e10vq

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 October 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
1389 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

1308 Moffett Park Drive
Sunnyvale, California 94089
(Registrant’s former address)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

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

At November 30, 2005, there were 296,175,093 shares of the registrant’s common stock, $.001 par value, issued and outstanding.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FINISAR CORPORATION

CONSOLIDATED BALANCE SHEETS


	October 31, 2005			April 30, 2005
	(In thousands, except share amounts)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	33,165		$	29,431
Short-term investments		62,493			72,931
Restricted investments, short-term		3,710			3,717
Accounts receivable, net of allowance for doubful accounts of $1,673 and $1,379 at October 31, 2005 and April 30, 2005		44,911			42,443
Accounts receivable, other		2,914			11,371
Inventories		40,890			33,933
Prepaid expenses		3,287			3,470

Total current assets		191,370			197,296
Property, plant and improvements, net		79,028			87,264
Restricted investments, long-term		3,612			5,393
Purchased technology, net		21,554			33,046
Other purchased intangible assets, net		5,016			4,424
Goodwill, net		132,275			119,690
Minority investments		16,172			21,366
Other assets		16,678			18,109

Total assets	$	465,705		$	486,588


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	32,927		$	30,430
Accrued compensation		5,668			4,500
Other accrued liabilities		15,429			14,073
Deferred revenue		4,974			3,519
Current portion of other long-term liabilities		628			2,242
Convertible notes		1,000			15,811
Non-cancelable purchase obligations		1,390			6,449

Total current liabilities		62,016			77,024
Long-term liabilities:
Convertible notes, net of beneficial conversion feature of $14,271 and $16,501 at October 31, 2005 and April 30, 2005		236,043			250,019
Other long-term liabilities		13,930			13,623
Deferred income taxes		2,868			1,632

Total long-term		252,841			265,274
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at October 31, 2005 and April 30, 2005		—			—
Common stock, $0.001 par value, 750,000,000 shares authorized, 295,949,046 shares issued and outstanding at October 31, 2005 and 258,931,278 shares issued and outstanding at April 30, 2005		296			259
Additional paid-in capital		1,356,586			1,314,960
Accumulated other comprehensive income		184			381
Accumulated deficit		(1,206,218	)		(1,171,310	)

Total stockholders’ equity		150,848			144,290

Total liabilities and stockholders’ equity	$	465,705		$	486,588

See accompanying notes

FINISAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
	(Unaudited, in thousands, except per share data)
Revenues	$	86,622		$	71,005		$	168,354		$	132,882
Cost of revenues		59,698			49,499			120,489			95,203
Impairment of acquired developed technology		853			3,656			853			3,656
Amortization of acquired developed technology		5,421			6,086			11,075			11,652

Gross profit		20,650			11,764			35,937			22,371


Operating expenses:
Research and development		14,141			17,043			27,162			33,118
Sales and marketing		7,501			7,570			15,872			14,721
General and administrative		6,768			4,995			14,777			9,677
Amortization of deferred stock compensation		—			24			—			121
Amortization of purchased intangibles		453			170			929			313
Restructuring costs		3,064			—			3,064			—
Acquired in-process research and development		—			318			—			318

Total operating expenses		31,927			30,120			61,804			58,268
Loss from operations		(11,277	)		(18,356	)		(25,867	)		(35,897	)
Interest income		765			560			1,548			1,152
Interest expense		(3,830	)		(3,552	)		(7,917	)		(6,915	)
Other income (expense), net		(821	)		192			(1,421	)		(1,596	)

Loss before income taxes		(15,163	)		(21,156	)		(33,657	)		(43,256	)
Provision for income taxes		657			37			1,251			56

Net loss	$	(15,820	)	$	(21,193	)	$	(34,908	)	$	(43,312	)


Net loss per share — basic and diluted	$	(0.05	)	$	(0.09	)	$	(0.12	)	$	(0.19	)

Shares used in computing net loss per share — basic and diluted		289,968			223,380			281,048			223,155

See accompanying notes.

FINISAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	October 31,
	2005			2004
	(Unaudited, in thousands)
Operating activities
Net loss	$	(34,908	)	$	(43,312	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		18,958			14,053
Amortization of deferred stock compensation		—			121
Acquired in-process research and development		—			318
Amortization of beneficial conversion feature of convertible notes		2,231			2,129
Amortization of purchased technology and other purchased intangibles		929			313
Amortization of acquired developed technology		11,076			11,652
Amortization of discount on restricted securities		(87	)		(146	)
Loss on sale/retirement of equipment		326			1,319
Share of losses of equity investee		1,039			793
Impairment of intangible assets		853			3,656
Non-employee option expense		—			16
Changes in operating assets and liabilities:
Accounts receivable		(2,244	)		(9,268	)
Inventories		(6,854	)		(3,454	)
Other assets		3,504			(5,233	)
Deferred income taxes		1,236			—
Accounts payable		2,243			(1,100	)
Accrued compensation		1,097			447
Other accrued liabilities		755			716
Deferred revenue		1,429			—

Net cash provided by (used in) operating activities		1,583			(26,980	)

Investing activities
Purchases of property, equipment and improvements		(8,968	)		(10,916	)
Sale/(purchase) of short-term investments		10,241			(2,083	)
Maturity of restricted securties		1,875			5,156
Purchase of minority investment		—			(1,000	)
Acquisition of subsidiaries, net of cash assumed		(1,213	)		—
Acquisition of product line assets		—			(6,168	)
Proceeds from sale of property and equipment		153			743

Net cash provided by (used in) investing activities		2,088			(14,268	)

Financing activities
Repayments of liablity related to sale-leaseback of building		(115	)		—
Repayments of borrowings under notes		(195	)		—
Payment received on stockholder notes receivable		—			467
Proceeds from exercise of stock options		373			286

Net cash provided by (used in) financing activities		63			753

Net increase (decrease) in cash and cash equivalents		3,734			(40,495	)

Cash and cash equivalents at beginning of period		29,431			69,872

Cash and cash equivalents at end of period	$	33,165		$	29,377


Supplemental disclosure of cash flow information
Cash paid for interest	$	4,528		$	4,528
Cash paid for taxes	$	(13	)	$	19
Supplemental schedule of non-cash investing and financing activities
Issuance of common stock upon conversion of promissory notes	$	32,474		$	—

Issuance of common stock in connection with acquisitions	$	8,815		$	—

Issuance of common stock on achievement of milestones	$	—		$	256

See accompanying notes.

