FINISAR CORP, S-1/A, 2000-03-22

FINISAR CORP
S-1/A, 2000-03-22
SEMICONDUCTORS & RELATED DEVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000

REGISTRATION NO. 333-32620

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

AMENDMENT NO. 1
TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FINISAR CORPORATION
(Exact name of Registrant as specified in its charter)
--------------------------

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

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

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

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

PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:

<TABLE>
<S> <C>
DENNIS C. SULLIVAN, ESQ. GAVIN B. GROVER, ESQ.
JOHN M FOGG, ESQ. MATTHEW BURNS, ESQ.
JULIE L. HSU, ESQ. BRIAN H. BILLS, ESQ.
GRAY CARY WARE & FREIDENRICH LLP MORRISON & FOERSTER LLP
400 HAMILTON AVENUE 425 MARKET STREET
PALO ALTO, CALIFORNIA 94301-1825 SAN FRANCISCO, CALIFORNIA 94105
(650) 328-6561 (415) 268-7000
</TABLE>

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

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

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

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

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

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

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.

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

PRELIMINARY PROSPECTUS DATED MARCH 22, 2000

PROSPECTUS

7,000,000 SHARES

[FINISAR LOGO]

COMMON STOCK
-------------

Finisar Corporation is selling 2,000,000 shares and Finisar Corporation
stockholders are selling 5,000,000 shares.

The shares are quoted on the Nasdaq National Market under the symbol
"FNSR." On March 21, 2000 the last sale price of the shares as reported on the
Nasdaq National Market was $123.50.

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

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

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

Proceeds, before expenses, to Finisar
Corporation.................................... $ $

Proceeds to the selling stockholders............. $ $
</TABLE>

The underwriters may also purchase up to an additional 205,346 shares
from us and 844,654 shares from some of the selling stockholders at the public
offering price, less the underwriting discount, within 30 days from the date of
this prospectus to cover over-allotments.

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

The shares will be ready for delivery on or about , 2000.

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

MERRILL LYNCH & CO.

J.P. MORGAN & CO.
CIBC WORLD MARKETS
DAIN RAUSCHER WESSELS
A.G. EDWARDS & SONS, INC.
MORGAN KEEGAN & COMPANY, INC.
WIT SOUNDVIEW
AMERITRADE
-----------

The date of this prospectus is , 2000.
<PAGE>
[INSIDE FRONT COVER]

[FINISAR LOGO]

FIBER OPTIC SOLUTIONS FOR GIGABIT NETWORKING

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<S> <C>
OPTICAL DATA LINKS CATV DIGITAL RETURN LINKS

[Picture of Finisar's Optical Data [Picture of Finisar's CATV Digital Return
Links.] Links.]

- - Transmitters, Receivers, and - Drop-in Upgrade for Analog
Transceivers for Switches, Hubs, Transmitters
Servers and Storage Arrays - Performance Independent of Path Link
- - Built-in Diagnostics (up to 80 km)
- - Multi-mode and Single-mode for - Lowers Network Operating Costs
Multiple Transmission Distances

OPTICITY NETWORK PERFORMANCE TEST SYSTEMS

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

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

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

<TABLE>
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Price Range of Our Common Stock............................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 31
Management.................................................. 48
Related Party Transactions.................................. 55
Principal and Selling Stockholders.......................... 56
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 61
Underwriting................................................ 63
Legal Matters............................................... 66
Experts..................................................... 66
Where You Can Find More Information......................... 66
Index to Financial Statements............................... F-1
</TABLE>

------------------------
Unless otherwise indicated, the information in this prospectus assumes no
exercise of the underwriters' over-allotment option.

On March 14, 2000, our Board of Directors approved a three-for-one stock
split to be effected in the form of a 200% stock dividend payable to
stockholders of record on March 27, 2000, and established April 12, 2000 as the
payment date for the planned dividend. The information in this prospectus does
not reflect the pending stock split.

Beginning in fiscal 2000, our financial records have been maintained on the
basis of a fiscal year ending on April 30, with fiscal quarters ending on the
Sunday closest to the end of the period (thirteen-week periods). For ease of
comparison, all references to period end dates in this prospectus have been
presented as though the period ended on the last day of the calendar month. The
first three quarters of fiscal 2000 ended on August 1, 1999, October 31, 1999
and January 30, 2000, respectively.

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

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

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

FINISAR CORPORATION

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

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

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

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

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

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

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

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

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

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

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

We sell our products to leading networking and storage equipment
manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge Networks and Sun
Microsystems, as well as emerging manufacturers such as Brocade Communications
and Extreme Networks. For the fiscal year ended April 30, 1999, we had revenues
of $35.5 million and net income of $3.0 million. For the nine months ended
January 31, 2000, we had revenues of $46.5 million and net income of
$1.2 million.

CORPORATE INFORMATION

Finisar was incorporated in California in April 1987 and reincorporated in
Delaware in November 1999. Our principal executive offices are located at 1308
Moffett Park Drive, Sunnyvale, California 94089, our telephone number is
(408) 548-1000 and our website is located at www.finisar.com. Information on our
website is not a part of this prospectus.

2
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THE OFFERING

<TABLE>
<S> <C>
Common stock offered by Finisar.............. 2,000,000 shares
Common stock offered by the selling
stockholders............................... 5,000,000 shares
Common stock to be outstanding after this
offering................................... 53,253,428 shares
Use of proceeds.............................. For general corporate purposes, including
working capital and capital expenditures. See
"Use of Proceeds." We will not receive any of
the proceeds from the sale of shares by the
selling stockholders.
Nasdaq National Market symbol................ FNSR
</TABLE>

The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of January 31, 2000 and excludes:

- 1,957,152 shares of common stock issuable upon exercise of options
outstanding at January 31, 2000 under our 1989 and 1999 stock option
plans, with a weighted average exercise price of $5.0626 per share, and an
additional 4,725,855 shares reserved for issuance under our 1999 stock
option plan as of January 31, 2000; and

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

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

The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The statement of operations data for the fiscal
years ended April 30, 1997, 1998 and 1999 are derived from, and are qualified by
reference to, our audited financial statements included elsewhere in this
prospectus. The statement of operations data for the fiscal years ended
April 30, 1995 and 1996 are derived from unaudited financial statements not
included in this prospectus. The statement of operations data for the nine month
periods ended January 31, 1999 and 2000 and the balance sheet data as of
January 31, 2000 are derived from, and are qualified by reference to, our
unaudited financial statements included elsewhere in this prospectus.

Net income per share (1):
Basic...................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.07 $ 0.03
Diluted.................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.06 $ 0.03
Shares used in per share
calculations (1):
Basic...................... 44,000 44,000 44,000 43,753 36,860 36,638 34,628
Diluted.................... 44,000 44,000 44,000 43,753 44,938 42,424 46,029
</TABLE>

<TABLE>
<CAPTION>
JANUARY 31, 2000
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ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $134,115 $371,053
Working capital............................................. 152,121 389,059
Total assets................................................ 168,705 405,643
Long-term portion of capital lease obligations and other
long-term liabilities..................................... 154 154
Total stockholders' equity.................................. 158,315 395,253
</TABLE>

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

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

(2) Adjusted to reflect the sale of 2,000,000 shares of common stock by Finisar
in this offering, at an assumed public offering price of $123.50 per share
after deducting the estimated underwriting discount and offering expenses,
and our receipt of the net proceeds. See "Use of Proceeds" and
"Capitalization."

4
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RISK FACTORS

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

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

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

We may experience a delay in generating or recognizing revenues for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenues for that quarter and are generally cancelable at any time.
Accordingly, we depend on obtaining orders 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, cable television, or CATV, networks and extended networks. Accordingly,
widespread adoption of high-speed LANs, SANs 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 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.

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

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

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

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

A small number of customers have accounted for a significant portion of our
revenues. Our success will depend on our continued ability to develop and manage
relationships with significant customers. Sales to Newbridge Networks
Corporation and EMC Corporation represented 29.1% and 21.6% of our revenues
during the nine month period ended January 31, 2000, 25.1% and 24.1% of our
revenues for fiscal 1999, and 43.9% and 14.6% of our revenues for fiscal 1998.
Although we are attempting to expand our customer base, we expect that
significant customer concentration will continue for the foreseeable future.

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

6
<PAGE>
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.

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.

7
<PAGE>
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
Corporation, 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, some of our current and
potential customers may attempt to integrate their operations by producing their
own optical subsystems and network performance test systems or acquiring one of
our competitors, thereby eliminating the need to purchase our products.
Furthermore, larger companies in other related industries, such as the
telecommunications industry, may develop or acquire technologies and apply their
significant resources, including their distribution channels and brand name
recognition, to capture significant market share.

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

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

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

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

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sustained product shift toward a greater percentage of optical subsystem
products resulting in a decline in overall gross margins. We expect this trend
to continue over the next few quarters.

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 another manufacturer 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 $224.3 million 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. In addition, 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. For a more complete
discussion of this litigation matter, please refer to "Business--Pending Legal
Proceeding."

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

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minimum purchase commitments. Failure of our customers to incorporate our
products into their systems would significantly harm our business.

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

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

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

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supplying components to us without penalty. If a supplier discontinued supplying
a component, our business may be harmed by the resulting product manufacturing
and delivery delays.

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

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

We currently derive substantially all of our revenue from sales of our
optical subsystems and network performance test systems. We expect that revenue
from these products will continue to account for substantially all of our
revenue for the foreseeable future. Accordingly, widespread acceptance of these
products is critical to our future success. If the market does not continue to
accept either our optical subsystems or our network performance test systems,
our revenues will decline significantly. Factors that may affect the market
acceptance of our products include the continued growth of the markets for LANs,
SANs, 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 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,

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

OUR PRODUCTS MAY CONTAIN DEFECTS 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
which incorporate a variety of components produced by third parties. As a
result, when problems occur, it may be difficult to identify the source of the
problem. These problems may cause us to incur significant damages or warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relation problems or
loss of customers, all of which would harm our business.

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

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

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. For a more detailed
discussion of this lawsuit, please refer to "--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

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<PAGE>
royalty or licensing agreements, any of which could significantly harm our
business. Royalty or licensing agreements, if required, may not be available on
terms acceptable to us, if at all. In addition, our agreements with our
customers typically require us to indemnify our customers from any expense or
liability resulting from claimed infringement of third party intellectual
property rights. In the event a claim against us was successful and we could not
obtain a license to the relevant technology on acceptable terms or license a
substitute technology or redesign our products to avoid infringement, our
business would be significantly harmed.

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

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

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.

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

Upon completion of this offering, our executive officers, directors and 5%
or greater stockholders will beneficially own 28,692,040 shares or approximately
53.16% of the outstanding shares of common stock, or 28,185,358 shares or
52.02%, assuming the full exercise of the underwriters' over-allotment option.
These stockholders, acting together, would be able to control all matters
requiring approval by stockholders, including the election or removal of
directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which in turn could have an
adverse effect on the market price of our common stock or prevent our
stockholders from realizing a premium over the market price for their shares of
common stock. See "Principal and Selling Stockholders."

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

Historically, substantially all of our sales have been made to customers in
North America. To address expanding international markets, we have recently
established relationships with distributors in Japan, the United Kingdom,
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.

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

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

- authorizing the board to issue additional preferred stock;

- prohibiting cumulative voting in the election of directors;

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

- prohibiting stockholder actions by written consent;

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

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

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

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

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

OUR HEADQUARTERS AND 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 natural disasters and other risks, such as earthquakes, fires and
floods, which at times have disrupted the local economy and posed physical risks
to our and our manufacturers' property. We presently do not have redundant,
multiple site capacity in the event of a natural disaster. In the event of such
disaster, our business would suffer.

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

Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of shares is
available for sale, could cause the market price of our common stock to decline.
The number of shares of common stock available for sale in the public market
will be limited by lock-up agreements under which all of our officers, directors
and the entities affiliated with them and all of the selling stockholders will
agree not to sell or otherwise dispose of any of their shares for a period of
70, 90 or 110 days after the date of this prospectus depending on the date of
the final prospectus for this offering without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. In addition, under lock-up
agreements entered into in connection with our initial public offering, holders
of approximately shares of restricted securities are subject to similar
restrictions until May 10, 2000.

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<PAGE>
As a result of the lock-up agreements described above and the provisions of
Rule 144, Rule 144(k) and Rule 701, additional shares will be available for sale
in the public market as follows:

<TABLE>
<CAPTION>
FINAL PROSPECTUS DATE
---------------------------------
ON OR BEFORE AFTER
DATE OF AVAILABILITY FOR SALE APRIL 21, 2000 APRIL 21, 2000
- ----------------------------- --------------- ---------------
<S> <C> <C>
As of the date of this prospectus.................. 9,899,633 9,899,633
May 10, 2000.......................................
70 days after the date of this prospectus.......... --
90 days after the date of this prospectus.......... --
110 days after the date of this prospectus.........
At various times afterwards upon expiration of
applicable holding periods.......................
</TABLE>

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

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

The estimated public offering price of our common stock will be
substantially higher than the pro forma net tangible book value per share of the
outstanding common stock immediately after the offering. Therefore, based on an
estimated public offering price of $123.50 per share, if you purchase our common
stock in this offering you will suffer immediate dilution of approximately
$116.08 per share. If outstanding options for our common stock are exercised,
there will be further dilution. See "Dilution."

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

The trading price of our common 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.

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FORWARD-LOOKING STATEMENTS

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

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

- uncertainty regarding our future operating results;

- our ability to introduce new products;

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

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

- increased demands on our resources due to anticipated growth.

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

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USE OF PROCEEDS

We estimate our net proceeds from the sale of the 2,000,000 shares of common
stock offered by Finisar in this offering to be approximately $236.9 million,
based on an estimated public offering price of $123.50 per share and after
deducting the estimated underwriting discount and offering expenses. If the
underwriters excercise their over-allotment option in full, our net proceeds are
estimated to be $261.3 million. We will not receive any of the proceeds from the
sale of shares by the selling stockholders.

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

DIVIDEND POLICY

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

PRICE RANGE OF OUR COMMON STOCK

Since our initial public offering on November 11, 1999, our common stock has
traded on the Nasdaq National Market under the symbol "FNSR." The following
table sets forth the range of high and low closing sales prices of our common
stock for the periods indicated:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 30, 2000 HIGH LOW
- --------------------------------- -------------- -----------
<S> <C> <C>
Third Quarter (from November 11, 1999)...................... $115 1/4 $ 63 1/2
Fourth Quarter (through March 21, 2000)..................... $148 15/16 $ 60 3/8
</TABLE>

On March 21, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $123.50 per share.

