FINISAR CORP, 10-Q, 2000-12-13

FINISAR CORP
10-Q, 2000-12-13
SEMICONDUCTORS & RELATED DEVICES

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

FORM 10-Q
Mark one

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________ to ________

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

<TABLE>
<S> <C> <C>
DELAWARE 000-27999 94-3038428
(State or other jurisdiction of incorporation or (Commission File No.) (I.R.S. Employer Identification No.)
organization)
</TABLE>

1308 Moffett Park Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 408-548-1000

-----------

COMMON STOCK, $.001 PAR VALUE
(Title of Class)

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

At October 31, 2000 there were 169,497,374 shares of the registrant's
common stock, $.001 par value, issued and outstanding.
================================================================================

<PAGE>

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2000

<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Balance Sheets as of October 31, 2000 and April 30, 2000.......................... 3
Statements of Operations for the fiscal quarter and six months ended October 31,
2000 and October 31, 1999.......................................................... 4
Statements of Cash Flows for the six months ended October 31, 2000 and October 31,
1999............................................................................... 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................... 29

PART II OTHER INFORMATION PAGE
----
Item 1. Legal Proceedings....................................................................... 30
Item 6. Exhibits and Reports on Form 8-K........................................................ 30
Signatures........................................................................................... 31
Index to Exhibits.................................................................................... 32
</TABLE>

2
<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
----------- ---------
2000 2000
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 75,872 $171,194
Short-term investments.......................................... 193,360 149,541
Accounts receivable - trade (net) .............................. 29,615 14,348
Accounts receivable, other...................................... 5,514 151
Inventories..................................................... 36,582 16,494
Income tax receivable........................................... 1,539 148
Deferred income taxes........................................... 2,384 2,653
Prepaid expenses................................................ 636 278
-------------- -------------
Total current assets............................................... 345,502 354,807
Property, equipment and improvements, net.......................... 20,914 9,426
Purchased intangible assets........................................ 60,638 -
Goodwill........................................................... 286,121 -
Other assets....................................................... 13,007 809
-------------- -------------
Total assets....................................................... $726,182 $365,042
============== =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $16,053 $5,908
Accrued compensation............................................ 4,339 3,001
Other accrued liabilities....................................... 11,894 3,065
Income tax payable.............................................. - 122
Short-term debt................................................. 633 -
-------------- -------------
Total current liabilities.......................................... 32,919 12,096
-------------- -------------
Long-term liabilities:
Deferred Tax Liability.......................................... 28,048 -
Long-term debt.................................................. 1,493 -
Other long-term liabilities..................................... 893 524
-------------- -------------
Total long-term liabilities........................................ 30,434 524
-------------- -------------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued or outstanding at April 30, 2000 and
October 31, 2000............................................ - -
Common stock:
$0.001 par value, 200,000,000 shares authorized: 159,842,784
and 169,497,374 shares issued and outstanding at April 30,
2000 and October 31, 2000 respectively..................... 169 160
Additional paid-in capital...................................... 718,849 384,526
Notes receivable from stockholders.............................. (2,394) (3,248)
Deferred stock compensation..................................... (15,266) (9,404)
Accumulated other comprehensive income (loss)................... 162 (182)
Accumulated deficit............................................. (38,691) (19,430)
-------------- -------------
Total stockholders' equity......................................... 662,829 352,422
-------------- -------------

Total liabilities and stockholders' equity......................... $726,182 $365,042
============== =============
</TABLE>

SEE ACCOMPANYING NOTES.

3
<PAGE>

FINISAR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 31, SIX MONTHS ENDED OCTOBER 31,
------------------------------ ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................................... $ 44,528 $16,077 $ 71,740 $ 29,956
Cost of revenues................................... 26,028 7,878 42,499 14,130
Amortization of acquired developed technology...... 916 - 916 -
------------ ------------- -------------- ----------
Gross profit....................................... 17,584 8,199 28,325 15,826
------------ ------------- -------------- ----------

Operating expenses:
Research and development........................ 6,320 3,333 10,634 6,173
Sales and marketing............................. 3,693 1,895 6,200 3,437
General and administrative...................... 1,722 864 3,107 1,623
Amortization of deferred stock compensation..... 1,183 1,723 2,882 2,010
In-process research and development............. 23,027 - 23,027 -
Amortization of acquired intangibles............ 5,002 - 5,002 -
Other acquisition compensation.................. 554 - 554 -
------------ ------------- -------------- ----------
Total operating expenses........................... 41,501 7,815 51,406 13,243
------------ ------------- -------------- ----------
Income (loss) from operations...................... (23,917) 384 (23,081) 2,583
Interest income (expense), net..................... 4,055 ( 84) 8,500 (173)
Other non-operating income (expense), net.......... (21) (28) (43) (56)
------------ ------------- -------------- ----------
Income (loss) before income taxes.................. (19,883) 272 (14,624) 2,354
Provision for income taxes......................... 2,601 659 4,637 1,488
------------ ------------- -------------- ----------
Net income (loss).................................. $(22,484) $ (387) $(19,261) $ 866
============ ============= ============== ==========

Net income (loss) per share:
Basic........................................... $ (0.15) $ 0.00 $ (0.13) $ 0.01
============ ============= ============== ==========
Diluted......................................... $ (0.15) $ 0.00 $ (0.13) $ 0.01
============ ============= ============== ==========

Shares used in computing net income (loss)
per share:
Basic........................................... 154,313 88,650 152,115 88,521
============ ============= ============== ==========
Diluted......................................... 154,313 88,650 152,115 129,087
============ ============= ============== ==========
----------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES.

4
<PAGE>

FINISAR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $(19,261) $ 866
Adjustments to reconcile net income to net cash from
operating activities:
Amortization of deferred stock compensation.......... 2,882 2,010
Depreciation and amortization........................ 1,592 404
Acquired in-process research and development......... 23,027 -
Amortization of acquired intangibles................. 5,918 -
Tax benefit on employee stock options................ 2,645 -
Changes in operating assets and liabilities:
Accounts receivable.................................. (12,465) (845)
Inventories.......................................... (18,473) (5,626)
Other assets......................................... (6,228) (622)
Accounts payable..................................... 8,641 2,048
Accrued compensation................................. 1,111 281
Income tax payable................................... (122) 428
Other accrued liabilities............................ 2,239 1,268
Other liabilities.................................... 237 -
-------------- --------------
Net cash provided by (used in) operating activities..... (8,257) 212
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................... (8,616) (2,317)
Purchase of short-term investments...................... (43,475) -
Acquisition of business, net of cash acquired .......... (25,685) -
Other Investments....................................... (11,282) -
--------------------------------
Net cash used in investing activities................... (89,058) (2,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations................... - (28)
Repayments of borrowings................................ (531) -
Proceeds from exercise of stock options, net of loans,
repurchase of unvested shares, and stock purchase
plan................................................. 2,524 251
-------------- --------------
Net cash provided by financing activities............... 1,993 223
-------------- --------------
Net decrease in cash and cash equivalents............... (95,322) (1,882)
Cash and cash equivalents at beginning of period........ 171,194 5,044
-------------- --------------
Cash and cash equivalents at end of period.............. $ 75,872 $ 3,162
============== ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ 20 $ 387
============== ==============

