833,652 1,542,143
General and administrative........... 463,622 832,548 2,299,346 297,943 758,873
Amortization of deferred stock
compensation....................... -- -- 427,732 -- 286,679
------------ ------------- ------------- ------------ -------------
Total operating expenses............... 3,644,622 6,268,131 14,736,094 2,525,498 5,428,086
------------ ------------- ------------- ------------ -------------
Income from operations................. 1,374,378 7,093,883 5,221,090 1,602,509 2,199,318
Interest income........................ 15,000 38,141 154,058 -- 98,755
Interest expense....................... (2,000) (33,240) (428,507) (6,607) (188,141)
Other income (expense) net............. -- (25,451) (28,173) 25,253 (27,984)
------------ ------------- ------------- ------------ -------------
Income before income taxes............. 1,387,378 7,073,333 4,918,468 1,621,155 2,081,948
Provision for income taxes............. 440,000 2,714,900 1,873,693 568,169 829,000
------------ ------------- ------------- ------------ -------------
Net income............................. $ 947,378 $ 4,358,433 $ 3,044,775 $ 1,052,986 $ 1,252,948
============ ============= ============= ============ =============
Net income per share:
Basic................................ $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
============ ============= ============= ============ =============
Diluted.............................. $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
============ ============= ============= ============ =============
Shares used in computing net income per
share:
Basic................................ 44,000,000 43,752,877 36,860,000 41,800,000 29,463,905
============ ============= ============= ============ =============
Diluted.............................. 44,000,000 43,752,877 44,937,917 41,800,000 42,609,931
============ ============= ============= ============ =============
Pro forma net income per share:
Basic................................ $ 0.07 $ 0.03
============= =============
Diluted.............................. $ 0.07 $ 0.03
============= =============
Shares used in computing pro forma net
income per share:
Basic................................ 41,166,389 38,445,802
============= =============
Diluted.............................. 44,937,917 42,609,931
============= =============
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>
FINISAR CORPORATION
STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------
CONVERTIBLE REDEEMABLE
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------- DEFERRED STOCK
SHARES AMOUNT SHARES AMOUNT COMPENSATION
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1996......................... -- $ -- 44,000,000 $ 95,200 $ --
Net income and comprehensive income............. -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Balance at April 30, 1997......................... -- -- 44,000,000 95,200 --
Contribution of shares by principal
shareholder................................... -- -- (2,200,000) -- --
Net income and comprehensive income............. -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Balance at April 30, 1998......................... -- -- 41,800,000 95,200 --
Stock options exercised......................... -- -- 5,039,660 1,806,244 --
Issuance of preferred stock at $2.1932 per
share, net of issuance costs of $145,334 12,039,486 26,259,664 -- -- --
Repurchase of common stock at $2.1932 per
share......................................... -- -- (14,457,295) -- --
Deferred stock compensation..................... -- -- -- 2,403,110 (2,403,110)
Amortization of deferred stock compensation..... -- -- -- -- 427,732
Net income and comprehensive income............. -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Balance at April 30, 1999......................... 12,039,486 26,259,664 32,382,365 4,304,554 (1,975,378)
Stock options exercised
(unaudited)................................... -- -- 130,000 164,000 --
Amortization of deferred stock compensation
(unaudited)................................... -- -- -- -- 286,679
Net income and comprehensive income
(unaudited)................................... -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Balance at July 31, 1999 (unaudited).............. 12,039,486 $26,259,664 32,512,365 $ 4,468,554 $(1,688,699)
=========== =========== =========== ============ ===========

STOCKHOLDERS' EQUITY (DEFICIT)