18
<PAGE>
CAPITALIZATION

The following table sets forth our short-term debt and total capitalization
as of January 31, 2000:

- on an actual basis; and

- as adjusted to reflect the sale of 2,000,000 shares of common stock by
Finisar in this offering, at an estimated public offering price of $123.50
per share after deducting the estimated underwriting discount and offering
expenses, and our receipt and application of the net proceeds.

<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current portion of capital lease obligations................ $ 21 $ 21
======== ========

Long-term portion of capital lease obligations and other
long-term liabilities..................................... $ 154 $ 154

Stockholders' equity:

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

Common stock, $0.001 par value; 200,000,000 shares
authorized, 51,253,428 shares issued and outstanding,
actual; 53,253,428 issued and outstanding, as adjusted
(1)................................................... 51 53

Additional paid-in capital.............................. 194,262 431,198

Notes receivable from stockholders...................... (3,696) (3,696)

Deferred stock compensation............................. (11,143) (11,143)

Unrealized loss on short-term investments............... (57) (57)

Retained earnings (accumulated deficit)................. (21,102) (21,102)
-------- --------

Total stockholders' equity............................ 158,315 395,253
-------- --------

Total capitalization................................ $158,469 $395,407
======== ========
</TABLE>

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

(1) Excludes:

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

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

19
<PAGE>
DILUTION

The net tangible book value of our common stock as of January 31, 2000 was
approximately $158.2 million, or $3.09 per share. Net tangible book value per
share represents the amount of our total assets, excluding net intangible
assets, less our total liabilities, divided by the total number of shares of
common stock outstanding. Dilution in net tangible book value per share
represents the difference between the amount per share paid by investors in this
offering and the net tangible book value per share of our common stock
immediately after the offering. After giving effect to the sale of the 2,000,000
shares of common stock by us in this offering, at an assumed public offering
price of $123.50 per share, and after deducting the estimated underwriting
discount and offering expenses payable by us, the pro forma net tangible book
value of our common stock would have been $395.2 million, or $7.42 per share.
This represents an immediate increase in net tangible book value of $4.33 per
share to existing stockholders and an immediate dilution of $116.08 per share to
new investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share............................. $123.50
-------
Net tangible book value per share as of January 31,
2000.................................................... $3.09
Increase per share attributable to new investors.......... 4.33
-----
Pro forma net tangible book value per share after this
offering.................................................. 7.42
-------
Dilution per share to new investors......................... $116.08
=======
</TABLE>

The following table summarizes, on a pro forma basis, as of January 31,
2000:

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

- the total consideration paid to us;

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

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

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 51,253,428 96.2% $181,675,005 42.4% $ 3.54
New investors........................... 2,000,000 3.8 247,000,000 57.6 123.50
---------- ----- ------------ -----
Total............................... 53,253,428 100.0% $428,675,005 100.0%
========== ===== ============ =====
</TABLE>

The foregoing table assumes no exercise of the underwriters' over-allotment
option. See "Underwriting" and "Principal and Selling Stockholders."

20
<PAGE>
SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 2,684 $ 5,660 $8,457 $22,067 $35,471 $23,181 $46,466
Cost of revenues............................... 862 3,122 3,438 8,705 15,514 9,895 22,252
------- ------- ------ ------- ------- ------- -------
Gross profit................................... 1,822 2,538 5,019 13,362 19,957 13,286 24,214
------- ------- ------ ------- ------- ------- -------
Operating expenses:
Research and development..................... 745 1,442 2,536 3,806 7,864 5,048 10,051
Sales and marketing.......................... 144 116 645 1,629 4,145 2,864 5,080
General and administrative................... 279 280 464 833 2,299 1,203 2,597
Amortization of deferred stock
compensation............................... -- -- -- -- 428 219 3,791
------- ------- ------ ------- ------- ------- -------
Total operating expenses................... 1,168 1,838 3,645 6,268 14,736 9,334 21,519
------- ------- ------ ------- ------- ------- -------
Income from operations......................... 654 700 1,374 7,094 5,221 3,952 2,695
Interest income (expense), net................. 1 10 13 5 (275) (131) 1,169
Other income (expense), net.................... -- -- -- (25) (28) 4 (72)
------- ------- ------ ------- ------- ------- -------
Income before income taxes..................... 655 710 1,387 7,074 4,918 3,825 3,792
Provision for income taxes..................... 222 247 440 2,715 1,873 1,410 2,583
------- ------- ------ ------- ------- ------- -------
Net income..................................... $ 433 $ 463 $ 947 $ 4,359 $ 3,045 $ 2,415 $ 1,209
======= ======= ====== ======= ======= ======= =======
Net income per share:
Basic........................................ $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.07 $ 0.03
======= ======= ====== ======= ======= ======= =======
Diluted...................................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.06 $ 0.03
======= ======= ====== ======= ======= ======= =======
Shares used in per share calculations:
Basic........................................ 44,000 44,000 44,000 43,753 36,860 36,638 34,628
======= ======= ====== ======= ======= ======= =======
Diluted...................................... 44,000 44,000 44,000 43,753 44,938 42,424 46,029
======= ======= ====== ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
APRIL 30,
---------------------------------------------------- JANUARY 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 474 $ 772 $ 422 $ 722 $ 5,044 $134,115
Working capital............................... 757 856 1,685 5,730 13,011 152,121
Total assets.................................. 1,277 1,948 2,987 7,761 20,955 168,705
Long-term portion of note payable and capital
lease obligations, and other long-term
liabilities................................. -- -- -- 416 11,032 154
Convertible redeemable preferred stock........ -- -- -- -- 26,260 --
Total stockholders' equity (deficit).......... 678 1,141 2,088 6,447 (21,503) 158,315
</TABLE>

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

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

OVERVIEW

We 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 sales of our optical subsystems
and network performance test systems to networking and storage systems
manufacturers. Sales to our two largest customers accounted for 45.9% of our
revenues for the fiscal year ended April 30, 1999 and 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

22
<PAGE>
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.

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

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

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

In connection with the grant of stock options to employees between
August 1, 1998 and October 15, 1999, we recorded deferred stock compensation of
$2.4 million in fiscal 1999, and $13.0 million in 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 stockholder's equity, with accelerated amortization recorded over
the vesting period which is typically five years. We amortized $428,000 and
$3.8 million of deferred compensation during fiscal 1999 and the nine months
ended January 31, 2000. We expect to record additional amortization expense
relating to deferred stock compensation approximately as follows: $1.7 million
during the fourth quarter of fiscal 2000, $4.4 million during fiscal 2001,
$2.7 million during fiscal 2002, $1.5 million during fiscal 2003 and $850,000
thereafter. The amount of deferred stock compensation expense to be recorded in
future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.

23
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................. 40.7 39.4 43.7 42.7 47.9
----- ----- ----- ----- -----
Gross profit..................................... 59.3 60.6 56.3 57.3 52.1
----- ----- ----- ----- -----
Operating expenses:
Research and development....................... 30.0 17.2 22.2 21.8 21.6
Sales and marketing............................ 7.6 7.4 11.7 12.4 10.9
General and administrative..................... 5.5 3.8 6.5 5.2 5.6
Amortization of deferred stock compensation.... -- -- 1.1 0.9 8.2
----- ----- ----- ----- -----
Total operating expenses..................... 43.1 28.4 41.5 40.3 46.3
----- ----- ----- ----- -----
Income from operations........................... 16.2 32.2 14.8 17.0 5.8
Interest income (expense), net................... 0.2 0.0 (0.8) (0.6) 2.5
Other income (expense), net...................... -- (0.1) (0.1) -- (0.1)
----- ----- ----- ----- -----
Income before income taxes....................... 16.4 32.1 13.9 16.4 8.2
Provision for income taxes....................... 5.2 12.3 5.3 6.0 5.6
----- ----- ----- ----- -----
Net income....................................... 11.2% 19.8% 8.6% 10.4% 2.6%
===== ===== ===== ===== =====
</TABLE>

COMPARISON OF 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. Sales to our two principal customers during the nine
month periods ended January 31, 1999 and 2000 were as follows:

<TABLE>
<CAPTION>
SALES (IN PERCENTAGE OF
MILLIONS) REVENUES
----------------------- -----------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
----------------------- -----------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Newbridge Networks.................................... $5.1 $13.5 22.1% 29.1%
EMC................................................... $6.2 $10.0 26.5% 21.6%
</TABLE>

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 average selling prices
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.

24
<PAGE>
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. 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 as a percentage of
revenue remained relatively unchanged at 21.6% for the nine months ended
January 31, 2000 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. This 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.

PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$1.4 million for the nine months ended January 31, 1999 based on an effective
rate of 35% to $2.6 million for the nine months ended January 31, 2000 based on
a projected annual effective tax rate of 34%, excluding the impact of deferred
stock compensation charges of 34%. The projected annual effective tax rate
differs from the statutory rate primarily due to state taxes offset by research
and development credits and projected benefits from a foreign sales corporation.
See Note 7 to our financial statements.

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

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

<TABLE>
<CAPTION>
SALES (IN MILLIONS) PERCENTAGE OF REVENUES
------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Newbridge Networks................................. $3.5 $9.7 $8.9 41.6% 43.9% 25.1%
EMC................................................ $0.1 $3.2 $8.5 1.2% 14.6% 24.1%
</TABLE>

25
<PAGE>
GROSS PROFIT. Gross profit increased from $5.0 million in fiscal 1997 to
$13.4 million in fiscal 1998 and $20.0 million in fiscal 1999. With product mix
remaining relatively unchanged between fiscal 1997 and 1998, our gross profit
margin remained relatively constant at 59.3% in fiscal 1997 and 60.6% in fiscal
1998. Our gross profit margin decreased to 56.3% in fiscal 1999 reflecting
startup costs associated with the introduction of new optical subsystem products
and lower average selling prices for some optical subsystems which more than
offset the shift in product mix toward a greater percentage of higher-margin
test system sales.

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

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

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

INTEREST INCOME (EXPENSE), NET. Interest income (expense), net remained
relatively unchanged from fiscal 1997 to fiscal 1998. In fiscal 1999, interest
expense of $275,000 reflected borrowings under our $11.0 million term loan
beginning in November 1998.

PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$440,000 in fiscal 1997 to $2.7 million in fiscal 1998 and decreased to
$1.9 million in fiscal 1999. The provision for income taxes is based on annual
effective tax rates of 31.7%, 38.4% and 35.0%, excluding the impact of deferred
stock compensation charges of 3.1%. The annual effective tax rates differ from
the statutory rate primarily due to state taxes, offset by research and
development tax credits. See Note 7 to our financial statements.

26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly statement of operations
data for the seven fiscal quarters ended January 31, 2000, and such data
expressed as a percentage of revenues. This information reflects all normal
non-recurring adjustments that we consider necessary for a fair presentation of
such information in accordance with generally accepted accounting principles.
The results for any quarter are not necessarily indicative of results that may
be expected for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31,
1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $6,794 $7,402 $8,985 $12,290 $13,879 $16,077 $16,510
Cost of revenues.............. 2,666 3,058 4,171 5,619 6,252 7,878 8,122
------ ------ ------ ------- ------- ------- -------
Gross profit.................. 4,128 4,344 4,814 6,671 7,627 8,199 8,388
------ ------ ------ ------- ------- ------- -------
Operating expenses:
Research and development.... 1,394 1,764 1,890 2,816 2,840 3,333 3,878
Sales and marketing......... 833 871 1,160 1,281 1,542 1,895 1,643
General and
administrative............ 298 421 484 1,096 759 864 974
Amortization of deferred
stock compensation........ -- 99 120 209 287 1,723 1,781
------ ------ ------ ------- ------- ------- -------
Total operating
expenses................ 2,525 3,155 3,654 5,402 5,428 7,815 8,276
------ ------ ------ ------- ------- ------- -------
Income from operations........ 1,603 1,189 1,160 1,269 2,199 384 112
Interest income (expense),
net......................... (7) 17 (141) (144) (89) (84) 1,342
Other income (expense), net... 25 -- (21) (32) (28) (28) (16)
------ ------ ------ ------- ------- ------- -------
Income before income taxes.... 1,621 1,206 998 1,093 2,082 272 1,438
Provision for income taxes.... 568 458 384 463 829 659 1,095
------ ------ ------ ------- ------- ------- -------
Net income (loss)............. $1,053 $ 748 $ 614 $ 630 $ 1,253 $ (387) $ 343
====== ====== ====== ======= ======= ======= =======

AS A PERCENTAGE OF REVENUES:
Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............. 39.2 41.3 46.4 45.7 45.0 49.0 49.2
------ ------ ------ ------- ------- ------- -------
Gross profit.................. 60.8 58.7 53.6 54.3 55.0 51.0 50.8
------ ------ ------ ------- ------- ------- -------
Operating expenses:
Research and development.... 20.5 23.8 21.1 22.9 20.5 20.7 23.5
Sales and marketing......... 12.3 11.8 12.9 10.4 11.1 11.8 9.9
General and
administrative............ 4.4 5.7 5.4 8.9 5.5 5.4 5.9
Amortization of deferred
compensation.............. -- 1.3 1.3 1.7 2.1 10.7 10.8
------ ------ ------ ------- ------- ------- -------
Total operating
expenses................ 37.2 42.6 40.7 43.9 39.2 48.6 50.1
------ ------ ------ ------- ------- ------- -------
Income from operations........ 23.6 16.1 12.9 10.4 15.8 2.4 0.7
Interest income (expense),
net......................... (0.1) 0.2 (1.6) (1.2) (0.6) (0.5) 8.1
Other income (expense), net... 0.4 -- (0.2) (0.3) (0.2) (0.2) (0.1)
------ ------ ------ ------- ------- ------- -------
Income before income taxes.... 23.9 16.3 11.1 8.9 15.0 1.7 8.7
Provision for income taxes.... 8.4 6.2 4.3 3.8 6.0 4.1 6.6
------ ------ ------ ------- ------- ------- -------
Net income (loss)............. 15.5% 10.1% 6.8% 5.1% 9.0% (2.4)% 2.1%
====== ====== ====== ======= ======= ======= =======
</TABLE>

Revenues increased steadily over the last seven quarters as a result of
increased unit sales to an expanding customer base. The 37% increase in revenues
for the three months ended April 30, 1999 was

27
<PAGE>
primarily due to substantial increases in shipments to several of our major
customers and the introduction of a new optical subsystem product.