Cash paid for taxes.................................. $ 4,070 $ 1,060
============== ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock in exchange for notes
receivable........................................ $ 151 $ 2,036
============== ==============
Issuance of common stock and assumption of options
in acquisition of Sensors Unlimited, Inc.......... $ 330,017 $ 2,036
============== ==============
</TABLE>

SEE ACCOMPANYING NOTES.

5
<PAGE>

FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

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

INTERIM FINANCIAL INFORMATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
as of October 31, 2000, and for the three and six months ended October 30, 2000
and 1999, have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial statements and pursuant to
the rules and regulations of the Securities and Exchange Commission, and include
the accounts of Finisar Corporation and its wholly-owned subsidiaries
(collectively "Finisar" or the "Company"). Intercompany accounts and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of management,
the unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position at October 31, 2000 and the
operating results and cash flows for the three and six months ended October 31,
2000 and 1999. These unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
and notes for the year ended April 30, 2000.

The balance sheet at April 30, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

FISCAL PERIODS

The Company maintains 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 and
the first two quarters of fiscal 2001 ended on July 30, 2000 and October 29,
2000 respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 AND WARRANTY 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 24.7% and 12.5% of the total balance at April 30, 2000 and two
customers represented 16.7% and 17.2% of the total balance at October 31, 2000,
respectively. Generally, Finisar does not require collateral or other security
to support customer receivables. Finisar performs

6
<PAGE>

periodic credit evaluations of its customers and maintains an allowance for
potential credit losses based on historical experience and other information
available to management. Losses to date have been within management's
expectations.

CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS

Finisar sells products primarily to customers located in North America.
During the six months ended October 31, 1999, revenues from two customers
represented 34.7% and 20.4% and during the six months ended October 31, 2000
revenues from three customers represented 19.8%, 17.8% and 11.3% of net
revenues.

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 and highly
liquid short-term investments 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 October 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 September 29, 2003.
The difference between market value and cost of these securities at October 31,
2000 was a gain of $310,014 or $161,984 on an after-tax basis and at April 30,
2000 was a loss of $302,608 or $182,065 on an after tax basis.

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.

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 (LOSS) PER SHARE

Basic and diluted net income (loss) 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.

7
<PAGE>

Effective April 12, 2000, the Company's Board of Directors approved a
three-for-one stock split in the form of a stock dividend. Accordingly, all
share and per-share data for all prior periods presented have been restated to
reflect this event.

Basic net income (loss) per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted net income (loss) per share has been computed using the weighted-average
number of shares of common stock and dilutive potential common shares from
options (under the treasury stock method) and convertible redeemable preferred
stock (on an if-converted basis) outstanding during the period.

COMPREHENSIVE INCOME

Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes
rules for reporting and display of comprehensive income and its components. SFAS
130 requires unrealized gains or losses on the Company's available-for-sale
securities to be included in comprehensive income. The amount of the change in
net unrealized gain on available-for-sale securities in the six months ended
October 31, 2000 was $612,622 or $344,049 on an after-tax basis.

SEGMENT REPORTING

Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("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 Company
has determined that it operates only in one segment.

EFFECT OF NEW ACCOUNTING STANDARDS

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 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 change. This amount, if recognized,
would be recorded as deferred revenue and recognized as revenue in future
periods. Prior financial statements would not be restated.

2. NET INCOME (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31, SIX MONTHS ENDED OCTOBER 31,
------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)....................................... $ (22,484) $ (387) $ (19,261) $ 866
============== ============= =============== ============
Historical:
Denominator for basic net income (loss) per share:
Weighted-average shares outstanding-total............... 166,109 99,951 163,031 98,119
Weighted-average shares outstanding-subject to
repurchase........................................... (8,741) (12,349) (9,405) (9,588)
Weighted-average shares outstanding-performance shares.. (3,055) (26,943) (1,511) -
-------------- ------------- --------------- ------------
Weighted-average shares outstanding-basic............... 154,313 88,650 152,115 88,521
-------------- ------------- --------------- ------------
Effect of dilutive securities:
Employee stock options.................................. - - - 4,035
Stock subject to repurchase............................. - - - 9,588
Convertible redeemable preferred stock.................. - - - 26,943
-------------- ------------- --------------- ------------
Dilutive potential common shares........................... - - - 40,566
-------------- ------------- --------------- ------------
Denominator for diluted net income (loss) per share........ 154,313 88,650 152,115 129,087
============== ============= =============== ============
Basic net income (loss) per share.......................... $ (0.15) $ 0.00 $ (0.13) $ 0.01
============== ============= =============== ============
Diluted net income (loss) per share........................ $ (0.15) $ 0.00 $ (0.13) $ 0.01
============== ============= =============== ============

Common stock equivalents related to potentially dilutive
securities excluded from computation because they
are anti-dilutive:
Employee stock options.................................. 6,171 3,520 5,707 -
Stock subject to repurchase............................. 8,741 11,301 9,405 -
Convertible redeemable preferred stock.................. - 26,943 - -
-------------- ------------- --------------- ------------
14,912 41,764 15,112 -
============== ============= =============== ============
</TABLE>

8
<PAGE>

3. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
2000 2000
------------ -----------
<S> <C> <C>
Raw materials........................................................... $23,598 $8,960
Work-in-process......................................................... 11,363 6,524
Finished goods.......................................................... 1,621 1,010
------------ -----------
$36,582 $16,494
============ ===========
</TABLE>

4. PROPERTY, EQUIPMENT AND IMPROVEMENTS

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

<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
2000 2000
------------- -----------
<S> <C> <C>
Computer equipment...................................................... $ 2,702 $ 2,603
Office equipment, furniture, and fixtures............................... 3,292 833
Machinery and equipment................................................. 16,315 6,144
Leasehold improvements.................................................. 3,155 1,470
------------- -----------
25,464 11,050
Accumulated depreciation and amortization............................... (4,550) (1,624)
------------- -----------
Property and equipment, net............................................. $20,914 $ 9,426
============= ===========
</TABLE>