-------------------------------------------
NOTES RETAINED TOTAL
RECEIVABLE EARNINGS STOCKHOLDERS'
FROM (ACCUMULATED EQUITY
STOCKHOLDERS DEFICIT) (DEFICIT)
------------ ------------ -------------
<S> <C> <C> <C>
Balance at April 30, 1996......................... $ -- $ 1,045,681 $ 1,140,881
Net income and comprehensive income............. -- 947,378 947,378
----------- ----------- ------------
Balance at April 30, 1997......................... -- 1,993,059 2,088,259
Contribution of shares by principal
shareholder................................... -- -- --
Net income and comprehensive income............. -- 4,358,433 4,358,433
----------- ----------- ------------
Balance at April 30, 1998......................... -- 6,351,492 6,446,692
Stock options exercised......................... (1,520,788) -- 285,456
Issuance of preferred stock at $2.1932 per
share, net of issuance costs of $145,334 -- -- --
Repurchase of common stock at $2.1932 per
share......................................... -- (31,707,739) (31,707,739)
Deferred stock compensation..................... -- -- --
Amortization of deferred stock compensation..... -- -- 427,732
Net income and comprehensive income............. -- 3,044,775 3,044,775
----------- ----------- ------------
Balance at April 30, 1999......................... (1,520,788) (22,311,472) (21,503,084)
Stock options exercised
(unaudited)................................... (150,649) -- 13,351
Amortization of deferred stock compensation
(unaudited)................................... -- -- 286,679
Net income and comprehensive income
(unaudited)................................... -- 1,252,948 1,252,948
----------- ----------- ------------
Balance at July 31, 1999 (unaudited).............. $(1,671,437) $(21,058,524) $(19,950,106)
=========== =========== ============
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<PAGE>
FINISAR CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED APRIL 30, JULY 31,
---------------------------------- ---------------------
1997 1998 1999 1998 1999
--------- ---------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 947,378 $4,358,433 $ 3,044,775 $1,052,986 $1,252,948
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization.................... 41,127 161,699 432,628 65,027 176,008
Amortization of deferred stock compensation...... -- -- 427,732 -- 286,679
Loss on fixed assets disposal.................... -- 29,963 237,498 -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (764,617) (1,583,937) (3,868,633) (946,732) (905,675)
Inventories.................................... (505,663) (1,780,709) (2,505,005) (492,561) (1,722,918)
Other assets................................... (720) 7,900 (489,481) (4,903) (140,761)
Deferred income taxes.......................... -- (240,622) (660,242) -- --
Accounts payable............................... (53,890) (178,640) 1,129,185 (302,258) 1,120,065
Accrued compensation........................... 20,450 54,758 1,382,703 503,143 (95,949)
Income tax payable............................. -- (298,478) 824,054 61,170 469,000
Other accrued liabilities...................... 109,278 211,928 1,103,436 693,954 473,180
--------- ---------- ----------- --------- ----------
Net cash provided by (used in) operating
activities....................................... (206,657) 742,295 1,058,650 629,826 912,577
--------- ---------- ----------- --------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment................ (143,642) (855,446) (2,099,620) (144,406) (550,418)
--------- ---------- ----------- --------- ----------
Net cash used in investing activities.............. (143,642) (855,446) (2,099,620) (144,406) (550,418)
--------- ---------- ----------- --------- ----------
FINANCING ACTIVITIES
Payments on capital lease obligations.............. -- (37,367) (39,290) -- (15,668)
Proceeds from borrowings under bank note........... -- 500,000 11,015,000 -- --
Repayments of borrowings under bank note........... -- (50,000) (450,000) (25,000) --
Proceeds from issuance of common stock............. -- -- 285,456 -- 13,351
Proceeds from issuance of preferred stock.......... -- -- 26,259,664 -- --
Repurchase of common stock......................... -- -- (31,707,739) -- --
--------- ---------- ----------- --------- ----------
Net cash provided by (used in) financing
activities....................................... -- 412,633 5,363,091 (25,000) (2,317)
--------- ---------- ----------- --------- ----------
Net (decrease) increase in cash and cash
equivalents...................................... (350,299) 299,482 4,322,121 460,420 359,842
Cash and cash equivalents at beginning of period... 772,492 422,193 721,675 721,675 5,043,796
--------- ---------- ----------- --------- ----------
Cash and cash equivalents at end of period......... $ 422,193 $ 721,675 $ 5,043,796 $1,182,095 $5,403,638
========= ========== =========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................. $ 1,595 $ 32,659 $ 363,650 $ 6,607 $ 188,141
========= ========== =========== ========= ==========
Cash paid for taxes................................ $ 440,000 $3,254,000 $ 1,709,881 $ 50,699 $ 360,000
========= ========== =========== ========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES
Acquisition of property and equipment under capital
lease obligations................................ $ 15,211 $ 132,447 $ -- $ -- $ --
========= ========== =========== ========= ==========
Issuance of common stock in exchange for notes
receivable....................................... $ -- $ -- $ 1,520,788 $ -- $ 150,649
========= ========== =========== ========= ==========
Deferred stock compensation related to
options granted.................................. $ -- $ -- $ 2,403,110 $ -- $ --
========= ========== =========== ========= ==========
</TABLE>

SEE ACCOMPANYING NOTES.

F-6
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Finisar Corporation ("Finisar" or the "Company") was incorporated in the
state of California on April 17, 1987. Finisar designs, manufactures, and
markets fiber optic subsystems and network performance test systems for
high-speed data communications.

INTERIM FINANCIAL INFORMATION

The interim financial information at July 31, 1999 and for the three months
ended July 31, 1998 and 1999 is unaudited but, in the opinion of management, has
been prepared on the same basis as the annual financial statements and includes
all adjustments (consisting only of normal recurring adjustments) that Finisar
considers necessary for a fair presentation of its financial position at such
date and its operating results and cash flows for those periods. Results for the
interim period are not necessarily indicative of the results to be expected for
the entire year, or any future period.

FISCAL PERIODS

In fiscal 2000, the Company began to maintain its financial records on the
basis of a fiscal year ending on April 30, with fiscal quarters ending on the
Sunday closest to the end of the period (thirteen week periods). For ease of
reference, all references to period end dates have been presented as though the
period ended on the last day of the calender month. The first quarter of fiscal
2000 ended on August 1, 1999.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

REVENUE RECOGNITION

Revenue is recognized at the time of product shipment, net of allowances for
estimated returns. Warranty expenses are also estimated and provided for at the
time of shipment.

CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject Finisar to concentrations of
credit risk include cash and cash equivalents and accounts receivable. Finisar
places its cash and cash equivalents with high-credit quality financial
institutions. At times, such investments may be in excess of FDIC insurance
limits. Concentrations of credit risk, with respect to accounts receivable,
exist to the extent of amounts presented in the financial statements. Accounts
receivable from two customers represented 32.3% and 33.2% of the total balance
at April 30, 1998, 32.2% and 18.2% at April 30, 1999 and 23.5% and 28.5% at July
31, 1999, respectively. Generally, Finisar does not require collateral or other
security to support customer receivables. Finisar performs periodic credit
evaluations of its customers and maintains an allowance for potential credit
losses based on historical experience and other information available to
management. Losses to date have been within management's expectations.

F-7
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS

Finisar sells products primarily to customers located in North America.
During fiscal 1997, 1998, and 1999, revenues from two customers represented
41.4% and 1.2%, and 43.9% and 14.6%, and 25.1% and 20.8% of total revenues,
respectively (34.9% and 19.0% in the quarter ended July 31, 1999).

RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to operations as incurred.

CASH AND CASH EQUIVALENTS

Finisar's cash equivalents consist of money market funds with qualified
financial institutions. Finisar considers all highly liquid investments with an
original maturity from the date of purchase of three months or less to be cash
equivalents.

INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, generally five years.