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 Delaware in November 1999. Finisar’s principal executive offices are located at 1389 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 October 31, 2005, and for the three and six month periods ended October 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 October 31, 2005, its operating results for the three and six month periods ended October 31, 2005 and 2004, and its cash flows for the six month periods ended October 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 comparison, all references to period end dates have been presented as though the period ended on the last day of the calendar month. The second quarter of fiscal 2006 ended on October 30, 2005. The second quarter of fiscal 2005 ended on October 31, 2004.

Reclassifications

Certain reclassifications have been made to the prior year balance sheet and statement of cash flows to conform to the current year presentation. These changes had no impact on previously reported net income or retained earnings.

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.

Revenue Recognition

The Company’s revenue transactions consist predominately of sales of products to customers. The Company follows The Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104 Revenue 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.

Sales to certain distributors are made under agreements providing distributor price adjustments and rights of return under certain circumstances. Revenue and costs relating to distributor sales are deferred until products are sold by the distributors to end customers. Revenue recognition depends on notification from the distributor that product has been sold to the end customer. Also reported by the distributor are product resale price, quantity and end customer shipment information, as well as inventory on hand. Deferred revenue on shipments to distributors reflects the effects of distributor price adjustments and, the amount of gross margin expected to be realized when distributors sell-through products purchased from us. Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfers, typically upon shipment from us at which point we have a legally enforceable right to collection under normal payment terms.

Segment Reporting

Statement of Financial Accounting Standards (SFAS) No. 131 Disclosures about Segments of an Enterprise and Related Information establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that it operates 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 not been material. The Company’s five largest customers represented 39.0% and 39.3% of total accounts receivable at October 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 and six months ended October 31, 2005, sales to the top five optical subsystems and components customers represented 47.0% and 47.6% of total revenues, respectively. During the three and six months ended October 31, 2004, sales to the top five optical subsystems and components customers represented 48.5% and 47.5% of total revenues, respectively. One customer represented more than 10% of total revenues during each of 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 $64,000 and $193,000 in the three and six months ended October 31, 2005, respectively, and $222,000 and $379,000 in the three and six months ended October 31, 2004, respectively.

Shipping and Handling Costs

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

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. 115 Accounting 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 October 31, 2005 and April 30, 2005, the fair value of the Company’s convertible subordinated debt was approximately $221.2 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 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. 25 Accounting for Stock Issued to Employees and complies with the disclosure provisions of SFAS No. 123 Accounting for Stock-Based Compensation and SFAS No. 148 Accounting 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 net 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						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
Net loss:
As reported	$	(15,820	)	$	(21,193	)	$	(34,908	)	$	(43,312	)
Add: Stock-based employee compensation reported in net loss		—			40			—			137
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards		(1,905	)		(5,211	)		(4,572	)		(9,598	)

Net loss — pro forma	$	(17,725	)	$	(26,364	)	$	(39,480	)	$	(52,773	)


Basic and diluted net loss per share — as reported	$	(0.05	)	$	(0.09	)	$	(0.12	)	$	(0.19	)

Basic and diluted net loss per share — pro forma	$	(0.06	)	$	(0.12	)	$	(0.14	)	$	(0.24	)

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 and second quarters of fiscal 2006: for stock option grants the Company used risk-free interest rates of 4.12% and 4.42%, respectively; a dividend yield of 0% for both periods; a volatility factor of 1.10 and 1.08, respectively; and a weighted-average expected life of the option of 3.6 years and 3.7 years, respectively. For the employee stock purchase plan the Company used a risk-free interest rate of 4.0%, a dividend yield of 0%, a volatility factor of 1.08, and a weighted-average expected life of the option of 0.50 years for both periods.

The fair value of these options at the date of grant was estimated using the following weighted-average assumptions for the first and second quarters of fiscal 2005: for stock options grants we used risk-free interest rates of 3.30% and 3.71%, respectively; a volatility factor of 1.17 and 1.19, respectively; a weighted-average expected life of the option of 3.85 for both periods; and a dividend yield of 0% for both periods. For the employee stock purchase plan, the Company used a risk-free interest rate of 2.85%, a dividend yield of 0%, a volatility fact of 0.99, and a weighted-average expected life of the option of 0.46 years for the first quarter of fiscal 2005. There was no employee purchase plan activity in the second quarter of fiscal 2005.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, which replaces SFAS 123 and supersedes 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. 128 Earnings Per Share for 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.

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


	Three Months Ended						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
Numerator:
Net loss	$	(15,820	)	$	(21,193	)	$	(34,908	)	$	(43,312	)

Denominator for basic net loss per share:
Weighted-average shares outstanding — total		289,972			223,413			281,051			223,283
Weighted-average shares outstanding — subject to repurchase		(4	)		(33	)		(4	)		(128	)
Weighted-average shares outstanding — performance stock		—			—			—			—

Weighted-average shares outstanding — basic and diluted		289,968			223,380			281,047			223,155


Basic and diluted net loss per share	$	(0.05	)	$	(0.09	)	$	(0.12	)	$	(0.19	)

Common stock equivalents related to potentially dilutive securities excluded from computation above because they are anti-dilutive:
Employee stock options		1,565			4,142			1,503			4,337
Stock subject to repurchase		4			33			4			128
Conversion of convertible subordinated notes		58,647			58,647			58,647			58,647
Conversion of convertible notes		749			—			749			—
Performance stock		—			—			—			—
Warrants assumed in acquisition		942			964			942			964

Potentially dilutive securities		61,907			63,786			61,845			64,076

Comprehensive Income

SFAS No. 130 Reporting Comprehensive Income establishes 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 and six months ended October 31, 2005 and 2004 were as follows (in thousands):


	Three Months Ended						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
Net loss	$	(15,820	)	$	(21,193	)	$	(34,908	)	$	(43,312	)
Foreign currency translation adjustment		(27	)		62			(5	)		59
Change in unrealized gain (loss) on securities, net of reclassification adjustments for realized gain (loss)		(69	)		98			(192	)		(92	)

Comprehensive loss	$	(15,916	)	$	(21,033	)	$	(35,105	)	$	(43,345	)

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


	October 31, 2005			April 30, 2005
Net unrealized losses on available-for-sale securities	$	(688	)	$	(496	)
Cumulative translation adjustment		872			877

Accumulated other comprehensive income	$	184		$	381

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 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 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 October 31, 2005. During the quarter ended October 31, 2005, the Company incurred additional costs of $130,000 related to this acquisition which have been included in the total consideration.