5. INCOME TAXES

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

6. DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options to employees,
Finisar recorded deferred stock compensation of $2.4 million during fiscal 1999
and $13.0 million during fiscal 2000 prior to the Company's initial public
offering, 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. In addition, the Company recorded an additional $8.7 million
in deferred compensation in conjunction with the assumption of certain stock
options in the acquisition of Sensors Unlimited, Inc. Deferred stock
compensation is presented as a reduction of stockholders' equity, with graded
amortization recorded over a five year vesting period. The amortization expense
relates to options awarded to

9
<PAGE>

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 DEFERRED
STOCK STOCK
COMPENSATION- COMPENSATION- AMORTIZATION
PRIOR TO IPO ACQUISITIONS EXPENSE
---------------------------------------------
<S> <C> <C> <C>
Fiscal year ended April 30, 1999.................................... $ 2,403 $ - $ 428
Fiscal year ended April 30, 2000.................................... 12,959 - 5,530
First quarter ended July 31, 2000 (unaudited) ...................... - - 1,699
Second quarter ended October 31, 2000 (unaudited) .................. - 8,744 1,183
Third quarter ending January 31, 2001 (unaudited) .................. - - 1,630
Fourth quarter ending April 30, 2001(unaudited)..................... - - 1,617
Fiscal year ending April 30, 2002(unaudited)........................ - - 5,573
Fiscal year ending April 30, 2003(unaudited)........................ - - 4,381
Fiscal year ending April 30, 2004(unaudited)........................ - - 1,930
Fiscal year ending April 30, 2005(unaudited)........................ - - 135
---------------------------------------------
Total............................................................ $15,362 $8,744 $24,106
=============================================
</TABLE>

7. ACQUISITION OF SENSORS UNLIMITED, INC.

On August 16, 2000 Finisar and Sensors Unlimited, Inc. ("Sensors")
entered into an Agreement and Plan of Reorganization (the "Agreement") pursuant
to which Finisar effectively acquired Sensors. The transaction closed on October
17, 2000. For convenience, Finisar designated September 30, 2000 as the
acquisition date for accounting purposes and, accordingly, the accompanying
financial statements include the results of operations of Sensors subsequent to
September 30, 2000.

Pursuant to the Agreement, Finisar issued 18,962,141 shares of
common stock in exchange for the outstanding shares of Sensors common stock.
In addition, Finisar assumed options to purchase Sensors common stock and
reserved 381,417 shares of Finisar common stock for issuance upon the
exercise of the assumed options. At the closing of the merger transaction,
the assumed Sensors options converted into Finisar options and vested to the
extent of the greater of (i) 25% of the total number of shares subject to the
option or (ii) the vested percentage of the Sensors option at the closing of
the merger transaction, up to a maximum of 50% of the total number of shares
subject to the option. The unvested portion of each assumed option will vest
in three approximately equal annual installments on each of the first three
anniversaries of the date of closing of the transaction, subject to the
option holder's continued service with Finisar or a subsidiary.

At the closing of the transaction, certificates representing 9,481,109
shares of Finisar common stock where issued to the former stockholders of
Sensors (the "Initial Consideration") and 9,481,032 shares of common stock, or
one-half of the shares issued pursuant to the transaction, were deposited into
escrow with U.S. Bank Trust, National Association (the "Deferred
Consideration"). One-third of the shares deposited in escrow will be released on
each of the first three anniversaries of October 17, 2000, the closing date,
subject to the achievement of certain development milestones. If the milestones
are not achieved, the escrow shares will be cancelled and returned to the status
of authorized but unissued shares. Further, one-third of the escrow shares that
would otherwise be delivered to the principal shareholders of Sensors on the
third anniversary of the closing of the transaction will be subject to claims
for indemnification by Finisar under the Agreement and the procedures specified
in the escrow agreement. Those shares will remain in escrow until all pending
claims for indemnification have been resolved.

In addition to the Initial Consideration and Deferred Consideration, on
each of the first three anniversaries of the closing of the transaction, Finisar
will issue and deliver to the former shareholders of Sensors, on a pro rata
basis, additional shares of Finisar common stock (valued on the basis of the
average closing trading price per share of such stock on the Nasdaq National
Market for the ten trading days preceding the applicable payment date) (the
"Additional Consideration"). These shares of Finisar common stock, with an
estimated value of $48 million, will be distributed as follows:

- If on the first anniversary of the closing of the transaction, at
least 75% of the key management and technical employees originally
employed by Sensors, or equivalent replacement employees, are then

10
<PAGE>

employed by Finisar, Finisar will issue and deliver Finisar shares
having an aggregate value of $2.375 multiplied by the total number of
shares initially deposited in escrow, rounded to the nearest whole
share;

- If on the second anniversary of the closing of the transaction, at
least 65% of the key Sensors employees, or equivalent replacement
employees, are then employed by Finisar, Finisar will issue and deliver
Finisar shares having an aggregate value of $1.58333 multiplied by the
total number of escrow shares, rounded to the nearest whole share; and

- If on the third anniversary of the closing of the transaction, at
least 50% of the key Sensors employees, or equivalent replacement
employees, are then employed by Finisar, and if prior to that date all
six development milestones set forth in the Agreement have been
achieved, Finisar will issue Finisar shares having an aggregate value
of $0.79167 multiplied by the total number of escrow shares, rounded
to the nearest whole share.

Only the Initial Consideration has been recorded for accounting
purposes since the payment of the Deferred and Additional Consideration is
contingent upon future events that are not assured of occurring beyond a
reasonable doubt. The Deferred Consideration, if any, will be recorded as
additional purchase cost at the then current market price of the common stock
when the milestones are attained. The Additional Consideration, if any, will be
recorded as additional purchase cost at the then current market price of common
stock on the first, second and third anniversaries of closing. Accordingly,
Finisar's initial cost to acquire Sensors is calculated to be $356,128,000 using
a Finisar common stock price of $33.47, which is the average of the closing
market prices of Finisar's common shares for a period from three days before
through three days after August 16, 2000, the day the transaction was announced.
The fair value of the options of $12.7 million, as well as estimated direct
transaction expenses of $26.1 million, have been included as a part of the total
purchase cost. Sensors currently operates as a wholly-owned subsidiary of
Finisar.

The costs to acquire Sensors have been allocated to the assets acquired
and liabilities assumed according to their respective fair values, with the
excess purchase price being allocated to goodwill. The fair value of the
acquired assets and liabilities is based upon an independent valuation.

