Finisar (FNSR) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended July 31, 2005
or

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

For the transition period from            to

Commission file number 000-27999

Finisar Corporation

(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of	94-3038428
incorporation or organization)	(I.R.S. Employer
1308 Moffett Park Drive	Identification No.)
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. Yesþ Noo

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o

     At August 29, 2005, there were 286,012,595 shares of the registrant’s common stock, $.001 par value, issued and outstanding.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended July 31, 2005

	Page
PART I FINANCIAL INFORMATION		3
Item 1. Financial Statements:		3
Consolidated Balance Sheets as of July 31, 2005 and April 30, 2005		3
Consolidated Statements of Operations for the three month periods ended July 31, 2005 and 2004		4
Consolidated Statements of Cash Flows for the three month periods ended July 31, 2005 and 2004		5
Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosure About Market Risk		40
Item 4. Controls and Procedures		40
PART II OTHER INFORMATION		41
Item 1. Legal Proceedings		41
Item 4. Submission of Matters to a Vote of Security Holders		42
Item 6. Exhibits		43
Signatures		44
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

FINISAR CORPORATION

CONSOLIDATED BALANCE SHEETS

	July 31, 2005			April 30, 2005
	(In thousands)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	29,180		$	29,431
Short-term investments		72,604			72,931
Restricted investments, short-term		3,732			3,717
Accounts receivable, net of allowance for doubtful accounts of $1,579 and $1,379 at July 31, 2005 and April 30, 2005		43,350			42,443
Accounts receivable, other		4,723			11,371
Inventories		37,486			36,330
Prepaid expenses		3,486			3,470
Total current assets		194,561			199,693
Property, plant and improvements, net		84,798			87,264
Restricted investments, long-term		5,425			5,393
Purchased technology, net		27,821			33,046
Other purchased intangible assets, net		5,476			4,424
Goodwill, net		132,217			119,690
Minority investments		16,689			21,366
Other assets		17,127			18,109
Total assets	$	484,114		$	488,985
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	32,827		$	30,430
Accrued compensation		6,667			4,500
Other accrued liabilities		15,422			14,073
Deferred revenue		6,560			5,916
Current portion of other long-term liabilities		2,599			2,242
Convertible notes		1,000			15,811
Non-cancelable purchase obligations		2,009			6,449
Total current liabilities		67,084			79,421
Long-term liabilities:
Convertible notes, net of beneficial conversion feature of $15,420 and $16,501 at July 31, 2005 and April 30, 2005		247,043			250,019
Other long-term liabilities		13,571			13,623
Deferred income taxes		2,218			1,632
Total long-term liabilities		262,832			265,274
Commitments and contingent liabilities:
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at July 31, 2005 and April 30, 2005		—			—
Common stock, $0.001 par value, 500,000,000 shares authorized, 284,636,842 shares issued and outstanding at July 31, 2005 and 258,931,278 shares issued and outstanding at April 30, 2005		285			259
Additional paid-in capital		1,344,031			1,314,960
Accumulated other comprehensive income		280			381
Accumulated deficit		(1,190,398	)		(1,171,310	)
Total stockholders’ equity		154,198			144,290
Total liabilities and stockholders’ equity	$	484,114		$	488,985

See accompanying notes

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FINISAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended
	July 31,
	2005			2004
	(Unaudited, in thousands,
	except per share data)
Revenues	$	81,732		$	61,877
Cost of revenues		60,791			45,704
Amortization of acquired developed technology		5,654			5,566
Gross profit		15,287			10,607
Operating expenses:
Research and development		13,021			16,075
Sales and marketing		8,371			7,151
General and administrative		8,009			4,682
Amortization of deferred stock compensation		—			97
Amortization of purchased intangibles		476			143
Total operating expenses		29,877			28,148
Loss from operations		(14,590	)		(17,541	)
Interest income		783			592
Interest expense		(4,087	)		(3,363	)
Other income (expense), net		(600	)		(1,788	)
Loss before income taxes		(18,494	)		(22,100	)
Provision for income taxes		594			19
Net loss	$	(19,088	)	$	(22,119	)
Net loss per share — basic and diluted	$	(0.07	)	$	(0.10	)
Shares used in computing net loss per share — basic and diluted		272,228			222,929

See accompanying notes.

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FINISAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	July 31,
	2005			2004
	(Unaudited, in thousands)
Operating activities
Net loss	$	(19,088	)	$	(22,119	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,471			6,874
Amortization of deferred stock compensation		—			97
Amortization of beneficial conversion feature of convertible notes		1,081			1,060
Amortization of goodwill and other purchased intangibles		476			142
Amortization of acquired developed technology		5,654			5,566
Amortization of discount on restricted securities		(47	)		(75	)
Loss on sale/retirement of equipment		24			997
Share of losses of equity investee		522			361
Changes in operating assets and liabilities:
Accounts receivable		(683	)		(5,598	)
Inventories		(871	)		(2,961	)
Other assets		1,468			(78	)
Deferred income taxes		586			—
Accounts payable		2,129			(4,208	)
Accrued compensation		2,096			866
Other accrued liabilities		2,583			3,765
Deferred revenue		617			—
Net cash provided by (used) in operating activities		4,018			(15,311	)
Investing activities
Purchases of property, equipment and improvements		(3,968	)		(7,045	)
Sale/maturity of short-term investments		226			900
Acquisition of subsidiaries, net of cash assumed		(394	)		—
Acquisition of product line assets		—			(5,668	)
Proceeds from sale of property and equipment		—			243
Net cash used in investing activities		(4,136	)		(11,570	)
Financing activities
Payments on capital lease obligations		(39	)		—
Repayments of liability related to sale-leaseback of building		(57	)		—
Repayments of borrowings under notes		(79	)		—
Payment received on stockholder notes receivable		—			196
Proceeds from exercise of stock options		42			146
Net cash provided by (used) in financing activities		(133	)		342
Net increase (decrease) in cash and cash equivalents		(251	)		(26,539	)
Cash and cash equivalents at beginning of year		29,431			69,872
Cash and cash equivalents at end of year	$	29,180		$	43,333
Supplemental disclosure of cash flow information
Cash paid for interest	$	21		$	—
Cash paid for taxes	$	(10	)	$	19
Supplemental schedule of non-cash investing and financing activities
Issuance of common stock upon conversion of promissory note	$	20,239		$	—
Issuance of common stock in connection with acquisitions	$	8,815		$	—
Issuance of common stock on achievement of milestones	$	—		$	256

See accompanying notes.

5

FINISAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Summary of Significant Accounting Policies

Description of Business

     Finisar Corporation is a leading provider of optical subsystems and components and network performance test and monitoring systems. These products enable high-speed data communications over local area networks, or LANs, storage area networks, or SANs, and metropolitan area networks, or MANs. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for SAN, LAN and MAN applications. Optical subsystems also include multiplexers, demultiplexers and optical add/drop modules used in MAN applications. 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 data networking and storage equipment manufacturers. Finisar’s line of optical subsystems supports a wide range of network protocols, transmission speeds, distances, physical mediums and configurations. Finisar’s line of optical components consists primarily of packaged lasers and photodetectors used in transceivers, primarily for LAN and SAN applications. The Company also provides network performance test and monitoring systems to original equipment manufacturers for testing and validating equipment designs and to operators of networking and storage data centers for testing, monitoring and troubleshooting the performance of their installed systems. Finisar sells its products primarily to leading storage and networking equipment manufacturers such as Brocade, Cisco Systems, EMC, Emulex, Hewlett-Packard Company and Qlogic.

     Finisar Corporation was incorporated in California in April 1987 and reincorporated in Deleware in November 1999. Finisar’s principal executive offices are located at 1308 Moffett Park Drive, Sunnyvale, California 94089, and our telephone number is (408) 548-1000.

Interim Financial Information and Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of July 31, 2005, and for the three month periods ended July 31, 2005 and 2004, have been prepared in accordance with U.S generally accepted accounting principles 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 U.S. 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 Company’s financial position at July 31, 2005 and its operating results and cash flows for the three month periods ended July 31, 2005 and 2004. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes for the fiscal year ended April 30, 2005.

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 quarter of fiscal 2006 ended on July 31, 2005. The first quarter of fiscal 2005 ended on August 1, 2004.

Use of Estimates

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

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Revenue Recognition

     The Company’s revenue transactions consist predominately of sales of products to customers. The Company follows SEC Staff Accounting Bulletin (SAB) No. 104Revenue Recognition. Specifically, the Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer, generally upon shipment, the price is fixed or determinable and collectability is reasonably assured. For those arrangements with multiple elements, or in related arrangements with the same customer, the Company invoices and charges for each separate element based on the list price for such element.

     At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with sales, recorded as a component of cost of revenues. The Company’s customers and distributors generally do not have return rights. However, the Company has established an allowance for estimated customer returns, based on historical experience, which is netted against revenue.

Segment Reporting

     Statement of Financial Accounting Standards (SFAS) No. 131Disclosures about Segments of an Enterprise and Related Informationestablishes 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 in two segments consisting of optical subsystems and components and network test and monitoring systems.

Concentrations of Credit Risk

     Financial instruments which potentially subject Finisar to concentrations of credit risk include cash, cash equivalents, short-term and restricted investments and accounts receivable. Finisar places its cash, cash equivalents and short-term and restricted 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. Generally, Finisar does not require collateral or other security to support customer receivables. Finisar performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have been within management’s expectations. The Company’s five largest customers represented 43.9% and 39.3% of total accounts receivable at July 31, 2005 and April 30, 2005, respectively.

Current Vulnerabilities Due to Certain Concentrations

     Finisar sells products primarily to customers located in North America. During the three months ended July 31, 2005 and 2004, sales to the top five optical subsystems and components customers represented 48.2% and 46.3% of total revenues, respectively. One customer represented more than 10% of total revenues during these periods.

Foreign Currency Translation

     The functional currency of our foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet dates. Revenues and expenses are translated using average exchange rates prevailing during the year. Any translation adjustments resulting from this process are shown separately as a component of accumulated other comprehensive income. Foreign currency transaction gains and losses are included in the determination of net loss.

Research and Development

     Research and development expenditures are charged to operations as incurred.

Advertising Costs

     Advertising costs are expensed as incurred. Advertising is used infrequently in marketing the Company’s products. Advertising costs were $128,000 and $157,000 in the three months ended July 31, 2005 and 2004, respectively.

Shipping and Handling Costs

     The Company records costs related to shipping and handling in cost of sales for all periods presented.

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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.

Investments

Short-Term

     Short-term investments consist of interest bearing securities with maturities of greater than 90 days from the date of purchase and an equity security. Pursuant to SFAS No. 115Accounting for Certain Investments in Debt and Equity Securities, the Company has classified its short-term investments as available-for-sale. Available-for-sale securities are stated at market value, which approximates fair 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 accumulated other comprehensive income 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.

Restricted Investments

     Restricted investments consist of interest bearing securities with maturities of greater than three months from the date of purchase and investments held in escrow under the terms of the Company’s convertible subordinated notes. In accordance with SFAS 115, the Company has classified its restricted investments as held-to-maturity. Held-to-maturity securities are stated at amortized cost.

Other

     The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. For entities in which the Company holds an interest of greater than 20% or in which the Company does have the ability to exercise significant influence, the Company uses the equity method. In determining if and when a decline in the market value of these investments below their carrying value is other-than-temporary, the Company evaluates the market conditions, offering prices, trends of earnings and cash flows, price multiples, prospects for liquidity and other key measures of performance. The Company’s policy is to recognize an impairment in the value of its minority equity investments when clear evidence of an impairment exists, such as (a) the completion of a new equity financing that may indicate a new value for the investment, (b) the failure to complete a new equity financing arrangement after seeking to raise additional funds or (c) the commencement of proceedings under which the assets of the business may be placed in receivership or liquidated to satisfy the claims of debt and equity stakeholders. The Company’s minority investments in private companies are generally made in exchange for preferred stock with a liquidation preference that is intended to help protect the underlying value of its investment.