Gross profit margins declined over the seven-quarter period, principally as
a result of a shift in product mix toward a greater percentage of lower margin
optical subsystem products and a lower percentage of higher margin test systems.
Gross margins were also negatively impacted in the second half of fiscal 1999 by
start-up costs associated with the introduction of new optical subsystem
products and lower average selling prices for some optical subsystems.

Quarterly increases in operating expenses reflected the continued expansion
of our operations throughout the seven-quarter period. An expense of $397,000 in
connection with the relocation of our primary operations to our new facility was
included in general and administrative expenses for the quarter ended April 30,
1999. Income from operations was adversely affected in the quarters ended
October 31, 1999 and January 31, 2000 by increased amortization of deferred
compensation. Net interest expense increased significantly beginning in the
three months ended January 31, 1999 as a result of the $11.0 million term loan
in November 1998. The net interest income in the quarter ended January 31, 2000
reflected increased cash balances following our initial public offering in
November 1999 and the repayment of the term loan from the proceeds of the
offering.

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

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

LIQUIDITY AND CAPITAL RESOURCES

From our inception through November 1998, we financed our operations
primarily through internal cash flow and periodic bank borrowings. In
November 1998, we raised $5.6 million of net proceeds from the sale of preferred
stock and bank borrowings to fund the continued growth and development of our
business. In November 1999, we received net proceeds of $151.0 million from the
initial public offering of our common stock.

As of January 31, 2000, our principal sources of liquidity were
$134.1 million in cash, cash equivalents and short-term investments, and
$6.5 million available under a revolving loan facility that matures 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 provided by operating activities was $742,000 in fiscal 1998 and
$1.1 million in fiscal 1999, and $4.0 million was used in operating activities
in the nine months ended January 31, 2000. Cash

28
<PAGE>
provided by operations during fiscal 1998 and 1999 was primarily a result of
continued growth in revenues and net income offset in part by an increase in
related assets and liabilities for working capital purposes. The use of net cash
in operating activities in the nine months ended January 31, 2000 was primarily
a result of continuing growth in revenues and net income and an increase in
assets and liabilities for working capital purposes.

Net cash used in investing activities was $855,000 in fiscal 1998,
$2.1 million in fiscal 1999 and $72.3 million in the nine months ended
January 31, 2000. Net cash used in investing activities for fiscal 1998 and 1999
consisted primarily of purchases of equipment. Net cash used in investing
activities in the nine months ended January 31, 2000 consisted primarily of
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 $413,000 in fiscal 1998,
$5.4 million in fiscal 1999, and $137.6 million in the nine months ended
January 31, 2000. Net cash provided by financing activity in fiscal 1999
primarily consisted of net proceeds of $26.3 million from the sale of preferred
stock and $11.0 million in bank borrowings under a term loan, offset by
$31.7 million used to repurchase shares of our outstanding common stock. Net
cash provided by financing activities in the nine months ended January 31, 2000
reflected net proceeds to us of $151.0 million from the initial public offering
of our common stock in November 1999. Following the offering, $11.0 million of
the net proceeds was used to repay debt and $2.6 million was used to redeem
preferred stock.

We had no material commitments for capital expenditures at January 31, 2000,
but we expect these expenditures to total approximately $5.0 million in fiscal
2000 and $5.0 million in fiscal 2001. These expenditures will primarily be for
equipment, furniture and leasehold improvements. We also have total minimum
lease obligations of $11.6 million from January 31, 2000 through April 30, 2007,
under non-cancelable operating and capital leases.

We believe that our existing balances of cash and cash equivalents, together
with the net proceeds of this offering, our available credit facilities and cash
flow expected to be generated from our future operations, will be sufficient to
meet our cash needs for working capital and capital expenditures for at least
the next 12 months.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

IMPACT OF YEAR 2000

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

29
<PAGE>
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-related 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.

RECENT ACCOUNTING PRONOUNCEMENT

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", or
SAB 101. SAB 101 summarizes certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We are currently evaluating the impact of SAB 101. Should we
determine that a change in our accounting policy is necessary, such a change
will be made effective May 1, 2000 and would result in a charge 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. Financial statements for prior periods would not be restated.

30
<PAGE>
BUSINESS

We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over local area
networks, or LANs, and storage area networks, or SANs. Additionally, we have
recently developed products for digitizing the return path of a cable
television, or CATV, network and for aggregating data traffic in extended
networks. We are focused on providing high-performance, reliable, value-added
optical subsystems, which convert electrical signals into optical signals, for
networking and storage equipment manufacturers that develop and market systems
based on Gigabit Ethernet and Fibre Channel, which are advanced transmission
protocols used in LAN and SAN applications. Our line of optical subsystems
supports a wide range of network applications, transmission speeds, distances
and mediums. We also provide unique network performance test systems which
assist networking and storage equipment manufacturers in the efficient design of
reliable, high-speed networking systems and the testing and monitoring of the
performance of these systems. We sell our products to leading networking and
storage equipment manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge
Networks and Sun Microsystems, as well as emerging manufacturers such as Brocade
Communications and Extreme Networks.

INDUSTRY BACKGROUND

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

EVOLUTION OF NETWORKS, NETWORKING SYSTEMS AND NETWORKING PROTOCOLS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CABLE TELEVISION NETWORKS. Cable television networks have traditionally
relied on the use of radio frequency, or RF, analog transmission to broadcast
video signals over copper cable. The initial objective of these networks was to
provide one-way broadcast of video channels to the home. These early networks
relied on multiple amplifiers in order to compensate for the loss of signal
strength over distance caused by the use of copper cable as the transmission
medium.

Since the early 1990's, CATV operators have greatly expanded their ability
to offer a growing array of entertainment services by upgrading their networks
with fiber optic technologies in order to reduce the number of amplifiers needed
to transmit signals to the home, expand capacity and enhance the reliability of
their networks. While operators realize several benefits as a result of
upgrading their networks in this manner, the fiber optic technologies deployed
to date continue to use RF analog transmission to send signals.

With the rapid growth in Internet-related services, the demand for two-way
interactive CATV services has increased dramatically. The transformation of a
one-way broadcast network to a two-way interactive network requires that the
signals originating at each home be aggregated at a node before being sent back
to the CATV network headend. This transformation, using analog signal
transmission for the return path, involves numerous technical challenges because
the electrical noise originating at each home is also aggregated before being
transmitted. This aggregation of noise limits the amount of bandwidth and
distance over which these return signals can be transmitted. For this reason, a
substantial portion of CATV networks have not been upgraded for two-way
transmission and those operators who have implemented analog return path systems
are limited with respect to their ability to carry two-way traffic.

DEMAND FOR HIGH-SPEED DATA COMMUNICATION TEST SYSTEMS

The design and development of data and storage networking systems require
extensive testing to ensure system performance and reliability. As new, highly
complex transmission protocols such as

33
<PAGE>
Gigabit Ethernet and Fibre Channel have emerged, system testing has become more
difficult, requiring increasingly sophisticated and specialized test systems
capable of capturing data at high speeds, filtering the data and identifying
various types of intermittent errors and other network problems. Other new
technologies are continually being developed, such as the Infiniband
transmission protocol, which is being engineered to interconnect clusters of
computer devices. In the past, many systems manufacturers designed their own
test equipment each time they developed a new product. However, as the pace of
technological change has accelerated, the performance requirements of data
communications systems have increased and competition has afforded shorter
market windows within which manufacturers can develop and introduce new
products. Thus, system manufacturers have increasingly focused on the design and
development of their own products and turned to specialized independent
suppliers for state-of-the-art test equipment. As Ethernet and Fibre
Channel-based systems reach even higher transmission speeds and new standards
like Infiniband emerge, the internal development of test equipment by systems
manufacturers will become more challenging, further increasing the demand for
high performance, easy-to-use test systems from independent suppliers.

EVOLUTION OF FIBER OPTIC SUBSYSTEMS FOR NETWORKING

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

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

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

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

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

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

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

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

THE FINISAR SOLUTION

We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over LANs, SANs, CATV
networks and extended networks.

34
<PAGE>
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. Our digital return path technology
overcomes many of the limitations associated with analog components used to
provide two-way interactive services over CATV networks. We also provide unique
network performance test systems which assist networking and storage equipment
manufacturers in the efficient design of reliable, high-speed networking systems
and the testing and monitoring of the performance of these systems. Our products
provide the following key benefits to manufacturers of high-speed data
networking and storage systems:

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

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

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

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

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

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<PAGE>
STRATEGY

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

MAINTAIN TECHNOLOGY LEADERSHIP IN HIGH-SPEED FIBER OPTIC TRANSMISSION. We
have been focused on the development of fiber optic subsystems since 1988.
Current Finisar employees were actively involved in the original development of
the Fibre Channel standard and, more recently, in the development and
implementation of Gigabit Ethernet and the emerging Infiniband protocol. Our
years of engineering experience, our multi-disciplinary technical expertise and
our participation in the development of industry standards have enabled us to
become a leader in the design and development of fiber optic subsystems and test
systems. We intend to maintain our technological leadership through continual
enhancement of our existing products and the development of new products as
evolving technology permits higher speed transmission of data, with greater
capacity, over longer distances. For example, we are designing flexible hardware
and software architectures to support emerging technologies such as 10 Gbps
Ethernet, 2 Gbps Fibre Channel, wavelength division multiplexing, or WDM, and
the Infiniband protocol. We are also focusing on increased product integration
to enhance the price/performance capabilities of our products. An example of
this product integration is our new digital return path links used in broadband
CATV systems that utilize existing technology from our optical subsystems, test
equipment and extended network subsystems. Our CATV products are plug compatible
with existing systems, offer superior performance and allow various system
enhancements. This technology also has the potential to change the product
architecture of CATV systems for use as broadband metropolitan networks.

LEVERAGE CORE COMPETENCIES ACROSS MULTIPLE, HIGH-GROWTH MARKETS. We believe
that fiber optic technology will increasingly become the transmission technology
of choice for multiple high-growth data communication markets, including Gigabit
Ethernet-based LANs, Fibre Channel-based SANs and CATV and extended networks.
These markets are characterized by differentiated applications with unique
design criteria such as product function, performance, cost, in-system
monitoring, size limitations and software. We intend to target opportunities
where our core competencies in high-speed data transmission protocols such as
Gigabit Ethernet, Fibre Channel and Infiniband can be leveraged into leadership
positions as these technologies are extended across multiple markets and
applications. Our goal is to be the optical subsystem and network performance
test system provider of choice for multiple protocols and network applications.
Recently, we entered the broadband CATV market with a product that leverages our
core competencies in optical subsystems, test systems and WDM. Our CATV digital
return path product can emulate existing analog return links, plug into existing
sockets, provide better performance, lower cost and reduce system level
diagnostics. Furthermore, this product has traffic aggregation features that
enhance the traditional analog coaxial system.

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

CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. Many manufacturers of high-speed
data networking and storage systems purchase both optical subsystems and test
systems from third-party providers. Frequently, however, different groups or
departments within a manufacturer's organization are responsible for qualifying
and purchasing subsystems and test equipment. We are increasingly able to

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<PAGE>
capitalize on our customers' satisfaction with one of our product lines and our
service-oriented approach to gain valuable introductions that lead to sales of
our other product lines. As this trend develops, we intend to leverage our
unique expertise in both optical subsystems and test systems. In particular, the
widespread acceptance of our Fibre Channel test systems is providing
opportunities to develop new customers for our optical subsystems. Our entry
into the broadband CATV market targets customers in both the direct CATV digital
return path link market and the extended network subsystems market, allowing
cable operators to offer digital services economically to businesses in their
service area.

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

PRODUCTS

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

OPTICAL SUBSYSTEMS

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

OPTICAL DATA LINKS

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

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

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

The following table describes our principal optical data link products:

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

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

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

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

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

Fibre Channel 1.062/2.125 Multimode 850 500 m 28-pin Built-in diagnostics

Gigabit Ethernet 1.25/2.125 Singlemode 1310 10 km 9-pin OFC auto-sense
1550 30 km GBIC Serial identification
80 km RJ-45
</TABLE>

CABLE TELEVISION DIGITAL RETURN PATH SYSTEMS

Over the past year, we have developed a new technical approach to the
transportation of information inside broadband cable television networks.
Traditionally, fiber optic links in CATV networks have used analog modulation to
transport signals. Our design digitizes the return path signal with performance
comparable to the best analog links. We have begun customer trials of our
digital optical return path links for CATV systems.

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Our digital technology enables us to make links that have significant
advantages over traditional analog links. These links are more stable in varying
temperatures, show no analog variation with fiber distance and are more immune
to mishandling problems, such as poor splices and connectors, than traditional
analog links.

Digital return path links allow broadband systems to be better managed and
to support a variety of CATV architectures. Our products are used in nodes that
typically serve between 50 and 500 homes as well as in secondary hub sites and
headends. These products build on our basic optical modules and test systems to
provide our customers with a level of service, reliability and signal integrity
that is superior to the systems they are replacing at a lower cost. These
modules plug into existing nodes, hubs and headends, which facilitates market
acceptance.

OPTICAL LINK EXTENDERS

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

OPTICITY 3000

Introduced in September 1999, our Opticity 3000 is now being evaluated by
several network service providers ranging from application service providers to
competitive local exchange carriers and CATV operators. Our Opticity 3000
combines cost-effective wavelength division multiplexing with the ability to
create reliable ring network topologies. The Opticity 3000 allows enterprises
and service providers to build gigabit metropolitan data networks. The
Opticity 3000 aggregates data traffic on fiber rings. It is able to multiplex up
to 16 channels of Fibre Channel or Gigabit Ethernet traffic on a single fiber
pair, providing aggregate full-duplex bandwidth of up to 20 Gbps. The Opticity
3000 can be remotely managed using standard network management protocols such as
the Simple Network Management Protocol. Opticity 3000 also has features such as
redundant power supply designed to maximize reliability and uptime in case of
failures.

The Opticity 3000 platform enables our customers to create complex systems
combining both networking and storage based services and to access Ethernet
service at speeds up to 100 Mbps at costs comparable to today's prices for T1 or
DSL connections provided by local telephone companies.