The estimated total initial purchase cost of Sensors is as follows (in
thousands):

<TABLE>
<S> <C>
Value of securities issued.............................................. $317,342
Assumption of Sensors common stock options.............................. 12,675
Estimated transaction costs and expenses................................ 26,111
------------
$356,128
============
</TABLE>

The preliminary purchase price allocation as of September 30, 2000 is
as follows (in thousands):

<TABLE>
<CAPTION>
Annual
Useful Life Amortization of
Amount in Years Intangibles
-------------------------------------------------------
<S> <C> <C> <C>
Net tangible assets (liabilities) of Sensors $ (140) $ 10,986
Intangible assets acquired:
Developed technology 54,930 5 $ 10,986
In-process research and development 23,027 N/A N/A
Assembled workforce 1,539 3 513
Customer base 1,901 3 634
Tradename 3,336 5 667
Deferred compensation 8,744 3 2,915
Goodwill 290,971 5 58,194
Deferred income tax (28,180) 3-5 (6,286)
------------------- --------------------
Total preliminary purchase price allocation $ 356,128 $ 67,623
=================== ====================
</TABLE>

11
<PAGE>

An independent valuation specialist performed an allocation of the
total purchase price of Sensors to its individual assets. The purchase price was
allocated to Sensors' tangible assets, specific intangible assets such as
assembled workforce, customer base, tradename, and developed technology and to
in-process research and development.

The acquired developed technology, which is comprised of products that
are already technologically feasible, mainly includes optical components that
monitor the performance of dense wavelength division multiplexing networks.
Sensors' technology enables telecommunications companies to optimize the use of
existing bandwidth in fiber optic networks. Finisar will amortize the acquired
developed technology of approximately $54.9 million on a straight-line basis
over an average estimated remaining useful life of five years.

The acquired assembled workforce is comprised of all the skilled
employees of Sensors and includes the estimated cost to replace existing
employees, including recruiting and training costs and loss of productivity
costs. Finisar will amortize the value assigned to the assembled workforce of
approximately $1.5 million on a straight-line basis over an average estimated
useful life of three years.

Acquired customer base is based on historical costs incurred and is
comprised of Sensors management's estimation of resources that have been devoted
to the development of the relationships with key customers. Finisar will
amortize the value assigned to customer relationships of approximately $1.9
million on a straight-line basis over an average estimated useful life of three
years.

The acquired tradename is recognized for the intrinsic value of Sensors
name and products in the marketplace. Finisar will amortize the value assigned
to the tradename of approximately $3.3 million on a straight-line basis over an
average estimated useful life of five years.

Deferred compensation expense is recognized for the intrinsic value
of the unvested Finisar options exchanged for options held by Sensor's
employees. The $8.7 million of deferred compensation will be amortized over
the remaining vesting period of approximately three years.

Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets and deferred compensation, will be amortized on a
straight-line basis over its estimated remaining useful life of five years.

In-process research and development represents that portion of the
purchase price of an acquisition related to the research and development
activities which: i) have not demonstrated their technological feasibility, and
ii) have no alternative future uses. Accordingly, the Company recognized an
expense of $23.0 million during the quarter ended October 31, 2000 in
conjunction with the completion of this acquisition.

8. SUBSEQUENT EVENTS

ACQUISITION OF DEMETER TECHNOLOGIES, INC.

On November 21, 2000, the Company completed the acquisition of Demeter
Technologies, Inc., a privately-held company located in El Monte, California
("Demeter Technologies"). Demeter Technologies was founded in August 2000 and is
focused on the development of long wavelength Fabry Perot and distributed
feedback lasers for datacom and telecommunications applications.

Pursuant to the agreement, the Company issued 6,020,012 shares of
common stock in exchange for the outstanding shares of Demeter Technologies
capital stock. In addition, Finisar assumed options to purchase Demeter
Technologies common stock and reserved 566,573 shares of Finisar common stock
for issuance upon the exercise of the assumed options. The assumed options
generally vest to the extent of 25% of the total number of shares subject to the
option at the end of one year after the date of grant, with the remainder
vesting in 36 equal monthly installments, subject to the optionholder's
continued service with Finisar or a subsidiary. The Company anticipates the
purchase price for accounting purposes will be approximately $185 million and
will be allocated primarily to intangible assets and in-process research and
development.

At the closing of the transaction, certificates representing 601,993
shares of Finisar common stock were deposited into an escrow with the U.S. Bank
Trust, National Association. The escrow shares will be subject to claims for
indemnification by Finisar under the reorganization agreement and the procedures
specified in the escrow

12
<PAGE>

agreement. Those shares will remain in escrow until all pending claims for
indemnification, if any, have been resolved.

The acquisition of Demeter Technologies will be accounted for under the
purchase method of accounting.

ACQUISITION OF TRANSWAVE FIBER, INC.

On November 21, 2000, the Company entered into an agreement to acquire
Transwave Fiber, Inc. ("Transwave Fiber"), a privately-held company located in
Fremont, California. Established in February 2000, Transwave Fiber has applied
its core competencies in fusion couplers, crystal processing and instrumentation
technologies to develop a broad line of passive optical products for datacom and
telecommunications applications.

Under the terms of the agreement, Transwave stockholders will be
entitled to receive up to approximately 3.2 million shares of Finisar common
stock including shares issuable upon exercise of options to be assumed in the
transaction. One-third of the shares issued in the transaction will be deposited
in an escrow and will be released to the former shareholders of Transwave Fiber
upon the achievement of certain financial and technical milestones during a
three-year period following the completion of the merger. The transaction will
be accounted for under the purchase method of accounting. The transaction is
expected to close during the first calendar quarter of 2001 and is subject to
approval by Transwave's stockholders and other customary conditions.

ACQUSITION OF SHOMITI SYSTEMS, INC.

On November 21, 2000, the Company entered into an agreement to acquire
Shomiti Systems, Inc. ("Shomiti Systems"), a privately-held company located in
San Jose, California. Established in 1995, Shomiti Systems is a technology
leader in designing products which measure the performance of Ethernet networks
in order to enhance their quality of service (QoS). Shomiti's line of products
are currently being deployed for measuring and monitoring 10-100 megabit and
Gigabit Ethernet local area networks (LANs) and e-commerce storage server farms.

Under the terms of the agreement, Shomiti Systems stockholders will be
entitled to receive up to approximately 4.3 million shares of Finisar common
stock including shares issuable upon exercise of options to be assumed in the
transaction. The transaction will be accounted for under the purchase method of
accounting. The transaction is expected to close during the first calendar
quarter of 2001 and is subject to approval by Shomiti's stockholders, the
notification requirements of the Hart-Scott-Rodino Antitrust Act and other
customary conditions.