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	$	1,213	$	10,028

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
	$(4	)	$	429	$	1,529	$	8,074	$	10,028

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. 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. During the quarter ended October 31, 2005, the Company issued 9,938,256 shares of common stock upon the conversion of $12.1 million of principal and $191,000 of interest related to this convertible promissory note. As of October 31, 2005, all of the principal and interest on this note has been converted into shares of common stock.

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. During the quarter ended October 31, 2005, there were not any conversions related to these convertible notes. As of October 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 Finisar 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 Finisar common stock. The Company made cash payments of $1.4 million in August 2003, $2.0 million in September 2004, and $2.0 million in August 2005 to pay down minimum commitments to New Focus under a royalty arrangement entered into in connection with the acquisition. As of October 31, 2005, the entire commitment under this royalty arrangement has been paid. Because such payments were not fixed in time, they were not discounted as otherwise required under APB Opinion No. 21.

7. Letter of Credit Reimbursement Agreement

On April 29, 2005, the Company 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. Costs 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 the Company to maintain its 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. On October 20, 2005, the Company amended this letter of credit reimbursement agreement with Silicon Valley Bank to increase the letter of credit facility to $20 million. Costs related to the credit facility amendment consisted of a loan fee of 0.50% of the credit facility amount, or $100,000, plus the bank’s out of pocket expenses associated with the amended credit facility. This amended letter of credit facility will be available to the Company through October 26, 2006. At October 31, 2005 outstanding letters of credit secured by this facility totaled $3.0 million.

8. Convertible Subordinated Notes due 2010

On October 15, 2003, the Company sold $150 million aggregate principal amount of 2 1/2% convertible subordinated notes due October 15, 2010. Interest on the notes is 2 1/2% per year, payable semiannually on April 15 and October 15, beginning on April 15, 2004. The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of the Company’s common

stock at a conversion price of $3.705 per share, which is equal to a conversion rate of approximately 269.9055 shares per $1,000 principal amount of notes. The conversion price is subject to adjustment.

At issuance of the notes the Company purchased and pledged to a collateral agent, as security for the exclusive benefit of the holders of the notes, approximately $14.4 million of 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 the notes. At October 31, 2005, approximately $7.3 million of U.S. government securities remained pledged as security for the note holders.

The notes are subordinated to all of the Company’s existing and future senior indebtedness and effectively subordinated to all existing and future indebtedness and other liabilities of its subsidiaries. Because the notes are subordinated, in the event of bankruptcy, liquidation, dissolution or acceleration of payment on the senior indebtedness, holders of the notes will not receive any payment until holders of the senior indebtedness have been paid in full. The indenture does not limit the incurrence by the Company or its subsidiaries of senior indebtedness or other indebtedness. The Company may redeem the notes, in whole or in part, at any time on or after October 15, 2007 up to, but not including, the maturity date at specified redemption prices, plus accrued and unpaid interest.

Upon a change in control of the Company, or on October 15, 2007, each holder of the notes may require the Company to repurchase some or all of the notes at a purchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. Instead of paying the change of control purchase price in cash, the Company may, at its option, pay it in shares of the Company’s common stock valued at 95% of the average of the closing sales prices of its common stock for the five trading days immediately preceding and including the third trading day prior to the date the Company is required to repurchase the notes. The Company cannot pay the change in control purchase price in common stock unless the Company satisfies the conditions described in the indenture under which the notes have been issued.

The notes were issued in fully registered form and are represented by one or more global notes, deposited with the trustee as custodian for The Depository Trust Company, or DTC, and registered in the name of Cede & Co., DTC’s nominee. Beneficial interests in the global notes will be shown on, and transfers will be effected only through, records maintained by DTC and its participants.

The Company has agreed to use its best efforts to file a shelf registration statement covering the notes and the common stock issuable upon conversion of the stock and keep such registration statement effective until two years after the latest date on which the Company issued notes in the offering (or such earlier date when the holders of the notes and the common stock issuable upon conversion of the notes are able to sell their securities immediately pursuant to Rule 144(k) under the Securities Act). If the Company does not comply with these registration obligations, the Company will be required to pay liquidated damages to the holders of the notes or the common stock issuable upon conversion. The Company will not receive any of the proceeds from the sale by any selling security holders of the notes or the underlying common stock. A registration statement covering the notes and the common stock issuable upon conversion thereof was declared effective in February 2004.

Unamortized debt issuance costs associated with this note were $3.5 million and $3.8 million at October 31, 2005 and April 30, 2005, respectively. Amortization of prepaid loan costs are classified as Other Income (Expense), Net on the consolidated statement of operations. Amortization of prepaid loan costs for the six months ended October 31, 2005 and 2004 were $351,000 and $356,000, respectively.

9. Inventories

Inventories consist of the following (in thousands):


	October 31, 2005		April 30, 2005
Raw materials	$	16,265	$	12,657
Work-in-process		14,663		10,720
Finished goods		9,962		10,556

Total inventory	$	40,890	$	33,933

During the three months ended October 31, 2005, the Company did not record any charges for excess and obsolete inventory. For the six months ended October 31, 2005, the Company recorded charges of $1.1 million for excess and obsolete inventory. During the three and six months ended October 31, 2005 the Company sold inventory that was written-off in previous periods with an approximate cost of $1.3 million and $2.7 million, respectively. As a result, cost of revenue associated with the sale of this inventory was zero.

During the three and six months ended October 31, 2004, the Company recorded negative charges of $5.3 million and $7.8 million, respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $2.7 million and $4.8 million, respectively. As a result, cost of revenue associated with the sale of this inventory was zero.

10. Property, Plant, Equipment and Improvements

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


	October 31, 2005			April 30, 2005
Land	$	9,747		$	9,747
Buildings		10,583			10,593
Computer equipment		32,893			31,674
Office equipment, furniture and fixtures		3,239			3,209
Machinery and equipment		110,939			108,899
Leashold improvements		5,670			7,786
Construction-in-process		3,914			3,341

Total		176,985			175,249
Accumulated depreciation and amortization		(97,957	)		(87,985	)

Property, equipment and improvements (net)	$	79,028		$	87,264

11. Income Taxes

The Company recorded a provision for income taxes of $657,000 and $1,251,000 for the three and six months, respectively ended October 31, 2005 compared to $37,000 and $56,000 for the three and six months, respectively, ended October 31, 2004. 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 October 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 October 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.