Currently our Opticity 3000 platform can be configured with as few as four
and as many as 16 channels. The Opticity 3000 platform manages a ring topology
matching the fiber layout in most metropolitan areas. The Opticity 3000 can
operate over a single fiber ring and still maintain the ability to provide
failover switching for redundancy and reliability in the event of a fiber
breakage. Extended networks using the Opticity 3000 are configured to remain
operational in the event of any single point of failure throughout the platform
or physical plant.

The effectiveness of the Opticity 3000 relies on a variety of bandwidth
enhancing techniques including time division multiplexing and WDM. All channels
are actively monitored, therefore service levels can be tracked and verified for
each customer served by the system. The Opticity 3000 platform can be managed
using simple network management protocol as well as a web browser. Remote
management of an entire ring system can be accomplished through a single
Internet connection to the system.

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<PAGE>
NETWORK PERFORMANCE TEST SYSTEMS

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

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

<TABLE>
INTRODUCTION PROTOCOL TRANSMISSION
PRODUCT DESCRIPTION DATE SUPPORTED SPEED APPLICATION CONFIGURATION
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
GIGABIT LINK ANALYZERS
GLA-3100ES 10/96 ESCON 200 Mbps R&D Service PC-Hosted
GLA-3100FC 1/97 Fibre Channel 1.062 Gbps R&D Service PC-Hosted
- ---------------------------------------------------------------------------------------------------------------
GT FIBRE CHANNEL GIGABIT TRAFFIC SYSTEM
GT-A 1/98 Fibre Channel 1.062 Gbps R&D Portable, Desk
Protocol and Top, High
Performance Analysis Perf. Tower
Card Set
GT-G 1/98 Fibre Channel 1.062 Gbps Inter-operability Portable, Desk
Data Generator Card Top, High
Perf. Tower
GT-J 2/99 Fibre Channel 1.062 Gbps Error Recovery Portable, Desk
Error Injector Module Top, High
Perf. Tower
- ---------------------------------------------------------------------------------------------------------------
GT FIBRE CHANNEL GIGABIT TRAFFIC JAMMER
GT-J22 System 2/99 Fibre Channel 1.062 Gbps Error Recovery High
Perf. Tower
- ---------------------------------------------------------------------------------------------------------------
GT GIGABIT TRAFFIC CHECK
GT-C-FC 5/98 Fibre Channel 1.062 Gbps Field Service Hand Held
Link Monitor
GT-C-GE 5/98 Gigabit 1.25 Gbps Field Service Hand Held
Link Monitor Ethernet
GTX-A 11/99 Fibre Channel 1.062 Gbps R&D Portable, High
2.125 Gbps Perf. Tower
</TABLE>

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<PAGE>
CUSTOMERS

The following table is a list of our customers who have purchased more than
$75,000 of our products during the nine-month period ended January 31, 2000:

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

Sales to our two principal customers, Newbridge Networks and EMC
Corporation, accounted for 43.9% and 14.6% of our revenues in fiscal 1998, 25.1%
and 24.1% in fiscal 1999 and 29.1% and 21.6% in the nine months ended
January 31, 2000.

CUSTOMER CASE STUDIES

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

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

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

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

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

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

TECHNOLOGY

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

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

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

COMPLEX LOGIC DESIGN. Our test equipment designs are based on field
programmable gate arrays, or FPGAs. In recent customer trials, our newest
products are being used to operate with clock

42
<PAGE>
frequencies of up to 125 MHz and logic densities up to 1 million gates per chip.
Our test systems use FPGAs that are programmed by the host PC and therefore can
be configured differently for different tests. All of our logic design is done
in the VHDL hardware description language which will enable migration to ASICs
as volumes warrant. We develop VHDL code in a modular fashion for reuse in logic
design which comprises a critical portion of our intellectual property. This
re-usable technology base of logic design is available for use in both our test
system and optical subsystem product lines and allows us to reduce the time to
market for our new and enhanced products.

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

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

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

COMPETITION

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

- product performance, features, functionality and reliability;

- price/performance characteristics;

- timeliness of new product introductions;

- adoption of emerging industry standards;

- service and support;

43
<PAGE>
- size and scope of distribution network;

- brand name;

- access to customers; and

- size of installed customer base.

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

SALES, MARKETING AND TECHNICAL SUPPORT

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

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

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

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

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

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

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

MANUFACTURING

We outsource the majority of our assembly operations, and we conduct
manufacturing engineering, supply chain management, quality assurance and
documentation control operations at our facility in

44
<PAGE>
Sunnyvale, California. This approach enables us to focus on our design
strengths, reduce fixed costs and capital expenditures and provide flexibility
in meeting market demand.

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

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

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

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

RESEARCH AND DEVELOPMENT

In fiscal 1998, fiscal 1999 and the nine months ended January 31, 2000, our
research and development expenses were $3.8 million, $7.9 million and $10.1
million, respectively. We believe that our future success depends on our ability
to continue to enhance our existing products and to develop new products that
maintain technological competitiveness. We focus our product development
activities on addressing the evolving needs of our customers within the LAN,
SAN, CATV networks and extended network markets. We work closely with our
original equipment manufacturers and system integrators to monitor changes in
the marketplace. We design our products around current industry standards and
will continue to support emerging standards that are consistent with our product
strategy. Our research and development groups are aligned with our different
product lines and we have specific groups devoted to ASIC design and test,
gigabit per second subsystem design, test equipment hardware and software
design. In addition, our research and development also includes manufacturing
engineer efforts whereby we examine each product for its manufacturability,
predicted reliability, expected lifetime and manufacturing costs.

We are currently undertaking development efforts for our product lines with
emphasis on increasing reliability, integrity and performance, as well as
value-added functions. Some examples of products that we are working on are 10
Gbps Ethernet and 2.125 Gbps Fibre Channel optical subsystems. We also intend to
focus on increased product integration to enhance the price/performance
capabilities of our products. We believe that our research and development
efforts are key to our ability to maintain technical competitiveness and to
deliver innovative products that address the needs of the market. However, there
can be no assurance that our product development efforts will result in

45
<PAGE>
commercially successful products, or that our products will not be rendered
obsolete by changing technology or new product announcements by other companies.

INTELLECTUAL PROPERTY

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

PENDING LITIGATION

In April 1999, Methode Electronics, a manufacturer of electronic component
devices, filed a lawsuit against us and another manufacturer, Hewlett-Packard
Co., in the United States District Court for the Northern District of Illinois
alleging that our optoelectronic products infringe four patents held by Methode.
The original complaint sought monetary damages and injunctive relief. In July
1999, we and Hewlett-Packard filed a motion, which was opposed by Methode, to
transfer the case to the United States District Court for the Northern District
of California. In August 1999, the Court granted our motion and the case is now
pending in the Northern District. 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 $224.3 million plus interest for the alleged breach of contract. Based on
consultation with our

46
<PAGE>
counsel, it is our position that the Methode patents are invalid, unenforceable
and/or not infringed by our products. The United States Patent and Trademark
Office has determined that all of the claims asserted by Methode in one of the
patents are invalid, although this determination is not final and is subject to
further administrative review. We also believe, based on consultation with our
counsel, that the breach of contract claim that Methode seeks to include in the
amended complaint is without merit and that, in any event, the amended complaint
grossly overstates the amount of damages that Methode could possibly have
suffered as a result of any such breach. We believe that we have strong defenses
against Methode's lawsuit. In addition, we have filed a counterclaim against
Methode asserting, among other things, that one of our founders, Frank H.
Levinson, is the primary inventor of the technology that is the subject of all
five patents, that Methode improperly obtained the patents based on our
disclosure of the technology to Methode and that we are the rightful owner or
co-owner of the patents. We intend to defend Methode's lawsuit and pursue our
counterclaim vigorously. However, the litigation is in the preliminary stage,
and we cannot predict its outcome with certainty. 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. Patent litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. In connection with the
Methode litigation, we have incurred, and expect to continue to incur,
substantial legal fees and expenses. The Methode litigation has also diverted,
and is expected to continue to divert, the efforts and attention of some of our
key management and technical personnel. As a result, our defense of this
litigation, regardless of its eventual outcome, has been, and will likely
continue to be, costly and time consuming. Should the outcome of the litigation
be adverse to us, we could be required to pay significant monetary damages to
Methode and could be enjoined from selling those of our products found to
infringe Methode's patents unless and until we are able to negotiate a license
from Methode. In the event we obtain a license from Methode, we would likely be
required to make royalty payments with respect to sales of our products covered
by the license. Any such payments would increase our cost of revenues and reduce
our gross profit. If we are required to pay significant monetary damages, are
enjoined from selling any of our products or are required to make substantial
royalty payments pursuant to any such license agreement, our business would be
significantly harmed.

FACILITIES

Our facility is located in Sunnyvale, California. We lease approximately
75,000 square feet for our corporate headquarters which includes research and
development, sales and marketing, general and administrative and manufacturing
operations. This lease expires in July 2006. We currently sublease approximately
15,000 square feet of this facility. We believe our current facilities will be
adequate to meet our needs for the foreseeable future.

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

EMPLOYEES

As of February 29, 2000, we employed a total of 220 full-time employees. We
also from time to time employ part-time employees and hire contractors. Our
employees are not represented by any collective bargaining agreement, and we
have never experienced a work stoppage. We believe that our employee relations
are good.

47
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors, and their ages as of February 29,
2000, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- --------------------------------------------- -------- ------------------------------------------------
<S> <C> <C>
Jerry S. Rawls............................... 55 President, Chief Executive Officer and Director
Frank H. Levinson............................ 46 Chairman of the Board and Chief Technical
Officer
Mark J. Farley............................... 37 Vice President, Digital Systems Engineering
Jan Lipson................................... 49 Vice President, Optical Engineering
Stephen K. Workman........................... 49 Vice President, Finance, Chief Financial Officer
and Secretary
Michael C. Child............................. 45 Director
Roger C. Ferguson............................ 57 Director
Richard B. Lieb.............................. 52 Director
Larry D. Mitchell............................ 57 Director
</TABLE>

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

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

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

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

STEPHEN K. WORKMAN has served as our Vice President, Finance and Chief
Financial Officer since March 1999 and as our Secretary since August 1999. From
November 1989 to March 1999,

48
<PAGE>
Mr. Workman served as Chief Financial Officer at Ortel Corporation. Mr. Workman
holds a B.S. in Engineering Science and an M.S. in Industrial Administration
from Purdue University.

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

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

RICHARD B. LIEB has been a member of our Board of Directors since
October 1999. Since November 1990 Mr. Lieb has served as Executive President of
SEI Investments, an investment and investment processing business solutions
company. Mr. Lieb holds a B.A. in History from Duke University and an M.A. in
Public Administration from the Wharton School of Business at the University of
Pennsylvania.

LARRY D. MITCHELL has been a member of our Board of Directors since
October 1999. Mr. Mitchell has been retired since October 1997. From
October 1994 to October 1997, he served as a site General Manager in Roseville,
California for Hewlett-Packard. Mr. Mitchell holds a B.A. in Engineering Science
from Dartmouth College and an M.B.A. from the Stanford Graduate School of
Business.

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

COMPOSITION OF THE BOARD OF DIRECTORS

Our Board of Directors is currently fixed at six directors. Our certificate
of incorporation provides that the terms of office of the members of the Board
of Directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 2000, Class II, whose term
will expire at the annual meeting of stockholders to be held in 2001 and Class
III, whose term will expire at the annual meeting of stockholders to be held in
2002. The Class I directors are Messrs. Ferguson and Mitchell, the Class II
directors are Messrs. Levinson and Lieb, and the Class III directors are Messrs.
Child and Rawls. At each annual meeting of stockholders after the initial
classification, the successors to directors whose term will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following their election. Our nonemployee directors devote such
time to our affairs as is necessary to discharge their duties. There are no
family relationships among any of our directors, officers or key employees.

BOARD COMMITTEES

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

49
<PAGE>
The compensation committee of our Board of Directors reviews and recommends
to the Board of Directors the compensation and benefits of all executive
officers of Finisar and establishes and reviews general policies relating to
compensation and benefits of Finisar employees. The compensation committee
currently consists of Messrs. Child and Ferguson.

COMPENSATION OF DIRECTORS

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

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION INFORMATION

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

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM AND OTHER
COMPENSATION
--------------------------
ANNUAL COMPENSATION NUMBER OF
------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- -------- -------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Jerry S. Rawls (2) ............... $190,000 $106,192 $4,677 -- $ --
President
Frank H. Levinson (2) ............ 190,000 106,192 3,581 -- --
Chief Executive Officer
Mark J. Farley ................... 151,000 64,731 2,857 -- --
Vice President, Digital Systems
Engineering
Jan Lipson ....................... 140,000 44,077 162 300,000 (3) --
Vice President, Optical
Engineering
</TABLE>

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

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

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

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

OPTION GRANTS

The following table sets forth information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table above
during the fiscal year ended April 30, 1999. All of these options were granted
under our 1989 stock option plan. The percentage of total options set forth
below is based on an aggregate of 2,900,000 options granted during the fiscal
year. All options were granted at the fair market value of our common stock, as
determined by the Board of Directors on the date of grant. Potential realizable
values are net of exercise price, but before taxes associated with exercise.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price

50
<PAGE>
appreciation are provided in accordance with rules of the SEC and do not
represent Finisar's estimate or projection of the future common stock price.

OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 30, 1999

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

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

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

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

OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS

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

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

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

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

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

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

STOCK PLANS

1999 STOCK OPTION PLAN

Finisar's 1999 stock option plan was adopted by the Board of Directors and
approved by the stockholders in April 1999. Finisar is authorized to issue up to
7,000,000 shares of common stock under

51
<PAGE>
this plan. This number of shares will be increased on May 1, 2001 and each
subsequent May 1 during the term of the plan by 5% of the number of shares of
common stock issued and outstanding on the immediately preceding April 30. The
1999 stock option plan is currently being administered by the Board of
Directors. The plan allows grants of incentive stock options, within the meaning
of Section 422 of the Internal Revenue Code, to employees, including officers
and employee directors. In addition, it allows grants of nonstatutory options to
employees, non-employee directors and consultants. The plan expires in
April 2009, but may be terminated sooner by the Board of Directors.