PURCHASE OF BUILDINGS

On November 14, 2000 the Company purchased a 92,000 square foot
facility in Sunnyvale, California, consisting of three buildings for $32.5
million cash plus closing costs. The facility is currently under lease to a
tenant through November 13, 2002 at which time the tenant has an option to renew
the lease at fair market value for an additional five years.

13
<PAGE>

ITEM 2. 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 That Could Affect Our
Future Performance". The following discussion should be read together with our
financial statements and related notes thereto included elsewhere in this
document.

OVERVIEW

We are a leading provider of fiber optic subsystems and network
performance test systems which enable high-speed data communications over
Gigabit Ethernet local area networks (LANs), Fibre Channel storage area networks
(SANs), and wide-area and metropolitan data networking applications (WANs and
MANs). The Company is focused on the application of digital fiber optics to
provide a broad line of high-performance, reliable, value-added optical
subsystems for networking and storage equipment manufacturers. 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 founded in 1988. We funded our initial product development
efforts largely through revenues derived under research and development
contracts. After shipping our first products 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 million from the initial public offering of shares of our
common stock, and in April 2000 we received $191 million from an additional
public offering of shares of our common stock.

We have acquired two companies and entered into agreements to acquire
two other companies during fiscal 2001 in order to gain access to new
technologies which can be used in conjunction with our existing core
competencies to develop new and innovative products. On October 17, 2000, we
acquired Sensors Unlimited, Inc., a privately-held company located in Princeton,
New Jersey. On November 21, 2000, we acquired Demeter Technologies, Inc., a
privately-held company located in El Monte, California, and entered into
agreements to acquire Transwave Fiber, Inc., a privately-held company located in
Fremont, California, and Shomiti Systems, Inc., a privately-held company located
in San Jose, California. The pending acquisitions are expected to be completed
during the first calendar quarter of 2001.

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 37.6% of
our revenues for the six months ended October 31, 2000 compared to 54.9% for the
same period in the prior year. Although we are attempting to expand our customer
base, we expect that significant customer concentration will continue for the
foreseeable future.

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

Our cost of revenues consists of materials, salaries and related
expenses for manufacturing personnel, manufacturing overhead and warranty
expense. We outsource the majority of our assembly operations, and we conduct
manufacturing engineering, supply chain management, quality assurance and
documentation control at our facilities in Sunnyvale, California, and Princeton,
New Jersey. Accordingly, a significant portion of our cost of revenues consists
of

14
<PAGE>

payments to our contract manufacturers.

Our gross margins are generally lower for our optical subsystems
than for our test systems. Gross margins are also generally lower for newly
introduced products and improve as unit volumes increase. As a result, 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.
During the four quarters ended July 31, 2000, we experienced a general
decline in our average gross margins primarily due to the shift in the mix of
products sold toward optical subsystems. Despite the continuing shift in
product mix during the most recent quarter ended October 31, 2000, our gross
margins improved from the immediately preceding quarter primarily due to our
ongoing efforts to reduce product costs. However, there can be no assurance
that we will be able to reduce our cost of revenues going forward 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 fiscal 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. We recorded
an additional $8.7 million of deferred compensation in conjunction with the
acquisition of Sensors Unlimited on October 17, 2000. 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 $6.0 million of deferred compensation through April 30,
2000 and an additional $2.9 million through the first six months ended October
31, 2000. We expect to record additional amortization expense relating to
deferred stock compensation in future periods although the amount of such
deferred compensation could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................................... 58.5 49.0 59.2 47.2
Amortization of acquired developed technology.............. 2.0 - 1.3 -
------------- ----------- ----------- ----------
Gross profit............................................... 39.5% 51.0% 39.5% 52.8%
------------- ----------- ----------- ----------
Operating expenses:
Research and development................................ 14.2 20.7 14.8 20.6
Sales and marketing..................................... 8.3 11.8 8.6 11.5
General and administrative.............................. 3.9 5.4 4.3 5.4
Amortization of deferred stock compensation............. 2.7 10.7 4.0 6.7
In-process research and development..................... 51.7 - 32.1 -
Amortization of acquired intangibles.................... 11.2 - 7.0 -
Other acquisition compensation.......................... 1.2 - 0.8 -
------------- ----------- ----------- ----------
Total operating expenses............................. 93.2% 48.6% 71.6% 44.2%
------------- ----------- ----------- ----------
Income (loss) from operations.............................. (53.7) 2.4 (32.1) 8.6
Interest income (expense), net............................. 9.1 (0.5) 11.8 (0.6)
Other non-operating income (expense), net.................. .0 (0.2) (0.1) (0.2)
------------- ----------- ----------- ----------
Income before (loss) income taxes.......................... (44.6)% 1.7% (20.4) 7.8%
Provision for income taxes................................. 5.8 4.1 6.4 5.0
------------- ----------- ----------- ----------
Net income (loss).......................................... (50.4)% (2.4)% (26.8)% 2.8%
============= =========== =========== ==========
</TABLE>

15
<PAGE>

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>
THREE MONTHS ENDED OCTOBER 31, SIX MONTHS ENDED OCTOBER 31,
------------------------------ ----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues (thousands):
Optical subsystems.......................... $ 37,325 $ 10,828 $ 59,363 $ 20,308
Test instruments............................ 7,203 5,249 12,377 9,648
-------------- -------------- -------------- --------------
$44,528 $16,077 $71,740 $29,956
============== ============== ============== ==============

Geographic coverage (thousands):
United States............................... $38,188 $9,988 $61,331 $18,117
Canada...................................... 4,555 5,449 7,432 10,326
Rest of the World........................... 1,785 640 2,977 1,513
-------------- -------------- -------------- --------------
$44,528 $16,077 $71,740 $29,956
============== ============== ============== ==============

As a percent or revenues:
Optical subsystems.......................... 83.8% 67.4% 82.7% 67.8%
Test instruments............................ 16.2 32.6 17.3 32.2
-------------- -------------- -------------- --------------
100.0% 100.0% 100.0% 100.0%
============== ============== ============== ==============

Geographic coverage:
United States............................... 85.8% 62.1% 85.5% 60.5%
Canada...................................... 10.2 33.9 10.4 34.5
Rest of the World........................... 4.0 4.0 4.1 5.0
-------------- -------------- -------------- --------------
100.0% 100.0% 100.0% 100.0%
============== ============== ============== ==============
</TABLE>

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

COMPARISON OF THREE AND SIX MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 2000

REVENUES. Revenues increased 177% from $16.1 million in the quarter
ended October 31, 1999 to $44.5 million in the quarter ended October 31,
2000. This reflects a 245% increase in sales of optical subsystems from $10.8
million in the quarter ended October 31, 1999 to $37.3 million in the quarter
ended October 31, 2000 and a 37% increase in sales of test systems from $5.2
million in the quarter ended October 31, 1999 to $7.2 million in the quarter
ended October 31, 2000.

