FINISAR CORP, 10-Q/A, 2000-03-16

FINISAR CORP
10-Q/A, 2000-03-16
SEMICONDUCTORS & RELATED DEVICES

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

AMENDMENT NUMBER ONE
TO
FORM 10-Q

<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE QUARTERLY PERIOD ENDED JANUARY 30, 2000
<TABLE>
<S> <C>

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NO. 000-27999

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FINISAR CORPORATION

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 94-3038428
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1308 MOFFETT PARK DRIVE,
SUNNYVALE, CALIFORNIA 94089-1133
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

Registrant's Telephone Number, Including Area Code: (408) 548-1000

NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

As of January 30, 2000, there were 51,253,428 shares of the registrant's no
par value Common Stock outstanding.

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<PAGE>
FINISAR CORPORATION
INDEX

<TABLE>
<CAPTION>
PAGE(S)
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<S> <C> <C>
PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Balance Sheets as of January 31, 2000 (unaudited)
and
April 30, 1999............................................ 3

Condensed Statements of Operations (unaudited) for the
fiscal quarter and nine months ended January 31, 2000 and
1999...................................................... 4

Condensed Statements of Cash Flows (unaudited) for the nine
months ended January 31, 2000 and 1999.................... 5

Notes to Condensed Financial Statements (unaudited)......... 6-11

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12-28

Item 3. Quantitative and Qualitative Disclosure About Market Risk... 28

PART II OTHER INFORMATION

Item 1. Legal Proceedings........................................... 29

Item 2. Changes in Securities and Use of Proceeds................... 29

Item 6. Exhibits and Reports on Form 8-K............................ 29

Signatures............................................................. 30

Index to Exhibits...................................................... 31
</TABLE>

2
<PAGE>
PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FINISAR CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
2000 1999
----------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 66,356 $ 5,044
Short-term investments.................................... 67,759 --
Accounts receivable, trade (net).......................... 10,170 6,653
Accounts receivable, other................................ 140 3
Inventories............................................... 15,087 5,236
Income tax receivable..................................... 148 --
Deferred income taxes..................................... 2,360 1,047
Prepaid expenses.......................................... 337 194
-------- --------
Total current assets.................................... 162,357 18,177
Property, equipment and improvements (net).................. 5,885 2,482
Other assets................................................ 463 296
-------- --------
Total assets............................................ $168,705 $ 20,955
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,248 $ 1,394
Accrued compensation...................................... 2,258 1,499
Other accrued liabilities................................. 2,279 1,476
Income tax payable........................................ 1,430 743
Capital lease obligations, current portion................ 21 54
-------- --------
Total current liabilities............................... 10,236 5,166
Notes payable, long-term portion............................ -- 11,015
Capital lease obligations, long-term portion................ 22 17
Other long-term liabilities................................. 132 --
Preferred stock............................................. -- 26,260
-------- --------
Total liabilities....................................... 10,390 42,458
Stockholders' equity:
Common stock, no par value.................................. -- 4,304
Common stock, $0.001 par value.............................. 51 --
Additional paid-in capital.................................. 194,262 --
Notes receivable from stockholders.......................... (3,696) (1,521)
Deferred stock compensation................................. (11,143) (1,975)
Unrealized loss on short-term investments................... (57) --
Retained earnings (accumulated deficit)..................... (21,102) (22,311)
-------- --------
Total stockholders' equity (deficit).................... 158,315 (21,503)
-------- --------
Total liabilities and stockholders' equity.............. $168,705 $ 20,955
======== ========
</TABLE>

3
<PAGE>
FINISAR CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................................ $16,510 $ 8,985 $46,466 $23,181
Cost of revenues........................................ 8,122 4,171 22,252 9,895
------- ------- ------- -------
Gross profit.......................................... 8,388 4,814 24,214 13,286
Operating expenses:
Research and development.............................. 3,878 1,890 10,051 5,048
Sales and marketing................................... 1,643 1,160 5,080 2,864
General and administrative............................ 974 484 2,597 1,203
Amortization of deferred stock compensation........... 1,781 120 3,791 219
------- ------- ------- -------
Total operating expenses............................ 8,276 3,654 21,519 9,334
------- ------- ------- -------
Income from operations.................................. 112 1,160 2,695 3,952
Interest income, net.................................... 1,342 (141) 1,169 (131)
Other non-operating income (expense), net............... (16) (21) (72) 4
------- ------- ------- -------
Income before income taxes.............................. 1,438 998 3,792 3,825
Provision for income taxes.............................. 1,095 384 2,583 1,410
------- ------- ------- -------
Net income.............................................. $ 343 $ 614 $ 1,209 $ 2,415
======= ======= ======= =======