12. Purchased Intangible Assets Including Goodwill

During the first six months of fiscal 2006, the Company recorded $4.3 million of additional goodwill in the optical subsystems and components reporting unit. The addition was primarily due to a reassessment of the allocation of the purchase price of assets related to the acquisition of the transceiver and transponder business of Infineon Technologies AG which was completed in January 2005. The reassessment reduced the allocation to a minority investment by $4.2 million. The Company also recorded additional payments of $184,000 associated with the Infineon acquisition. The Company recorded additional goodwill of $8.2 million in the network test and monitoring systems reporting unit. The addition was due to recording the acquisition of InterSAN in the amount of $8.1 million and additional payments of $112,000 for the I-TECH acquisition and $59,000 for the Data Transit acquisition.

During the second quarter of fiscal 2006, the Company determined that the remaining intangible assets related to certain purchased optical amplifier technology related to the Company’s acquisition of certain assets of Genoa Corporation and certain intangible assets related to passive optical technology acquired with our acquisition of Transwave Fiber, Inc., had a fair value of zero. Accordingly, an impairment charge of $853,000 was recorded against the remaining net book value of these assets.

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		4,339		8,246		12,585

Balance at October 31, 2005	$	92,761	$	39,514	$	132,275

13. Available-For-Sale Investments

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


			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
Investment Type	Cost		Gain		Loss			Value

As of October 31, 2005
Debt:
Corporate	$	47,388	$	2	$	(422	)	$	46,968
Government agency		25,214		—		(236	)		24,978
Municipal		300		—		(6	)		294

Total	$	72,902	$	2	$	(664	)	$	72,240

Reported as:
Cash equivalents	$	9,748	$	—	$	(1	)	$	9,747
Short-term investments		63,154		2		(663	)		62,493

	$	72,902	$	2	$	(664	)	$	72,240

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 and six months ended October 31, 2005 was $12,000 and $16,000, respectively. The gross realized gains for the three and six months ended October 31, 2004 were $28,000 and $49,000, respectively. 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 October 31, 2005 and April 30, 2005 (in thousands):


			Gross
	Amortized		Unrealized			Market
	Cost		Gain/(Loss)			Value
As of October 31, 2005
Government agency	$	7,322	$	(145	)	$	7,177

Classified as:
Short term — less than 1 year	$	3,710	$	(43	)	$	3,667
Long term — 1 to 3 years		3,612		(102	)		3,510

Total	$	7,322	$	(145	)	$	7,177

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

Cost Method Investments

Included in minority investments at October 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 three privately held companies accounted for under the cost method. During the quarter ended July 31, 2005, the Company re-assessed the value assigned to a minority investment acquired on January 31, 2005 as part of the Infineon acquisition and determined the value of the investment should have been 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 October 31, 2005 and April 30, 2005 are $4.9 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 and six months ended October 31, 2005, the Company recorded expenses of $517,000 and $1,039,000 respectively, representing the Company’s share of the loss of the investee, which was classified as other expense. During the three and six months ended October 31, 2004, the Company recorded expenses of $432,000 and $793,000, respectively, for its share of the loss of the investee.

14. 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.

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


	Three Months Ended						Six Month Ended
	October 31,						October 31,
	2005			2004			2005			2004
Revenues:
Optical subsystems and components	$	77,449		$	59,912		$	149,819		$	113,662
Network test and monitoring systems		9,173			11,093			18,535			19,220

Total revenues	$	86,622		$	71,005		$	168,354		$	132,882

Depreciation and amortization expense:
Optical subsystems and components	$	10,982		$	7,789			18,063			14,161
Network test and monitoring systems		505			239			895			422

Total depreciation and amortization expense	$	11,487		$	8,028		$	18,958		$	14,583

Operating loss:
Optical subsystems and components	$	(1,078	)	$	(7,695	)	$	(6,444	)	$	(18,370	)
Network test and monitoring systems		(408	)		(407	)		(3,502	)		(1,468	)

Total operating loss		(1,486	)		(8,102	)		(9,946	)		(19,838	)
Unallocated amounts:
Amortization of acquired developed technology		(6,274	)		(9,742	)		(11,928	)		(15,308	)
Amortization of deferred stock compensation		—			(24	)		—			(121	)
In-porcess research and development		—			(318	)		—			(318	)
Amortization of other intangibles		(453	)		(170	)		(929	)		(313	)
Restructuring costs		(3,064	)		—			(3,064	)		—
Interest income (expense), net		(3,065	)		(2,992	)		(6,369	)		(5,762	)
Other non-operating income (expense), net		(821	)		192			(1,421	)		(1,596	)

Total unallocated amounts		(13,677	)		(13,054	)		(23,711	)		(23,418	)


Loss before provision for income tax	$	(15,163	)	$	(21,156	)	$	(33,657	)	$	(43,256	)

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


	October 31,		April 30,
	2005		2005
Optical subsystems and components	$	316,515	$	342,968
Network test and monitoring systems		72,939		71,535
Other assets		76,251		72,085

	$	465,705	$	486,588

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

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):


	October 31,		April 30,
	2005		2005
Long-lived assets
United States	$	248,070	$	258,345
Malaysia		20,802		23,415
Rest of the world		1,851		2,139

	$	270,723	$	283,899

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


	Three Months Ended				Six Months Ended
	October 31,				October 31,
	2005		2004		2005		2004
Optical subsystems and components	$	4,970	$	4,154	$	8,938	$	11,025
Network test and monitoring systems		31		293		63		467

Total capital expenditures	$	5,001	$	4,447	$	9,001	$	11,492

15. 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):


	Six month period ended
	October 31, 2005
Beginning balance	$	2,963
Additions during the period based upon product sold		805
Settlements		(175	)
Changes in liability for pre-existing warranties, including expirations		(443	)

Ending balance	$	3,150

16. Restructuring

During the quarter ended October 31, 2005, the Company consolidated its Sunnyvale facilities into one building and permanently exited a portion of its Scotts Valley facility. As a result of these activities, the Company recorded restructuring charges of approximately $3.1 million. These restructuring charges include $290,000 of miscellaneous costs required to effect the closures and approximately $2.8 million of non-cancelable facility lease payments. Of the $3.1 million in restructuring charges, $1.9 million relates to our optical subsystems and components segment and $1.2 million relates to our network test and monitoring systems segment.