On a year-to-date basis, revenues increased 139% from $30.0 million in
the six months ended October 31, 1999 to $71.7 million in the six months ended
October 31, 2000. This reflects a 192% increase in sales of optical subsystems
from $20.3 million in the six months ended October 31, 1999 to $59.4 million in
the six months ended October 31, 2000 and a 28% increase in sales of test
systems from $9.6 million in the six months ended October 31, 1999 to $12.4
million in the six months ended October 31, 2000.

16
<PAGE>

Sales to our optical subsystems represented 83.8% and 67.4%,
respectively, of total revenues in the quarters ended October 31, 2000, and
October 31, 1999. Sales of test systems represented 16.2% and 32.6%,
respectively, of total revenues in the same periods. On a year-to-date basis,
sales of optical subsystems represented 82.7% and 67.8%, respectively, in the
six months ended October 31, 2000, and October 31, 1999. Sales of test systems
represented 17.3% and 32.2%, respectively, in the same periods.

Sales to principal customers representing 10% or more of total revenues
during the three and six months ended October 31, 1999 and October 31, 2000 were
as follows:

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
-------------------------------------
2000 1999 2000 1999
-------------------------------------
($ MILLIONS) ($ MILLIONS)
<S> <C> <C> <C> <C>
Alcatel Networks Corporation (formerly Newbridge Networks).................... $3.8 $5.4 $ 6.7 $10.4
Brocade Communications Systems................................................ $8.0 $0.1 $12.8 $ 0.1
EMC........................................................................... $8.4 $3.4 $14.2 $ 6.1
Emulex........................................................................ $5.1 $0.8 $ 8.1 $ 1.3
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2000 1999 2000 1999
-------------------------------------
PERCENTAGE OF PERCENTAGE OF
REVENUES REVENUES
-------------------------------------
<S> <C> <C> <C> <C>
Alcatel Networks Corporation (formerly Newbridge Networks).................... 8.6% 33.7% 9.3% 34.7%
Brocade Communications Systems................................................ 18.0% 0.6% 17.8% 0.0%
EMC........................................................................... 18.8% 21.1% 19.8% 20.4%
Emulex........................................................................ 11.4% 5.0% 11.3% 4.3%
</TABLE>

GROSS PROFIT. Gross profit increased 114% from $8.2 million in the
quarter ended October 31, 1999 to $17.6 million in the quarter ended October 31,
2000. As a percentage of revenues, gross profit decreased from 51.0% in the
quarter ended October 31, 1999 to 39.5% in the quarter ended October 31, 2000.
The lower gross margin reflects lower average selling prices for optical
subsystems as a result of increased shipment levels, a higher percentage of
total revenues from the sale of optical subsystems (83.8% in the quarter ended
October 31, 2000 compared to 67.4% in the quarter ended October 31, 1999) which
generally have lower gross margins than test systems and a non-cash charge
totaling $916,000 related to the amortization of acquired developed technology
associated with the acquisition of Sensors Unlimited during the quarter.
Excluding the charge for the amortization of acquired developed technology,
gross profit as a percent of total revenues was 41.5% in the most recent quarter
compared to 51.0% in the prior year period and 39.5% in the previous quarter
ended July 31, 2000.

On a year-to-date basis, gross profit increased 79% from $15.8 million
in the six months ended October 31, 1999 to $28.3 million in the six months
ended October 31, 2000. As a percentage of revenues, gross profit decreased from
52.8% in the six months ended October 31, 1999 to 39.5% in the six months ended
October 31, 2000. The lower gross margin reflects lower average selling prices
for optical subsystems as a result of increased shipment levels, a higher
percentage of total revenues from the sale of optical subsystems (82.7% in the
six months ended October 31, 2000 compared to 67.8% in the six months ended
October 31, 1999) which generally have lower gross margins than test systems and
a non-cash charge totaling $916,000 related to the amortization of acquired
developed technology associated with the acquisition of Sensors Unlimited.
Excluding the charge for amortization of acquired developed technology, gross
profit as a percent of total revenues was 40.8% in the six months ended October
31, 2000 compared to 52.8% in the prior year period.

RESEARCH AND DEVELOPMENT EXPENSES. Excluding a non-cash charge for the
purchase of in-process research and development associated with the acquisition
of Sensors Unlimited, research and development expenses increased 90% from $3.3
million in the quarter ended October 31, 1999 to $6.3 million in the quarter
ended October 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 and
additional costs as

17
<PAGE>

a result of including the results of Sensors Unlimited for one month of the
quarter. Research and development expenses as a percentage of revenues decreased
from 20.7% in the quarter ended October 31, 1999 to 14.2% in the quarter ended
October 31, 2000 as a result of a higher rate of growth in revenues as compared
to research and development expenses.

On a year-to-date basis and excluding the non-cash, non-recurring
charge for the purchase of in-process research and development, research and
development expenses increased 72% from $6.2 million in the six months ended
October 31, 1999 to $10.6 million in the six months ended October 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 revenues decreased from 20.6% in the six months ended October 31, 1999 to
14.8% in the six months ended October 31, 2000 as a result of a higher rate of
growth in revenues as compared to research and development expenses.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
95% from $1.9 million in the quarter ended October 31, 1999 to $3.7 million in
the quarter ended October 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 11.8% in the
quarter ended October 31, 1999 to 8.3% in the quarter ended October 31, 2000.

On a year-to-date basis, sales and marketing expenses increased 80%
from $3.4 million in the six months ended October 31, 1999 to $6.2 million in
the six months ended October 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
11.5% in the six months ended October 31, 1999 to 8.6% in the six months ended
October 31, 2000.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 99% from $0.9 million in the quarter ended October 31, 1999
to $1.7 million in the quarter ended October 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 decreased as a percent of revenues
from 5.4% in the quarter ended October 31, 1999 to 3.9% in the quarter ended
October 31, 2000.