Net income per share:
Basic................................................. $ 0.01 $ 0.02 $ 0.03 $ 0.07
======= ======= ======= =======
Diluted............................................... $ 0.01 $ 0.01 $ 0.03 $ 0.06
======= ======= ======= =======
Shares used in per share computations:
Basic................................................. 45,080 28,585 34,628 36,638
======= ======= ======= =======
Diluted............................................... 51,845 44,105 46,029 42,424
======= ======= ======= =======
</TABLE>

4
<PAGE>
FINISAR CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 1,209 $ 2,415
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of deferred stock compensation.............. 3,791 219
Depreciation and amortization............................ 788 281
Changes in operating assets and liabilities:
Accounts receivable...................................... (3,517) (3,829)
Inventories.............................................. (9.851) (2,317)
Prepaid and other assets................................. (315) (360)
Accounts payable......................................... 2,854 507
Accrued compensation..................................... 759 1,017
Other accrued liabilities................................ 1,053 533
Income taxes, net........................................ (774) (301)
-------- --------
Net cash (used in) operating activities................ (4,003) (1,835)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (4,441) (1,352)
Short-term investments..................................... (67,816) --
-------- --------
Net cash (used in) investing activities................ (72,257) (1,352)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in initial public
offering, net............................................ 150,978 --
Redemption of preferred stock.............................. (2,640) --
Proceeds from issuance of preferred stock.................. -- 26,260
Repurchase of common stock................................. -- (31,708)
Proceeds from exercise of stock options, net of loans...... 277 396
Proceeds from borrowings under bank note................... -- 11,015
Repayment of borrowings under bank note.................... (11,015) (450)
Principal payments on lease obligations.................... (28) (29)
-------- --------
Net cash provided by financing activities.............. 137,572 5,484
-------- --------
Net increase in cash and equivalents................... 61,312 2,297
Cash and cash equivalents, beginning of period............. 5,044 722
-------- --------
Cash and cash equivalents, end of period................... $ 66,356 $ 3,019
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................. 510 253
Income taxes............................................. 3,352 1,710
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Loans to related parties for stock option exercises...... 2,175 221
Conversion of preferred stock to common stock............ 23,620 --
Deferred stock compensation related to grants of certain
stock options.......................................... 12,959 1,033
</TABLE>

5
<PAGE>
FINISAR CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Finisar Corporation ("Finisar" or the "Company") designs, manufactures, and
markets fiber optic subsystems and network performance test systems for
high-speed data communications.

INTERIM FINANCIAL INFORMATION AND BASIS OF PRESENTATION

The interim financial information at January 31, 2000 and for the three
months and nine months ended January 31, 2000 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.

The balance sheet at April 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

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 calendar month. The first three quarters of
fiscal 2000 ended on August 1, 1999, October 31, 1999 and January 30, 2000,
respectively.

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, short-term investments and
accounts receivable. Finisar places its cash and cash equivalents and
short-term investments with high-credit quality financial institutions. Such
investments are generally 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 33.8% and 16.0% of the total balance at April 30, 1999
and three customers represented 27.1%, 16.8% and 12.2% at January 31, 2000,
respectively. Generally,

6
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FINISAR CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS

Finisar sells products primarily to customers located in North America.
During the third quarter and first nine months of fiscal 2000, sales to two
customers, each representing more than 10% of revenues, totaled 43.0% and 50.7%
of total revenues, respectively. Sales to two customers, each representing more
than 10% of revenues, in the third quarter and first nine months of fiscal 1999
represented 45.3% and 48.6% of total revenues, respectively.

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.