Fair Value of Financial Instruments

     The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities, approximate fair value because of their short maturities. As of July 31, 2005 and April 30, 2005, the fair value of the Company’s convertible subordinated debt was approximately $203.4 million and $206.6 million, respectively.

Inventories

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

     The Company permanently writes down the cost of inventory that the Company specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company defines obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using management’s best estimate of future demand at the time, based upon information then available to the Company. The Company uses a twelve-month historical usage model to compute excess inventory and, in addition to the historical usage model, the Company also

8

considers: (1) forecast demand (2) parts and subassemblies that can be used in alternative finished products, (3) parts and subassemblies that are likely to be engineered out of the Company’s products, and (4) known design changes which would reduce the Company’s ability to use the inventory as planned.

Property, Equipment and Improvements

     Property, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Property, plant, equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally three years to seven years except for buildings, which are depreciated over 40 years. Land is carried at acquisition cost and not depreciated. Leased land costs are depreciated over the life of the lease.

Goodwill and Other Intangible Assets

     Goodwill and other intangible assets result from acquisitions accounted for under the purchase method. Amortization of intangibles has been provided on a straight-line basis over periods ranging from one to nine years. The amortization of goodwill ceased with the adoption of SFAS No. 142 beginning in the first quarter of fiscal 2003.

Accounting for the Impairment of Long-Lived Assets

     The Company periodically evaluates whether changes have occurred to long-lived assets that would require revision of the remaining estimated useful life of the property, improvements and assigned intangible assets or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows.

Stock-Based Compensation

     Finisar accounts for employee stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25Accounting for Stock Issued to Employeesand complies with the disclosure provisions of SFAS No. 123Accounting for Stock-Based Compensationand SFAS No. 148Accounting for Stock-based Compensation — Transition and Disclosure. The Company accounts for stock issued to non-employees in accordance with provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.

     The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to employee stock benefits, including shares issued under the Company’s stock option plans and Employee Stock Purchase Plan (collectively “options”). For purposes of these pro forma disclosures, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting periods and the amortization of deferred compensation has been added back. Pro forma information follows (in thousands, except per share amounts):

	Three Months Ended
	July 31,
	2005			2004
Net loss:
As reported	$	(19,088	)	$	(22,119	)
Add: Stock-based employee compensation reported in net loss		—			97
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(3,084	)		(5,626	)
Net loss — pro forma	$	(22,172	)	$	(27,648	)
Basic and diluted net loss per share — as reported	$	(0.07	)	$	(0.10	)
Basic and diluted net loss per share — pro forma	$	(0.08	)	$	(0.12	)

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     The fair value of the Company’s stock option grants prior to the Company’s initial public offering was estimated at the date of grant using the minimum value option valuation model. The fair value of the Company’s stock option grants subsequent to the initial public offering was determined using the Black-Scholes valuation model based on the actual stock closing price on the day previous to the date of grant. These option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because Finisar’s stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards.

     The fair value of these options at the date of grant was estimated using the following weighted-average assumptions for the first quarter of fiscal 2006 and 2005. For stock option grants the Company used: risk-free interest rates of 4.12% and 3.70%, respectively; a dividend yield of 0%; a volatility factor of 1.10 and 1.19, respectively; and a weighted-average expected life of the option of 3.6 years and 3.9 years, respectively. For the employee stock purchase plan the Company used: risk-free interest rates of 2.85%; a dividend yield of 0%; a volatility factor of 0.99; and a weighted-average expected life of the option of 0.46 years for both periods.

     In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 123R, which replaces SFAS 123 and supersedes Accounting Principles Board (APB) 25. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method. Under APB 25, the Company generally recognizes no compensation expense for employee stock options, as the exercise prices of the options granted are usually equal to the quoted market price of the Company’s common stock on the date of the grant. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, except in limited circumstances when stock options have been exchanged in a business combination. Under SFAS 123R, the pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. In April 2005, the Security and Exchange Commission (SEC) issued a rule delaying the required adoption date for SFAS 123R to the first interim period of the first fiscal year beginning on or after June 15, 2005. The Company will adopt SFAS 123R as of May 1, 2006.

     Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method of compensation cost and the transition method to be used at date of adoption. The transition methods include retroactive and prospective adoption options. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption. The retroactive method requires that compensation expense for all unvested stock options and restricted stock begins with the first period restated. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The Company expects to adopt SFAS 123R under the prospective method. The Company is evaluating the requirements of SFAS 123R and has not yet determined the effect of adopting SFAS 123R or whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123, although the Company expects that the adoption of SFAS 123R will result in significant stock-based compensation expense.

Net Loss Per Share

     Basic and diluted net loss per share is presented in accordance with SFAS No. 128Earnings Per Sharefor all periods presented. Basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from options and warrants (under the treasury stock method) and convertible notes (on an as-if-converted basis) outstanding during the period.

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

	Three Months Ended
	July 31,
	2005			2004
Numerator:
Net loss	$	(19,088	)	$	(22,119	)
Denominator for basic net loss per share:
Weighted-average shares outstanding — total		272,228			223,155
Weighted-average shares outstanding — subject to repurchase		—			(223	)
Weighted-average shares outstanding — performance stock		—			(3	)
Weighted-average shares outstanding — basic and diluted		272,228			222,929
Basic and diluted net loss per share	$	(0.07	)	$	(0.10	)
Common stock equivalents related to potentially dilutive securities excluded from computation above because they are anti-dilutive:
Employee stock options		1,545			4,447
Stock subject to repurchase		—			223
Conversion of convertible subordinated notes		58,647			58,647
Conversion of convertible notes		16,284			—
Performance stock		—			3
Warrants assumed in acquisition		942			964
Potentially dilutive securities		77,418			64,284

Comprehensive Income

     SFAS No. 130Reporting Comprehensive Incomeestablishes rules for reporting and display of comprehensive income and its components. SFAS No. 130 requires unrealized gains or losses on the Company’s available-for-sale securities and foreign currency translation adjustments to be included in comprehensive income.

     The components of comprehensive loss for the three months ended July 31, 2005 and 2004 were as follows (in thousands):

	Three Months Ended
	July 31,
	2005			2004
Net loss	$	(19,088	)	$	(22,119	)
Foreign currency translation adjustment		22			(3	)
Change in unrealized gain (loss) on securities, net of reclassification adjustments for realized gain (loss)		(123	)		(190	)
Comprehensive loss	$	(19,189	)	$	(22,312	)

     The components of accumulated other comprehensive income, net of taxes, were as follows (in thousands):

	July 31, 2005			April 30, 2005
Net unrealized losses on available-for-sale securities	$	(619	)	$	(496	)
Cumulative translation adjustment		899			877
Accumulated other comprehensive income	$	280		$	381

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2. Acquisition of InterSAN, Inc.

     On May 12, 2005, the Company completed the acquisition of InterSAN, Inc., a privately held company located in Scotts Valley, California. The acquisition expanded the Company’s product offering for testing and monitoring systems. Under the terms of the acquisition agreement, the holders of InterSAN’s securities will be entitled to receive up to 7,132,186 shares of Finisar common stock having a value of approximately $8.8 million. Approximately 10% of the shares of Finisar common stock that would otherwise be distributed to the holders of InterSAN’s securities at the closing of the acquisition were deposited into an escrow account for 12 months following the closing for the purpose of providing a fund against which the Company may assert claims for damages, if any, based on breaches of the representations and warranties made by InterSAN in the agreement. The issuance of such shares was not registered under the Securities Act in reliance on the exemption from registration provided by Section 3(a)(10) of the Securities Act. The results of operations of InterSAN (beginning with the closing date of the acquisition) and the estimated fair value of assets acquired are included in the Network Test and Monitoring segment of the Company’s consolidated financial statements for the quarter ended July 31, 2005.

     The following is a summary of the consideration paid for this acquisition (in thousands, except shares):

Stock			Cash including		Total
Value	Shares		acquisition costs		Consideration
$          8,815		7,132,229	$	1,083	$	9,898

     The following is a summary of the initial purchase price allocation for this acquisition (in thousands):

Net Tangible	Developed		Customer				Total
Assets	Technology		Related		Goodwill		Consideration
$            (19)	$	429	$	1,529	$	7,959	$	9,898

     The weighted average amortization period for the intangible assets acquired are as follows (in years):

Developed	Customer
Technology	Related		Total
3.0		2.9		3.0

3. Convertible Note Related to Acquisition of Assets from Data Transit Corp.

     On August 6, 2004, the Company completed the purchase of substantially all of the assets of Data Transit Corp. in exchange for a cash payment of $500,000 and the issuance of a convertible promissory note in the original principal amount of $16.3 million. Transaction costs totaled $682,000. The principal balance of the note bears interest at 8% per annum and is due and payable, if not earlier converted, on the second anniversary of its issuance. Generally, the terms of the convertible promissory note provide for automatic conversion of the outstanding principal and interest into shares of Finisar common stock on a biweekly basis, commencing on the later of the effectiveness of a registration statement covering the resale of the shares or one year after the closing date. Because the number of shares to be issued is based upon the market price of Finisar common stock, the Company is unable at this time to determine the exact number of shares that will be issued pursuant to the note. The conversion price is the average closing bid price of the stock for the three days preceding the date of conversion. The amount of principal and interest to be converted on each conversion date is based on the average trading volume of our common stock over the preceding 14 days.

     During the quarter ended July 31, 2005, the Company issued 5,144,609 shares of common stock upon the conversion of $4.2 million of principal and $1.1 million of interest related to this convertible promissory note. As of July 31, 2005, $12.1 million of principal remains outstanding on this note.

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4. Convertible Note Related to Acquisition of I-Tech Corp.

     On April 8, 2005, the Company completed the acquisition of I-TECH CORP, a privately-held network test and monitoring company, in exchange for the issuance of two promissory notes to the sole holder of I-TECH’s common stock. The promissory notes, which have an aggregate principal amount of approximately $12.1 million and an interest rate of 3.35% per annum, are convertible into shares of Finisar common stock upon the occurrence of certain events and at the election of the Company and the holder of the notes. The exact number of shares of Finisar common stock to be issued pursuant to the promissory notes is dependent on the trading price of Finisar common stock on the dates of conversion of the notes. Because the number of shares to be issued is based upon the market price of Finisar common stock, the Company is unable at this time to determine the exact number of shares that will be issued pursuant to the notes.

     During the quarter ended July 31, 2005, the Company issued 9,834,541 shares of common stock upon the conversion of $11.1 million of principal and $65,000 of interest related to these convertible promissory notes. As of July 31, 2005, $1.0 million of principal remains outstanding on these notes.

5. Convertible Note Related to Acquisition of Minority Investment in CyOptics, Inc.

     On April 29, 2005, the Company entered into a Series F Preferred Stock Purchase Agreement (the “SPA”) with CyOptics, Inc. Pursuant to the SPA, the Company issued a convertible promissory note in the principal amount of approximately $3.8 million and an interest rate of 3.35% per annum as consideration for the purchase of 24,298,580 shares of CyOptics Series F Preferred Stock.

     The terms of the note provide for four weekly conversions of equal portions of the outstanding principal of the note into shares of our common stock, commencing on June 14, 2005. The number of shares to be issued upon each conversion is determined by dividing the amount converted by the average closing bid price of Finisar common stock for either (i) the four trading days immediately prior to the conversion, or (ii) the trading day prior to the conversion, as selected by the holder of the note.

     During the quarter ended July 31, 2005, the Company issued 3,594,607 shares of common stock upon the conversion of the full $3.8 million of principal and $19,000 of interest related to this convertible promissory note. As of July 31, 2005 the entire principal balance has been repaid.

6. Loans Related to Acquisition of Assets from New Focus, Inc.

     In partial consideration for the purchase of certain assets of New Focus, Inc. for a total purchase price of $12.1 million in May 2002, the Company delivered to New Focus a non-interest bearing convertible promissory note in the principal amount of $6.75 million. On August 9, 2002, the note was converted into 4,027,446 shares of common stock. The Company made cash payments of $1.4 million in August 2003, and $2.0 million in September 2004, to pay down minimum commitments to New Focus under a royalty arrangement entered into in connection with the acquisition. The remaining minimum commitment with respect to royalty payments totaling $2.0 million was paid in August 2005. Because such payments were not fixed in time, they were not discounted as otherwise required under APB Opinion No. 21.