STOCK-BASED COMPENSATION

Finisar accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").

NET INCOME PER SHARE

Basic and diluted net income per share are presented in accordance with SFAS
No. 128, "Earnings Per Share" ("SFAS 128"), for all periods presented. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
shares and convertible preferred shares issued or granted for nominal
consideration prior to the anticipated effective date of Finisar's initial
public offering (the "Offering," see Note 10) should be included in the
calculation of basic and diluted net income per share as if they had been
outstanding for all periods presented. To date, Finisar has not had any
issuances or grants for nominal consideration.

Basic net income per share has been computed using the weighted-average
number of shares of common stock outstanding during the period. Diluted net
income per share has been computed using the weighted-average number of shares
of common stock and dilutive potential common shares from options (under the
treasury stock method) and convertible redeemable preferred stock (on an if-
converted basis) outstanding during the period. Basic and diluted pro forma net
income per share have been computed as described above and also give effect to
the conversion of all convertible redeemable preferred stock which automatically
convert upon the completion of the Company's initial public offering.

F-8
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and pro forma diluted net income per share:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED APRIL 30, JULY 31,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income............................. $ 947,378 $ 4,358,433 $ 3,044,775 $ 1,052,986 $ 1,252,948
============ ============ ============ ============ ============
Historical:
Denominator for basic net income per
share:
Weighted-average shares
outstanding--basic................... 36,860,000 29,463,905
Effect of dilutive securities:
Employee stock options................. -- -- 728,448 -- 1,240,289
Stock subject to repurchase............ -- -- 3,043,080 -- 2,923,840
Convertible redeemable preferred
stock................................ -- -- 4,306,389 -- 8,981,897
------------ ------------ ------------ ------------ ------------
Dilutive potential common shares......... -- -- 8,077,917 -- 13,146,026
------------ ------------ ------------ ------------ ------------
Denominator for diluted net income per
share.................................. 44,000,000 43,752,877 44,937,917 41,800,000 42,609,931
============ ============ ============ ============ ============
Basic net income per share............... $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
============ ============ ============ ============ ============
Diluted net income per share............. $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
============ ============ ============ ============ ============
Denominator for pro forma basic net
income per share:
Weighted average shares
outstanding--basic................... 36,860,000 29,463,905
Convertible redeemable preferred
stock................................ 4,306,389 8,981,897
------------ ------------
Weighted-average shares
outstanding--pro forma basic......... 41,166,389 38,445,802
------------ ------------
Effect of dilutive securities:
Employee stock options................. 728,448 1,240,289
Stock subject to repurchase............ 3,043,080 2,923,840
------------ ------------
Pro forma dilutive potential common
shares................................. 3,771,528 4,164,129
------------ ------------
Denominator for pro forma diluted net
income per share....................... 44,937,917 42,609,931
============ ============
Pro forma basic net income per share..... $ 0.07 $ 0.03
============ ============
Pro forma diluted net income per share... $ 0.07 $ 0.03
============ ============
</TABLE>

UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY

If the Offering is consummated, all of the convertible redeemable preferred
stock will be automatically converted into common stock and redeemable preferred
stock upon completion of the

F-9
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
offering (see Note 10). Unaudited pro forma stockholders' equity at July 31,
1999, as adjusted for the assumed conversion of such shares, is disclosed on the
balance sheets.

COMPREHENSIVE INCOME

Effective May 1, 1998, Finisar adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income". Comprehensive income is equal to net income for all
periods presented and has been disclosed in the statement of stockholders'
equity.

SEGMENT REPORTING

Effective May 1, 1998, Finisar adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 superseded SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." SFAS 131 establishes standards for the
way that public business enterprises report information about operating segments
in interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect Finisar's results of operations or
financial position.

EFFECT OF NEW ACCOUNTING STATEMENTS

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). Finisar is required to adopt SFAS 133 for the year ending
April 30, 2002. SFAS 133 establishes methods of accounting for derivative
financial instruments and hedging activities. Because Finisar currently holds no
derivative financial instruments as defined by SFAS 133 and does not currently
engage in hedging activities, adoption of SFAS 133 is not expected to have a
material effect on Finisar's financial condition or results of operations.

In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. Finisar is required to implement SOP 98-1 for the year ending April 30,
2000. Adoption of SOP 98-1 is not expected to have a material effect on
Finisar's financial condition or results of operations.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform to the current
presentation.

F-10
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
APRIL 30,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................................... $ 1,546,445 $ 2,907,811 $ 3,717,834
Work-in-process......................................................... 988,788 1,763,038 2,856,203
Finished goods.......................................................... 196,090 565,479 385,209
------------ ------------ ------------
$ 2,731,323 $ 5,236,328 $ 6,959,246
============ ============ ============
</TABLE>

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
APRIL 30,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment...................................................... $ 505,343 $ 839,547 $ 1,011,128
Office equipment, furniture, and fixtures............................... 422,852 445,421 445,421
Research and development equipment...................................... 215,888 1,021,549 1,185,272
Manufacturing equipment................................................. 146,583 773,352 988,466
------------ ------------ ------------
1,290,666 3,079,869 3,630,287
Accumulated depreciation and amortization............................... (238,425) (598,134) (774,142)
------------ ------------ ------------
Property and equipment, net............................................. $ 1,052,241 $ 2,481,735 $ 2,856,145
============ ============ ============
</TABLE>

Finisar has financed $132,447 of equipment purchased under capital lease
arrangements as of April 30, 1998 and 1999 and July 31, 1999. Accumulated
amortization of assets acquired under capital leases was $17,063, $43,552 and
$50,174 at April 30, 1998 and 1999 and July 31, 1999, respectively.