SHORT-TERM INVESTMENTS

Short-term investments consist of interest bearing securities with
maturities greater than 90 days. The Company has adopted the provisions of
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, the
Company has classified its short-term investments as available-for-sale.
Available-for-sale securities are stated at market value and unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a separate component of stockholders' equity until realized. A
decline in the market value of the security below cost that is deemed other than
temporary is charged to earnings, resulting in the establishment of a new cost
basis for the security. At January 30, 2000, the Company's marketable investment
securities consisted of highly liquid investments in both taxable and tax free
municipal obligations with various maturity dates through November 1, 2002. The
difference between market value and cost of these securities at January 30, 2000
was $57,000.

INVENTORIES

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

PROPERTY, EQUIPMENT AND IMPROVEMENTS

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

7
<PAGE>
FINISAR CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 effective date of Finisar's initial public offering
are required to 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.

COMPREHENSIVE INCOME

Effective May 1, 1998, Finisar adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes rules for reporting and display
of comprehensive income and its components. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities to be included
in comprehensive income. The amount of the change in net unrealized loss on
available-for-sale securities for the three and nine months ended January 31,
2000 was $57,000. Prior to Fiscal 2000, net income equaled comprehensive
income.

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 annual financial statements and requires that
those enterprises report selected 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.

8
<PAGE>
FINISAR CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 981 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 did not have a material
effect on Finisar's financial condition or results of operations for the nine
months ended January 31, 2000.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is currently evaluating the impact of SAB 101. Should
the Company determine that a change in its accounting policy is necessary,
such a change will be made effective May 1, 2000 and would result in a change
to results of operations for the cumulative effect of the change. This
amount, if recognized, would be recorded as deferred revenue and recognized
as revenue in future periods. Prior financial statements would not be
restated.

2. NET INCOME PER SHARE

The following table presents the calculation of basic and diluted net income
per share (in thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net income......................................... $ 343 $ 614 $ 1,209 $ 2,415
Historical:
Denominator for basic net income per share:
Weighted-average shares outstanding-basic.......... 45,080 28,585 34,628 36,638
Effect of dilutive securities:
Employee stock options............................. 1,727 3,935 1,446 1,736
Stock subject to repurchase........................ 3,854 2,603 3,553 1,251
Convertible redeemable preferred stock............. 1,184 8,982 6,402 2,799
------- ------- ------- -------
Dilutive potential common shares..................... 6,765 15,520 11,401 5,786
------- ------- ------- -------
Denominator for diluted net income per share......... 51,845 44,105 46,029 42,424
======= ======= ======= =======

Basic net income per share........................... $ 0.01 $ 0.02 $ 0.03 $ 0.07
======= ======= ======= =======
Diluted net income per share......................... $ 0.01 $ 0.01 $ 0.03 $ 0.06
======= ======= ======= =======
</TABLE>

9
<PAGE>
FINISAR CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

3. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
2000 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
Raw materials............................................... $ 7,929 $2,908
Work-in-process............................................. 6,057 1,763
Finished goods.............................................. 1,101 565
------- ------
Total inventories......................................... $15,087 $5,236
======= ======
</TABLE>

4. PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements consist of the following (in
thousands):

<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
2000 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
Computer equipment and software............................. $ 1,663 $ 840
Office equipment, furniture, and fixtures................... 687 445
Machinery and equipment..................................... 3,853 1,795
Leasehold improvements...................................... 932 --
------- ------
Total capital equipment..................................... 7,135 3,080
Accumulated depreciation and amortization................... (1,250) (598)
------- ------
Property, equipment and improvements, net................... $ 5,885 $2,482
======= ======
</TABLE>

5. INCOME TAXES

Income taxes for the respective periods were computed using the effective
tax rate estimated to be applicable for the fiscal year, which is subject to
ongoing review and evaluation by management.

6. DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options to employees,
Finisar recorded deferred stock compensation of $2.4 million during fiscal
1999 and $13.0 million during the nine months ended January 31, 2000,
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 stock compensation is presented as a reduction of
stockholders' equity, with graded amortization recorded over the five-year
vesting period. The amortization expense relates to options awarded to
employees in all operating expense categories. The following table summarizes
the amount of deferred compensation expense which Finisar has recorded and
the amortization it has recorded and expects to record in

10
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FINISAR CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

6. DEFERRED COMPENSATION (CONTINUED)
future periods. Amounts to be recorded in future periods could decrease if
options for which accrued but unvested compensation has been recorded are
forfeited (in thousands):

<TABLE>
<CAPTION>
DEFERRED STOCK
COMPENSATION AMORTIZATION
GENERATED EXPENSE
------------ ------------
<S> <C> <C>
Second quarter ended October 31, 1998....................... $ 1,033 $ 99
Third quarter ended January 31, 1999........................ -- 120
Fourth quarter ended April 30, 1999......................... 1,370 209
First quarter ended July 31, 1999........................... -- 287
Second quarter ended October 31, 1999....................... 12,959 1,723
Third quarter ended January 31, 2000........................ -- 1,781
Fourth quarter ending April 30, 2000........................ -- 1,740
Fiscal year ending April 30, 2001........................... -- 4,427
Fiscal year ending April 30, 2002........................... -- 2,659
Fiscal year ending April 30, 2003........................... -- 1,467
Fiscal year ending April 30, 2004........................... -- 715
Fiscal year ending April 30, 2005........................... -- 135
------- -------
Total................................................... $15,362 $15,362
======= =======
</TABLE>

11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the unaudited condensed financial
statements included herein. The discussion in this section contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below.

OVERVIEW

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.
Additionally, we have recently developed products for digitizing the return
path of a CATV network and for aggregating data traffic in extended networks.
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 design of reliable, high-speed networking systems and
the testing and monitoring of the performance of these systems.

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. In November 1999, we
received net proceeds of $151.0 million from the initial public offering of
shares of our common stock.

Our revenues are derived principally from 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 50.7% of our revenues for the nine
months ended January 31, 2000. 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, Israel, Germany and Korea.

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 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. Our gross margins are generally lower for newly
introduced products and improve as unit volumes increase. Our overall gross
margins have fluctuated from period to period as a result of shifts in
product mix, the introduction of new products, decreases in average selling
prices for older products and our ability to reduce product costs. As a
result of a significant growth in sales of optical subsystem products over
the past several quarters, including sales of new products to a number of new
customers, we have experienced a sustained product shift toward a greater
percentage of optical subsystem products resulting in a decline in overall
gross margins. We expect this trend to contine over the next few quarters.

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

12
<PAGE>
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.

RESULTS OF OPERATIONS

The following table sets forth certain items from the statement of
operations as a percentage of revenues excluding the amortization of deferred
compensation associated with the issuance of stock options prior to the
Company's initial public offering on November 12, 1999:

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................ 49.2 46.4 47.9 42.7
----- ----- ----- -----
Gross profit.............................................. 50.8 53.6 52.1 57.3
Operating expenses:
Research and development.................................. 23.5 21.0 21.6 21.8
Sales and marketing....................................... 9.9 12.9 10.9 12.4
General and administrative................................ 5.9 5.4 5.6 5.2
----- ----- ----- -----
Total operating expenses.................................. 39.3 39.3 38.1 39.4
----- ----- ----- -----
Income from operations...................................... 11.5 14.3 14.0 17.9
Interest income (expense), net.............................. 8.1 (1.6) 2.5 (0.5)
Other income (expense), net................................. (0.1) (0.2) (0.1) --
----- ----- ----- -----
Income before income taxes.................................. 19.5 12.5 16.4 17.4
Provision for income taxes.................................. 6.6 4.3 5.6 6.0
----- ----- ----- -----
Net income (excluding amortization of deferred stock
compensation)............................................. 12.9% 8.2% 10.8% 11.4%
===== ===== ===== =====
</TABLE>

The following table highlights certain aspects of the Company's revenues for
the three-month and nine-month periods ended January 31, 2000 and 1999. 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:

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (thousands):
Optical subsystems........................................ $10,917 $ 5,271 $31,225 $13,503
Test systems.............................................. 5,593 3,714 15,241 9,678
------- ------- ------- -------
Total................................................... $16,510 $ 8,985 $46,466 $23,181
======= ======= ======= =======
Geographic coverage (thousands):
North America............................................. $15,664 $ 8,498 $44,105 $21,965
Rest of World............................................. 846 487 2,361 1,216
------- ------- ------- -------
Total................................................... $16,510 $ 8,985 $46,466 $23,181
======= ======= ======= =======
As a percent of revenues:
Optical subsystems........................................ 66.1% 58.7% 67.2% 58.3%
Test systems.............................................. 33.9 41.3 32.8 41.7
------- ------- ------- -------
Total................................................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
Geographic coverage:
North America............................................. 94.9% 94.6% 94.9% 94.8%
Rest of World............................................. 5.1 5.4 5.1 5.2
------- ------- ------- -------
Total................................................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
</TABLE>

13
<PAGE>
COMPARISON OF THREE MONTHS ENDED JANUARY 31, 2000 AND 1999

REVENUES. Revenues increased 84% from $9.0 million for the three months
ended January 31, 1999 to $16.5 million for the three months ended January 31,
2000. This reflects a 107% increase in sales of optical subsystems from $5.3
million for the three months ended January 31, 1999 to $10.9 million for the
three months ended January 31, 2000 and a 51% increase in sales of test systems
from $3.7 million for the three months ended January 31, 1999 to $5.6 million
for the three months ended January 31, 2000. Sales of optical subsystems and
test systems represented 66.1% and 33.9%, respectively, of total revenues for
the three months ended January 31, 2000, compared to 58.7% and 41.3%,
respectively, for the three months ended January 31, 1999.

GROSS PROFIT. Gross profit increased from $4.8 million for the three months
ended January 31, 1999 to $8.4 million for the three months ended January 31,
2000. As a percentage of revenues, gross profit decreased from 53.6% for the
three months ended January 31, 1999 to 50.8% for the three months ended January
31, 2000. This decrease in gross profit margin reflects lower ASPs for optical
subsystems as a result of increased shipment levels and a higher percentage of
total revenue from the sale of optical subsystems (66.1% vs. 58.7%) which
generally have lower gross margins than test systems.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 105% from $1.9 million for the three months ended January 31, 1999 to
$3.9 million for the three months ended January 31, 2000. This increase was
primarily related to higher compensation expense resulting from higher manpower
levels and increased expenditures for materials purchased for product
development programs. Research and development expenses increased as a percent
of revenues from 21.0% for the three months ended January 31, 1999 to 23.5% for
the current quarter.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 42%
from $1.2 million for the three months ended January 31, 1999 to $1.6 million
for the three months ended January 31, 2000, 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 percent of total revenue decreased from 12.9% for
the three months ended January 31, 1999 to 9.9% in the current quarter.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 101% from $484,000 for the three months ended January 31, 1999 to
$974,000 for the three months ended January 31, 2000. This increase was related
to higher compensation expense resulting from higher manpower levels and
increased expenses for professional services, primarily legal and accounting
services. General and administrative expenses increased as a percent of revenues
from 5.4% for the three months ended January 31, 1999 to 5.9% in the current
quarter.

INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense,
of $1.3 million for the three months ended January 31, 2000, compares to net
interest expense of $141,000 for the three months ended January 31, 1999. The
increase in interest income was the result of an increase in cash balances
resulting from the Company's initial public offering of its common stock in
November 1999. Interest expense in the prior year is related primarily to
borrowings of $11.0 million commencing in November of 1998 which was repaid from
the proceeds of the public offering.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. The non-cash charges for
amortization of deferred stock compensation of $1.8 million for the three
months ended January 31, 2000 and $120,000 for the three months ended January
31, 1999 was related to the issuance of stock options to employees prior to
the Company's initial public offering in November 1999, and represents 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.

14
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED JANUARY 31, 2000 AND JANUARY 31, 1999

REVENUES. Revenues increased 100% from $23.2 million for the nine months
ended January 31, 1999 to $46.5 million for the nine months ended January 31,
2000. This reflects a 131% increase in sales of optical subsystems from $13.5
million for the nine months ended January 31, 1999 to $31.2 million for the nine
months ended January 31, 2000 and a 58% increase in sales of test systems from
$9.7 million for the nine months ended January 31, 1999 to $15.2 million for the
nine months ended January 31, 2000. Sales of optical subsystems and test systems
represented 67.2% and 32.8%, respectively, of total revenues for the nine months
ended January 31, 2000, and 58.3% and 41.7%, respectively, for the nine months
ended January 31, 1999.