7. Inventories

     Inventories consist of the following (in thousands):

	July 31, 2005		April 30, 2005
Raw materials	$	13,400	$	12,657
Work-in-process		13,408		10,720
Finished goods		10,678		12,953
	$	37,486	$	36,330

     During the three months ended July 31, 2005 and 2004, the Company recorded charges of $1.1 million and $2.5 million, respectively, for excess and obsolete inventory and sold inventory that was written-off in previous periods with an approximate cost of $1.4 million and $2.1 million, respectively. As a result, cost of revenue associated with the sale of this inventory was zero.

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8. Property, Plant, Equipment and Improvements

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

	July 31, 2005			April 30, 2005
Land	$	9,747		$	9,747
Buildings		10,593			10,593
Computer equipment		34,748			31,674
Office equipment, furniture and fixtures		3,244			3,209
Machinery and equipment		110,737			108,899
Leasehold improvements		8,057			7,786
Construction-in-process		5,080			3,341
Total		182,206			175,249
Accumulated depreciation and amortization		(97,408	)		(87,985	)
Property, equipment and improvements (net)	$	84,798		$	87,264

9. Income Taxes

     The Company recorded a provision for income taxes of $594,000 and $19,000 for the three months ended July 31, 2005 and 2004, respectively. The provision in fiscal 2006 resulted from a deferred tax liability which was established to reflect tax amortization of goodwill for which no financial statement amortization has occurred under generally accepted accounting principles, as promulgated by SFAS 142, and from fiscal 2006 state minimum tax payments and foreign income taxes netted against the return of certain foreign tax payments made in fiscal 2005 in excess of the fiscal 2005 final foreign tax liability. The provision for income taxes in fiscal 2005 primarily consisted of state minimum taxes.

     Realization of deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets as of July 31, 2005 have been fully offset by a valuation allowance. The Company does not expect to record any tax benefit for future operating losses that may be sustained in fiscal 2006.

     A portion of the valuation allowance at July 31, 2005 related to stock option deductions that are not currently realizable and will be credited to paid-in capital if and when realized. The remaining portion of the valuation allowance, when realized, will first reduce unamortized goodwill, then other non-current intangible assets of acquired subsidiaries and then income tax expense. There can be no assurance that deferred tax assets subject to the valuation allowance will be realized.

     Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth by Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.

10. Purchased Intangible Assets Including Goodwill

     During the first quarter of fiscal 2006, the Company recorded additional goodwill in the optical subsystems and components reporting unit in the amount of $4.4 million. The addition was primarily due to a reassessment of the allocation of purchase price to a minority investment of $4.2 million and additional payments of $209,000, both associated with the January 2005 Infineon acquisition. The Company recorded additional goodwill in the network test and monitoring systems reporting unit of $8.2 million. The addition was due to recording the acquisition of InterSAN in the amount of $8.0 million and additional payments of $145,000 for the I-tech acquisition and $59,000 for the Data Transit acquisition.

     The following table reflects the changes in the carrying amount of goodwill by reporting unit (in thousands):

	Optical Subsystems		Network Test and		Consolidated
	and components		Monitoring Systems		Total
Balance at April 30, 2005	$	88,422	$	31,268	$	119,690
Addition related to acquisition of subsidiary		4,364		8,163		12,527
Balance at July 31, 2005	$	92,786	$	39,431	$	132,217

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     The following table reflects intangible assets subject to amortization as of July 31, 2005 and April 30, 2005 (in thousands):

	July 31, 2005
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Purchased technology	$	106,260	$	(78,439	)	$	27,821
Trade name		3,625		(2,635	)		990
Customer relationships		5,243		(756	)		4,487
Total	$	115,128	$	(81,830	)	$	33,298

	April 30, 2005
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Purchased technology	$	105,831		($72,785	)	$	33,046
Trade name		3,625		(2,465	)		1,160
Customer relationships		3,714		(450	)		3,264
Total	$	113,170		($75,700	)	$	37,470

     Estimated remaining amortization expense for each of the next five fiscal years ending April 30, is as follows (dollars in thousands):

Year	Amount
2006 remaining	$	13,688
2007		7,331
2008		6,079
2009		3,264
2010 and beyond		2,936
	$	33,298

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11. Available-For-Sale Investments

     The following is a summary of the Company’s available-for-sale investments as of July 31, 2005 and April 30, 2005 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
Investment Type	Cost		Gain		Loss			Value
As of July 31, 2005
Debt:
Corporate	$	49,381	$	1	$	(357	)	$	49,025
Government agency		30,809		—		(258	)		30,551
Municipal		598		—		(5	)		593
Total	$	80,788	$	1	$	(620	)	$	80,169
Reported as:
Cash equivalents	$	7,565	$	—	$	—		$	7,565
Short-term investments		73,223		1		(620	)		72,604
	$	80,788	$	1	$	(620	)	$	80,169
As of April 30, 2005
Debt:
Corporate	$	47,546	$	4	$	(258	)	$	47,292
Government agency		32,298		1		(243	)		32,056
Municipal		349		—		—			349
Total	$	80,193	$	5	$	(501	)	$	79,697
Reported as:
Cash equivalents	$	6,767	$	—	$	(1	)	$	6,766
Short-term investments		73,426		5		(500	)		72,931
	$	80,193	$	5	$	(501	)	$	79,697

     The gross realized loss for the three month period ended July 31, 2005 was $4,000 and the gross realized gain for the three month period ended July 31, 2004 was $21,000. Realized gains and losses were calculated based on the specific identification method.

Restricted Securities

     The Company has purchased and pledged to a collateral agent, as security for the exclusive benefit of the holders of the Company’s 2 1/2% convertible subordinated notes, U.S. government securities, which will be sufficient upon receipt of scheduled principal and interest payments thereon, to provide for the payment in full of the first eight scheduled interest payments due on each series of its outstanding convertible subordinated notes. These restricted securities are classified as held to maturity and are recorded on the Company’s consolidated balance sheet at amortized cost. The following table summarizes the Company’s restricted securities as of July 31, 2005 and April 30, 2005 (in thousands):

			Gross
	Amortized		Unrealized			Market
	Cost		Gain/(Loss)			Value
As of July 31, 2005
Government agency	$	9,157	$	(147	)	$	9,010
Classified as:
Short term — less than 1 year	$	3,732	$	(20	)	$	3,712
Long term — 1 to 3 years		5,425		(127	)		5,298
Total	$	9,157	$	(147	)	$	9,010
As of April 30, 2005
Government agency	$	9,110	$	(143	)	$	8,967
Classified as:
Short term — less than 1 year	$	3,717	$	(30	)	$	3,687
Long term — 1 to 3 years		5,393		(113	)		5,280
Total	$	9,110	$	(143	)	$	8,967

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Cost Method Investments

     Included in minority investments at July 31, 2005 and April 30, 2005 are cost method investments of $11.3 million and $15.4 million, respectively. Minority investments at April 30, 2005 represents the carrying value of the Company’s minority investments in four privately held companies accounted for under the cost method. During the quarter ended July 31, 2005, the Company evaluated the valuation of a minority investment acquired on January 31, 2005 as part of the Infineon acquisition and determined the value of the investment to be zero. As a result, the Company reclassified the purchase price originally allocated to the investment to goodwill.

Equity Method Investment

     Included in minority investments at July 31, 2005 and April 30, 2005 are $5.4 million and $6.0 million, respectively, representing the carrying value of the Company’s minority investment in one private company, Quintessence Photonics, accounted for under the equity method. During the three months ended July 31, 2005 and 2004, the Company recorded expenses of $522,000 and $361,000 respectively, representing the Company’s share of the loss of the investee, which was classified as other expense.

12. Segments and Geographic Information

     The Company designs, develops, manufactures and markets optical subsystems, components and test and monitoring systems for high-speed data communications. The Company views its business as having two principal operating segments, consisting of optical subsystems and components and network test and monitoring systems.

     Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for storage area networks (SANs) and local area networks (LANs) and metropolitan access network (MAN) applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in MAN applications. Optical components consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers, primarily for LAN and SAN applications. Network test and monitoring systems include products designed to test the reliability and performance of equipment for a variety of protocols including Fibre Channel, Gigabit Ethernet, 10 Gigabit Ethernet, iSCSI, SAS and SATA. These test and monitoring systems are sold to both manufacturers and end-users of the equipment.

     Both of the Company’s operating segments and its corporate sales function report to the President and Chief Executive Officer. Where appropriate, the Company charges specific costs to these segments where they can be identified and allocates certain manufacturing costs, research and development, sales and marketing and general and administrative costs to these operating segments, primarily on the basis of manpower levels or a percentage of sales. The Company does not allocate income taxes, non-operating income, acquisition related costs, stock compensation, interest income and interest expense to its operating segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There are no intersegment sales.

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     Information about reportable segment revenues and income are as follows (in thousands):

	Three Months Ended
	July 31,
	2005			2004
Revenues:
Optical subsystems and components	$	72,370		$	53,750
Network test and monitoring systems		9,362			8,127
Total revenues	$	81,732		$	61,877
Depreciation and amortization expense:
Optical subsystems and components	$	7,081		$	6,693
Network test and monitoring systems		390			181
Total depreciation and amortization expense	$	7,471		$	6,874
Operating loss:
Optical subsystems and components	$	(5,366	)	$	(10,675	)
Network test and monitoring systems		(3,094	)		(1,060	)
Total operating loss		(8,460	)		(11,735	)
Unallocated amounts:
Amortization of acquired developed technology		(5,654	)		(5,566	)
Amortization of deferred stock compensation		—			(97	)
Amortization of other intangibles		(476	)		(143	)
Interest income (expense), net		(3,304	)		(2,771	)
Other non-operating income (expense), net		(600	)		(1,788	)
Total unallocated amounts		(10,034	)		(10,365	)
Loss before provision for income tax	$	(18,494	)	$	(22,100	)

     The following is a summary of total assets by segment (in thousands):

	July 31, 2005		April 30, 2005
Optical subsystems and components	$	319,882	$	345,365
Network test and monitoring systems		77,020		71,535
Other assets		87,212		72,085
	$	484,114	$	488,985

     Short-term, restricted and minority investments are the primary components of other assets in the above table.

     The following is a summary of operations within geographic areas based on the location of the entity purchasing the Company’s products (in thousands):

	Three Months Ended
	July 31,
	2005		2004
Revenues from sales to unaffiliated customers:
United States	$	46,675	$	39,635
Rest of the world		35,057		22,242
	$	81,732	$	61,877

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     Revenues generated in the United States are all from sales to customers located in the United States.

     The following is a summary of long-lived assets within geographic areas based on the location of the assets (in thousands):

	July 31,		April 30,
	2005		2005
Long-lived assets
United States	$	260,114	$	258,345
Malaysia		21,957		23,415
Rest of the world		2,058		2,139
	$	284,129	$	283,899

     The following is a summary of capital expenditures by reportable segment (in thousands):

	Three Months Ended
	July 31,
	2005		2004
Optical subsystems and components	$	3,936	$	6,871
Network test and monitoring systems		32		174
Total capital expenditures	$	3,968	$	7,045

13. Warranty

     The Company generally offers a one-year limited warranty for all of its products. The specific terms and conditions of these warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs based on revenue recognized. Factors that affect the Company’s warranty liability include historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

     Changes in the Company’s warranty liability during the following period were as follows (in thousands):

	July 31, 2005
Beginning balance	$	2,963
Additions during the period based upon product sold		360
Settlements		(143	)
Changes in liability for pre-existing warranties, including expirations		(263	)
Ending balance	$	2,917

14. Restructuring

     As of July 31, 2005, $329,000 of committed facilities payments remains accrued and is expected to be fully utilized by the end of fiscal 2006. This amount relates to restructuring activities associated with the closure of the Company’s Hayward facility that took place in fiscal 2003.