On a year-to-date basis, general and administrative expenses increased
91% from $1.6 million in the six months ended October 31, 1999 to $3.1 million
in the six months ended October 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 decreased as a percent of revenues from 5.4%
in the six months ended October 31, 1999 to 4.3% in the six months ended October
31, 2000.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. The amortization of
deferred stock compensation totaling $1.2 million in the quarter ended October
31, 2000 is comprised of $940,000 related to the issuance of stock options prior
to the Company's initial public offering in November 1999 and $243,000 related
to the amortization of deferred stock compensation associated with the
acquisition of Sensors Unlimited, Inc. during the quarter. A discussion of these
amortization charges going forward are discussed in Note 6 to the financial
statements.

IN-PROCESS RESEARCH AND DEVELOPMENT. A non-cash charge totaling
$23.0 million was recognized in the quarter ended October 31, 2000 for the
purchase of in-process research and development at Sensors Unlimited. This
charge represents that portion of the total purchase consideration for
Sensors Unlimited associated with new products currently in development or to
be developed. The projects under development at the time of the acquisition
included manufacturing process improvements that will allow Finisar to
produce InGaAs photodiode arrays on larger wafers, next generation cameras
and high speed photodiodes and receivers.

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AMORTIZATION OF ACQUIRED INTANGIBLES. In conjunction with the
acquisition of Sensors Unlimited, Inc., the Company recorded a total of
approximately $353 million in goodwill and intangible assets which are to be
amortized over the next three to five years. The amount of $5.0 million recorded
during the quarter represents one month of amortization.

OTHER ACQUISITION COMPENSATION. Other acquisition compensation for the
quarter ended October 31, 2000 totaling $554,000 is primarily related to a
retention bonus totaling $2 million to be paid to the employees of Sensors
Unlimited over a three year period of which $500,000 was paid at closing. The
remaining $1.5 million is to be paid in three equal installments at the
anniversary of the closing to those who were employees of Sensors Unlimited as
of the closing who continue to remain employees of Sensors Unlimited, Inc. or
Finisar at the time of payment.

INTEREST INCOME (EXPENSE), NET. Interest income, net of interest
expense, of $4.1 million in the quarter ended October 31, 2000, compares to net
interest expense of $84,000 in the quarter ended October 31, 1999. 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 and an additional public
offering in April 2000. Interest expense in fiscal 1999 is related primarily to
borrowings of $11.0 million commencing in November of 1998 that were repaid from
the proceeds of the public offering in November 1999.

On a year-to-date basis, interest income, net of interest expense, of
$8.5 million in the six months ended October 31, 2000, compares to net interest
expense of $173,000 in the six months ended October 31, 1999. The increase in
interest income reflects the additional cash raised from two public offerings
since October 31, 1999.

PROVISION FOR INCOME TAXES. The provision for income taxes increased
from $659,000 in the quarter ended October 31, 1999 to $2.6 million in quarter
ended October 31, 2000 and includes a deferred tax benefit associated with

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the purchase of Sensors Unlimited of $524,000. Excluding the nondeductible
charges for the amortization of deferred compensation, and all other merger
related costs including acquired developed technology, in-process research and
development, the amortization of intangible assets, and the merger-related
deferred tax benefit, the effective tax rate was 33.0% in the quarter ended
October 31, 1999 and 30.5% in the quarter ended October 31, 2000.

For the year-to-date period, the provision for income taxes increased
from $1.5 million in the six months ended October 31, 1999 to $4.6 million in
the six months ended October 31, 2000. Excluding the nondeductible charges for
the amortization of deferred compensation, and all other merger related costs
including acquired developed technology, in-process research and development the
amortization of intangible assets, and the merger-related deferred tax benefit
the effective tax rate was 34.1% in the six months ended October 31, 1999 and
30.0% in the six months ended October 31, 2000.

The decrease in the effective rate from the three and six months ended
October 31, 1999 to the three and six months ended October 31, 2000 reflects in
part the nontaxable nature of a portion of interest income earned. The 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 8 to our financial statements included in our Form 10-K
for the fiscal year ended April 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

From 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 million from the
initial public offering of our common stock, and in April 2000 we received $191
million from an additional public offering.

As of October 31, 2000, our principal sources of liquidity were $269.2
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 October 31, 2000. With the acquisition of
Sensors Unlimited, Finisar assumed debt obligations totaling $2.1 million under
a line of credit secured by the assets of Sensors. We intend to pay down this
debt obligation during the third fiscal quarter ended January 31, 2001.

Net cash used in operating activities totaled $8.3 million in the
six month period ended October 31, 2000 while $0.2 million was provided by
operating activities in the six month period ended October 31, 1999. The use
of net cash in operating activities in the six months ended October 31, 2000
was primarily a result of continuing growth in revenues and net income which
was more than offset by an increase in assets and liabilities for working
capital purposes. Cash provided by operations during the six months ended
October 31, 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.

Net cash used in investing activities of $89.1 million in the six
months ended October 31, 2000 consisted primarily of short-term investments
totaling $43.5 million which generally mature greater than 90 days from the
initial date of purchase. Other investing activities during the six months
ended October 31, 2000 consisted primarily of cash used in the acquisition of
Sensors Unlimited, Inc. totaling $25.7 million, minority strategic
investments in other businesses totaling $11.3 million and purchases of
equipment and leasehold improvements totaling $8.6 million. Net cash used in
investing activities of $2.3 million in the six months ended October 31, 1999
consisted primarily of purchases of equipment.

Net cash provided by financing activities of $2.0 million in the six
months ended October 31, 2000 reflected net proceeds to us of $2.5 million
from the exercise of employee stock options, net of loans, repurchase of
unvested shares, and stock purchases made by the Company's employee stock
purchase plan. Net cash provided by financing activities totaled $0.2 million
in the six month period ended October 31, 1999.

We had no material commitments for capital expenditures at October 31,
2000. However, on November 14, 2000 we purchased a building for $32.5 million
cash plus closing costs. Since October 31, 2000, we have acquired one company
and agreed to acquire two additional companies. Consideration for all three
acquisitions consists primarily of shares of our common stock. We have total
minimum lease obligations of $12.4 million from

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April 30, 2000 through April 30, 2007, under non-cancelable operating leases.

We believe that our existing balances of cash, cash equivalents and
short-term investments, together with 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.

EFFECT OF NEW ACCOUNTING STATEMENTS

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 does not believe that there is any change in its accounting policy
due to the adoption 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 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.

FACTORS THAT COULD AFFECT OUR FUTURE PERFORMANCE

OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER
INFORMATION CONTAINED IN THIS REPORT, 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, extended versions
of these networks, or WANs and MANs, storage area networks, or SANs and cable
television, or CATV 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

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<PAGE>

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.