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

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

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

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

As of January 31, 2000, under the 1999 stock option plan 1,234,533 shares of
common stock had been issued upon exercise of options outstanding, options to
purchase 1,039,612 shares of common stock, with a weighted average exercise
price of $9.3235, were outstanding, and 4,725,855 shares of common stock
remained available for future grants.

1989 STOCK OPTION PLAN

Finisar's 1989 stock option plan was adopted by the Board of Directors and
approved by the stockholders in April 1989. Prior to the expiration of its
ten-year term in April 1999, a total of 19,638,800 shares of common stock were
reserved for issuance under the 1989 stock option plan. Although no additional
options will be granted under this plan, options for 917,540 shares of common
stock outstanding as of January 31, 2000 remain subject to its provisions and
the plan will continue to be administered by the Board of Directors.

The 1989 stock option plan allowed the grant of incentive stock options and
nonstatutory stock options. The exercise price of incentive stock options
granted under the plan was required to be not less than the fair market value of
a share of the common stock on the date of grant. The exercise price of
nonstatutory stock options granted under the plan was required to be not less
than 85% of the fair market value of a share of common stock on the date of
grant. With respect to any optionee who owned stock representing more than 10%
of the voting power of all classes of Finisar's outstanding

52
<PAGE>
capital stock, the exercise price of any option was required to be equal to at
least 110% of the fair market value of a share of the common stock on the date
of grant, the term of any incentive stock option could not exceed five years and
the term of any nonstatutory stock option could not exceed five years and one
day. The terms of all other options could not exceed ten years. The aggregate
fair market value (determined as of the date of option grant) of the common
stock for which incentive stock options could become exercisable for the first
time by any optionee could not exceed $100,000 in any calendar year. The Board
of Directors had the discretion to determine vesting schedules and exercise
requirements, if any, of all option grants under this plan. However, the plan
provided that in connection with a sale of all or substantially all of the
assets of Finisar, or a merger of Finisar with or into another corporation, if
the acquiring corporation fails to assume the plan's outstanding options or
replace them with equivalent new options, all options will become immediately
vested and exercisable in full.

As of January 31, 2000, under the 1989 stock option plan 6,697,660 shares of
common stock had been issued upon exercise of options outstanding and options to
purchase 917,540 shares of common stock, at a weighted average exercise price of
$0.2348, were outstanding.

1999 EMPLOYEE STOCK PURCHASE PLAN

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

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

401(k) PLAN

Our 401(k) retirement and deferred savings plan covers all eligible
employees and is intended to qualify as a tax-qualified plan under the Internal
Revenue Code. Employees are eligible to participate in the plan on the first day
of the month immediately following twelve months of service with Finisar. The
plan provides that each participant may contribute up to 12% of his or her
pre-tax gross compensation up to a statutory limit, which is $10,000 in calendar
year 1999. All amounts contributed by participants and earnings on participant
contributions are fully vested at all times. Finisar may contribute an amount
equal to one-half of the first 5% of each participant's contribution. Finisar's
contributions vest one-fifth per year over five years. Finisar's contributions
to the plan through January 31, 2000 totaled $188,502.

53
<PAGE>
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY

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

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

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

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

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

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

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

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

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

- the rights provided in the bylaws are not exclusive.

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

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

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

54
<PAGE>
RELATED PARTY TRANSACTIONS

FINANCING TRANSACTION

In November 1998, we sold and issued an aggregate of 12,039,486 shares of
our convertible redeemable preferred stock at a price of $2.1932 per share. TA
Associates, Inc., of which Mr. Child is a Managing Director, and its affiliated
entities purchased 9,422,305 of such shares for an aggregate purchase price of
$20,665,000. Upon the closing of our initial public offering in November 1999,
each share of convertible redeemable preferred stock was converted into
0.7460371 of a share of common stock and one share of redeemable preferred
stock, and all outstanding shares of redeemable preferred stock were redeemed
for $0.2193 per share.

LOAN TO OFFICER

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

CONTRIBUTIONS TO CAPITAL AND REPURCHASES OF COMMON STOCK

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

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

OPTION GRANTS AND EXERCISES

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

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

OTHER TRANSACTIONS

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

55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of January 31, 2000, and as adjusted
to reflect the sale of the common stock offered hereby, by:

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

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

- each of our directors;

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

- each selling stockholder.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED PRIOR NUMBER OF BENEFICIALLY OWNED AFTER
TO THE OFFERING(1) SHARES THE OFFERING(1)(2)
------------------------- BEING -------------------------
BENEFICIAL OWNER(1) NUMBER PERCENTAGE OFFERED(2) NUMBER PERCENTAGE
- ------------------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS:
Entities affiliated with TA
Associates, Inc. (3)............... 6,329,621 12.35% 1,062,187 5,267,434 9.89%
Margaret G. Rawls.................... 4,235,314 8.26 678,550 3,556,764 6.30
Mark L. Alderman (4)................. 2,685,706 5.24 100,000 2,585,706 4.85
EXECUTIVE OFFICERS AND DIRECTORS:
Jerry S. Rawls....................... 4,235,313 8.26 500,865 3,734,448 7.01
Frank H. Levinson (5)................ 15,096,872 29.46 1,262,028 13,834,844 25.98
Mark J. Farley (6)................... 1,885,000 3.63 183,450 1,701,550 3.16
Jan Lipson (7)....................... 301,000 * -- 301,000 *
Michael C. Child (8)................. 6,329,621 12.35 1,062,187 5,267,434 9.89
Roger C. Ferguson (9)................ 30,000 * -- 30,000 *
Richard B. Lieb (10)................. 32,500 * -- 32,500 *
Larry D. Mitchell (10)............... 32,500 * -- 32,500 *
All executive officers and directors
as a group (9 persons)(11)......... 28,143,806 54.14 3,008,530 25,135,276 46.56
OTHER SELLING STOCKHOLDERS:
Warren L. Rawls (12)................. 2,080,000 4.06 400,000 1,680,000 3.15
Other selling stockholders (13)...... 4,224,200 8.24 912,920 3,311,280 6.22
</TABLE>

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

* Less than 1%.

(1) Unless otherwise indicated, the address of each of the named individuals is:
c/o Finisar Corporation, 1308 Moffett Park Drive, Sunnyvale, CA 94089.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. All shares of common stock subject to options exercisable within
60 days following January 31, 2000 are deemed to be outstanding and
beneficially owned by the person holding those options for the purpose of
computing the number of shares beneficially owned and the percentage of
ownership of that person. They are not, however, deemed to be outstanding
and beneficially owned for the purpose of computing the percentage ownership
of any other person. Accordingly, percent ownership is based on: (i) before
the offering, 51,253,428 shares of Common Stock outstanding as of
January 31, 2000 plus any shares issuable pursuant to options held by the
person or group in question which may be exercised within 60 days following
January 31, 2000; and (ii) after the offering, an additional 2,000,000
shares to be issued by the Company in the offering. Except as indicated in
the other footnotes to the table and subject to applicable community

56
<PAGE>
property laws, based on information provided by the persons named in the
table, these persons have sole voting and investment power with respect to
all shares of the common stock shown as beneficially owned by them.

(2) Assumes no exercise of the underwriters' over-allotment option. If the
underwriters exercise their over-allotment option in full, Seti Trading Co.,
Inc. (an entity controlled by Frank H. Levinson), Margaret G. Rawls,
Jerry S. Rawls and entities affiliated with TA Associates, Inc. will sell
337,972 additional shares, 168,513 additional shares, 134,432 additional
shares and 203,737 additional shares, respectively. Giving effect to such
sales, Mr. Levinson, Ms. Rawls, Mr. Rawls and entities affiliated with TA
Associates will beneficially own 13,496,872 shares, 3,388,251 shares,
3,600,016 shares and 5,063,697 shares, respectively, of the outstanding
common stock, after completion of this offering.

(3) Includes 1,529,186 shares held by Advent Atlantic and Pacific III L.P.,
4,587,556 shares held by TA/ Advent VIII, L.P., 95,014 shares held by TA
Investors LLC and 117,865 shares held by TA Executives Fund LLC. TA/Advent
VIII L.P., Advent Atlantic & Pacific III L.P., TA Executives Fund LLC and TA
Investors LLC are part of an affiliated group of investment partnerships.
The general partner of TA/Advent VIII L.P. is TA Associates VIII LLC. The
general partner of Advent Atlantic and Pacific III L.P. is TA Associates AAP
III Partners L.P. TA Associates, Inc. is the general partner of TA
Associates AAP III Partner L.P. and is the sole manager of TA Advent VIII
LLC, TA Executives Fund LLC and TA Investors LLC. In such capacity, TA
Associates, Inc., through an executive committee, exercises sole voting and
investment power with respect to all shares held of record by the named
investment partnerships; individually, no stockholder, director or officer
of TA Associates, Inc., is deemed to have or share such voting or investment
power. The address of TA Associates, Inc. is 125 High Street, High Street
Tower, Suite 2500, Boston, MA 02110.

(4) Includes 2,633,206 shares held by Mr. Alderman in his capacity as sole
trustee for the following trusts: 1,143,206 shares held by the
Frank & Wynnette Levinson Irrevocable Trust, (25,000 of which are being
offered hereby), 500,000 shares held by the Alana Marie Levinson 1998 Gift
Trust, (25,000 of which are being offered hereby), 500,000 shares held by
the Frank Henry Levinson 1998 Gift Trust, (25,000 of which are being offered
hereby), 500,000 shares held by the Rose Wynnette Levinson 1998 Gift Trust
(25,000 of which are being offered hereby), 10,000 shares held by the Carl
Alan Levinson Trust and 10,000 shares held by the Paul Norman Levinson
Trust. Mr. Alderman disclaims beneficial ownership of all shares which he
holds as sole trustee of the foregoing trusts. Mr. Alderman's address is c/o
Wolf, Block, Schorr and Solis-Cohen LLP, 1650 Arch Street, 22nd Floor,
Philadelphia, PA 19103.

(5) Includes 12,346,872 shares held by the Frank H. & Wynnette Levinson 1998
Revocable Trust, (250,000 of which are being offered hereby), 1,250,000 held
by Seti Trading Co., Inc., an investment company owned by Frank and Wynnette
Levinson (912,028 of which are being offered hereby), 500,000 shares held by
the Rose Wynnette Levinson 1998 Gift Trust, (25,000 of which are being
offered hereby), 500,000 shares held by the Alana Marie Levinson 1998 Gift
Trust (25,000 of which are being offered hereby) and 500,000 shares held by
the Frank Henry Levinson 1998 Gift Trust (25,000 of which are being offered
hereby).

(6) Includes 661,540 shares issuable upon exercise of options exercisable within
60 days following January 31, 2000, 923,460 shares held by the Farley Family
Trust and 300,000 shares held by an irrevocable trust for the benefit of
Mr. Farley's child.

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

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<PAGE>

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

(9) All 30,000 shares are subject to a right of repurchase in favor of Finisar
which lapses over time.

(10) Includes 30,000 shares issuable upon exercise of options exercisable within
60 days following January 31, 2000; however, the shares issuable upon
exercise of such options are subject to a right of repurchase in favor of
Finisar which lapses over time.

(11) Including 6,315,167 shares held by TA Associates, Inc. and its affiliates
as to which Mr. Child disclaims beneficial ownership. See Note 3 above.

(12) Includes 2,030,000 shares held by Mr. Rawls in his capacity as sole trustee
for the following trusts: 1,000,000 shares held by the Amanda Kathryn Rawls
Irrevocable Trust (200,000 of which are being offered hereby),
1,000,000 shares held by the Steven Patrick Rawls Irrevocable Trust (200,000
of which are being offered hereby) and 30,000 shares held by irrevocable
trusts for the benefits of Mr. Rawls' children. Mr. Rawls disclaims
beneficial ownership of all shares which he holds as sole trustee of the
foregoing trusts.

(13) Consists of stockholders, each of whom beneficially own less than 1% of the
shares outstanding before and after the offering.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 200,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share.

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

COMMON STOCK

As of January 31, 2000, there were 51,253,428 shares of our common stock
outstanding held of record by 217 stockholders. The holders of our common stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of stockholders. Holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably any
dividends declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of Finisar, holders of common stock are entitled to share ratably in
the assets remaining after payment of liabilities and the liquidation
preferences of any outstanding preferred stock. Holders of our common stock have
no preemptive, conversion or redemption rights. Each outstanding share of common
stock is, and all shares of common stock to be outstanding upon the closing of
this offering will be, fully paid and non-assessable.

PREFERRED STOCK

Up to 5,000,000 shares of undesignated preferred stock are authorized for
issuance. Our Board of Directors has the authority, without further action by
its stockholders, to issue preferred stock in one or more series. In addition,
the Board of Directors may fix the rights, preferences and privileges of any
preferred stock it determines to issue. Any or all of these rights may be
superior to the rights of the common stock. Preferred stock could thus be issued
quickly with terms calculated to delay or prevent a change in control of Finisar
or to make removal of management more difficult. Additionally, the issuance of
preferred stock may decrease the market price of our common stock. At present,
we have no plans to issue any shares of preferred stock.

REGISTRATION RIGHTS

Under the Securities Purchase Agreement dated as of November 6, 1998, the
purchasers of our convertible redeemable preferred stock have various
registration rights with respect to the shares of common stock into
which their convertible redeemable preferred stock was converted.

Beginning on May 10, 2000, these holders have the right to require Finisar,
on not more than two occasions, to file a registration statement under the
Securities Act to register their shares at our expense. Demand for this
registration must be made by holders of at least 20% of the shares that are
entitled to this registration. The underwriters of the offering have the right,
subject to some limitations, to limit the number of shares included.

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

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

59
<PAGE>
underwriters of this offering have the right, subject to some limitations, to
limit the number of shares included.

ANTITAKEOVER PROVISIONS

DELAWARE LAW

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

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

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

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

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

CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS

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

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

TRANSFER AGENT AND REGISTRAR

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

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales, could adversely affect the trading
price of the common stock.

Upon completion of this offering, we will have outstanding 53,253,428 shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options to purchase common stock after
January 31, 2000. Of these shares, the 2,000,000 shares sold in this offering
and the 9,305,000 shares sold in our initial public offering will be freely
tradable without restriction or further registration under the Securities Act,
except for any shares purchased by "affiliates" of Finisar, as defined in
Rule 144 under the Securities Act, which would be subject to the limitations and
restrictions described below. The remaining shares of common stock outstanding
upon completion of this offering will be "restricted securities" as defined in
Rule 144. These securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or 701
under the Securities Act, which are summarized below.