F-11
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. COMMITMENTS

Future minimum payments under noncancelable capital and operating lease
agreements are as follows as of April 30, 1999:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASE
------------ ----------
<S> <C> <C>
Fiscal years ending April 30:
2000.......................................................... $ 349,300 $ 59,176
2001.......................................................... 363,128 17,144
2002.......................................................... 377,650 --
2003.......................................................... 31,572 --
------------ ----------
Total minimum payments required................................. $ 1,121,650 76,320
============
Amount representing interest.................................... (5,319)
----------
Present value of future lease payments.......................... 71,001
Current portion................................................. (53,539)
----------
Long-term portion............................................... $ 17,462
==========
</TABLE>

Rent expense was approximately $77,034, $412,000, $366,905 and $136,822 for
the years ended April 30, 1997, 1998, and 1999 and the quarter ended July 31,
1999.

In August 1999, Finisar entered into a new facility operating lease. This
lease is non-cancellable and has a term of 7 years. Future lease payments for
fiscal years 2000, 2001, 2002, 2003, and thereafter are $580,306, $1,012,944,
$1,044,032, $1,075,120 and $3,904,110, respectively.

5. LOAN AGREEMENT

On November 4, 1998, Finisar borrowed the principal amount of $11,015,000
under a secured term loan agreement and entered into a secured revolving loan
facility for additional borrowings of up to $6,500,000. The revolving loan
facility expires in April 2003. No amounts were outstanding under the revolving
loan facility at April 30, 1999 or July 31, 1999. All business assets have been
pledged as collateral for borrowings under the term loan and the revolving loan
facility.

The term loan is repayable quarterly, commencing April 30, 2001. Quarterly
repayment amounts are $275,375, $826,125, and $1,652,250 in 2001, 2002, and
2003, respectively. Interest is payable monthly on the outstanding principal
amount of borrowings under the term loan and the revolving loan facility at the
effective prime or LIBOR rate (7.04% at April 30, 1999 and July 31, 1999).
Finisar believes that as of April 30, 1999, the fair value of the term loan
approximates its carrying value.

The loan agreement contains certain financial covenants and currently
prohibits the payment of dividends. At April 30, 1999 and July 31, 1999, Finisar
was in compliance with those covenants.

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

COMMON STOCK

Finisar's Articles of Incorporation provide for the issuance of up to
75,000,000 shares of common stock. The holder of each share of common stock
shall have the right to one vote.

F-12
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Common stock subject to future issuance is as follows:

<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Conversion of convertible redeemable preferred stock.............. 8,981,897 8,981,897
Exercise of outstanding options................................... 1,486,540 1,356,540
Common stock available for grant under stock option
plans........................................................... 6,535,000 6,535,000
------------ ------------
17,003,437 16,873,437
============ ============
</TABLE>

CONVERTIBLE REDEEMABLE PREFERRED STOCK

Holders of convertible redeemable preferred stock are entitled to non
cumulative dividends at an annual rate equal to $0.1316 per share (adjusted for
stock splits and like events), in preference to other stockholders if, when and
as declared by the board of directors. No dividends have been declared as of
April 30, 1999 or July 31, 1999.

The holders of outstanding convertible redeemable preferred stock, voting as
a single class, are entitled to appoint one director of Finisar. In all other
matters, each holder of convertible redeemable preferred stock has voting rights
based on the number of shares of common stock into which the preferred stock is
convertible, as described below.

The holders of outstanding convertible redeemable preferred stock are
entitled to receive upon liquidation and in certain other circumstances (a
merger, acquisition, or similar event), an amount per share of $2.1932 plus all
accrued but unpaid dividends (including any unpaid interest on such amounts).
Any remaining assets shall be distributed on a pro rata basis among the holders
of all common stock and preferred stock (on an if-converted basis).

Upon the approval of the holders of a majority of the outstanding shares of
convertible redeemable preferred stock, the convertible redeemable preferred
stock will be redeemed by Finisar for cash in three installments of the
following percentages on the following dates: November 6, 2004 (33.3%);
November 6, 2005 (50%); and November 6, 2006 (16.7%). The redemption price for
each share is $2.1932 plus all accrued but unpaid dividends (including any
unpaid interest on such amounts). At the option of each individual holder of
convertible redeemable preferred stock, each share of convertible redeemable
preferred stock is convertible, without any payment of additional consideration,
into one fully paid share of redeemable preferred stock and one fully paid share
of common stock (adjusted for stock splits, stock sales, issue of options,
warrants, and like events). Upon the closing of an underwritten public offering
prior to July 30, 2000 (in which the aggregate net proceeds exceed $20,000,000)
each share of convertible redeemable preferred stock will be automatically
converted into one fully paid share of redeemable preferred stock and a fraction
of a fully paid share of common stock as determined under a formula contained in
the Articles of Incorporation. If the public offering price exceeds $7.0955 per
share, each share of convertible redeemable preferred stock will be
automatically converted into approximately 0.746 shares of common stock.

On November 6, 1998 and November 25, 1998, Finisar issued an aggregate of
12,039,486 shares of convertible redeemable preferred stock to investors at
$2.1932 per share, resulting in gross cash proceeds of $26,405,000.

F-13
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

REDEEMABLE PREFERRED STOCK

Holders of outstanding redeemable preferred stock are entitled to non
cumulative dividends at an annual rate equal to $0.0381 per share (adjusted for
stock splits and like events), in preference to holders of common stock as and
when declared by the board of directors. No dividends have been declared as of
April 30, 1999 or July 31, 1999.

The holders of redeemable preferred stock have no voting rights.

The holders of redeemable preferred stock are entitled to receive upon
liquidation and in certain other circumstances (a merger, acquisition, or
similar event), an amount per share of $0.6345 plus all accrued but unpaid
dividends (including any unpaid interest on such amounts).