15. Pending Litigation

     A securities class action lawsuit was filed on November 30, 2001 in the United States District Court for the Southern District of New York, purportedly on behalf of all persons who purchased the Company’s common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants Finisar, Jerry S. Rawls, its President and Chief Executive Officer, Frank H. Levinson, its Chairman of the Board and Chief Technical Officer, Stephen K. Workman, its Senior Vice President and Chief Financial

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Officer, and an investment banking firm that served as an underwriter for its initial public offering in November 1999 and a secondary offering in April 2000. The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the registration statements for the offerings failed to disclose, among other things, that (i) the underwriter had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriter allocated to those investors material portions of the shares of its stock sold in the offerings and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of its stock sold in the offerings to those customers in exchange for which the customers agreed to purchase additional shares of its stock in the aftermarket at pre-determined prices. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October 2002, all claims against the individual defendants were dismissed without prejudice. On February 19, 2003, the Court denied the Company’s motion to dismiss the complaint. In July 2004, the Company and the individual defendants accepted a settlement proposal made to all of the issuer defendants. Under the terms of the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, the Company would be responsible to pay its pro rata portion of the shortfall, up to the amount of the self-insured retention under its insurance policy, which may be up to $2 million. The timing and amount of payments that the Company could be required to make under the proposed settlement will depend on several factors, principally the timing and amount of any payment that the insurers may be required to make pursuant to the $1 billion guaranty. On February 15, 2005, the Court issued an order providing preliminary approval of the proposed settlement and set a hearing for April 24, 2006 to consider final approval of the settlement. If the settlement is not approved by the Court, the Company intends to defend the lawsuit vigorously. Because of the inherent uncertainty of litigation, however, we cannot predict its outcome. If, as a result of this dispute, we are required to pay significant monetary damages, its business would be substantially harmed.

     On April 4, 2005, the Company filed an action in the United States District Court, against the DirecTV Group, Inc.; DirecTV Holdings, LLC; DirecTV Enterprises, LLC; DirecTV Operations, LLC; DirecTV, Inc.; and Hughes Network Systems, Inc. (collectively “DirecTV”). The lawsuit alleges that DirecTV willfully infringes the Company’s U.S. Patent No. 5,404,505 by making, using, selling, offering to sell and/or importing systems and/or methods that embody one or more of the claims of our patent. On May 13, 2005, DirecTV answered the Complaint. DirecTV’s counterclaim seeks a declaration of non-infringement, patent invalidity and patent unenforceability. The trial is scheduled for June 6, 2006.

16. Guarantees and Indemnifications

     In November 2002, the FASB issued Interpretation No. 45Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The Company may terminate the indemnification agreements with its officers and directors upon 90 days written notice, but termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid.

     The Company enters into indemnification obligations under its agreements with other companies in its ordinary course of business, including agreements with customers, business partners, and insurers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or the use of the Company’s products. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.

     The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of July 31, 2005. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

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17. Sales of Accounts Receivable

     On October 29, 2004, the Company entered into an agreement with Silicon Valley Bank to sell certain trade receivables. In these non-recourse sales, the Company removes the sold receivables from its books and records no liability related to the sale, as the Company has assessed that the sales should be accounted for as “true sales” in accordance with SFAS No. 140Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.During the three months ended July 31, 2005, the Company sold approximately $6.0 million of its trade receivables to Silicon Valley Bank under the terms of this agreement.

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 below under “Factors That Could Affect Our Future Performance.” The following discussion should be read together with our consolidated financial statements and related notes thereto included elsewhere in this report.

Overview

     We were incorporated in 1987 and funded our initial product development efforts largely through revenues derived under research and development contracts. After shipping our first 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 $151.0 million from the initial public offering of shares of our common stock, and in April 2000 we received $190.6 million from an additional public offering of shares of our common stock. In October 2001, we sold $125 million aggregate principal amount of 5 1/4% convertible subordinated notes due October 15, 2008, and in October 2003, we sold $150 million aggregate principal amount of 2 1/2% convertible subordinated notes due October 15, 2010.

     Since October 2000, we have acquired a number of companies and certain businesses and assets of other companies in order to broaden our product offerings and provide new sources of revenue, production capabilities and access to advanced technologies that we believe will enable us to reduce our product costs and develop innovative and more highly integrated product platforms while accelerating the timeframe required to develop such products.

     In October 2002, we sold our subsidiary, Sensors Unlimited, Inc. to a new company organized by a management group led by Dr. Greg Olsen, then an officer and director of Finisar and a former majority owner of Sensors Unlimited. The intellectual property developed after the acquisition of Sensors Unlimited was transferred to other operations within Finisar. In November 2002, we discontinued a product line at our Demeter Technologies subsidiary that was not making a significant contribution to our operating results and was no longer considered a key part of our product strategy. Certain assets of Demeter Technologies were sold in conjunction with the product line discontinuation. In April 2003, we acquired Genoa Corporation and announced the closure of Demeter Technologies and the consolidation of all active device development and wafer fabrication operations into the Genoa facility. The consolidation was completed in fiscal 2004. During the second quarter of fiscal 2004, we completed the closure of our German facility associated with the acquisition of AIFOtec, GmbH. The intellectual property, technical know-how and certain assets related to the German operations were consolidated with our operations in Sunnyvale, California, during the second quarter of fiscal 2004.

     The principal strategic goal of most of our acquisitions to date related to our optical subsystems and components business has been to gain access to leading-edge technology for the manufacture of optical components in order to improve the performance and reduce the cost of our optical subsystem products. We have also sold these optical components on a stand-alone basis to other manufacturers; however, prior to our acquisition of Honeywell International Inc.’s VCSEL Optical Products business unit in March 2004, the sale of these components into this so-called “merchant market” had not been a strategic priority, and our revenues from the sale of optical subsystems and components consisted predominantly of subsystems sales. As a result of the Honeywell acquisition, we are now selling vertical cavity surface emitting lasers, or VCSELs, in the merchant market, and we intend to evaluate opportunities to increase the sale of these and other components in the merchant market. The principal strategic goal of most of our acquisitions to date related to our network test and monitoring business has been to broaden our product portfolio and to gain access to new distribution channels. The acquisition of assets and intellectual property of Data Transit, Inc. in August 2004, I-TECH CORP. in April 2005, and InterSAN, Inc. in May 2005 were examples of our pursuit of this strategy. As a result of these acquisitions, we have expanded our product offerings for SAN test, analysis and monitoring tools to include additional products which test and monitor storage networks using the SAS and SATA protocols as well as additional tools for testing and reconfiguring SANs.

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     To date, our revenues have been principally derived from sales of our optical subsystems to networking and storage systems manufacturers and sales of our network performance test systems to these manufacturers as well as end users. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for SANs, LANs, and MAN applications. A large proportion of our sales are concentrated with a relatively small number of customers. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future.

     We recognize revenue when persuasive evidence of an arrangement exists, title and risk of loss pass to the customer, which is generally upon shipment, the price is fixed or determinable and collectability is reasonably assured. For those arrangements with multiple elements, or in related arrangements with the same customer, we allocate revenue to the separate elements based upon each element’s fair value as determined by the list price for such element.

     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. 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 and monitoring systems is usually considerably shorter.

     The market for optical subsystems and components is characterized by declining average selling prices resulting from factors such as industry over-capacity, increased competition, the introduction of new products and the growth in unit volumes as manufacturers continue to deploy network and storage systems. We anticipate that our average selling prices will continue to decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty.

     Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, inventory adjustments for obsolete and excess inventory and the amortization of acquired developed technology associated with acquisitions that we have made. Historically, we outsourced the majority of our assembly operations. However, in fiscal 2002, we commenced manufacturing of our optical subsystem products at our subsidiary in Ipoh, Malaysia. We conduct component manufacturing, manufacturing engineering, supply chain management, quality assurance and documentation control at our facilities in Sunnyvale, California and Richardson, Texas and at our subsidiaries’ facilities in Fremont, California, Shanghai, China and Ipoh, Malaysia. With the transition of most of our production to Malaysia and the added manufacturing infrastructure associated with several acquisitions completed during the past two years, our cost structure has become more fixed, making it more difficult to reduce costs during periods when demand for our products is weak, product mix is unfavorable or selling prices are generally lower. While we undertook measures to reduce our operating costs during fiscal 2003, 2004 and 2005, there can be no assurance that we will be able to reduce our cost of revenues enough to achieve or sustain profitability during periods of weak demand or when average selling prices are low.

     Our gross profit margins vary among our product families, and are generally higher on our network test and monitoring systems than on our optical subsystems and components. Our optical products sold for longer distance MAN and telecom applications typically have higher gross margins than our products for shorter distance LAN and SAN applications. 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 overall revenue levels, shifts in product mix, the introduction of new products, decreases in average selling prices and our ability to reduce product costs.

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

     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.

     General and administrative expenses consist primarily of salaries and related expenses for administrative, finance and human resources personnel, professional fees, and other corporate expenses.

     In connection with the grant of stock options to employees between August 1, 1998 and October 15, 1999, we recorded deferred stock compensation representing the difference between the deemed value of our common stock for accounting purposes and the exercise price of these options at the date of grant. In connection with the assumption of stock options previously granted to employees of companies we acquired, we recorded deferred compensation representing the difference between the fair market value of

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our common stock on the date of closing of each acquisition and the exercise price of the unvested portion of options granted by those companies which we assumed. Deferred stock compensation is presented as a reduction of stockholder’s equity, with accelerated amortization recorded over the vesting period, which is typically three to five years. The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited prior to vesting and could increase if we modify the terms of an option grant resulting in a new measurement date.

     Acquired in-process research and development represents the amount of the purchase price in a business combination allocated to research and development projects underway at the acquired company that had not reached the technologically feasible stage as of the closing of the acquisition and for which we had no alternative future use.

     A portion of the purchase price in a business combination is allocated to goodwill and intangibles. Prior to May 1, 2002, goodwill and purchased intangibles were amortized over their estimated useful lives. Subsequent to May 1, 2002, goodwill and intangible assets with indefinite lives are no longer amortized but subject to annual impairment testing.

     Impairment charges consist of write downs to the carrying value of intangible assets and goodwill arising from various business combinations to their implied fair value.

     Restructuring costs generally include termination costs for employees associated with a formal restructuring plan and the cost of facilities or other unusable assets abandoned or sold.

     Other acquisition costs primarily consist of incentive payments for employee retention included in certain of the purchase agreements of companies we acquired and costs incurred in connection with transactions that were not completed.

     Other income and expenses generally consist of bank fees, gains or losses as a result of the periodic sale of assets and other-than-temporary decline in the value of investments.

Recent Acquisition

Acquisition of InterSAN

     On May 12, 2005, the we completed the acquisition of InterSAN, Inc., a privately held company located in Scotts Valley, California. The acquisition expanded our product offering for testing and monitoring systems. Under the terms of the acquisition agreement, the holders of InterSAN’s securities will be entitled to receive up to 7,132,186 shares of Finisar common stock having a value of approximately $8.8 million. Approximately 10% of the shares of Finisar common stock that would otherwise have been distributed to the holders of InterSAN’s securities at the closing of the acquisition were deposited into an escrow account for 12 months following the closing for the purpose of providing a fund against which we may assert claims for damages, if any, based on breaches of the representations and warranties made by InterSAN in the agreement. The issuance of such shares was not registered under the Securities Act in reliance on the exemption from registration provided by Section 3(a)(10) of the Securities Act. The results of operations of InterSAN (beginning with the closing date of the acquisition) and the estimated fair value of assets acquired are included in the network test and monitoring segment of the Company’s consolidated financial statements for the quarter ended July 31, 2005.

Critical Accounting Policies

     There have been no material changes to our critical accounting policies, which are described in our Annual Report on Form 10-K for the year ended April 30, 2005.

Pending Adoption of New Accounting Standards

     In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 123R, which replaces SFAS 123 and supersedes Accounting Principles Board (APB) 25. As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25’s intrinsic value method. Under APB 25, we generally recognize no compensation expense for employee stock options, as the exercise prices of the options granted are usually equal to the quoted market price of our common stock on the date of the grant. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, except in limited circumstances when stock options have been exchanged in a business combination. Under SFAS 123R, the pro forma disclosures

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previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. In April 2005, the Security and Exchange Commission (SEC) issued a rule delaying the required adoption date for SFAS 123R to the first interim period of the first fiscal year beginning on or after June 15, 2005. We will adopt SFAS 123R as of May 1, 2006.

     Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method of compensation cost and the transition method to be used at date of adoption. The transition methods include retroactive and prospective adoption options. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption. The retroactive method requires that compensation expense for all unvested stock options and restricted stock begins with the first period restated. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. We expect to adopt SFAS 123R under the prospective method. We are evaluating the requirements of SFAS 123R and have not yet determined the effect of adopting SFAS 123R or whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123, although we expect that the adoption of SFAS 123R will result in significant stock-based compensation expense.

     On June 7, 2005, the FASB issued Statement No. 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles were required recognition via a cumulative effect adjustment within net income of the period of the change. Statement 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. We do not believe adoption of Statement 154 will have a material effect on our consolidated financial position, results of operations or cash flows.

Results of Operations

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

	Three Months Ended
	July 31,
	2005			2004
Revenues:
Optical subsystems and components		88.5	%		86.9	%
Network test and monitoring systems		11.5			13.1
Total revenues		100.0			100.0
Cost of revenues		74.4			73.9
Amortization of acquired developed technology		6.9			9.0
Gross profit		18.7			17.1
Operating expenses:
Research and development		15.9			26.0
Sales and marketing		10.3			11.6
General and administrative		9.8			7.6
Amortization of deferred stock compensation		—			0.2
Amortization of purchased intangibles		0.6			0.2
Total operating expenses		36.6			45.6
Loss from operations		(17.9	)		(28.5	)
Interest income		1.0			1.0
Interest expense		(5.0	)		(5.4	)
Other income (expense), net		(0.7	)		(2.9	)
Loss before income taxes		(22.6	)		(35.8	)
Provision for income taxes		0.7			0.0
Net loss		(23.3	)%		(35.8	)%

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     Revenues.Revenues increased $19.9 million, or 32.1%, to $81.7 million in the quarter ended July 31, 2005 compared to $61.9 million in the quarter ended July 31, 2004. Sales of optical subsystems and components and network test and monitoring systems represented 88.5% and 11.5%, respectively, of total revenues in the quarter ended July 31, 2005, compared to 86.9% and 13.1%, respectively, in the quarter ended July 31, 2004.

     Optical subsystems and components revenues increased $18.6 million, or 34.6%, to $72.4 million in the quarter ended July 31, 2005 compared to $53.8 million in the quarter ended July 31, 2004. Our acquisition on January 31, 2005, of certain assets of Infineon’s fiber optics business unit contributed $8.0 million in the quarter ended July 31, 2005. Excluding the effect of the acquisition, sales of optical subsystems and components increased $10.6 million, or 19.8%, in the quarter ended July 31, 2005 compared to the quarter ended July 31, 2004. Of the total increase of optical subsystem and component revenues, $13.5 million was related to sales of products for short distance LAN/SAN applications. Increased sales in these product lines were partially offset by a $2.9 million decline in sales of other products. The increase in revenues from the sale of these products was primarily the result of an increase in the volume of units sold to new and existing customers, partially offset by a decrease in average selling prices.

     Network test and monitoring systems revenues increased $1.3 million, or 15.2%, to $9.4 million in the quarter ended July 31, 2005 compared to $8.1 million in the quarter ended July 31, 2004. The increase was primarily due to product lines acquired from Data Transit in August 2004, I-Tech in April 2005, and Intersan in May 2005, as well as increased sales of new test and monitoring products used in the development of Fibre Channel SANs operating at 2 and 4 Gbps.

     Amortization of Acquired Developed Technology.Amortization of acquired developed technology, a component of cost of revenues, increased $88,000, or 1.6%, in the quarter ended July 31, 2005 to $5.7 million compared to $5.6 million in the quarter ended July 31, 2004. The increase was primarily due to the acquisitions of Data Transit, I-TECH, InterSAN and certain product lines from Infineon which contributed $350,000, $75,000, $36,000, and $381,000, respectively, to the cost of revenues in the quarter ended July 31, 2005. Additionally, in the second quarter of fiscal 2005 we recorded an impairment charge of $3.7 million to cost of revenue to write-off the remaining net book value of certain passive optical technology associated with our acquisition of assets of New Focus, Inc in May 2002. This charge reduced amortization by $711,000 in the quarter ended July 31, 2005 compared to the quarter ended July 31, 2004.

     Gross Profit.Gross profit increased $4.7 million, or 44.1%, to $15.3 million in the quarter ended July 31, 2005 compared to $10.6 million in the quarter ended July 31, 2004. Gross profit as a percentage of total revenue was 18.7% in the quarter ended July 31, 2005 compared to 17.1% in the quarter ended July 31, fiscal 2004. We recorded charges of $1.1 million for obsolete and excess inventory in the quarter ended July 31, 2005 and $2.5 million in the quarter ended July 31, 2004. We sold inventory that was written-off in previous periods resulting in a benefit of $1.4 million in the quarter ended July 31, 2005 and $2.1 million in the quarter ended July 31, 2004. As a result, we recognized a net benefit of $300,000 in the quarter ended July 31, 2005 compared to a net charge of $400,000 in the quarter ended July 31, 2004. Excluding the amortization of acquired developed technology and the net impact of excess and obsolete inventory charges, gross profit would have been $20.7 million, or 25.3% of revenue, in the quarter ended July 31, 2005 compared to $16.6 million, or 26.8% of revenue in the quarter ended July 31, 2004. The increase in gross profit was primarily due to an increase in unit sales across most of our product lines, which spread our fixed overhead costs over a higher production volume and reduced material costs.

     Research and Development Expenses.Research and development expenses decreased $3.1 million, or 19.0%, to $13.0 million in the quarter ended July 31, 2005 compared to $16.1 million in the quarter ended July 31, 2004. Management initiatives to reduce research and development expenses resulted in reductions in temporary labor and consulting services of $905,000, project materials and new product development scrap of $2.5 million, and lower depreciation costs of $421,000. Research and development expenses as a percent of revenues decreased to 15.9% in the quarter ended July 31, 2005 compared to 26.0% in the quarter ended July 31, 2004 as a result of such reductions, as well as the increase in revenues.

     Sales and Marketing Expenses.Sales and marketing expenses increased $1.2 million, or 17.1%, to $8.4 million in the quarter ended July, 31 2005 compared to $7.2 million in the quarter ended July 31, 2004. The increase in sales and marketing expenses was primarily due to a $847,000 increase in personnel-related costs, a $190,000 increase in marketing costs, primarily associated with our increase in revenue. Sales and marketing expenses as a percent of revenues decreased to 10.2% in the quarter ended July 31, 2005 compared to 11.6% in the quarter ended July 31, 2004.

     General and Administrative Expenses.General and administrative expenses increased $3.3 million, or 71.1%, to $8.0 million in the quarter ended July 31, 2005 compared to $4.7 million in the quarter ended July 31, 2004. The increase was primarily due to additional costs associated with the evaluation and testing of internal control systems required under Section 404 of the Sarbanes-

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Oxley Act of 2002 of $650,000, a $1.4 million increase in audit fees, a $225,000 increase in legal expense, a $604,000 increase in personnel-related costs including $212,000 for reduction in force related expenses, and an increase in our allowance for aged receivables of $283,000. General and administrative expenses as a percent of revenues increased to 9.8% in the quarter ended July 31, 2005 compared to 7.6% in the quarter ended July 31, 2004.

     Amortization of Deferred Stock Compensation.Amortization of deferred stock compensation costs decreased by $97,000 to zero in the quarter ended July 31, 2005, compared to $97,000 in the quarter ended July 31, 2004. As of April 30, 2005, previously recorded deferred stock compensation was fully amortized.

     Amortization of Purchased Intangibles.Amortization of purchased intangibles increased $333,000, or 232.9%, to $476,000 in the quarter ended July 31, 2005 compared to $143,000 in the quarter ended July 31, 2004. The increase was due to purchased intangibles related to our acquisitions of Data Transit, Infineon, I-Tech and InterSAN in the amounts of $93,000, $43,000, $63,000 and $134,000, respectively.

     Interest Income.Interest income increased $191,000, or 32.3%, to $783,000 in the quarter ended July 31, 2005 compared to $592,000 in the quarter ended July 31, 2004. The increase was primarily the result of fluctuating investment balances and interest rates between the quarters.

     Interest Expense.Interest expense increased $724,000, or 21.5%, to $4.1 million in the quarter ended July 31, 2005 compared to $3.4 million in the quarter ended July 31, 2004. Interest expense is primarily related to our convertible subordinated notes due in 2008 and 2010. In August 2004, we acquired substantially all of the assets of Data Transit in exchange for a cash payment and the issuance of a convertible note in the principal amount of $16.3 million, bearing interest at 8% annually. In the quarter ended April 30, 2005, we recorded a financing liability of $12.9 million associated with the sale-leaseback of one our corporate office facilities. In April 2005, we acquired I-TECH CORP. in exchange for convertible notes in the aggregate principal amount of $12.1 million, bearing interest at 3.35% annually. The increase in interest expense, was primarily related to these transactions. Of our total interest expense, $1.1 million represented the amortization of the beneficial conversion feature of these notes in the quarters ended July 31, 2005 and 2004, respectively.

     Other Income (Expense), Net.Other income (expense), net, decreased $1.2 million, or 66.4%, to an expense of $600,000 in the quarter ended July 31, 2005 compared to an expense of $1.8 million in the quarter ended July 31, 2004. In the quarter end July 31, 2004, we recorded a loss of $1.0 million on the sale of equipment. The remaining expense in the quarters ended July 31, 2005 and 2004 primarily consisted of our proportional share of losses associated with a minority investment and amortization of subordinated loan costs.

     Provision for Income Taxes.We recorded an income tax provision of $594,000 in the quarter ended July 31, 2005 compared to $19,000 in the quarter ended July 31, 2004. The provision for income taxes in the quarter ended July 31, 2005 is primarily the result of establishing a deferred tax liability to reflect tax amortization of goodwill for which no book amortization has occurred. Due to the uncertainty regarding the timing and extent of our future profitability, we have recorded a valuation allowance to offset potential income tax benefits associated with our operating losses. As a result, we did not record any income tax benefit in either of the quarters ended July 31, 2005 or 2004. There can be no assurance that deferred tax assets subject to the valuation allowance will ever be realized.

Liquidity and Capital Resources

     At July 31, 2005, cash, cash equivalents and short-term investments were $101.8 million compared to $102.4 million at April 30, 2005. Restricted securities, used to secure future interest payments on our convertible debt were $9.2 million at July 31, 2005 compared to $9.1 million at April 30, 2005. At July 31, 2005, total short and long term debt was $250.4 million, compared to $267.8 million at April 30, 2005.

     Net cash provided by operating activities totaled $4.0 million in the quarter ended July 31, 2005, compared to a use of $15.3 million of cash in the quarter ended July 31, 2004. Cash provided by operating activities in the quarter ended July 31, 2005 was primarily a result of operating losses adjusted for non-cash related items. Working capital uses of cash in the quarter ended July 31, 2005 included cash inflows of $9.5 million offset by outflows of $1.5 million. Cash inflows were primarily due to a $2.6 million increase in accrued liabilities, a $2.1 million increase in accounts payable, a $2.1 million increase in accrued compensation and a $1.5

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million decrease in other assets. The increase in accrued liabilities was primarily due to an increase in accrued interest for our convertible debt due in 2008 and 2010 and a $642,000 increase in deferred revenue associated increased sales through distributor channels. The increases in accrued compensation and accounts payable are related to the timing of those payments. The decrease in other assets was primarily due to the receipt of $3 million for payment of notes receivable offset by investments of $1.2 million in our patent portfolio. Cash outflows were due to a $871,000 increase in inventory and a $683,000 increase in accounts receivable.