Holders of approximately of these restricted securities, including
all of our officers and directors and the entities affiliated with them and all
of the selling stockholders, have entered into lock-up agreements providing
that, subject to limited exceptions, they will not sell, directly or indirectly,
any common stock without the prior consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated for a specified period of time from the date of this
prospectus. These lock-up agreements provide that, if the prospectus is dated on
or prior to April 21, 2000, the holders executing the lock-ups may sell up to
one-half of their shares that are otherwise eligible for sale 70 days after the
date of this prospectus and all of their shares that are otherwise eligible for
sale 110 days after the date of this prospectus, and if the prospectus is dated
after April 21, 2000, the holders executing the lock-ups may sell all of their
shares that are otherwise eligible for sale 90 days after the date of this
prospectus. In addition, under lock-up agreements entered into in connection
with our initial public offering, holders of approximately shares of
restricted securities are subject to similar restrictions until May 10, 2000.

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

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<PAGE>
As a result of the lock-up agreements described above and the provisions of
Rule 144, Rule 144(k) and Rule 701, additional shares will be available for sale
in the public market as follows:

As of January 31, 2000, options to purchase an aggregate of
1,957,152 shares of common stock were outstanding under our stock option plans.
We intend to file registration statements on Form S-8 under the Securities Act
to register an aggregate of 6,933,007 shares of common stock issued or reserved
for issuance under our stock option plans and employee stock purchase plan.
Shares of common stock issued under the foregoing plans, after the filing of
related registration statements, will be freely tradable in the public market,
subject in the case of the holders to the Rule 144 limitations applicable to
Finisar affiliates, lock-up agreements with the underwriters and vesting
restrictions imposed by Finisar.

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<PAGE>
UNDERWRITING

GENERAL

Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc., A.G. Edwards & Sons, Inc., CIBC World Markets Corp., Dain Rauscher
Incorporated, Morgan Keegan & Company, Inc. SoundView Technology Group, Inc. and
Advanced Clearing, Inc. are acting as representatives of each of the
underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement, Finisar and the selling stockholders have agreed to sell to
each of the underwriters, and each of the underwriters, severally and not
jointly, has agreed to purchase, the number of shares of our common stock set
forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
J.P. Morgan Securities Inc. ................................
A.G. Edwards & Sons, Inc. ..................................
CIBC World Markets Corp. ...................................
Dain Rauscher Incorporated..................................
Morgan Keegan & Company, Inc. ..............................
SoundView Technology Group, Inc. ...........................
Advanced Clearing, Inc. ....................................

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

In the purchase agreement, the several underwriters have agreed, subject to
its terms and conditions, to purchase all of the shares of common stock being
sold under the terms of the agreement if any of the shares of common stock are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in some circumstances, the purchase commitments of the non-
defaulting underwriters may be increased or the purchase agreement may be
terminated.

We and the selling stockholders have agreed to indemnify the underwriters
against specified liabilities, including some liabilities under the Securities
Act, or to contribute to payments the underwriters may be required to make in
respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriter's reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in whole
or in part.

A prospectus in electronic format is being made available on a web site
maintained by Wit SoundView's affiliate, Wit Capital Corporation.

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<PAGE>
COMMISSIONS AND DISCOUNTS

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

The following table shows the per share and total public offering price, the
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to us and the selling
stockholders. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment options.

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

The expenses of the offering, not including the underwriting discount, are
estimated at $800,000 and are payable by us.

OVER-ALLOTMENT OPTION

Finisar and certain of the selling stockholders have granted to the
underwriters an option, exercisable for 30 days after the date of this
prospectus, to purchase up to an aggregate of 1,050,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.

NO SALES OF SIMILAR SECURITIES

We, our executive officers and directors, the selling stockholders and
certain of our other existing stockholders have entered into lock-up agreements
providing that, with certain exceptions, they will not directly or indirectly:

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

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

64
<PAGE>
without the prior written consent of Merrill Lynch for a specified period of
time after the date of this prospectus. These lock-up agreements provide that,
if the prospectus is dated on or prior to April 21, 2000, the holders executing
the agreements may sell up to one-half of their shares that are otherwise
eligible for sale 70 days after the date of this prospectus and all of their
shares that are otherwise eligible for sale 110 days after the date of this
prospectus, and if the prospectus is dated after April 21, 2000, the holders
executing the agreements may sell all of their shares that are otherwise
eligible for sale 90 days after the date of this prospectus. See "Shares
Eligible for Future Sale."

NASDAQ NATIONAL MARKET LISTING

Our common stock is listed on the Nasdaq National Market under the symbol
"FNSR."

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

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

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

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

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

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

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<PAGE>
LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal
matters relating to the offering will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California. As of the date of this
prospectus, partners of and attorneys employed by Gray Cary Ware & Freidenrich
LLP beneficially own an aggregate of 3,300 shares of our common stock.

EXPERTS

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

WHERE YOU CAN FIND MORE INFORMATION

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

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

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<PAGE>
FINISAR CORPORATION

FINANCIAL STATEMENTS

INDEX

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

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

The Board of Directors and Stockholders
Finisar Corporation

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

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

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

/s/ ERNST & YOUNG LLP

Palo Alto, California

June 25, 1999

F-2
<PAGE>
FINISAR CORPORATION

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
APRIL 30,
------------------- JANUARY 31,
1998 1999 2000
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 722 $ 5,044 $ 66,356
Short-term investments.................................... -- -- 67,759
Accounts receivable (net of allowance for doubtful
accounts of $17, $265 and $329 at April 30, 1998 and
1999 and January 31, 2000).............................. 2,788 6,653 10,170
Accounts receivable, other................................ -- 3 140
Inventories............................................... 2,731 5,236 15,087
Income tax receivable..................................... -- -- 148
Deferred income taxes..................................... 387 1,047 2,360
Prepaid expenses.......................................... -- 194 337
------ -------- --------
Total current assets........................................ 6,628 18,177 162,357
Income taxes receivable..................................... 81 -- --
Other assets................................................ -- 296 463
Property, equipment and improvements, net................... 1,052 2,482 5,885
------ -------- --------
Total assets................................................ $7,761 $20,955 $168,705
====== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 265 $ 1,394 $ 4,248
Accrued compensation...................................... 116 1,499 2,258
Other accrued liabilities................................. 373 1,476 2,279
Income tax payable........................................ -- 743 1,430
Note payable, current portion............................. 100 -- --
Capital lease obligations, current portion................ 44 54 21
------ -------- --------
Total current liabilities................................... 898 5,166 10,236
------ -------- --------
Long-term liabilities:
Note payable, long-term portion........................... 350 11,015 --
Capital lease obligations, long-term portion.............. 66 17 22
Other long-term liabilities............................... -- -- 132
------ -------- --------
Total long-term liabilities................................. 416 11,032 154
------ -------- --------
Commitments and contingent liabilities
Convertible redeemable preferred stock:
No par value, 12,100,000 shares authorized at April 30,
1998 and 1999, and no shares authorized at January 31,
2000; no shares issued and outstanding at April 30,
1998; 12,039,486 shares issued and outstanding at
April 30, 1999; no shares issued and outstanding at
January 31, 2000; liquidation preference $26,405,000 at
April 30, 1999.......................................... -- 26,260 --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding at
April 30, 1998 and 1999 and January 31, 2000............ -- -- --
Common stock:
$0.001 par value, 200,000,000 shares authorized:
51,253,428 shares issued and outstanding at
January 31, 2000...................................... -- -- 51
No par value, 75,000,000 shares authorized at April 30,
1998 and 1999; no shares authorized at January 31,
2000; 41,800,000 and 32,382,365 shares issued and
outstanding at April 30, 1998 and 1999; no shares
issued and outstanding at January 31, 2000............ 95 4,304 --
Additional paid-in capital................................ -- -- 194,262
Notes receivable from stockholders........................ -- (1,521) (3,696)
Deferred stock compensation............................... -- (1,975) (11,143)
Unrealized loss on short-term investments................. -- -- (57)
Retained earnings (accumulated deficit)................... 6,352 (22,311) (21,102)
------ -------- --------
Total stockholders' equity (deficit)........................ 6,447 (21,503) 158,315
------ -------- --------
Total liabilities and stockholders' equity (deficit)........ $7,761 $20,955 $168,705
====== ======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>
FINISAR CORPORATION

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED APRIL 30, JANUARY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 8,457 $22,067 $35,471 $23,181 $46,466
Cost of revenues............................... 3,438 8,705 15,514 9,895 22,252
------- ------- ------- ------- -------
Gross profit................................... 5,019 13,362 19,957 13,286 24,214
------- ------- ------- ------- -------
Operating expenses:
Research and development..................... 2,536 3,806 7,864 5,048 10,051
Sales and marketing.......................... 645 1,629 4,145 2,864 5,080
General and administrative................... 464 833 2,299 1,203 2,597
Amortization of deferred stock
compensation............................... -- -- 428 219 3,791
------- ------- ------- ------- -------
Total operating expenses....................... 3,645 6,268 14,736 9,334 21,519
------- ------- ------- ------- -------
Income from operations......................... 1,374 7,094 5,221 3,952 2,695
Interest income................................ 15 38 154 101 1,616
Interest expense............................... (2) (33) (429) (232) (447)
Other income (expense) net..................... -- (25) (28) 4 (72)
------- ------- ------- ------- -------
Income before income taxes..................... 1,387 7,074 4,918 3,825 3,792
Provision for income taxes..................... 440 2,715 1,873 1,410 2,583
------- ------- ------- ------- -------
Net income..................................... $ 947 $ 4,359 $ 3,045 $ 2,415 $ 1,209
======= ======= ======= ======= =======
Net income per share:
Basic........................................ $ 0.02 $ 0.10 $ 0.08 $ 0.07 $ 0.03
======= ======= ======= ======= =======
Diluted...................................... $ 0.02 $ 0.10 $ 0.07 $ 0.06 $ 0.03
======= ======= ======= ======= =======
Shares used in computing net income per share:
Basic........................................ 44,000 43,753 36,860 36,638 34,628
======= ======= ======= ======= =======
Diluted...................................... 44,000 43,753 44,938 42,424 46,029
======= ======= ======= ======= =======
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>
FINISAR CORPORATION
STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK,
REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE -----------------------------------
REDEEMABLE REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- -------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996................. -- $ -- -- $ -- 44,000,000 $ 95 $ --
Net income and comprehensive income..... -- -- -- -- -- -- --
----------- -------- ----------- ------- ----------- ------- --------
Balance at April 30, 1997................. -- -- -- -- 44,000,000 95 --
Contribution of shares by principal
shareholder........................... -- -- -- -- (2,200,000) -- --
Net income and comprehensive income..... -- -- -- -- -- -- --
----------- -------- ----------- ------- ----------- ------- --------
Balance at April 30, 1998................. -- -- -- -- 41,800,000 95 --
Stock options exercised................. -- -- -- -- 5,039,660 1,806 --
Issuance of preferred stock at $2.1932
per share, net of issuance costs of
$145.................................. 12,039,486 26,260 -- -- -- -- --
Repurchase of common stock at $2.1932
per share............................. -- -- -- -- (14,457,295) -- --
Deferred stock compensation............. -- -- -- -- -- 2,403 --
Amortization of deferred stock
compensation.......................... -- -- -- -- -- -- --
Net income and comprehensive income..... -- -- -- -- -- -- --
----------- -------- ----------- ------- ----------- ------- --------
Balance at April 30, 1999................. 12,039,486 26,260 -- -- 32,382,365 4,304 --
Reincorporation in State of Delaware
(unaudited)........................... -- -- -- -- -- (4,272) 4,272
Conversion of preferred stock
(unaudited)........................... (12,039,486) (26,260) 12,039,486 2,640 8,981,897 9 23,611
Issuance of common stock, net of
issuance costs of $1,076
(unaudited)........................... -- -- -- -- 8,605,233 9 150,969
Redemption of preferred stock
(unaudited)........................... -- -- (12,039,486) (2,640) -- -- --
Stock options exercised net of loans and
repurchase of unvested shares
(unaudited)........................... -- -- -- -- 1,283,933 1 2,451
Deferred stock compensation
(unaudited)........................... -- -- -- -- -- -- 12,959
Amortization of deferred stock
compensation (unaudited).............. -- -- -- -- -- -- --
Unrealized loss on short-term
investments (unaudited)............... -- -- -- -- -- -- --
Net income (unaudited).................. -- -- -- -- -- -- --
Comprehensive income (unaudited)........
----------- -------- ----------- ------- ----------- ------- --------
Balance at January 31, 2000 (unaudited)... -- $ -- -- $ -- 51,253,428 $ 51 $194,262
=========== ======== =========== ======= =========== ======= ========

<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------
NOTES ACCUMULATED RETAINED TOTAL
RECEIVABLE DEFERRED OTHER EARNINGS STOCKHOLDERS'
FROM STOCK COMPREHENSIVE (ACCUMULATED EQUITY
STOCKHOLDERS COMPENSATION INCOME DEFICIT) (DEFICIT)
------------ ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1996................. $ -- $ -- $ -- $ 1,046 $ 1,141
Net income and comprehensive income..... -- -- -- 947 947
------- -------- ---- -------- --------
Balance at April 30, 1997................. -- -- -- 1,993 2,088
Contribution of shares by principal
shareholder........................... -- -- -- -- --
Net income and comprehensive income..... -- -- -- 4,359 4,359
------- -------- ---- -------- --------
Balance at April 30, 1998................. -- -- -- 6,352 6,447
Stock options exercised................. (1,521) -- -- -- 285
Issuance of preferred stock at $2.1932
per share, net of issuance costs of
$145.................................. -- -- -- -- --
Repurchase of common stock at $2.1932
per share............................. -- -- -- (31,708) (31,708)
Deferred stock compensation............. -- (2,403) -- -- --
Amortization of deferred stock
compensation.......................... -- 428 -- -- 428
Net income and comprehensive income..... -- -- -- 3,045 3,045
------- -------- ---- -------- --------
Balance at April 30, 1999................. (1,521) (1,975) -- (22,311) (21,503)
Reincorporation in State of Delaware
(unaudited)........................... -- -- -- -- --
Conversion of preferred stock
(unaudited)........................... -- -- -- -- 23,620
Issuance of common stock, net of
issuance costs of $1,076
(unaudited)........................... -- -- -- -- 150,978
Redemption of preferred stock
(unaudited)........................... -- -- -- -- --
Stock options exercised net of loans and
repurchase of unvested shares
(unaudited)........................... (2,175) -- -- -- 277
Deferred stock compensation
(unaudited)........................... -- (12,959) -- -- --
Amortization of deferred stock
compensation (unaudited).............. -- 3,791 -- -- 3,791
Unrealized loss on short-term
investments (unaudited)............... -- -- (57) -- (57)
Net income (unaudited).................. -- -- -- 1,209 1,209
--------
Comprehensive income (unaudited)........ 1,152
------- -------- ---- -------- --------
Balance at January 31, 2000 (unaudited)... $(3,696) $(11,143) $(57) $(21,102) $158,315
======= ======== ==== ======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<PAGE>
FINISAR CORPORATION