As of October 31, 2005, $2.9 million of committed facilities payments remain accrued and are expected to be fully utilized by the end of fiscal 2011. This amount relates to restructuring activities associated with the closure of the Company’s Hayward facility that took place in fiscal 2003 and the consolidation and exit activities of the Sunnyvale and Scotts Valley facilities during the second quarter of fiscal 2006.

17. 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 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 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. The Court held hearings on April 13, 2005 and September 6, 2005 to determine the form, substance and program of class notice and the scheduling of a fairness hearing for final approval of the settlement. The court 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, the Company is 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 for the Eastern District of Texas 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 involves our U.S. Patent No. 5,404,505 which relates to technology used in information transmission systems to provide access to a large database. Our complaint alleges that DirecTV willfully infringes our patent by making, using, selling, offering to sell and/or importing systems and/or methods related to the transmission of electronic programming guides via satellite broadcast that embody one or more of the claims of our patent. The complaint seeks monetary damages as well as an injunction against future infringement. On May 13, 2005, DirecTV answered the complaint and filed a counterclaim that seeks a declaration of non-infringement, patent invalidity and patent unenforceability. On October 17, 2005, the parties filed a joint claim construction statement, the hearing on which is scheduled to be held on January 25, 2006. The trial is scheduled for June 6, 2006.

On September 6, 2005, the Company filed an action in the United States District Court for the District of Delaware against Agilent Technologies, Inc. (“Agilent”). The lawsuit alleges that Agilent willfully infringes the Company’s U.S. Patents No. 5,019,769 and No. 6,941,077, relating to our digital diagnostics technology, by developing, manufacturing, using, importing, selling and/or offering to sell optoelectronic transceivers that embody one or more of the claims of the patents. The complaint seeks damages for lost profits of at least $1.1 billion based on Agilent’s sales of infringing products. The Company also seeks to treble those damages based on the willful nature of Agilent’s infringement and to obtain an injunction against future infringement. On October 24, 2005, the Company filed an amended complaint adding allegations of infringement of our U.S. Patents No. 6,952,531 and No. 6,957,021, two patents that also relate to our digital diagnostic technology. On December 7, 2005, Agilent answered the complaint denying infringement and asserting patent invalidity. Agilent filed counterclaims against the Company seeking a declaration that our patents are not infringed and are invalid.

against the Company filed on February 22, 2005 in the California Superior Court for the County of Ventura. In the state action, Epoch alleges interference with contract and unfair business practices and seeks damages of approximately $5 million. The state court complaint alleges, among other things, that the Company interfered with an Epoch sale contract with EMC Corporation by offering EMC a secret discount on the Company’s products. On April 5, 2005, the Company filed a cross-complaint against Epoch alleging interference with prospective economic advantage, unfair competition, misappropriation of trade secrets, civil conspiracy, unfair competition and trade libel and seeking damages of at least $1 million. Trial in the state action has been set for February 25, 2006. We believe that Epoch’s lawsuits are without merit, and we intend to defend the lawsuits and pursue our cross-complaint vigorously. Because of the inherent uncertainty of litigation, however, we cannot predict the outcome of these lawsuits. An adverse outcome could require us to pay substantial monetary damages which could harm our business.

18. Guarantees and Indemnifications

In November 2002, the FASB issued Interpretation No. 45 Guarantor’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 October 31, 2005. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

19. 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. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. On October 20, 2005, the Company entered into an amendment to this agreement to extend the availability of this facility to October 26, 2006. During the three and six months ended October 31, 2005, the Company sold approximately $5.2 million and $11.2 million, respectively, of its trade receivables to Silicon Valley Bank under the terms of this agreement.

20. Subsequent Events

On November 15, 2005, the Company completed the purchase of certain assets of Big Bear Networks, Inc. in exchange for a cash payment of $1.9 million. The acquisition expands the Company’s product offering and customer base for optical transponders and expands its portfolio of intellectual property used in designing and manufacturing these products as well as those to be developed in the future. The Company assumed certain liabilities totaling $897,000 as part of the acquisition. The acquisition will be accounted for as a purchase and, accordingly, the results of operations of the acquired assets (beginning with the closing date of the acquisition) and the estimated fair value of assets acquired will be included in the Company’s consolidated financial statements beginning in the third quarter of fiscal 2006.

On November 1, 2005, the Company received cash payments from Goodrich Corporation totaling $11.0 million related to the sale of its equity interest in Sensors Unlimited, Inc. The Company had not valued this interest for accounting purposes. Accordingly, the Company will record a gain of $11.0 million related to this transaction in the third quarter of fiscal 2006.

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.

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 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, including costs for non-cancelable leases in vacated facilities, and other costs related to exit activities.

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 Acquisitions

Acquisition of Transceiver and Transponder Product Line From Infineon Technologies AG

On January 31, 2005, we acquired certain assets of Infineon’s fiber optics business unit associated with the design, development and manufacture of optical transceiver and transponder products in exchange for 34 million shares of our common stock. The acquisition expanded our product offering and customer base for optical transceivers and transponders and expanded its portfolio of intellectual property used in designing and manufacturing these products as well as those to be developed in the future. The amount of goodwill recorded in this acquisition reflected the value to be realized associated with cost savings resulting from integrating these products withour Optical Subsystems and Components Division as well as the incremental growth in revenue and earnings from the sale of future products. We did not acquire any employees or assume any liabilities as part of the acquisition, except for obligations under customer contracts. The 34 million shares of our common stock issued to Infineon were valued at approximately $59.5 million based on the closing price of our common stock on January 31, 2005. The acquisition was accounted for as a purchase and, accordingly, the results of operations of the acquired assets (beginning with the closing date of the acquisition) and the estimated fair value of assets acquired were included in our consolidated financial statements beginning on the first day of our fourth quarter of fiscal 2005.

Acquisition of I-TECH Corp.