     Net cash used in investing activities totaled $4.1 million in the quarter ended July 31, 2005 compared to $11.6 million in the quarter ended July 31, 2004. The use of cash for investing activities in the quarter ended July 31, 2005 was primarily related to facility improvements and purchases of equipment at our new AOC Division manufacturing facility in Texas as well as purchases of equipment for our facility in Malaysia to support increased production volume. The use of cash for investing activities in the quarter ended July 31, 2004 consisted primarily of our purchase of the assets of Honeywell’s VCSEL Optical Products business unit and purchases of equipment to support increased production volume in our Malaysian manufacturing facility.

     Net cash used in financing activities was $133,000 in the quarter ended July 31, 2005 compared to cash provided by financing activities of $342,000 in the quarter ended July 31, 2004. Cash used in financing activities in the quarter ended July 31, 2005 included payment of borrowings of $175,000 offset by proceeds of $42,000 from the exercise of stock options. Cash provided by financing activities in the quarter ended July 31, 2004 included the repayment of a stockholder note of $196,000 and proceeds of $146,000 from the exercise of employee stock options.

     On April 29, 2005, we entered into a letter of credit reimbursement agreement with Silicon Valley Bank for a period of one year. Under the terms of the agreement, Silicon Valley Bank is providing a $7 million letter of credit facility to house existing letters of credit issued by Silicon Valley Bank and any other letters of credit that may be required by the Company. Cost related to the credit facility consisted of a loan fee of 0.50% of the credit facility amount, or $35,000, plus the bank’s out of pocket expenses associated with the credit facility. The credit facility is unsecured with a negative pledge on all assets, including intellectual property. The agreement requires us to maintain our primary banking and cash management relationships with Silicon Valley Bank or SVB Securities and to maintain a minimum unrestricted cash and cash equivalents balance, net of any outstanding debt and letters of credit exposure, of $40 million at all times. At July 31, 2005 outstanding letters of credit secured by this facility totaled $3.0 million.

     We believe that our existing balances of cash, cash equivalents and short-term investments, together with the cash 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. We may however require additional financing to fund our operations in the future. The significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.

Contractual Obligations and Commercial Commitments

     At July 31, 2005, we had contractual obligations of $328.9 million as shown in the following table (in thousands):

			Payments Due by Period
			Less than						After
Contractual Obligations	Total		1 Year		1-3 Years		4-5 Years		5 Years
Short-term debt	$	1,344	$	1,344	$	—	$	—	$	—
Long-term debt		262,463		—		12,213		100,250		150,000
Lease commitment under sale-leaseback agreement		51,551		2,978		6,159		6,439		35,975
Operating leases		9,488		4,852		2,652		1,637		347
Purchase obligations		2,009		2,009		—		—		—
Minimum royalty obligation		2,000		2,000		—		—		—
Total contractual obligations	$	328,855	$	13,183	$	21,024	$	108,326	$	186,322

     Short-term debt consists of a convertible promissory note for $1.0 million due in fiscal 2006, related to our fiscal 2005 acquisition of I-TECH and $344,000 of current debt obligations assumed as part of the acquisition of InterSAN, Inc.

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     Long-term debt consists of $158,000 in debt obligations assumed upon the acquisition of InterSAN, Inc., a convertible promissory note in the amount of $12.1 million due August 6, 2006, if not sooner converted, and two series of convertible subordinated notes in the aggregate principal amount of $100.3 million due October 15, 2008, and $150.0 million due October 15, 2010. The two series of notes are convertible by the holders of the notes at any time prior to maturity into shares of Finisar common stock at specified conversion prices. The two series of notes are redeemable by us, in whole or in part, after October 15, 2004 and October 15, 2007, respectively. Holders of the notes due in 2010 have the right to require us to repurchase some or all of their notes on October 15, 2007. We may choose to pay the repurchase price in cash, shares of Finisar common stock, or a combination thereof.

     Lease commitment under sale-leaseback agreement includes $12.5 million related to the sale-leaseback agreement for our corporate office building, which we entered into in the fourth quarter of 2005.

     Operating lease obligations consist primarily of base rents for facilities we occupy at various locations.

     Purchase obligations consist of standby repurchase obligations and are related to materials purchased and held by subcontractors on our behalf to fulfill the subcontractors’ purchase order obligations at their facilities. Our repurchase obligations of $2.0 million have been expensed and recorded on the balance sheet as non-cancelable purchase obligations as of July 31, 2005.

     The minimum commitment for royalty payments is related to the purchase of certain assets of New Focus and has been recorded on our balance sheet as of July 31, 2005 as current portion of long-term liabilities.

Off-Balance-Sheet Arrangements

     At July 31, 2005 and April 30, 2005, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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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 CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.

We are subject to a number of special risks as a result of our recent acquisition of the fiber optics transceiver business of Infineon Technologies AG

     On January 25, 2005, we entered into an agreement with Infineon Technologies AG to acquire certain assets associated with the design, development and manufacture of the optical transceiver and transponder products of Infineon’s fiber optics business unit in exchange for 34,000,000 shares of Finisar common stock. The acquisition closed on January 31, 2005. Our future results of operation will be substantially influenced by the operations of the new business, and we are subject to a number of risks and uncertainties related to the acquisition, including the following:

• The integration of the former Infineon transceiver and transponder products and technology with our products and technology and the transition of the manufacturing operations for such products to our facilities will be complex, time-consuming and expensive. The execution of these activities could potentially disrupt our ongoing business operations and distract management from day-to-day operational matters, as well as other strategic opportunities, and could strain our financial and managerial controls and reporting systems and procedures. In addition, unanticipated costs could arise during the integration of the products and technology and the transition of manufacturing operations to our facilities. If we are unable to successfully integrate the former Infineon products and technology with our products and technology, or if actual integration and transition costs are significantly greater than currently anticipated, we may not achieve the anticipated benefits of the acquisition and our revenues and operating results could be adversely affected.

• We will be dependent on Infineon to supply us with finished goods for a transition period of up to one year while we transfer manufacturing operations to our own facilities. Infineon’s failure to supply us with high quality products in a timely manner could adversely affect our operating results and our ability to retain the former customers of Infineon. In addition, we expect to realize lower gross profit margins on the sale of products supplied by Infineon than on the sale of products we manufacture until such time as those products are manufactured by us.

• We plan to transition the manufacture of the former Infineon transceiver and transponder products from Infineon’s production facilities to our facilities over a period of time. Some of the former Infineon customers may be unwilling to purchase products manufactured at our facilities without subjecting the products to new qualification testing procedures, and some customers may be unwilling to undertake these procedures and may elect to buy products from other suppliers. Delays in or losses of sales due to these requalification issues could result in lower revenues which could adversely affect our future operating results.

• Some of the existing customers for the Infineon products may decide for other reasons to purchase similar products from other competitors. The loss of one or more significant customers of the former Infineon business could result in lower revenues which would adversely affect our future operating results.

• Immediately prior to the acquisition, Infineon was engaged in a number of ongoing research and development projects related to its transceiver products and related technologies. We may not be able to successfully complete some or all of these projects, and our inability to do so could prevent us from achieving some of the strategic objectives and other anticipated potential benefits of the acquisition, and could have a material adverse effect on our revenues and operating results.

• We may incur charges to operations in amounts that are not currently estimable to reflect costs associated with integrating the acquired business with our company. These costs could adversely affect our future operating results.

• At the closing of the acquisition, we issued 34 million shares of our common stock to Infineon, which represented approximately 13% of the outstanding capital stock of Finisar at that time. The issuance of these shares caused a significant reduction in the relative percentage interest of current Finisar stockholders. In April 2005, Infineon sold the 34 million shares to certain funds managed by VantagePoint Venture Partners in a private transaction.

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• As a result of the acquisition, Finisar has become a substantiality larger organization, and if our management is unable to effectively manage the combined business, our operating results will suffer.

Past and future acquisitions could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results

     Since October 2000, we have completed the acquisition of eight privately-held companies, including our recent acquisitions of I-TECH CORP. in April 2005 and InterSAN, Inc. in May 2005, and certain businesses and assets from five other companies, including our recently completed acquisitions of certain assets related to the transceiver and transponder business of the fiber optics business unit of Infineon. We continue to review opportunities to acquire other businesses, product lines 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, and we from time to time make proposals and offers, and take other steps, to acquire businesses, products and technologies. Several of our past acquisitions have been material, and acquisitions that we may complete in the future may be material. In 10 of our 13 acquisitions, we issued stock as all or a portion of the consideration. We will issue additional shares upon conversion of the promissory notes issued as consideration for the acquisitions of Data Transit and I-TECH. The issuance of stock in these and any future transactions has or would dilute stockholders’ percentage ownership.

     Other risks associated with acquiring the operations of other companies include:

• 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.

     Several of our past acquisitions have not been successful. During fiscal 2003, we sold some of the assets acquired in two prior acquisitions, discontinued a product line and closed one of our acquired facilities. As a result of these activities, we have incurred significant restructuring charges and charges for the write-down of assets associated with those acquisitions. We cannot assure you that we will be successful in overcoming future problems encountered in connection with our past or future acquisitions, and our inability to do so could significantly harm our business. In addition, to the extent that the economic benefits associated with any of our acquisitions diminish in the future, we may be required to record additional write downs of goodwill, intangible assets or other assets associated with such acquisitions, which would adversely affect our operating results.

We have incurred significant net losses, our future revenues are inherently unpredictable, our operating results are likely to fluctuate from period to period, and if we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly

     We incurred net losses of $114.1 million, $113.8 million and $619.8 million in our fiscal years ended April 30, 2005, 2004 and 2003, respectively and $19.1 million in the three months ended July 31, 2005. Our operating results for future periods are subject to numerous uncertainties, and we cannot assure you that we will be able to achieve or sustain profitability.

     Our quarterly and annual operating results have fluctuated substantially 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, market demand for the products manufactured by our customers, the introduction of new products and manufacturing processes, manufacturing yields, competitive pressures and customer retention.

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     We may experience a delay in generating or recognizing revenues for a number of reasons. Orders at the beginning of each quarter typically represent a small percentage of expected revenues for that quarter and are generally cancelable at any time. Accordingly, we depend on obtaining orders during each 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 timeframes 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 will again decrease from the previous quarter or fall below the expectations of securities analysts and investors. In this event, it is likely that the trading price of our common stock would significantly decline.

We may have insufficient cash flow to meet our debt service obligations, including payments due on our subordinated convertible notes

     We will be required to generate cash sufficient to conduct our business operations and pay our indebtedness and other liabilities, including all amounts due on our outstanding 2 1/2% and 5 1/4% convertible subordinated notes due 2010 and 2008, respectively. The aggregate outstanding principal amount of these notes was $250.3 million at July 31, 2005. Holders of the notes due in 2010 have the right to require us to repurchase some or all of their notes on October 15, 2007. We may choose to pay the repurchase price in cash, shares of our common stock or a combination thereof. We may not be able to cover our anticipated debt service obligations from our cash flow. This may materially hinder our ability to make payments on the notes. Our ability to meet our future debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Accordingly, we cannot assure you that we will be able to make required principal and interest payments on the notes when due.

We may not be able to obtain additional capital in the future, and failure to do so may harm our business

     We believe that our existing balances of cash, cash equivalents and short-term investments will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future or to repay the principal of our outstanding 2 1/2% and 5 1/4% convertible subordinated notes due 2010 and 2008, respectively. The significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we continue to experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, we could be required to significantly reduce or restructure our business operations.

Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or non-cancelable purchase commitments

     We base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends which are highly unpredictable. Some of our purchase commitments are not cancelable, and in some cases we are required to recognize a charge representing the amount of material or capital equipment purchased or ordered which exceeds our actual requirements. In the past, we have sometimes experienced significant growth followed by a significant decrease in customer demand such as occurred in fiscal 2001, when revenues increased by 181% followed by a decrease of 22% in fiscal 2002. Based on projected revenue trends during these periods, we acquired inventories and entered into purchase commitments in order to meet anticipated increases in demand for our products which did not materialize. As a result, we recorded significant charges for obsolete and excess inventories and non-cancelable purchase commitments which contributed to substantial operating losses in fiscal 2002. Should revenue in future periods again fall substantially below our expectations, or should we fail again to accurately forecast changes in demand mix, we could be required to record additional charges for obsolete or excess inventories or non-cancelable purchase commitments.