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
APRIL 30, JANUARY 31,
------------------------------ -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 947 $ 4,359 $ 3,045 $ 2,415 $ 1,209
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization........................ 41 161 433 281 788
Amortization of deferred stock compensation.......... -- -- 428 219 3,791
Loss on fixed assets disposal........................ -- 30 237 -- --
Changes in operating assets and liabilities:
Accounts receivable.................................. (764) (1,584) (3,868) (3,829) (3,517)
Inventories.......................................... (505) (1,781) (2,505) (2,317) (9,851)
Other assets......................................... (1) 8 (490) (360) (315)
Deferred income taxes................................ -- (241) (660) -- --
Accounts payable..................................... (54) (179) 1,129 507 2,854
Accrued compensation................................. 21 55 1,383 1,017 759
Income tax payable................................... -- (298) 824 (301) (774)
Other accrued liabilities............................ 109 212 1,103 533 1,053
----- ------- -------- -------- --------
Net cash provided by (used in) operating activities.... (206) 742 1,059 (1,835) (4,003)
----- ------- -------- -------- --------
INVESTING ACTIVITIES
Purchases of property and equipment.................... (144) (855) (2,100) (1,352) (4,441)
Purchase of short-term investments..................... -- -- -- -- (67,816)
----- ------- -------- -------- --------
Net cash used in investing activities.................. (144) (855) (2,100) (1,352) (72,257)
----- ------- -------- -------- --------
FINANCING ACTIVITIES
Payments on capital lease obligations.................. -- (37) (39) (29) (28)
Proceeds from borrowings under bank note............... -- 500 11,015 11,015 --
Repayments of borrowings under bank note............... -- (50) (450) (450) (11,015)
Proceeds from exercise of stock options, net of loans
and repurchase of unvested shares.................... -- -- 285 396 277
Proceeds from issuance of common stock in initial
public offering, net of issue costs.................. -- -- -- -- 150,978
Proceeds from issuance of preferred stock.............. -- -- 26,260 26,260 --
Redemption of preferred stock.......................... -- -- -- -- (2,640)
Repurchase of common stock............................. -- -- (31,708) (31,708) --
----- ------- -------- -------- --------
Net cash provided by financing activities.............. -- 413 5,363 5,484 137,572
----- ------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents... (350) 300 4,322 2,297 61,312
Cash and cash equivalents at beginning of period....... 772 422 722 722 5,044
----- ------- -------- -------- --------
Cash and cash equivalents at end of period............. $ 422 $ 722 $ 5,044 $ 3,019 $ 66,356
===== ======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................... $ 2 $ 33 $ 364 $ 253 $ 510
===== ======= ======== ======== ========
Cash paid for taxes.................................. $ 440 $ 3,254 $ 1,710 $ 1,710 $ 3,352
===== ======= ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Acquisition of property, equipment and improvements
under capital lease obligations.................... $ 15 $ 132 $ -- $ -- $ --
===== ======= ======== ======== ========
Issuance of common stock in exchange for notes
receivable......................................... $ -- $ -- $ 1,521 $ 221 $ 2,175
===== ======= ======== ======== ========
Conversion of preferred stock to common stock........ $ -- $ -- $ -- $ -- $ 23,620
===== ======= ======== ======== ========
Deferred stock compensation related to options
granted............................................ $ -- $ -- $ 2,403 $ 1,033 $ 12,959
===== ======= ======== ======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

F-6
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Finisar Corporation ("Finisar" or the "Company") was incorporated in the
state of California on April 17, 1987. In November 1999, Finisar reincorporated
in the state of Delaware. Finisar designs, manufactures, and markets fiber optic
subsystems and network performance test systems for high-speed data
communications.

INTERIM FINANCIAL INFORMATION

The interim financial information at January 31, 2000 and for the 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 periods are not necessarily indicative of
the results to be expected for the entire year, or any future period.

FISCAL PERIODS

In fiscal 2000, the Company began to maintain its financial records on the
basis of a fiscal year ending on April 30, with fiscal quarters ending on the
Sunday closest to the end of the period (thirteen-week periods). For ease of
reference, all references to period end dates have been presented as though the
period ended on the last day of the 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, cash equivalents, short-term investments and accounts
receivable. Finisar places its cash, 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 32.3%
and 33.2% of the total balance at April 30, 1998; 33.8% and 16.0% of the total
balance at April 30, 1999 and three customers represented 27.1%, 16.8% and 12.2%
of the total balance at January 31, 2000, respectively. Generally, Finisar does
not require collateral or other security to support customer receivables.
Finisar performs periodic credit evaluations of its

F-7
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 fiscal 1997, 1998, and 1999, revenues from two customers represented
41.6% and 1.2%, and 43.9% and 14.6%, and 25.1% and 24.1% of total revenues,
respectively. During the first nine months of fiscal 1999 and 2000, sales to two
customers, each representing more than 10% of revenues, totaled 22.1% and 26.5%,
and 29.1% and 21.6% 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 31, 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 31, 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.

F-8
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS 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.

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

<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED APRIL 30, ENDED JANUARY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income........................................ $ 947 $4,359 $3,045 $2,415 $1,209
Historical:
Denominator for basic net income per share:
Weighted-average shares outstanding--basic........ 44,000 43,753 36,860 36,638 34,628
Effect of dilutive securities:
Employee stock options............................ -- -- 729 1,736 1,446
Stock subject to repurchase....................... -- -- 3,043 1,251 3,553
Convertible redeemable preferred stock............ -- -- 4,306 2,799 6,402
------ ------ ------ ------ ------
Dilutive potential common shares.................... -- -- 8,078 5,786 11,401
------ ------ ------ ------ ------
Denominator for diluted net income per share........ 44,000 43,753 44,938 42,424 46,029
====== ====== ====== ====== ======
Basic net income per share.......................... $ 0.02 $ 0.10 $ 0.08 $ 0.07 $ 0.03
====== ====== ====== ====== ======
Diluted net income per share........................ $ 0.02 $ 0.10 $ 0.07 $ 0.06 $ 0.03
====== ====== ====== ====== ======
</TABLE>

F-9
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME

Effective May 1, 1998, Finisar adopted Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). 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 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.

EFFECT OF NEW ACCOUNTING STATEMENTS

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

In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. Finisar is required to implement SOP 98-1 for the year ending April 30,
2000. Adoption of SOP 98-1 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 charge to results of
operations for the cumulative effect of the

F-10
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

RECLASSIFICATION

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

2. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999 JANUARY 31, 2000
-------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................... $1,546 $2,908 $ 7,929
Work-in-process....................................... 989 1,763 6,057
Finished goods........................................ 196 565 1,101
------ ------ -------
$2,731 $5,236 $15,087
====== ====== =======
</TABLE>

3. PROPERTY, EQUIPMENT AND IMPROVEMENTS

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

<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999 JANUARY 31, 2000
-------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................... $ 505 $ 840 $ 1,663
Office equipment, furniture, and fixtures............. 423 445 687
Machinery and equipment............................... 362 1,795 3,853
Leasehold improvements................................ -- -- 932
------ ------ -------
1,290 3,080 7,135
Accumulated depreciation and amortization............. (238) (598) (1,250)
------ ------ -------
Property and equipment, net........................... $1,052 $2,482 $ 5,885
====== ====== =======
</TABLE>

Finisar has financed $132,447 of equipment purchased under capital lease
arrangements as of April 30, 1998 and 1999 and January 31, 2000. Accumulated
amortization of assets acquired under capital leases was $13,777, $40,261 and
$60,124 at April 30, 1998 and 1999 and January 31, 2000, respectively.

F-11
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

4. COMMITMENTS

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

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASE
--------- --------
<S> <C> <C>
Fiscal years ending April 30:
2000........................................................ $ 349 $ 59
2001........................................................ 363 17
2002........................................................ 378 --
2003........................................................ 32 --
------ ----
Total minimum payments required............................. $1,122 76
======

Amount representing interest................................ (5)
----
Present value of future lease payments...................... 71
Current portion............................................. (54)
----
Long-term portion........................................... $ 17
====
</TABLE>

Rent expense was approximately $77,034, $412,000, $366,905 and $762,199 for
the years ended April 30, 1997, 1998, and 1999 and the nine months ended
January 31, 2000.

In August 1999, Finisar entered into a new facility operating lease. This
lease is non-cancellable and has a term of 7 years. Lease payments for the new
facility for fiscal years 2000, 2001, 2002, 2003, and thereafter are $960,141,
$1,470,216, $1,515,222, $1,560,229, and $5,520,810, respectively.

5. LOAN AGREEMENT

On November 4, 1998, Finisar borrowed the principal amount of $11,015,000
under a secured term loan agreement and entered into a secured revolving loan
facility for additional borrowings of up to $6,500,000. The term loan was repaid
in November 1999 with proceeds from the common stock offering (see Note 6). The
revolving loan facility expires in April 2003. No amounts were outstanding under
the revolving loan facility at April 30, 1999 or January 31, 2000. All business
assets have been pledged as collateral for borrowings under the term loan and
the revolving loan facility.

The outstanding borrowings under the term loan at April 30, 1999, were
repayable quarterly, commencing April 30, 2001. Annual required repayments were
$1,101,500, $3,304,500, and $6,609,000 in 2001, 2002, and 2003, respectively.
Interest is payable monthly on the outstanding principal amount of borrowings
under the term loan and the revolving loan facility at the effective prime or
LIBOR rate (7.04% at April 30, 1999). Finisar believes that as of April 30,
1999, the fair value of the term loan approximated its carrying value.

F-12
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

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

COMMON STOCK AND PREFERRED STOCK

Following the Company's reincorporation in November 1999, Finisar is
authorized to issue 200,000,000 shares of $0.001 par value common stock and
5,000,000 shares of $0.001 par value preferred stock. The board of directors has
the authority to issue the undesignated preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof. The
holder of each share of common stock has the right to one vote.

Common stock subject to future issuance is as follows:

<TABLE>
<CAPTION>
APRIL 30,
1999 JANUARY 31, 2000
---------- -----------------
(UNAUDITED)
<S> <C> <C>
Conversion of convertible redeemable preferred stock........ 8,981,897 --
Exercise of outstanding options............................. 1,486,540 1,957,152
Common stock available for grant under stock option plans... 6,535,000 4,725,855
Common stock reserved for issuance under the employee stock
purchase plan............................................. -- 250,000
---------- ---------
17,003,437 6,933,007
========== =========
</TABLE>

Effective November 11, 1999, the Company sold 9,305,000 shares in an initial
public offering of its common stock at a 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. Net proceeds of the offering to the Company after
deducting underwriting discounts and commissions, and other expenses aggregated
approximately $151.0 million.

To date, $11.0 million of the net proceeds have been used to repay bank
loans and another $2.6 million was used to redeem the Company's no par value,
redeemable preferred stock. The balance of the net proceeds will be used for
general corporate purposes, including working capital and capital expenditures.
The Company 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.

CONVERTIBLE REDEEMABLE PREFERRED STOCK

On November 6, 1998 and November 25, 1998, Finisar issued an aggregate of
12,039,486 shares of convertible redeemable preferred stock to investors at
$2.1932 per share, resulting in gross cash proceeds of $26,405,000. In
conjunction with the Company's initial public offering on November 11, 1999, the
convertible redeemable preferred shares were converted into 8,981,897 shares of
common

F-13
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
stock and 12,039,486 shares of redeemable preferred stock; the Company then paid
$2.6 million to redeem the redeemable preferred stock.

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

The holders of outstanding convertible redeemable preferred stock, voted as
a single class, and were entitled to appoint one director of Finisar. In all
other matters, each holder of convertible redeemable preferred stock had voting
rights based on the number of shares of common stock into which the preferred
stock was convertible.

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

REDEEMABLE PREFERRED STOCK

Holders of outstanding redeemable preferred stock were entitled to non
cumulative dividends at an annual rate equal to $0.0381 per share (adjusted for
stock splits and like events), in preference to holders of common stock as and
when declared by the board of directors. No dividends had been declared as of
April 30, 1999. In conjunction with the initial public offering on November 11,
1999, all outstanding convertible redeemable preferred shares were converted
into 8,981,987 shares of common stock and 12,034,486 shares of redeemable
preferred stock; the Company then paid $2.6 million to redeem the redeemable
preferred stock.

The holders of redeemable preferred stock had no voting rights.

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

1999 EMPLOYEE STOCK PURCHASE PLAN

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

F-14
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
November 30, 2000. In addition, a six-month offering period will generally
commence on June 1 of each year.

The employee stock purchase plan permits eligible employees to purchase
Finisar common stock through payroll deductions, which may not exceed 20% of the
employee's total compensation. Stock may be purchased under the plan at a price
equal to 85% of the fair market value of Finisar common stock on either the
first or the last day of the offering period, whichever is lower.

STOCK OPTION PLANS

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

During fiscal 1989 and 1999, Finisar adopted the 1989 and 1999 Stock Option
Plans (the "Plans"). Under the Plans, options to purchase common stock may be
granted at an exercise price of not less than 85% of the fair value of a share
of common stock on the date of grant (110% of the fair value in certain
instances) as determined by the board of directors. For purposes of determining
the fair market value of the common stock, the board of directors has considered
a number of factors including appraisals by independent third parties, the price
paid for convertible redeemable preferred stock in arms'-length transactions and
the illiquid nature of the common stock. Options generally vest over five years
and have a maximum term of 10 years. All options granted under the Plans are
immediately exercisable. As of April 30, 1999, 3,043,080 shares issued upon
exercise of options are subject to repurchase (3,773,573 shares at January 31,
2000).