GROSS PROFIT. Gross profit increased from $13.3 million for the nine months
ended January 31, 1999 to $24.2 million for the nine months ended January 31,
2000. As a percentage of revenues, gross profit decreased from 57.3% for the
nine months ended January 31, 1999 to 52.1% for the nine months ended
January 31, 2000. The lower gross margin reflects lower ASPs for optical
subsystems as a result of increased shipment levels and a higher percentage of
total revenue from the sale of optical subsystems (67.2% vs. 58.3%) which
generally have lower gross margins than test systems.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 99% from $5.0 million for the nine months ended January 31, 1999 to
$10.1 million for the nine months ended January 31, 2000. The increase was
primarily related to higher compensation expense resulting from higher manpower
levels and increased expenditures for materials purchased for product
development programs. Research and development expenses as a percent of revenues
remained relatively unchanged at 21.6% for the nine months ended January 31,
2000 as compared to 21.8% for the prior year period.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 77%
from $2.9 million for the nine months ended January 31, 1999 to $5.1 million for
the first nine months ended January 31, 2000. The increase was 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 percent of revenues decreased from
12.4% for the nine months ended January 31, 1999 to 10.9% for the current
period.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 116% from $1.2 million for the nine months ended January 31, 1999 to
$2.6 million for the nine months ended January 31, 2000. This increase was
related to higher compensation expense resulting from higher manpower levels and
increased expenses for professional services, primarily legal and accounting
services. General and administrative expenses increased as a percent of revenues
from 5.2% for the nine months ended January 31, 1999 to 5.6% for the current
period.

INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense,
of $1.2 million for the nine months ended January 31, 2000, compares to net
interest expense of $131,000 in the prior year. The increase in interest income
was the result of an increase in cash balances resulting from the Company's
initial public offering in November 1999. Interest expense in the prior year is
related primarily to borrowings of $11.0 million commencing in November of 1998
which was repaid from the proceeds of the public offering in November 1999.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. The non-cash charges for
amortization of deferred stock compensation of $3.8 million for the nine
months ended January 31, 2000, and $219,000 for the nine months ended January
31, 1999 was related to the issuance of stock options to employees prior to
the Company's initial public offering in November 1999, and represents 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.

15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

As of January 31, 2000, our principal sources of liquidity were $134.1
million in cash and short-term investments and $6.5 million available under a
revolving loan facility which matures on October 31, 2003. 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. There were no borrowings under this facility as
of January 31, 2000.

Net cash used by operating activities totaled $4.0 million for the nine
months ended January 31, 2000 and $1.8 million for the prior year period. Cash
used by operations for these periods was primarily due to continued growth in
revenues and net income and an increase in assets and liabilities for working
capital purposes.

Net cash used in investing activities was $72.3 million for the nine months
ended January 31, 2000 and $1.4 million in the prior year period. Net cash used
in investing activities during the current year included $67.8 million in
short-term investments consisting of securities that mature greater than 90 days
from January 31, 2000. Other investing activities consisted primarily of
purchases of equipment and leasehold improvements.

Net cash provided by financing activities was $137.6 million for the nine
months ended January 31, 2000 and $5.5 million for the prior year period. Net
cash provided by financing activities for the current year reflects the sale of
9,305,000 shares at a per share public offering price of $19.00. Of the shares
sold, 8,605,233 shares, with an aggregate offering price of $163.5 million, were
sold by Finisar against which an underwriting discount totaling $11.4 million
was paid. Other expenses of the offering paid by Finisar through January 31,
2000 totaled approximately $1.1 million resulting in a net cash infusion of
approximately $151 million. Post offering, $11.0 million was used to repay debt
while another $2.6 million was used to redeem preferred stock (see PART II, ITEM
2. CHANGES IN SECURITIES AND USE OF PROCEEDS). The net cash provided by
financing activities in the prior year period 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 common stock.