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 Alcatel Networks
Corporation (formerly Newbridge Networks Corporation), Brocade Communications
Systems, EMC Corporation and Emulex represented 8.6%, 18.0%, 18.8% and 11.4%
respectively, of our revenues during the quarter ended October 31, 2000.
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 that incorporate
our products. We have in the past experienced delays and reductions in orders
from some of our major customers. In addition, our customers have in the past
sought price concessions from us and will continue to do so in the future.
Further, some of our customers may in the future shift their purchases of
products from us to our competitors or to joint ventures between these customers
and our competitors. The loss of one or more of our largest customers, any
reduction or delay in sales to these customers, our inability to successfully
develop relationships with additional customers or future price concessions that
we may make could significantly harm our business.

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

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

- our customers can stop purchasing our products at any time without
penalty;
- our customers are free to purchase products from our competitors;
and
- our customers are not required to make minimum purchases.

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

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

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

- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical
personnel;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties with contract manufacturers;
- changing market or competitive product requirements; and
- unanticipated engineering complexities.

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

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

The markets for optical subsystems and network performance test systems
for use in LANs, SANs, 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, Molex Premise Networks, Stratos Lightwave (formerly
Methode Electronics) 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

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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

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 product shift toward a greater percentage of optical subsystem
products resulting in a general decline in overall gross margins.

WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING

In April 1999, Methode, 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 an additional defendant,
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. On
June 5, 2000, Methode transferred the patents at issue in the litigation, as
well as a number of other patents, to Stratos Lightwave LLC, and on June 21,
2000, Stratos Lightwave LLC transferred the same patents to Stratos
Lightwave, Inc. Methode has made a motion to add Stratos Lightwave, Inc. to
the lawsuit as an additional plaintiff. In September 2000, Methode and
Stratos Lightwave filed another complaint alleging infringement of a sixth
Methode patent.

We believe that we have strong defenses against Methode's lawsuits, and
we have filed counterclaims against Methode and Stratos Lightwave. Portions of
our counterclaim in the first lawsuit, based on principles of state law, were
dismissed in May 2000 on grounds of federal preemption; however, our basic
claims of ownership of the patents remain subject to our pending counterclaim.

We intend to defend Methode's lawsuit and pursue our counterclaim
vigorously. However, the litigation is in the preliminary stage, and we cannot
predict its outcome with certainty. The litigation process is inherently
uncertain and we may not prevail. Patent litigation is particularly complex and
can extend for a protracted time, which can substantially increase the cost of
such litigation. In connection with the Methode litigation, we have incurred,
and expect to continue to incur, substantial legal fees and expenses. The
Methode litigation has also diverted, and is

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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 "Part II, Item 1.- Legal Proceedings."

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 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 four 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.

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

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

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

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

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

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

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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 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

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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 completed the acquisition of Sensors Unlimited, Inc. on October 17,
2000. On November 21, 2000, we completed the acquisition of Demeter
Technologies, Inc. and entered into agreements to acquire Transwave Fiber, Inc.
and Shomiti Systems, Inc. We expect from time to time to evaluate the
acquisition of 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. We have issued
stock in order to complete the acquisitions of Sensors Unlimited and Demeter
Technologies and expect to issue stock to complete the acquisitions of Transwave
Fiber and Shomiti Systems as well as other businesses. The issuance of stock to
consummate these recent and future acquisitions dilutes existing stockholders'
percentage ownership. In addition, we could incur substantial debt or assume
contingent liabilities in the course of these acquisitions. Our experience in
acquiring other business and technologies is limited. These recent, pending and
potential acquisitions 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 will be successful in overcoming problems
encountered in connection with these acquisitions, and our inability to do so
could significantly harm our business.

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

Our executive officers, directors and 5% or greater stockholders
beneficially own approximately 73.3 million shares or 46% of the outstanding
shares of our common stock. These stockholders, acting together, would be able
to effectively 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.

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;

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- 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;
- 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.

OUR HEADQUARTERS ARE LOCATED IN NORTHERN CALIFORNIA WHERE NATURAL DISASTERS MAY
OCCUR

Currently, our corporate headquarters and some 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.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

PART II - OTHER INFORMATION

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ITEM 1. LEGAL PROCEEDINGS

In April 1999, Methode, 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. Methode has amended its
complaint to add another manufacturer as an additional defendant, 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
compensatory damages of at least $224.3 million plus interest for the alleged
breach of contract. On June 5, 2000, Methode transferred the patents at issue in
the litigation, as well as a number of other patents, to an affiliated company,
Stratos Lightwave LLC, and on June 21, 2000, Stratos Lightwave LLC transferred
the same patents to Stratos Lightwave, Inc. Methode has made a motion to add
Stratos Lightwave, Inc. to the lawsuit as an additional plaintiff.

In September 2000, Methode and Stratos Lightwave filed an additional
lawsuit against us, alleging infringement of a sixth patent, which issued in
August, 2000. This patent is a reissue of a previous patent that is the parent
of four of the five patents that are the subject of the original lawsuit filed
by Methode against Finisar.

Based on consultation with 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 counsel, that the breach of contract
claim included 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 lawsuits. In addition, we have filed
counterclaims against Methode and Stratos Lightwave 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 six 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. Portions of our
counterclaim, based on principles of state law, were dismissed in May 2000 on
grounds of federal preemption; however, our basic claims of ownership of the
patents remain subject to our pending counterclaim.

We intend to defend Methode's lawsuits and pursue our counterclaim
vigorously. However, the lawsuits are in the preliminary stage, and their
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 lawsuits, we have incurred, and expect to
continue to incur, substantial legal fees and expenses. The lawsuits have also
diverted, and are expected to continue to divert, the efforts and attention of
some of our key management and technical personnel. As a result, our defense of
these lawsuits, regardless of their eventual outcome, has been, and will likely
continue to be, costly and time consuming. Should the outcome of the lawsuits be
adverse to us, we could be required to pay significant monetary damages to
Methode and/or Stratos Lightwave and could be enjoined from selling those
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
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.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits.

Reference is hereby made to the Exhibit Index commencing on
page 35.

b. Reports on Form 8-K

1. Regarding acquisition of Sensors Unlimited, Inc.
filed on August 30, 2000.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DATE: December 13, 2000 FINISAR CORPORATION

BY: /s/Jerry S. Rawls
--------------------------------
Jerry S. Rawls
PRESIDENT AND CHIEF EXECUTIVE OFFICER

BY: /s/Stephen K. Workman
--------------------------------
Stephen K. Workman,
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER

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EXHIBIT INDEX

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