On April 8, 2005, we completed our acquisition of I-TECH Corp., a privately-held network test and monitoring company based in Eden Prairie, Minnesota. The acquisition expanded our product offering for testing and monitoring systems, particularly for those systems relying on the use of the Fibre Channel protocol, and expanded the its portfolio of intellectual property used in designing and manufacturing these products as well as those to be developed in the future. The amount of goodwill recorded with this acquisition reflected the underlying patents and know-how used in manufacturing future products and cost synergies associated with integrating the operations of I-TECH with our Network Tools Division. The acquisition agreement provided for the merger of I-TECH with a wholly-owned subsidiary of Finisar and the issuance by Finisar to the sole holder of I-TECH’s common stock of promissory notes in the aggregate principal amount of approximately $12.1 million. The notes are convertible into shares of Finisar common stock over a period of one year following the closing of the acquisition. 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’s common stock on the dates of conversion of the notes. The results of operations of I-TECH (beginning with the closing date of the acquisition) and the estimated fair value of assets acquired were included in our consolidated financial statements beginning in the fourth fiscal quarter of fiscal 2005.

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.

Acquisition of Assets of Big Bear Networks

On November 15, 2005, we completed the purchase of certain assets of Big Bear Networks, Inc. in exchange for a cash payment of $1.9 million. The acquisition expands our product offering and customer base for optical transponders and expands our portfolio of intellectual property used in designing and manufacturing these products as well as those to be developed in the future. We assumed certain liabilities totaling $897,000 as part of the acquisition. The acquisition will be accounted for as a purchase and, accordingly, the results of operations of the acquired assets (beginning with the closing date of the acquisition) and the estimated fair value of assets acquired will be included in our consolidated financial statements beginning in the third quarter of fiscal 2006.

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 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 required recognition via a cumulative effect adjustment within net income for 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						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
Revenues:
Optical subsystems and components		89.4	%		84.4	%		89.0	%		85.5	%
Network test and monitoring systems		10.6			15.6			11.0			14.5

Total revenues		100.0			100.0			100.0			100.0
Cost of revenues		66.9			69.7			70.5			71.6
Impairment of acquired developed technology		1.0			5.1			0.5			2.8
Amortization of acquired developed technology		6.3			8.6			6.6			8.8

Gross profit		25.8			16.6			22.4			16.8

Operating expenses:
Research and development		14.1			24.0			15.0			24.9
Sales and marketing		8.5			10.7			9.3			11.1
General and administrative		7.7			7.0			8.7			7.3
Amortization of deferred stock compensation		0.0			0.0			0.0			0.1
Amortization of purchased intangibles		0.5			0.2			0.6			0.2
Restructuring costs		8.2			0.0			4.2			0.0
Acquired in-process research and development		0.0			0.4			0.0			0.2

Total operating expenses		39.0			42.3			37.8			43.8
Loss from operations		(13.2	)		(25.7	)		(15.4	)		(27.0	)
Interest income		0.9			0.8			0.9			0.9
Interest expense		(4.4	)		(5.0	)		(4.7	)		(5.2	)
Other income (expense), net		(0.9	)		0.3			(0.8	)		(1.2	)

Loss before income taxes		(17.6	)		(29.6	)		(20.0	)		(32.5	)
Provision for income taxes		0.0			0.1			0.3			0.0

Net loss		(17.6	)%		(29.7	)%		(20.3	)%		(32.5	)%

Revenues. Revenues increased $15.6 million, or 22.0%, to $86.6 million in the quarter ended October 31, 2005 compared to $71.0 million in the quarter ended October 31, 2004. Sales of optical subsystems and components and network test and monitoring systems represented 89.4% and 10.6%, respectively, of total revenues in the quarter ended October 31, 2005, compared to 84.4% and 15.6%, respectively, in the quarter ended October 31, 2004.

Revenues increased $35.5 million, or 26.7%, to $168.4 million in the six months ended October 31, 2005 compared to $132.9 million in the six months ended October 31, 2004. Sales of optical subsystems and components and network test and monitoring systems represented 89.0% and 11.0%, respectively, of total revenues in the six months ended October 31, 2005, compared to 85.5% and 14.5%, respectively, in the six months ended October 31, 2004.

Optical subsystems and components revenues increased $17.5 million, or 29.3%, to $77.4 million in the quarter ended October 31, 2005 compared to $59.9 million in the quarter ended October 31, 2004. Our acquisition on January 31, 2005, of certain assets of Infineon’s fiber optics business unit contributed $7.0 million in the quarter ended October 31, 2005. Excluding the effect of the acquisition, sales of optical subsystems and components increased $10.5 million, or 17.6%, in the quarter ended October 31, 2005 compared to the quarter ended October 31, 2004. Excluding the effect of the acquisition, the increase in optical subsystem and component revenues was primarily related to a $9.9 million increase in sales of products for short distance LAN/SAN applications and a $3.0 million increase in sales of products for long distance and telecom applications, partially offset by a $2.2 million decrease in sales of laser components. The increase in revenues from the sale of optical subsystems 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. We believe that the decrease in the sale of laser components was primarily due to our gain in market share in the optical subsystems business which reduced the demand for laser components by other manufacturers.

Optical subsystems and components revenues increased $36.2 million, or 31.8%, to $149.8 million in the six months ended October 31, 2005 compared to $113.7 million in the six months ended October 31, 2004. Our acquisition on January 31, 2005, of certain assets of Infineon’s fiber optics business unit contributed $15.0 million in the six months ended October 31, 2005. Excluding

the effect of the acquisition, sales of optical subsystems and components increased $21.2 million, or 18.6%, in the six months ended October 31, 2005 compared to the six months ended October 31, 2004. Excluding the effect of the acquisition, the increase in optical subsystem and component revenues was primarily related to a $23.4 million increase in sales of products for short distance LAN/SAN applications and a $2.0 million increase in sales of products for long distance and telecom applications, partially offset by a $5.2 million decrease in sales of laser components. The increase in revenues from the sale of optical subsystems 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. The decrease in the sale of laser components was primarily due to our gain in market share in the optical subsystems business which reduced the demand for laser components by other manufacturers.

Network test and monitoring systems revenues decreased $1.9 million, or 17.3%, to $9.2 million in the quarter ended October 31, 2005 compared to $11.1 million in the quarter ended October 31, 2004. Network test and monitoring systems revenues decreased $685,000, or 3.6%, to $18.5 million in the six months ended October 31, 2005 compared to $19.2 million in the six months ended October 31, 2004. The decrease in revenues for the three and six months was primarily due to a decrease in demand resulting from a product lifecycle transition as OEM system manufacturers complete their transition from 2Ghz to 4Ghz models.