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

F-15
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

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

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
OPTIONS AVAILABLE NUMBER OF WEIGHTED-AVERAGE
FOR GRANT SHARES PRICE PER SHARE EXERCISE PRICE
----------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance at April 30, 1996............ 18,430,800 7,269,200 $0.0027-$0.02 $0.0033
Options granted...................... (442,000) 442,000 $0.05 $ 0.05
Options canceled..................... 7,000,000 (7,000,000) $0.0027 $0.0027
----------- ---------- ------------- -------
Balance at April 30, 1997............ 24,988,800 711,200 $0.0125-$0.05 $ 0.038
Options granted...................... (2,937,000) 2,937,000 $0.13 $ 0.13
Options canceled..................... 22,000 (22,000) $0.05 $ 0.05
----------- ---------- ------------- -------
Balance at April 30, 1998............ 22,073,800 3,626,200 $0.0125-$0.13 $0.1125
Decrease in authorized shares........ (12,638,800) -- -- --
Options granted...................... (2,900,000) 2,900,000 $0.15-$1.31 $0.7029
Options exercised.................... -- (5,039,660) $0.0125-$1.31 $0.3593
----------- ---------- ------------- -------
Balance at April 30, 1999............ 6,535,000 1,486,540 $0.05-$1.31 $0.5693
Options granted (unaudited).......... (1,817,820) 1,817,820 $1.41-$19.00 $6.3428
Options exercised (unaudited)........ -- (1,292,533) $0.05-$10.20 $1.7815
Options canceled (unaudited)......... 8,675 (54,675) $0.05-$19.00 $3.0256
----------- ---------- ------------- -------
Balance at January 31, 2000
(unaudited)........................ 4,725,855 1,957,152 $0.05-$19.00 $5.0626
=========== ========== ============= =======
</TABLE>

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

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

RESTRICTED SHARES ISSUED FOR PROMISSORY NOTES

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

F-16
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

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

DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options to employees, Finisar
recorded deferred stock compensation of $2.4 million during fiscal 1999 and
$13.0 million (unaudited) 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 stock compensation expense which Finisar has recorded and the
amortization it has recorded and expects to record in 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 (unaudited)............... -- 287
Second quarter ended October 31, 1999 (unaudited)........... 12,959 1,723
Third quarter ended January 31, 2000 (unaudited)............ -- 1,781
Fourth quarter ending April 30, 2000 (unaudited)............ -- 1,740
Fiscal year ending April 30, 2001 (unaudited)............... -- 4,427
Fiscal year ending April 30, 2002 (unaudited)............... -- 2,659
Fiscal year ending April 30, 2003 (unaudited)............... -- 1,467
Fiscal year ending April 30, 2004 (unaudited)............... -- 715
Fiscal year ending April 30, 2005 (unaudited)............... -- 135
------- -------
Total (unaudited)......................................... $15,362 $15,362
======= =======
</TABLE>

ACCOUNTING FOR STOCK-BASED COMPENSATION

Pro forma information regarding net income is required by SFAS 123 as if
Finisar had accounted for its employee stock options granted subsequent to
April 30, 1995 under the fair value method of SFAS 123. The fair value for
Finisar's stock option grants was estimated at the date of grant using the
minimum value option valuation model. The minimum value option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions. Because
Finisar's stock-based awards have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock-based awards. The fair value of these options was estimated
at the

F-17
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

6. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
date of grant using the minimum value method option pricing model with the
following weighted-average assumptions for fiscal years 1997, 1998, and 1999:
risk-free interest rates of 6% for 1997 and 1998 and 5.5% for 1999; a dividend
yield of 0%; and a weighted-average expected life of the option of four years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Finisar
Corporation's pro forma information is as follows (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income:
As reported............................................... $ 947 $4,359 $3,045
===== ====== ======
Pro forma................................................. $ 947 $4,333 $3,000
===== ====== ======
Basic net income per share:
As reported............................................... $0.02 $ 0.10 $ 0.08
===== ====== ======
Pro forma................................................. $0.02 $ 0.10 $ 0.07
===== ====== ======
Diluted net income per share:
As reported............................................... $0.02 $ 0.10 $ 0.07
===== ====== ======
Pro forma................................................. $0.02 $ 0.10 $ 0.06
===== ====== ======
</TABLE>

7. INCOME TAXES

Finisar's provision for income taxes consists of the following (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................... $ 423 $2,391 $1,995
State..................................................... 123 565 538
----- ------ ------
546 2,956 2,533
----- ------ ------

Deferred:
Federal................................................... (82) (226) (508)
State..................................................... (24) (15) (152)
----- ------ ------
(106) (241) (660)
----- ------ ------
Provision for income taxes.................................. $ 440 $2,715 $1,873
===== ====== ======
</TABLE>

F-18
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

7. INCOME TAXES (CONTINUED)
Finisar's provision for income taxes differs from the amount computed by
applying the federal statutory rate to income taxes as follows:

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

Significant components of Finisar's deferred federal and state income taxes
are as follows (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory reserve......................................... $165 $ 503
Accruals not currently deductible......................... 235 679
---- ------
Total deferred tax assets................................... 400 1,182
Deferred tax liabilities:
Tax depreciation over book depreciation................... (13) (135)
---- ------
Net deferred tax assets..................................... $387 $1,047
==== ======
</TABLE>

8. SEGMENTS AND GEOGRAPHIC INFORMATION

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

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------ NINE MONTHS ENDED
1997 1998 1999 JANUARY 31, 2000
-------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues from sales to unaffiliated customers:
United States.................................. $4,676 $ 9,877 $24,822 $30,276
Canada......................................... 3,574 9,695 8,941 13,829
Rest of the World.............................. 207 2,495 1,708 2,361
------ ------- ------- -------
$8,457 $22,067 $35,471 $46,466
====== ======= ======= =======
</TABLE>

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

F-19
<PAGE>
FINISAR CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE NINE MONTH PERIODS ENDED
JANUARY 31, 2000 AND 1999 IS UNAUDITED)

9. PENDING LITIGATION

In April 1999, Methode Electronics, a manufacturer of electronic component
devices, filed a lawsuit against Finisar and another manufacturer,
Hewlett-Packard Co., in the United States District Court for the Northern
District of Illinois alleging that our optoelectronic products infringe four
patents held by Methode. The original complaint sought monetary damages and
injunctive relief. In July 1999, the Company and Hewlett-Packard filed a motion,
which was opposed by Methode, to transfer the case to the United States District
Court for the Northern District of California. In August 1999, the Court granted
the Company's motion. 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 Finisar breached its obligations under a license and supply
agreement with Methode by failing to provide Methode with unspecified
information regarding new technology related to the products licensed under the
agreement. The amended complaint seeks compensatory damages of at least
$224.3 million plus interest for the alleged breach of contract. Methode has
also notified the Company that it intends to file another amended complaint
alleging infringement of a sixth Methode patent.

Based on consultation with counsel, it is the Company's position that the
Methode patents are invalid, unenforceable and/or not infringed by its products.
The United States Patent and Trademark Office has determined that all of the
claims asserted by Methode in one of the patents are invalid, although this
determination is not final and is subject to further administrative review. The
Company also believes, based on consultation with counsel, that the breach of
contract claim that Methode seeks to include in the amended complaint is without
merit and that, in any event, the amended complaint grossly overstates the
amount of damages that Methode could possibly have suffered as a result of any
such breach. The Company believes that it has strong defenses against Methode's
lawsuit. In addition, the Company has filed a counterclaim against Methode
asserting, among other things, that one of Finisar's founders, Frank H.
Levinson, is the primary inventor of the technology that is the subject of all
five patents, that Methode improperly obtained the patents based on the
Company's disclosure of the technology to Methode and that Finisar is the
rightful owner or co-owner of the patents.

Finisar intends to defend Methode's lawsuit and pursue the counterclaim
vigorously. However, the litigation is in the preliminary stage, and its outcome
cannot be predicted with certainty. The litigation process is inherently
uncertain. Patent litigation is particularly complex and can extend for a
protracted time, which can substantially increase the cost of such litigation.
In connection with the Methode litigation, the Company has incurred, and expects
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 the Company's key management and technical personnel.
As a result, the Company's 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 Finisar, the
Company could be required to pay significant monetary damages to Methode and
could be enjoined from selling those products found to infringe Methode's
patents unless and until the Company is able to negotiate a license from
Methode. In the event the Company obtains a license from Methode, the Company
would likely be required to make royalty payments with respect to sales of
products covered by the license. Any such payments would increase the Company's
cost of revenues and reduce gross profit. If Finisar is required to pay
significant monetary damages, is enjoined from selling any of its products or is
required to make substantial royalty payments pursuant to any such license
agreement, Finisar's business would be significantly harmed.

F-20
<PAGE>
[INSIDE BACK COVER]

[FINISAR LOGO]

FIBER OPTIC SOLUTIONS FOR GIGABIT NETWORKING

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

7,000,000 SHARES

[FINISAR LOGO]

COMMON STOCK

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

P R O S P E C T U S

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CIBC WORLD MARKETS
DAIN RAUSCHER WESSELS
A.G. EDWARDS & SONS, INC.
MORGAN KEEGAN & COMPANY, INC.
WIT SOUNDVIEW
AMERITRADE

, 2000

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

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

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $261,002
NASD filing fee............................................. 32,500
Nasdaq National Market application fee...................... 17,500
Blue sky qualification fees and expenses.................... 10,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 150,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 18,998
--------
Total..................................................... $800,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

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

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

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

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

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

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

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

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

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

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

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS.

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.11 Building Office Lease for 582 Market Street, Suite 609-610,
San Francisco, CA, dated December 17, 1996 between
Registrant and Niantic Corporation (1)
10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA,
dated April 30, 1997 between Registrant and DM Group VIII
and DM Group VIII-E (1)
10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA,
dated May 26, 1999 between Registrant and Aetna Life
Insurance Company (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1)
**24.1 Power of Attorney
27.1 Financial Data Schedule (2)
</TABLE>

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

(1) Incorporated by reference to the same numbered exhibit to Registrant's
Registration Statement on Form S-1 (File No. 333-87017).

(2) Incorporated by reference to the same numbered exhibit to Registrant's
Quarterly Report on Form 10-Q filed March 10, 2000.

* To be filed by amendment.

** Previously filed.

(B) FINANCIAL STATEMENT SCHEDULES.

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

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

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

ITEM 17. UNDERTAKINGS

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

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

II-3
<PAGE>
The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and

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

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Sunnyvale, State of
California, on March 21, 2000

<TABLE>
<S> <C> <C>
FINISAR CORPORATION

BY: /S/ JERRY S. RAWLS
-----------------------------------------
Jerry S. Rawls
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JERRY S. RAWLS President and Chief Executive March 21, 2000
---------------------------------------- Officer (PRINCIPAL
Jerry S. Rawls EXECUTIVE OFFICER)

/s/ FRANK H. LEVINSON* Chairman of the Board and March 21, 2000
---------------------------------------- Chief Technical Officer
Frank H. Levinson

Vice President, Finance, March 21, 2000
/s/ STEPHEN K. WORKMAN Chief Financial Officer and
---------------------------------------- Secretary (PRINCIPAL
Stephen K. Workman FINANCIAL AND ACCOUNTING
OFFICER)

/s/ MICHAEL C. CHILD* Director March 21, 2000
----------------------------------------
Michael C. Child

/s/ ROGER C. FERGUSON* Director March 21, 2000
----------------------------------------
Roger C. Ferguson

/s/ RICHARD B. LIEB* Director March 21, 2000
----------------------------------------
Richard B. Lieb

/s/ LARRY D. MITCHELL* Director March 21, 2000
----------------------------------------
Larry D. Mitchell
</TABLE>

<TABLE>
<S> <C> <C> <C>
*By: /s/ JERRY S. RAWLS
--------------------------------------
Jerry S. Rawls
ATTORNEY-IN-FACT
</TABLE>

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

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

S-1
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
*1.1 Form of Purchase Agreement
3.4 Bylaws of Registrant (1)
3.5 Restated Certificate of Incorporation of Registrant (1)
4.1 Specimen certificate representing the common stock (1)
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP
10.1 Form of Indemnity Agreement between Registrant and
Registrant's directors and officers (1)
10.2 1989 Stock Option Plan (1)
10.3 1999 Stock Option Plan (1)
10.4 1999 Employee Stock Purchase Plan (1)
10.5 Securities Purchase Agreement between Registrant and certain
investors, dated as of November 6, 1998 (1)
10.6 Shareholders' Agreement among Registrant and certain of its
shareholders, dated as of November 6, 1998 (1)
10.7 Voting Agreement among Registrant and certain of its
shareholders, dated as of November 6, 1998 (1)
10.8 Loan Agreement between Registrant and Fleet National Bank,
dated as of November 6, 1998 (1)
10.9 Security Agreement between Registrant and Fleet National
Bank, dated as of November 4, 1998 (1)
10.10 Security Agreement Re: Contracts, Leases, License and
Permits between Registrant and Fleet National Bank, dated as
of November 4, 1998 (1)
10.11 Building Office Lease for 582 Market Street, Suite 609-610,
San Francisco, CA, dated December 17, 1996 between
Registrant and Niantic Corporation (1)
10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA,
dated April 30, 1997 between Registrant and DM Group VIII
and DM Group VIII-E (1)
10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA,
dated May 26, 1999 between Registrant and Aetna Life
Insurance Company (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1)
**24.1 Power of Attorney
27.1 Financial Data Schedule (2)
</TABLE>

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

(1) Incorporated by reference to the same numbered exhibit to Registrant's
Registration Statement on Form S-1 (File No. 333-87017).

(2) Incorporated by reference to the same numbered exhibit to Registrant's
Quarterly Report on Form 10-Q filed March 10, 2000.

* To be filed by amendment.

** Previously filed.

<PAGE>
EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 25, 1999 in Amendment No. 1 to the Registration
Statement (Form S-1 No. 333-32620) and related Prospectus of Finisar Corporation
for the registration of 8,050,000 shares of its common stock.

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

/s/ ERNST & YOUNG LLP

Palo Alto, California
March 21, 2000