Upon the approval of the majority of redeemable preferred stockholders, the
redeemable preferred shares must be redeemed by Finisar for cash. The redemption
price for each share shall be $0.6345 plus all accrued but unpaid dividends
(including any unpaid interest on such amounts). Upon the closing of an
underwritten public offering, Finisar may elect at any time, to redeem in cash
all of the outstanding shares of redeemable preferred stock.

At any time after the sixth anniversary of the issuance of the redeemable
preferred stock, any holder of redeemable preferred stock can require Finisar to
redeem in cash up to 33% of the outstanding shares of redeemable preferred stock
held at that time. This redemption percentage increase to 66% after the seventh
anniversary and to 100% on the eighth anniversary of the issuance of shares.

At April 30, 1999 and July 31, 1999, no redeemable preferred stock had been
issued.

STOCK PLANS

As discussed in Note 1 and as permitted under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), Finisar has elected to follow APB Opinion No. 25 and related
interpretations in accounting for stock-based awards to employees.

During fiscal 1989 and 1999, Finisar adopted the 1989 and 1999 Stock Option
Plans (the "Plans"). Under the Plans, options to purchase common stock may be
granted at an exercise price of not less than 85% of the fair value of a share
of common stock on the date of grant (110% of the fair value in certain
instances) as determined by the board of directors. For purposes of determining
the fair market value of the common stock, the board of directors has considered
a number of factors including appraisals by independent third parties, the price
paid for convertible redeemable preferred stock in arms'-length transactions and
the illiquid nature of the common stock. Options generally vest over five years
and have a maximum term of 10 years. All options granted under the Plans are
immediately exercisable. As of April 30, 1999, 3,043,080 shares issued upon
exercise of options are subject to repurchase (2,923,840 shares at July 31,
1999).

F-14
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
A summary of activity under the Plans is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED-
OPTIONS ---------------------------- AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE
GRANT SHARES PRICE PER SHARE PRICE
------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1996........................... 18,430,800 7,269,200 $ 0.0027-$0.02 $ 0.0033
Options granted................................... (442,000) 442,000 $ 0.05 $ 0.05
Options canceled.................................. 7,000,000 (7,000,000) $ 0.0027 $ 0.0027
------------- ----------- --------------- ---------
Balance at April 30, 1997........................... 24,988,800 711,200 $ 0.0125-$0.05 $ 0.038
Options granted................................... (2,937,000) 2,937,000 $ 0.13 $ 0.13
Options canceled.................................. 22,000 (22,000) $ 0.05 $ 0.05
------------- ----------- --------------- ---------
Balance at April 30, 1998........................... 22,073,800 3,626,200 $ 0.0125-$0.13 $ 0.1125
Decrease in authorized shares..................... (12,638,800) -- -- --
Options granted................................... (2,900,000) 2,900,000 $ 0.15-$1.31 $ 0.7029
Options exercised................................. -- (5,039,660) $ 0.0125-$1.31 $ 0.3593
------------- ----------- --------------- ---------
Balance at April 30, 1999........................... 6,535,000 1,486,540 $ 0.05-$1.31 $ 0.5693
Options exercised (unaudited)..................... -- (130,000) $ 0.05-$1.31 $ 1.2615
------------- ----------- --------------- ---------
Balance at July 31, 1999 (unaudited)................ 6,535,000 1,356,540 $ 0.05-$1.31 $ 0.5029
============= =========== =============== =========
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------------------
WEIGHTED-
NUMBER AVERAGE REMAINING WEIGHTED-
OUTSTANDING AT AVERAGE
EXERCISE PRICE APRIL 30, 1999 CONTRACTUAL LIFE EXERCISE PRICE
- ----------------------------------------------------------------- -------------- ------------------- ---------------
(IN YEARS)
<S> <C> <C> <C>
$0.05............................................................ 107,000 7.72 $ 0.05
$0.13............................................................ 691,540 8.76 $ 0.13
$0.15............................................................ 116,000 9.18 $ 0.15
$0.26............................................................ 15,000 9.32 $ 0.26
$1.31............................................................ 557,000 9.81 $ 1.31
------------
$0.05-$1.31...................................................... 1,486,540 9.12
============
</TABLE>

The weighted-average fair value of options granted during fiscal 1999 was
$0.15.

RESTRICTED SHARES ISSUED FOR PROMISSORY NOTES

During fiscal 1999, employees exercised options for 2,646,308 shares of
common stock in exchange for promissory notes in the aggregate principal amount
of $1,520,788. The notes are full recourse, are secured by the shares and bear
interest at a rate of 6% per annum. The shares are restricted and are subject to
a right of repurchase at the original exercise price in favor of Finisar. This
repurchase right lapses in accordance with the original vesting schedule of the
option, which is generally five years.

F-15
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options to employees, Finisar
recorded deferred stock compensation of $2,403,110 during fiscal 1999,
representing the difference between the deemed value of common stock for
accounting purposes and the option exercise price of these options at the date
of grant. Deferred compensation is presented as a reduction of stockholders'
equity, with graded amortization recorded over the five year vesting period. The
Company recorded amortization of deferred stock compensation of approximately
$428,000 and $287,000 during the fiscal year ended April 30, 1999 and the three
months ended July 31, 1999, respectively, based on a graded vesting method. At
July 31, 1999, approximately $1,700,000 remained to be amortized on a graded
vesting method over the corresponding vesting period of each respective option,
generally five years. The amortization expense relates to options awarded to
employees in all operating expense categories. The amount of deferred
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Pro forma information regarding net income is required by SFAS 123 as if
Finisar had accounted for its employee stock options granted subsequent to
April 30, 1995 under the fair value method of SFAS 123. The fair value for
Finisar's stock option grants was estimated at the date of grant using the
minimum value option valuation model. The minimum value option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions. Because
Finisar's stock-based awards have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock-based awards. The fair value of these options was estimated
at the date of grant using the minimum value method option pricing model with
the following weighted-average assumptions for fiscal years 1997, 1998, and
1999: risk-free interest rates of 6% for 1997 and 1998 and 5.5% for 1999; a
dividend yield of 0%; and a weighted-average expected life of the option of four
years.