The Company considers cash flow from operations and available sources of
liquidity to be adequate to meet business requirements in the foreseeable
future, including planned capital expenditure programs and working capital
requirements.

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 than 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.

Prior to December 31, 1999, we completed our assessment of the ability of
our products to operate properly in the year 2000, as well as an assessment
of the computers, software applications and equipment used in connection with
our internal operations and determined that no year 2000-rated problems
existed that could not be remediated by the replacement of relatively
inexpensive equipment. Although we have not experienced year 2000-related
problems to date, it is possible that, even after January 1, 2000, year
2000-related issues may cause problems or disruptions. While we believe that
all of our products and systems are year 2000 compliant, we cannot assure you
that we will not discover a problem during the year 2000 and experience
unanticipated material costs due to undetected errors or defects. Also,
failure of other systems used by our customers may adversely affect the
performance of our products, which may in turn adversely affect our business.
Should any such problem arise, it is possible that customers or third parties
might seek indemnification or damages from us as a result of year 2000
issue-related errors caused by or not prevented by our products. We cannot
predict the extent to which we might be liable for such costs but it is still
conceivable that year 2000 problems could result in substantial expenditures.

16
<PAGE>
FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE

Our future business operations and financial results are subject to various
risks and uncertainties, including those described below.

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 during 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, CATV NETWORK 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, CATV networks, cable television, or CATV, networks and
extended networks. Accordingly, widespread adoption of high-speed LANs, SANs,
CATV networks and extended networks and the adoption of digital return path
technology for CATV network applications is critical to our future success.
The markets for high-speed LANs, SANs, CATV networks and extended networks
have only recently

17 <PAGE>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, CATV networks 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, CATV networks 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.

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 in redesigning 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.
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 29.1% and 21.6% of our revenues
during the nine month period ended January 31, 2000, and 25.1% and 24.1% of our
revenues for fiscal 1999. Although we are attempting to expand our customer
base, we expect that significant customer concentration will continue for the
foreseeable future.

<PAGE>
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. For example, sales to
one of our largest customers, Newbridge Networks Corporation, declined from
$5.3 million in the second quarter of fiscal 2000 to $3.3 million in the
third quarter of fiscal 2000. In addition, our customers have in the past and
will in the future seek 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 certain 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.

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.

19
<PAGE>
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, CATV networks 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 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., Infineon Technologies, International
Business Machines Inc., Methode Electronics, Molex Premise Networks 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, 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.

DECREASES IN AVERAGE SELLING PRICES OF OUR PRODUCTS MAY REDUCE GROSS MARGINS
OR REVENUES

The market for optical subsystems is characterized by declining average
selling prices, or ASPs, 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 ASPs. We
anticipate that ASPs 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 ASPs. 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.

SHIFTS IN OUR PRODUCT MIX MAY RESULT IN DECLINES IN GROSS MARGINS

20
<PAGE>
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 sought monetary damages and injunctive
relief. Methode has amended its complaint to add Agilent Technologies, Inc.
as a party, to allege infringement of a fifth Methode patent and to allege
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
amended complaint seeks additional compensatory damages of at least
$224,280,000 plus interest for the alleged breach of this license and supply
agreement. 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. Methode has notified us that it intends to file another
amended complaint alleging infringement of a sixth Methode patent.

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, 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.

OUR CUSTOMERS OFTEN EVALUATE OUR PRODUCTS FOR LONG AND VARIABLE PERIODS, WHICH
CAUSES THE TIMING OF OUR REVENUES 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.

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<PAGE>
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 any long-term contracts with 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 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 have recently begun outsourcing a portion of our contract
manufacturing internationally, and we intend to increase the use of
international contract manufacturers over time. 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.

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<PAGE>
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, CATV networks 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 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 WILL 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

23
<PAGE>
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 THAT 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
that 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

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 certain 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.

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

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<PAGE>
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 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 manufacturing 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.

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;

- 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.

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

25
<PAGE>
Japan, the United Kingdom, Israel, Germany and Korea. 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 local currency.
Doing so will subject us to fluctuations in exchange rates between the U.S.
dollar and the particular local currency.