Our operating expenses may need to be further reduced which could impact our future growth

     We experienced a significant decline in revenues and operating results during fiscal 2002. While revenues have recovered to some extent beginning in fiscal 2003, they have not yet reached levels required to operate on a profitable basis due primarily to higher fixed expenses related to a number of acquisitions, low gross margins and continued high levels of spending for research and development in anticipation of future revenue growth. While we continue to expect future revenue growth, we have taken steps to reduce our operating expenses in order to conserve our cash, and we may be required to take further action to reduce expenses. These expense reduction measures may adversely affect our ability to market our products, introduce new and improved products and increase our revenues, which could adversely affect our business and cause the price of our stock to decline. In order to be successful in the future,

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we must reduce our operating and product expenses, while at the same time completing our key product development programs and penetrating new customers.

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 components and network performance test and monitoring 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 and components or our network performance test and monitoring systems, our revenues will decline significantly. Factors that may affect the market acceptance of our products include the continued growth of the markets for LANs, SANs, and MANs 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 our 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.

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. For example, sales to our top five customers represented 48% of our revenues in the quarter ended July 31, 2005. Our success will depend on our continued ability to develop and manage relationships with significant customers. 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 optical subsystems and components 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 we expect that they will continue to do so in the future. Cost reduction measures that we have implemented during the past several quarters, and additional action we may take to reduce costs, may adversely affect our ability to introduce new and improved products which may, in turn, adversely affect our relationships with some of our key customers. 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.

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

     Typically, 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, it is likely that we will lose sales and customers.

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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 with respect to the protocols used in data communications networks. 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. In addition, a slowdown in demand for existing products ahead of a new product introduction could result in a write-down in the value of inventory on hand related to existing products. We have in the past experienced a slowdown in demand for existing products and delays in new product development and such delays may occur in the future. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in the expectation of a new product release or if 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;

• unanticipated engineering complexities;

• expense reduction measures we have implemented, and others we may implement, to conserve our cash and attempt to accelerate our return to profitability;

• difficulties in hiring and retaining necessary technical personnel;

• difficulties in reallocating engineering resources and overcoming resource limitations; and

• changing market or competitive product requirements.

     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 components and network performance test and monitoring systems for use in LANs, SANs and MANs are highly competitive. Our current competitors include a number of domestic and international companies, many of which have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. Other companies, including some of our customers, may enter the market for optical subsystems and network test and monitoring 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. and JDS Uniphase Corporation and a number of smaller venders. 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 components and subsystems and network test and monitoring systems or acquiring one of our competitors, thereby eliminating the need to purchase our products. Furthermore, larger companies in other related industries, such as the telecommunications industry, may develop or acquire technologies and apply their significant resources, including their distribution channels and brand name recognition, to capture significant market share.

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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, overcapacity, 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, in order to achieve and sustain profitable operations, 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 result in additional operating losses and 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 and could adversely affect our 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 margins.

Shifts in our product mix may result in declines in gross margins

     Our gross profit margins vary among our product families, and are generally higher on our network test and monitoring systems than on our optical subsystems and components. Our optical products sold for longer distance MAN and telecom applications typically have higher gross margins than our products for shorter distance LAN or SAN applications. 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, and these fluctuations are expected to continue in the future.

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 research and development and 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, the agreements that we enter into with our customers typically contain no minimum purchase commitments. Failure of our customers to incorporate our products into their systems would significantly harm our business.

We depend on facilities located outside of the United States to manufacture a substantial portion of our products, which subjects us to additional risks

     In addition to our principal manufacturing facility in Malaysia, we operate smaller facilities in China and Singapore and also rely on two contract manufacturers located outside of the United States. We also rely on Infineon to manufacture transceiver and transponder products for us until we are able to transfer manufacturing operations to our production facilities. Each of these facilities and manufacturers subjects us to additional risks associated with international manufacturing, including:

• 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;

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• greater difficulty in overseeing manufacturing operations;

• greater difficulty in hiring technical talent needed to oversee manufacturing operations;

• potential political and economic instability; and

• the outbreak of infectious diseases such as severe acute respiratory syndrome, or SARS, which could result in travel restrictions or the closure of our facilities or the facilities of our customers and suppliers.

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

Our future operating results may be subject to volatility as a result of exposure to foreign exchange risks.

     We are exposed to foreign exchange risks. Foreign currency fluctuations may affect both our revenues and our costs and expenses and significantly affect our operating results. Prices for our products are currently denominated in U.S. dollars for sales to our customers throughout the world. If there is a significant devaluation of the currency in a specific country relative to the dollar, the prices of our products will increase relative to that country’s currency, our products may be less competitive in that country and our revenues may be adversely affected.

     Although we price our products in U.S. dollars, portions of both our cost of revenues and operating expenses are incurred in foreign currencies, principally the Malaysian ringit, the Chinese yuan and the Euro. As a result, we bear the risk that the rate of inflation in one or more countries will exceed the rate of the devaluation of that country’s currency in relation to the U.S. dollar, which would increase our costs as expressed in U.S. dollars. On July 21, 2005, the People’s Bank of China announced that the yuan will no longer be pegged to the U.S. dollar but will be allowed to float in a band (and, to a limited extent, increase in value) against a basket of foreign currencies. This development increases the risk that Chinese-sourced materials and labor could become more expensive for us. To date, we have not engaged in currency hedging transactions to decrease the risk of financial exposure from fluctuations in foreign exchange rates.

Our business and future operating results are subject to a wide range of uncertainties arising out of the continuing threat of terrorist attacks and ongoing military action in the Middle East

     Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the continuing threat of terrorist attacks on the United States and ongoing military action in the Middle East, including the economic consequences of the war in Iraq or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:

• increased risks related to the operations of our manufacturing facilities in Malaysia;

• greater risks of disruption in the operations of our Asian contract manufacturers and more frequent instances of shipping delays; and

• the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities.

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 are also dependent on Infineon to supply finished transceiver and transponder products during a transition period of up to one year until we have transitioned the manufacturing operations to other facilities. We depend on these current and future sources to meet our production 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 generally have no long-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

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harmed by the resulting product manufacturing and delivery delays. We are also subject to potential delays in the development by our suppliers of key components which may affect our ability to introduce new products.

     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 have made and may continue to make strategic investments which may not be successful and may result in the loss of all or part of our invested capital

     Through the first quarter of fiscal 2006, we recorded minority equity investments in early-stage technology companies, totaling $52.4 million. Our investments in these early stage companies were primarily motivated by our desire to gain early access to new technology. We intend to review additional opportunities to make strategic equity investments in pre-public companies where we believe such investments will provide us with opportunities to gain access to important technologies or otherwise enhance important commercial relationships. We have little or no influence over the early-stage companies in which we have made or may make these strategic, minority equity investments. Each of these investments in pre-public companies involves a high degree of risk. We may not be successful in achieving the financial, technological or commercial advantage upon which any given investment is premised, and failure by the early-stage company to achieve its own business objectives or to raise capital needed on acceptable economic terms could result in a loss of all or part of our invested capital. In fiscal 2003, we wrote off $12.0 million in two investments which became impaired. In fiscal 2004, we wrote off $1.6 million in two additional investments, and in fiscal 2005, we wrote off $10.0 million in another investment. For the three months ended July 31, 2005 we reclassified $4.2 million of an investment associated with the Infineon acquisition to goodwill as the investment was deemed to have no value and recognized $522,000 of losses related to an investment accounted for under the equity method. We may be required to write off all or a portion of the $16.7 million in such investments remaining on our balance sheet as of July 31, 2005 in future periods.

We are subject to pending legal proceedings

     A securities class action lawsuit was filed on November 30, 2001 in the United States District Court for the Southern District of New York, purportedly on behalf of all persons who purchased our common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants Finisar, Jerry S. Rawls, our President and Chief Executive Officer, Frank H. Levinson, our Chairman of the Board and Chief Technical Officer, Stephen K. Workman, our Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an underwriter for our initial public offering in November 1999 and a secondary offering in April 2000. The complaint, as amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October 2002, all claims against the individual defendants were dismissed without prejudice. On February 19, 2003, our motion to dismiss the complaint was denied. In July 2004, we and the individual defendants accepted a settlement proposal made to all of the issuer defendants. Under the terms of the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, we would be responsible to pay our pro rata portion of the shortfall, up to the amount of the self-insured retention under our insurance policy, which may be up to $2 million. The timing and amount of payments that we could be required to make under the proposed settlement will depend on several factors, principally the timing and amount of any payment that the insurers may be required to make pursuant to the $1 billion guaranty. On February 15, 2005, the Court issued an order providing preliminary approval of the proposed settlement and set a hearing for April 24, 2006 to consider final approval of the settlement. If the settlement is not approved by the Court, we intend to defend the lawsuit vigorously. Because of the inherent uncertainty of litigation, however, we cannot predict its outcome. If, as a result of this dispute, we are required to pay significant monetary damages, our business would be substantially harmed.

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We have identified material weaknesses in our internal control over financial reporting which could lead to errors in our financial statements

     As discussed in Item 4. Controls and Procedures, we have identified several material weaknesses in our internal control over financial reporting. Although steps are being taken to remediate these deficiencies, there can be no assurance that these remediation steps will be successful or that, as a result of our ongoing evaluation of our internal control over financial reporting, we will not identify additional material weaknesses. Although management determined that the material weaknesses did not affect the financial results reported in our consolidated financial statements as of, and for the year ended, April 30, 2005, there can be no assurance that unremediated weakness in our internal control over financial reporting will not result in errors that are material to the financial results reported in our consolidated financial statements for future periods.

Because of 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 may 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.

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 to establish and protect our proprietary rights. We license certain of our proprietary technology, including our digital diagnostics technology, to customers who include current and potential competitors, and we rely largely on provisions of our licensing agreements to protect our intellectual property rights in this technology. Although a number of patents have been issued to us, we have obtained a number of other patents as a result of our acquisitions, and we have filed applications for additional patents, 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. We are currently engaged in pending litigation to enforce certain of our patents, and additional 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.

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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 have been involved in the past in patent infringement lawsuits. 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.

Our executive officers and directors and entities affiliated with them own a large percentage of our voting stock, and VantagePoint Venture Partners has recently acquired a large block of our common stock, that has resulted in a substantial concentration of control and could have the effect of delaying or preventing a change in our control

     As of June 30, 2005, our executive officers and directors and certain entities affiliated with them beneficially owned approximately 36.7 million shares of our common stock, or approximately 13.1% of the outstanding shares. These stockholders, acting together, may be able to substantially influence the outcome of matters requiring approval by stockholders, including the election or removal of directors and the approval of mergers or other business combination transactions. In addition, certain funds managed by VantagePoint Venture Partners, of which David C. Fries, a director of the Company, is a managing director hold approximately 12.3% of our outstanding common stock. Accordingly, if VantagePoint Venture Partners continues to hold its shares, it may also be able to influence the outcome of matters requiring stockholder approval, and VantagePoint Venture Partners, our executive officers, directors and entities affiliated with them, voting together, may be able to effectively control the outcome of such matters. This concentration of ownership could have the effect of delaying or preventing a change in 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.

The conversion of our outstanding convertible subordinated notes would result in substantial dilution to our current stockholders

     We currently have outstanding 5 1/4% convertible subordinated notes due 2008 in the principal amount of $100.3 million and 2 1/2% convertible subordinated notes due 2010 in the principal amount of $150.0 million. The 5 1/4% notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of our common stock at a conversion price of $5.52 per share. The 2 1/2% notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of our common stock at a conversion price of $3.705 per share. An aggregate of 58,647,060 shares of common stock would be issued upon the conversion of all outstanding convertible subordinated notes at these exchange rates, which would significantly dilute the voting power and ownership percentage of our existing stockholders. Holders of the notes due in 2010 have the right to require us to repurchase some or all of their notes on October 15, 2007. We may choose to pay the repurchase price in cash, shares of our common stock or a combination thereof. Our right to repurchase the notes, in whole or in part, with shares of our common stock is subject to the registration of the shares of our common stock to be issued upon repurchase under the Securities Act, if required, and registration with or approval of any state or federal governmental authority if such registration or approval is required before such shares may be issued. We have previously entered into privately negotiated transactions with certain holders of our convertible subordinated notes for the repurchase of notes in exchange for a greater number of shares of our common stock than would have been issued had the principal amount of the notes been converted at the original conversion rate specified in the notes, thus resulting in more dilution. Although we do not currently have any plans to enter into similar transactions in the future, if we were to do so there would be additional dilution to the voting power and percentage ownership of our existing stockholders.