F-16
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Finisar
Corporation's pro forma information is as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net income:
As reported....................................... $ 947,378 $ 4,358,433 $ 3,044,775
============ ============ ============
Pro forma......................................... $ 946,924 $ 4,332,764 $ 3,000,121
============ ============ ============
Basic net income per share:
As reported....................................... $ 0.02 $ 0.10 $ 0.08
============ ============ ============
Pro forma......................................... $ 0.02 $ 0.10 $ 0.07
============ ============ ============
Diluted net income per share:
As reported....................................... $ 0.02 $ 0.10 $ 0.06
============ ============ ============
Pro Forma......................................... $ 0.02 $ 0.10 $ 0.06
============ ============ ============
</TABLE>

7. INCOME TAXES

Finisar's provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
--------------------------------------
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................. $ 422,773 $ 2,390,613 $ 1,995,827
State............................................... 122,740 564,909 538,107
---------- ------------ ------------
545,513 2,955,522 2,533,934
Deferred:
Federal............................................. (81,773) (225,479) (508,263)
State............................................... (23,740) (15,143) (151,978)
---------- ------------ ------------
(105,513) (240,622) (660,241)
---------- ------------ ------------
Provision for income taxes............................ $ 440,000 $ 2,714,900 $ 1,873,693
========== ============ ============
</TABLE>

Finisar provision for income taxes differs from the amount computed by
applying the federal statutory rate to income taxes as follows:

<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax provision at U.S. federal statutory rate
(34%).......................................................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit.............................. 5.0 5.0 4.8
Research & development credits................................... (7.0) (0.8) (4.0)
Other permanent differences...................................... (0.3) 0.2 3.3
--------- --------- ---------
31.7% 38.4% 38.1%
========= ========= =========
</TABLE>

F-17
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES (CONTINUED)
Significant components of Finisar's deferred federal and state income taxes
are as follows:

<TABLE>
<CAPTION>
APRIL 30,
------------------------
1998 1999
---------- ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserve................................................. $ 164,934 $ 503,049
Accruals not currently deductible................................. 235,587 679,639
---------- ------------
Total deferred tax assets........................................... 400,521 1,182,688

Deferred tax liabilities:
Tax depreciation over book depreciation............................. (13,321) (135,246)
---------- ------------
Net deferred tax assets............................................. $ 387,200 $ 1,047,442
========== ============
</TABLE>

8. SEGMENTS AND GEOGRAPHIC INFORMATION

Finisar operates in one industry segment, the design, manufacture, and
marketing of fiber optic subsystems and network performance test systems for
high-speed data communications. The following is a summary of operations within
geographic areas based on the location of the entity purchasing the Company's
product:

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, THREE MONTHS
------------------------------------------ ENDED
1997 1998 1999 JULY 31, 1999
------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues from sales to unaffiliated customers:
United States....................................... $ 4,676,165 $ 9,877,244 $ 24,822,399 $ 8,128,699
Canada.............................................. 3,573,479 9,695,295 8,940,592 4,876,732
Rest of the World................................... 207,356 2,494,403 1,708,123 874,028
------------ ------------- ------------- -------------
$ 8,457,000 $ 22,066,942 $ 35,471,114 $ 13,879,459
============ ============= ============= =============
</TABLE>

Revenues generated in the U.S. and Canada (collectively, North America) are
all to customers located in those geographic regions.

9. PENDING LITIGATION

In April 1999, Methode Electronics, a manufacturer of electronic component
devices, filed a lawsuit against Finisar and another manufacturer,
Hewlett-Packard Co., in the United States District Court for the Northern
District of Illinois alleging that Finisar's optoelectronic products infringe
four patents held by Methode. The lawsuit seeks monetary damages and injunctive
relief. In August 1999, the Court granted a motion to transfer the case to the
United States District Court for the Northern District of California. On
October 18, 1999, Methode filed a motion seeking leave to file an amended
complaint. The proposed amended complaint alleges infringement of a fifth
Methode patent and also alleges that Finisar breached its obligations under a
license and supply agreement with Methode by failing to provide Methode with
unspecified information regarding new technology related to the products
licensed under the agreement. The proposed amended complaint purports to seek
compensatory damages of at least $224,280,000 plus interest for the alleged
breach of contract. It is Finisar's position that the Methode patents are
invalid, unenforceable and/or not infringed by Finisar's

F-18
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. PENDING LITIGATION (CONTINUED)

products. Finisar also believes that the breach of contract claim that Methode
seeks to include in the amended complaint is without merit and that, in any
event, the proposed amended complaint grossly overstates the amount of damages
that Methode could possibly have suffered as a result of any such breach.
Finisar believes that it has strong defenses against Methode's lawsuit and has
filed a counterclaim against Methode. Finisar intends to defend Methode's
lawsuit and pursue its counterclaim vigorously and does not believe that the
outcome of the litigation will have a material impact on its results of
operations or financial position. However, the litigation is in the preliminary
stage, and Finisar cannot predict its outcome with certainty. The litigation
process is inherently uncertain. Patent litigation is particularly complex and
can extend for a protracted time, which can substantially increase the cost of
such litigation. Should the outcome of the litigation be adverse to Finisar, it
could be required to pay significant monetary damages to Methode and could be
enjoined from selling those of Finisar's products found to infringe Methode's
patents unless and until Finisar is able to negotiate a license from Methode. If
Finisar is required to pay significant monetary charges, is enjoined from
selling any of Finisar's products or is required to make substantial royalty
payments pursuant to any such business agreement, Finisar's business would be
significantly harmed.