Impairment of Acquired Developed Technology. Impairment of acquired developed technology, a component of cost of revenues, decreased $2.8 million, or 76.7%, in the three and six months ended October 31, 2005 to $853,000 compared to $3.7 million in the three and six months ended October 31, 2004. Included in the balances for the three and six months ended October 31, 2005 was an impairment charge of $853,000 to write off technology for the linear optical amplifier product acquired with our acquisition of the assets of Genoa Corporation in April 2003 and technology related to the broadband lightsource product acquired with our acquisition of Transwave Fiber Inc. in May 2001. Each of these products was discontinued during the quarter. Included in the balances for the three and six months ended October 31, 2004 was an impairment charge of $3.7 million 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.

Amortization of Acquired Developed Technology. Amortization of acquired developed technology, a component of cost of revenues, decreased $665,000, or 10.9%, in the quarter ended October 31, 2005 to $5.4 million compared to $6.1 million in the quarter ended October 31, 2004, and decreased $577,000, or 5.0%, in the six months ended October 31, 2005 to $11.1 million compared to $11.7 million in the six months ended October 31, 2004.

Gross Profit. Gross profit increased $8.9 million, or 75.5%, to $20.7 million in the quarter ended October 31, 2005 compared to $11.8 million in the quarter ended October 31, 2004. Gross profit as a percentage of total revenue was 23.8% in the quarter ended October 31, 2005 compared to 16.6% in the quarter ended October 31, 2004. There were no charges for obsolete and excess inventory in the quarter ended October 31, 2005. We recorded charges of $5.3 million for obsolete and excess inventory in the quarter ended October 31, 2004, and recorded a benefit of $2.7 million for a reduction in our reserve for non-cancellable purchase orders. We sold inventory that was written-off in previous periods resulting in a benefit of $1.3 million in the quarter ended October 31, 2005 and $2.7 million in the quarter ended October 31, 2004. As a result, we recognized a net benefit of $1.3 million in the quarter ended October 31, 2005 compared to a net benefit of $128,000 in the quarter ended October 31, 2004. Excluding the amortization of acquired developed technology and the net impact of excess and obsolete inventory charges, gross profit would have been $25.7 million, or 29.6% of revenue, in the quarter ended October 31, 2005 compared to $21.4 million, or 30.1% of revenue in the quarter ended October 31, 2004. The slight decrease in the adjusted gross profit margin was primarily due to $1.8 million of accelerated depreciation charges for abandoned leasehold improvements and equipment which were included in manufacturing costs, duplicate manufacturing facility costs of $748,000 at our Advanced Optical Components Division as a result of our move to a new manufacturing facility in Texas and a reduction in gross margin contribution by the network test and monitoring segment as a result of a reduction in revenues of approximately $1.6 million. These factors were partially offset by lower material costs and an increase in unit sales, which spread our fixed overhead costs over higher production volume.

Gross profit increased $13.6 million, or 60.6%, to $35.9 million in the six months ended October 31, 2005 compared to $22.4 million in the six months ended October 31, 2004. Gross profit as a percentage of total revenue was 22.4% in the six months ended October 31, 2005 compared to 16.8% in the six months ended October 31, 2004. We recorded charges of $1.1 million in the six months ended October 31, 2005 compared to $7.8 million in the six months ended October 31, 2004, and recorded a benefit of $2.7 million for a reduction in our reserve for non-cancellable purchase orders in the quarter and six months ended October 31, 2004. We sold inventory that was written-off in previous periods resulting in a benefit of $2.7 million in the six months ended October 31, 2005 and $4.8 million in the six months ended October 31, 2004. As a result, we recognized a net benefit of $1.6 million in the six months ended October 31, 2005 compared to a net charge of $300,000 in the quarter ended October 31, 2004. Excluding the amortization of acquired developed technology and the net impact of excess and obsolete inventory charges, gross profit would have been $46.3 million, or 27.5% of revenue, in the six months ended October 31, 2005 compared to $38.0 million, or 28.6% of revenue in the six months ended October 31, 2004. The decrease in the adjusted gross profit margin was primarily due to the inclusion of accelerated depreciation charges in manufacturing costs for abandoned leasehold improvements and equipment of $1.8 million, duplicate manufacturing facility costs at our Advanced Optical Components Division as a result of our move to a new manufacturing facility in Texas of $1.3 million, a reduction in contribution as a result of the decrease in Network Test and Monitoring segment revenues of

approximately $569,000, offset by lower material costs and an increase in unit sales, which spread our fixed overhead costs over higher production volume.

Research and Development Expenses. Research and development expenses decreased $2.9 million, or 17.0%, to $14.1 million in the quarter ended October 31, 2005 compared to $17.0 million in the quarter ended October 31, 2004. The decrease in research and development expenses was primarily due to reductions in temporary labor and consulting services of $678,000, project materials and new product development scrap of $1.7 million, and lower depreciation costs of $1.1 million. Included in research and development expenses in the quarter ended October 31, 2005 were charges of $1.9 million related to the accelerated depreciation of abandoned leasehold improvements and equipment. Research and development expenses as a percent of revenues decreased to 16.3% in the quarter ended October 31, 2005 compared to 24.0% in the quarter ended October 31, 2004.

Research and development expenses decreased $6.0 million, or 18.0%, to $27.2 million in the six months ended October 31, 2005 compared to $33.1 million in the six months ended October 31, 2004. The decrease in research and development expenses was primarily due to reductions in temporary labor and consulting services of $1.6 million, project materials and new product development scrap of $4.2 million, and lower depreciation costs of $1.4 million. Included in research and development expenses in the quarter and six months ended October 31, 2005 were charges of $1.9 million related to abandoned leasehold improvements and equipment. Research and development expenses as a percentage of revenues decreased to 16.1% in the six months ended October 31, 2005 compared to 24.9% in the six months ended October 31, 2004 as a result of cost reductions, as well as the increase in revenues.

Sales and Marketing Expenses. Sales and marketing expenses decreased $69,000, or 0.9%, to $7.5 million in the quarter ended October, 31 2005 compared to $7.6 million in the quarter ended October 31, 2004. Included in sales and marketing expenses in the quarter ended October 31, 2005 were charges of $179,000 of accelerated depreciation related to abandoned leasehold improvements and equipment. Additionally, marketing expenses decreased $326,000 and commission expense increased $138,000 or 6.4% compared to the revenue increase of 22.0% due to modifications to our commission structure. Sales and marketing expenses as a percent of revenues decreased to 8.7% in the quarter ended October 31, 2005 compared to 10.7% in the quarter ended October 31, 2004.