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

Currently, our corporate headquarters and most of our contract
manufacturers are located in Northern California. Northern California
historically has been vulnerable to certain 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 COULD BECOME AVAILABLE FOR
SALE IN THE PUBLIC MARKET, WHICH COULD CAUSE THE MARKET PRICE OF OUR STOCK TO
DECLINE

Sales of substantial amounts of our common stock in the public market or the
appearance that a large number of shares are 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 following our initial public
offering were limited by lock-up agreements under which the holders of
substantially all of our outstanding shares of common stock and options 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 effective date of the Company's
initial public offering or until May 9, 2000, 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 January 31, 2000, approximately 40,257,829
shares of common 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.

26
<PAGE>
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT
OR ABOVE YOUR INITIAL PURCHASE PRICE

The trading price of our stock has fluctuated substantially since our
initial public offering in November 1999. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Finisar's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. We place our investments with high credit
issuers in short-term securities with maturities ranging from overnight up to 36
months. The average maturity of the portfolio will not exceed 18 months. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. Finisar has no investments denominated in
foreign country currencies and therefore our investments are not subject to
foreign exchange risk.

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<PAGE>
PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In April 1999, Methode Electronics, a manufacturer of electronic component
devices, filed a lawsuit against us and another manufacturer, Hewlett-Packard
Co., alleging that our optoelectronic products infringe patents held by Methode.
Reference is made to our Form 10-Q report for the quarter ended October 31, 1999
for a description of this pending litigation.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Finisar's first registration statement filed under the Securities Act (Form
S-1 registration statement, Commission File No. 333-87017) was declared
effective by the Commission on November 11, 1999. A total of 9,305,000 shares of
our common stock were registered under the registration statement. The managing
underwriters for the offering were Merrill Lynch, Pierce, Fenner & Smith
Incorporated, J.P. Morgan Securities Inc., Dain Rauscher Incorporated, Morgan
Keegan & Company, Inc. and SoundView Technology Group, Inc.

The offering commenced on November 11, 1999. All 9,305,000 shares were sold
at a per share public offering price of $19.00, including 1,155,000 shares that
were sold upon exercise of the underwriters' overallotment option. Of the shares
sold, 8,605,233 shares, with an aggregate offering price of $163,499,427, were
sold by Finisar, and 699,767 shares, with an aggregate offering price of
$13,295,573, were sold by selling stockholders. An aggregate underwriting
discount of $12,375,650 was paid in connection with the offering, $11,444,960 of
which was paid by Finisar and $930,690 of which was paid by the selling
shareholders. Other expenses of the offering incurred by Finisar are estimated
at $1,500,000.

The net proceeds to Finisar from the sale of the 8,605,233 shares sold by it
in the offering, after deducting the underwriting discount and offering
expenses, were approximately $151 million. To date, $11.0 million of these net
proceeds have been used to repay bank loans and another $2.6 million was used to
redeem the preferred stock that was not converted to common stock in the
offering. The balance of the net proceeds will be used 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 any of these types of acquisitions or
investments. Pending such uses, the remaining net proceeds of the offering have
been invested in short-term, investment-grade, interest-bearing securities.

A portion of the net proceeds used to redeem our redeemable preferred stock
was paid to entities affiliated with TA Associates, Inc., a principal
stockholder of Finisar. With the exception of these payments (and working
capital used for salaries and expense reimbursement in the ordinary course of
business), none of the net proceeds of the offering received by Finisar have
been paid, directly or indirectly, to any director or officer of Finisar or any
of their associates, to any persons owning 10 percent or more of any class of
equity securities of Finisar, or to any affiliate of Finisar.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits.

Reference is hereby made to the Exhibit Index commencing on page 29.

b. Reports on Form 8-K

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

<TABLE>
<S> <C>
DATE: March 16, 2000 FINISAR CORPORATION
(Registrant)
By: /s/ JERRY S. RAWLS

Jerry S. Rawls,
PRESIDENT AND CHIEF EXECUTIVE OFFICER

By: /s/ STEPHEN K. WORKMAN

Stephen K. Workman,
VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL
OFFICER
</TABLE>

29
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
27.1 Financial Data Schedule(1)
</TABLE>

(1) Previously filed.