10. EVENTS SUBSEQUENT TO THE DATE OF THE AUDIT REPORT

The board of directors has authorized Finisar to file a registration
statement with the U.S. Securities and Exchange Commission for an initial public
offering of its common stock. If the offering is consummated under the terms
presently anticipated, all of the currently outstanding shares of convertible
redeemable preferred stock will be automatically converted into 8,981,897 shares
of common stock and 12,039,486 shares of redeemable preferred stock and all
shares of such redeemable preferred stock will be redeemed for approximately
$2,640,000 from the net proceeds of the offering.

REINCORPORATION

In September 1999, Finisar's board of directors authorized the
reincorporation of the Company in the state of Delaware. Following the
reincorporation, Finisar will be authorized to issue 200,000,000 shares of
$0.001 par value common stock and 5,000,000 shares of $0.001 par value preferred
stock. The board of directors has the authority to issue the undesignated
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof.

1999 EMPLOYEE STOCK PURCHASE PLAN

Finisar's 1999 Employee Stock Purchase Plan was adopted by the board of
directors and approved by the stockholders in September 1999. A total of 250,000
shares of common stock are reserved for issuance under the plan, cumulatively
increased by 250,000 shares on May 1, 2001 and each May 1 thereafter through
May 1, 2010. Employees, including officers and employee directors, are eligible
to participate in the plan if they are employed by Finisar for more than
20 hours per week and more than five months in any calendar year. The plan will
be implemented during sequential 12-month offering periods, generally commencing
on or about December 1 of each year. However, the first such offering period
will commence on the effective date of the offering and will terminate on
November 30, 2000. In addition, a six-month offering period will generally
commence on June 1 of each year.

The employee stock purchase plan permits eligible employees to purchase
Finisar common stock through payroll deductions, which may not exceed 20% of the
employee's total compensation. Stock

F-19
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. EVENTS SUBSEQUENT TO THE DATE OF THE AUDIT REPORT (CONTINUED)
may be purchased under the plan at a price equal to 85% of the fair market value
of Finisar common stock on either the first or the last day of the offering
period, whichever is lower.

1999 STOCK OPTION PLAN

Finisar's 1999 Stock Option Plan was amended by the board of directors and
approved by the stockholders in September 1999. The amendment increased the
aggregate maximum number of shares that may be issued under the Plan on May 1,
2001 and each May 1 thereafter by a number of shares equal to 5% of the number
of shares of Finisar's common stock issued and outstanding as of the immediately
preceding April 30, subject to certain restrictions on the aggregate maximum
number of shares that may be issued pursuant to incentive stock options.

F-20
<PAGE>
[INSIDE BACK COVER]

[FINISAR LOGO]

FIBER OPTIC SOLUTIONS FOR GIGABIT ETHERNET AND FIBRE CHANNEL
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Through and including , 1999, (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

7,700,000 SHARES

[FINISAR LOGO]

COMMON STOCK

------------------

P R O S P E C T U S

------------------

MERRILL LYNCH & CO.

J.P. MORGAN & CO.

DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED

MORGAN KEEGAN & COMPANY, INC.

SOUNDVIEW TECHNOLOGY GROUP

, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions payable by the Registrant in connection
with the sale and distribution of the common stock being registered. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market application
fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 34,464
NASD filing fee................................................. 12,000
Nasdaq National Market application fee.......................... 95,000
Blue sky qualification fees and expenses........................ 6,000
Printing and engraving expenses................................. 150,000
Legal fees and expenses......................................... 300,000
Accounting fees and expenses.................................... 240,000
Director and officer liability insurance........................ 300,000
Transfer agent and registrar fees............................... 7,500
Miscellaneous expenses.......................................... 55,036
---------
Total......................................................... $1,200,000
=========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's certificate of
incorporation and bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements
(Exhibit 10.1) with its directors and officers which would require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature). The Registrant also
intends to maintain director and officer liability insurance, if available on
reasonable terms. These indemnification provisions and the indemnification
agreements may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.

The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.

Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
See also related undertakings in Item 17 below.

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

(a) Since July 31, 1996, Finisar has issued and sold the following
unregistered securities:

1. From inception through July 31, 1999, Finisar issued options to
purchase an aggregate of 40,328,200 shares of common stock under its 1989
and 1999 stock options plans, of which 6,769,660 have been exercised.

2. In November 1998, Finisar sold 12,039,486 shares of its convertible
redeemable preferred stock to certain investors at a purchase price of
$2.1932 per share, for an aggregate purchase price of $26,405,000.

There were no underwriters employed in connection with any of the
transactions set forth in this Item 15.

The issuances described in Items 15(a)(1) and 15(a)(2) were deemed exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Item 15(a)(1) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Finisar or had access, through
employment or other relationships, to such information.

For additional information concerning these equity investment transactions,
see the section entitled "Certain Transactions" in the prospectus.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS.

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.9 Security Agreement between Registrant and Fleet National Bank, dated as of November 4, 1998
10.10 Security Agreement Re: Contracts, Leases, License and Permits between Registrant and Fleet National
Bank, dated as of November 4, 1998
10.11 Building Office Lease for 582 Market Street, Suite 609-610, San Francisco, CA, dated December 17, 1996
between Registrant and Niantic Corporation
10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between Registrant and
DM Group VIII and DM Group VIII-E
10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA, dated May 26, 1999 between Registrant and
Aetna Life Insurance Company
*23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
24.1 Power of Attorney
*27.1 Financial Data Schedule
</TABLE>

- ------------------------

* Filed herewith. All other exhibits have previously been filed.