Delaware law, our charter documents and our stockholder rights plan 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 include provisions:

• authorizing the board of directors to issue additional preferred stock;

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• 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;

• permitting the board of directors to increase the size of the board and to fill vacancies;

• requiring a super-majority vote of our stockholders to amend our bylaws and certain provisions of our certificate of incorporation; 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.

     We are subject to the provisions of Section 203 of the Delaware General Corporation Law which limit the right of a corporation to engage in a business combination with a holder of 15% or more of the corporation’s outstanding voting securities, or certain affiliated persons.

     In addition, in September 2002, our board of directors adopted a stockholder rights plan under which our stockholders received one share purchase right for each share of our common stock held by them. Subject to certain exceptions, the rights become exercisable when a person or group (other than certain exempt persons) acquires, or announces its intention to commence a tender or exchange offer upon completion of which such person or group would acquire, 20% or more of our common stock without prior board approval. Should such an event occur, then, unless the rights are redeemed or have expired, our stockholders, other than the acquirer, will be entitled to purchase shares of our common stock at a 50% discount from its then-Current Market Price (as defined) or, in the case of certain business combinations, purchase the common stock of the acquirer at a 50% discount.

     Although we believe that these charter and bylaw provisions, provisions of Delaware law and our stockholder rights plan provide an opportunity for the board to assure that our stockholders realize full value for their investment, they could have the effect of delaying or preventing a change of control, even under circumstances that some stockholders may consider beneficial.

Our business and future operating results may be adversely affected by events outside of our control

     Our business and operating results are vulnerable to events outside of our control, such as earthquakes, fire, power loss, telecommunications failures and uncertainties arising out of terrorist attacks in the United States and overseas. Our corporate headquarters and a portion of our manufacturing operations are located in California. California in particular has been vulnerable to natural disasters, such as earthquakes, fires and floods, and other risks which at times have disrupted the local economy and posed physical risks to our property. We are also dependent on communications links with our overseas manufacturing locations and would be significantly harmed if these links were interrupted for any significant length of time. We presently do not have adequate redundant, multiple site capacity if any of these events were to occur, nor can we be certain that the insurance we maintain against these events would be adequate.

Our stock price has been and is likely to continue to be volatile

     The trading price of our common stock has been and is likely to continue to be subject to large fluctuations. Our stock price may increase or decrease in response to a number of events and factors, including:

• trends in our industry and the markets in which we operate;

• changes in the market price of the products we sell;

• changes in financial estimates and recommendations by securities analysts;

• acquisitions and financings;

• quarterly variations in our operating results;

• the operating and stock price performance of other companies that investors in our common stock may deem comparable; and

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• purchases or sales of blocks of our common stock.

     Part of this volatility is attributable to the current state of the stock market, in which wide price swings are common. This volatility may adversely affect the prices of our common stock regardless of our operating performance.

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. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. We place our investments with high credit issuers in short-term securities with maturities ranging from overnight up to 36 months or have characteristics of such short-term investments. 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.

     We invest in equity instruments of privately held companies for business and strategic purposes. These investments are included in other long-term assets and are accounted for under the cost method when our ownership interest is less than 20% and we do not have the ability to exercise significant influence. For entities in which we hold greater than a 20% ownership interest, or where we have the ability to exercise significant influence, we use the equity method. We recorded losses of $522,000 and $361,000 in the three months ended July 31, 2005 and 2004, respectively, for investments accounted for under the equity method. For these non-quoted investments, our policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. We identify and record impairment losses when events and circumstances indicate that such assets are impaired. If our investment in a privately-held company becomes marketable equity securities upon the company’s completion of an initial public offering or its acquisition by another company, our investment would be subject to significant fluctuations in fair market value due to the volatility of the stock market. There has been no material change in our interest rate exposure since April 30, 2005.

Item 4.Controls and Procedures.

Changes in Internal Control Over Financial Reporting

     As disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2005 (the “2005 Form 10-K”), our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of April 30, 2005 as required by Section 404 of the Sarbanes-Oxley Act of 2002. Based on management’s assessment of our internal control over financial reporting, we identified four control deficiencies that we concluded represented material weaknesses in our internal control over financial reporting as of April 30, 2005. As described in more detail in the 2005 Form 10-K, these material weaknesses consisted of:

• a material weakness in our financial reporting processes arising from a shortage of, and turnover in, qualified financial reporting personnel with sufficient skills and experience to apply generally accepted accounting principles to our transactions, to provide for timely review of account reconciliations, and to prepare financial statements that comply with U.S. generally-accepted accounting principles;

• a material weakness relating to our accounting for income and sales/use taxes including: (a) ineffective controls over the application of U.S. generally-accepted accounting principles pertaining to income taxes; (b) ineffective controls over the monitoring and accounting for income tax matters arising from business combinations and other complex and non-routine business transactions; (c) insufficient personnel with adequate technical skills relative to accounting for and disclosure of income taxes; and (d) inadequate accounting policies and procedures that do not provide for effective supervisory review of income and sales/use tax accounting amounts and analyses and related recordkeeping and disclosure activities;

• a material weakness related to the effectiveness of our inventory controls, including ineffective controls to physically verify the existence of inventory on consignment at customer locations and inventory acquired in recent business acquisitions; and

• a material weakness in our controls to monitor our Network Test and Monitoring segment sales agreements which have multiple elements such that revenue received under these agreements is properly allocated to each element and recognized in the proper period.

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     We have been, and intend to continue, planning and implementing increases in staffing levels and changes in our policies, processes and procedures to address these weaknesses and improve our internal control over financial reporting. In the 2005 Form 10-K, we identified various remediation efforts that we had undertaken and that we expect to continue throughout fiscal 2006. During the quarter ended July 31, 2005, management began to execute the remediation plan identified in the 2005 Form 10-K and, among other things, took the following actions:

• we hired additional personnel, including a Director of Internal Audit and an SEC reporting manager, to strengthen our accounting and financial reporting organizations;

• we engaged Deloitte & Touche LLP to provide consulting services in support of our tax accounting and reporting functions;

• we reconciled our accounts related to all inventory on consignment at customer locations, which totaled $2.1 million as of July 31, 2005, and adopted additional procedures to verify such inventory, including periodic physical inventories; and

• our accounting management reviewed all revenue transactions of our Network Test and Monitoring Division recorded during the quarter ended July 31, 2005 to assure that revenue was properly recognized.

     Aside from steps taken to implement the remediation plan, there was no change in our internal control over financial reporting during the quarter ended July 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

     Management continues to execute its remediation plan and to monitor closely the remediated controls and procedures described above. We will continue the implementation of additional policies, processes and procedures and the hiring of additional experienced accounting financial reporting personnel at both management and staff levels. Management believes that our controls and procedures will continue to improve as a result of the further implementation of these measures. We expect to complete our remediation plan and the testing of remediated controls and procedures by the end of fiscal 2006.

Evaluation of Effectiveness of Disclosure Controls and Procedures

     Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report because of the material weaknesses described above, the remediation of which is on-going.

     We believe that the corrective actions taken to date, including the actions described above, have mitigated the control deficiencies with respect to the preparation of this report and that these measures have been effective to ensure that information required to be disclosed in this report has been recorded, processed, summarized and reported correctly. In particular, management believes that the measures implemented to date provide reasonable assurance that the Company’s financial statements included in this report have been prepared in accordance with generally accepted accounting principles.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

     A securities class action lawsuit was filed on November 30, 2001 in the United States District Court for the Southern District of New York, purportedly on behalf of all persons who purchased the Company’s common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants Finisar, Jerry S. Rawls, its President and Chief Executive Officer, Frank H. Levinson, its Chairman of the Board and Chief Technical Officer, Stephen K. Workman, its Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an underwriter for its initial public offering in November 1999 and a secondary offering in April 2000. The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the

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registration statements for the offerings failed to disclose, among other things, that (i) the underwriter had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriter allocated to those investors material portions of the shares of its stock sold in the offerings and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of its stock sold in the offerings to those customers in exchange for which the customers agreed to purchase additional shares of its stock in the aftermarket at pre-determined prices. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October 2002, all claims against the individual defendants were dismissed without prejudice. On February 19, 2003, the Court denied our motion to dismiss the complaint. In July 2004, the Company and the individual defendants accepted a settlement proposal made to all of the issuer defendants. Under the terms of the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, the Company would be responsible to pay its pro rata portion of the shortfall, up to the amount of the self-insured retention under its insurance policy, which may be up to $2 million. The timing and amount of payments that the Company could be required to make under the proposed settlement will depend on several factors, principally the timing and amount of any payment that the insurers may be required to make pursuant to the $1 billion guaranty. On February 15, 2005, the Court issued an order providing preliminary approval of the proposed settlement and set a hearing for April 24, 2006 to consider final approval of the settlement. If the settlement is not approved by the Court, the Company intends to defend the lawsuit vigorously. Because of the inherent uncertainty of litigation, however, we cannot predict its outcome. If, as a result of this dispute, we are required to pay significant monetary damages, its business would be substantially harmed.

     On April 4, 2005, the Company filed an action in the United States District Court, against the DirecTV Group, Inc.; DirecTV Holdings, LLC; DirecTV Enterprises, LLC; DirecTV Operations, LLC; DirecTV, Inc.; and Hughes Network Systems, Inc. (collectively “DirecTV”). The lawsuit alleges that DirecTV willfully infringes our U.S. Patent No. 5,404,505 by making, using, selling, offering to sell and/or importing systems and/or methods that embody one or more of the claims of our patent. On May 13, 2005, DirecTV answered the complaint. DirecTV’s counterclaim seeks a declaration of non-infringement, patent invalidity and patent unenforceability. The trial is scheduled for June 6, 2006.

Item 4.Submission of Matters to a Vote of Security Holders.

     At the annual meeting of our stockholders held on May 6, 2005, the following matters were considered and voted upon:

          (a) Frank H. Levinson was elected as a Class II director to serve on our Board of Directors for a three-year term expiring at the 2007 annual meeting of stockholders and until his successor is duly elected and qualified by a vote of 207,984,522 shares in favor and 2,879,053 shares withheld. In addition to Mr. Levinson, as of the date of the meeting the following directors each had a term of office that continued after the meeting: Jerry S. Rawls, Michael C. Child, Roger C. Ferguson and Larry D. Mitchell.

          (b) A proposal to amend our Certificate of Incorporation to increase the number of authorized shares of common stock from 500,000,000 to 750,000,000 was approved by a vote of 203,369,081 shares for, 5,987,628 shares against, and 1,506,866 shares abstaining.

          (c) A proposal to amend the Finisar 1999 Employee Stock Purchase Plan to increase the number of shares of common stock authorized for issuance under such plan from 3,750,000 shares to 13,750,000 shares, to increase the automatic annual increase in the number of shares of common stock reserved for issuance under the plan from 750,000 shares to 1,000,000 shares and to adopt the International Employee Stock Purchase Plan was approved by a vote of 70,062,674 shares for, 26,585,973 shares against, 1,526,765 shares abstaining and 112,688,164 broker non-votes.

          (d) The appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending April 30, 2005 was approved and ratified by a vote of 209,655,354 shares for, 559,124 shares against, and 649,098 shares abstaining.

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Item 6.Exhibits

     The following exhibits are filed herewith:

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Executive Officer Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.4	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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.

FINISAR CORPORATION
By:	/s/ JERRY S. RAWLS
Jerry S. Rawls
Chief Executive Officer

By:	/s/ STEPHEN K. WORKMAN
Stephen K. Workman
Senior Vice President, Finance and Chief Financial Officer

Dated: September 8, 2005

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EXHIBIT INDEX

Exhibit
Number	Description
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002