(B) FINANCIAL STATEMENT SCHEDULES.

The following financial statement schedule of Finisar is filed as part of
this Registration Statement and should be read in conjunction with the financial
statements and related notes.

<TABLE>
<CAPTION>
SCHEDULE PAGE
- ----------------------------------------------------------------------------------------------------------- -----------
<S> <C>
II -- Valuation and Qualifying Accounts.................................................................... S-1
</TABLE>

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to

II-3
<PAGE>
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective; and

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amendment no. 2 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Sunnyvale, State of
California, on October 25, 1999

FINISAR CORPORATION

BY: /S/ STEPHEN K. WORKMAN
-----------------------------------------
Stephen K. Workman
VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER
AND SECRETARY

Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- -------------
/s/ JERRY S. RAWLS* President and Chief Executive October 25,
- ------------------------------ Officer (PRINCIPAL EXECUTIVE 1999
Jerry S. Rawls OFFICER)

/s/ FRANK H. LEVINSON* Chairman of the Board and Chief October 25,
- ------------------------------ Technical Officer 1999
Frank H. Levinson

Vice President, Finance, Chief October 25,
/s/ STEPHEN K. WORKMAN Financial Officer and Secretary 1999
- ------------------------------ (PRINCIPAL FINANCIAL AND
Stephen K. Workman ACCOUNTING OFFICER)

/s/ MICHAEL C. CHILD* Director October 25,
- ------------------------------ 1999
Michael C. Child

/s/ ROGER C. FERGUSON* Director October 25,
- ------------------------------ 1999
Roger C. Ferguson

<TABLE>
<S> <C> <C> <C>
*By: /s/ STEPHEN K. WORKMAN
-------------------------
Stephen K. Workman
ATTORNEY-IN-FACT
</TABLE>

II-5
<PAGE>
FINISAR CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ----------------------------
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS AND OTHER DEDUCTIONS-- END OF
PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------- ----------- --------------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended April 30, 1997..................... $ -- $ -- $ -- $ -- $ --
Year ended April 30, 1998..................... -- 16,538 -- -- 16,538
Year ended April 30, 1999..................... 16,538 248,600 -- -- 265,138
</TABLE>

S-1
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Purchase Agreement
3.1 Amended and Restated Articles of Incorporation of Registrant
3.2 Amended and Restated Bylaws of Registrant
3.3 Certificate of Incorporation of Registrant (Delaware)
3.4 Bylaws of Registrant (Delaware)
3.5 Form of Restated Certificate of Incorporation of Registrant to be filed after the closing of the
offering
4.1 Specimen certificate representing the common stock
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
10.1 Form of Indemnity Agreement between Registrant and Registrant's directors and officers
10.2 1989 Stock Option Plan
10.3 1999 Stock Option Plan
10.4 1999 Employee Stock Purchase Plan
10.5 Securities Purchase Agreement between Registrant and certain investors, dated as of November 6, 1998
10.6 Shareholders' Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
10.7 Voting Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
10.8 Loan Agreement between Registrant and Fleet National Bank, dated as of November 6, 1998
10.9 Security Agreement between Registrant and Fleet National Bank, dated as of November 4, 1998
10.10 Security Agreement Re: Contracts, Leases, License and Permits between Registrant and Fleet National
Bank, dated as of November 4, 1998
10.11 Building Office Lease for 582 Market Street, Suite 609-610, San Francisco, CA, dated December 17, 1996
between Registrant and Niantic Corporation
10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between Registrant and
DM Group VIII and DM Group VIII-E
10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA, dated May 26, 1999 between Registrant and
Aetna Life Insurance Company
*23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
24.1 Power of Attorney
*27.1 Financial Data Schedule
</TABLE>

- ------------------------

* Filed herewith. All other exhibits have previously been filed.

<PAGE>
EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 25, 1999 in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-87017) and related Prospectus of Finisar Corporation
dated October 25, 1999.

Our audits also included the financial statement schedule of Finisar
Corporation listed in Item 16(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Palo Alto, California
October 25, 1999

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> APR-30-1998 APR-30-1999 APR-30-2000
<PERIOD-START> MAY-01-1997 MAY-01-1998 MAY-01-1999
<PERIOD-END> APR-30-1998 APR-30-1999 JUL-31-1999
<CASH> 722 5,044 5,404
<SECURITIES> 0 0 0
<RECEIVABLES> 2,804 6,921 7,969
<ALLOWANCES> (17) (265) (407)
<INVENTORY> 2,731 5,236 6,959
<CURRENT-ASSETS> 6,628 18,177 21,137
<PP&E> 1,290 3,080 3,630
<DEPRECIATION> (238) (598) (774)
<TOTAL-ASSETS> 7,761 20,955 24,459
<CURRENT-LIABILITIES> 898 5,166 7,130
<BONDS> 0 0 0
0 26,260 26,260
0 0 0
<COMMON> 95 4,305 4,469
<OTHER-SE> 6,351 (25,808) (24,419)
<TOTAL-LIABILITY-AND-EQUITY> 7,761 20,955 24,459
<SALES> 22,067 35,471 13,879
<TOTAL-REVENUES> 22,067 35,471 13,879
<CGS> 8,705 15,514 6,252
<TOTAL-COSTS> 8,705 15,514 6,252
<OTHER-EXPENSES> 6,268 14,736 5,428
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 33 429 188
<INCOME-PRETAX> 7,073 4,919 2,082
<INCOME-TAX> 2,715 1,874 829
<INCOME-CONTINUING> 4,358 3,045 1,253
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,358 3,045 1,253
<EPS-BASIC> 0.10 0.08 0.04
<EPS-DILUTED> 0.10 0.07 0.03

</TABLE>