Sales and marketing expenses increased $1.2 million, or 7.8%, to $15.9 million in the six months ended October, 31 2005 compared to $14.7 million in the six months ended October 31, 2004. Included in sales and marketing expenses in the quarter and six months ended October 31, 2005 were charges of $179,000 of accelerated depreciation related to abandoned leasehold improvements and equipment. Additionally, the increase in sales and marketing expenses was primarily due to a $1.0 million increase in personnel-related costs which includes $220,000 in severance. Commission expense decreased $85,000 or 0.1% compared to a 26.7% increase in revenue due to modifications to our commission structure. Sales and marketing expenses decreased as a percentage of revenues to 9.4% in the six months ended October 31, 2005 compared to 11.1% in the six months ended October 31, 2004.

General and Administrative Expenses. General and administrative expenses increased $1.8 million, or 35.5%, to $6.8 million in the quarter ended October 31, 2005 compared to $5.0 million in the quarter ended October 31, 2004. Included in general and administrative expenses in the quarter October 31, 2005 were accelerated depreciation charges of $130,000 related to abandoned equipment and accelerated amortization charges of $500,000 related abandoned patents. Additionally, legal and audit fees increased $322,000, shared services allocations increased $267,000 and personnel related costs increased $124,000. General and administrative expenses as a percent of revenues increased to 7.8% in the quarter ended October 31, 2005 compared to 7.0% in the quarter ended October 31, 2004.

General and administrative expenses increased $5.1 million, or 52.7%, to $14.8 million in the six months ended October 31, 2005 compared to $9.7 million in the six months ended October 31, 2004. Included in general and administrative expenses in the quarter and six months ended October 31, 2005 were accelerated depreciation charges of $130,000 related to abandoned equipment and accelerated amortization charges of $500,000 related abandoned patents. Additionally, consulting costs and audit fees primarily associated with the evaluation and testing of internal control systems required under Section 404 of the Sarbanes-Oxley Act increased $2.3 million, legal expense increased $363,000, personnel-related costs increased $761,000, including and increase of $197,000 for reduction in force related expenses, and our allowance for aged receivables increased $323,000. General and administrative expenses as a percentage of revenues increased to 8.8% in the six months ended October 31, 2005 compared to 7.3% in the six months ended October 31, 2004.

Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation costs decreased by $24,000 to zero in the quarter ended October 31, 2005, and decreased by $121,000 to zero in the six months ended October 31, 2005. As of April 30, 2005, previously recorded deferred stock compensation was fully amortized.

Amortization of Purchased Intangibles. Amortization of purchased intangibles increased $283,000, or 166.5%, to $453,000 in the three months ended October 31, 2005 compared to $170,000 in the three months ended October 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 $59,000, 43,000, 47,000 and $134,000, respectively.

Amortization of purchased intangibles increased $616,000, or 196.8%, to $929,000 in the six months ended October 31, 2005 compared to $313,000 in the six months ended October 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 $151,000, 86,000, 109,000 and $270,000, respectively.

Restructuring costs. During the quarter ended October 31, 2005, we completed the consolidation of our Northern California facilities. The restructuring charges include the remaining value of non-cancelable lease obligations of $2.8 million for our abandoned corporate office located in Sunnyvale and a portion of our facility in Scotts Valley and moving costs of $290,000.

Interest Income. Interest income increased $205,000, or 36.6%, to $765,000 in the quarter ended October 31, 2005 compared to $560,000 in the quarter ended October 31, 2004. Interest income increased $396,000, or 34.4%, to $1.5 million in the six months ended October 31, 2005 compared to $1.1 million in the six months ended October 31, 2004. The increases for the quarter and six months were primarily the result of fluctuating investment balances and interest rates.

Interest Expense. Interest expense increased $278,000, or 7.8%, to $3.8 million in the quarter ended October 31, 2005 compared to $3.6 million in the quarter ended October 31, 2004. Interest expense increased $1.0 million, or 14.5%, to $8.0 million in the six months ended October 31, 2005 compared to $6.9 million in the six months ended October 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 October 31, 2005 and 2004, respectively, and $2.2 million and $2.1 million in the six months ended October 31, 2005 and 2004, respectively.

Other Income (Expense), Net. Other income (expense), net, decreased $1.0 million, or 526.6%, to an expense of $821,000 in the quarter ended October 31, 2005 compared to income of $192,000 in the quarter ended October 31, 2004. Other income (expense), net, decreased $175,000, or 11.0%, to an expense of $1.4 million in the six months ended October 31, 2005 compared to net expense of $1.6 million in the six months ended October 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 October 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 income tax provisions of $657,000 and $1.3 million, respectively, for the three months and six months ended October 31, 2005 compared to provisions of $37,000 and $56,000, respectively, for the three months and six months ended October 31, 2004. The provision for income taxes in the quarter and six months ended October 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 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 October 31, 2005, cash, cash equivalents and short-term investments were $95.7 million compared to $102.4 million at April 30, 2005. Restricted securities, used to secure future interest payments on our convertible debt were $7.3 million at October 31, 2005 compared to $9.1 million at April 30, 2005. At October 31, 2005, total short and long term debt was $237.4 million, compared to $267.8 million at April 30, 2005.

Net cash provided by operating activities totaled $1.6 million in the six months ended October 31, 2005, compared to a use of $27.0 million of cash in the six months ended October 31, 2004. Cash provided by operating activities for the six months ended October 31, 2005 was primarily a result of operating losses adjusted for non-cash related items. Working capital uses of cash in the six months ended October 31, 2005 included cash inflows of $10.3 million offset by outflows of $9.1 million. Cash inflows were primarily due to a $3.5 million decrease in other assets, a $2.2 million increase in accounts payable, a $1.4 million increase in deferred revenue, a $1.2 million decrease in deferred income taxes, a $1.1 million increase in other compensation, and an $800,000 increase in other accrued liabilities. The decrease in other assets was primarily due to the receipt of $3.3 million for payment of notes receivable and $3.7 million in payments from a subcontract manufacturer offset by investments of $2.1 million in our patent portfolio and additional shipments of $2.1 to a subcontract manufacturer. The $1.4 million increase in deferred revenue was associated with increased sales through distributor

channels. The increases in accrued compensation and accounts payable were related to the timing of those payments. The $800,000 increase in other accrued liabilities is mainly due to accruals of $2.8 million related to our restructuring offset by a payment of $2.0 million made to New Focus under a royalty arrangement. Cash outflows were due to a $6.9 million increase in inventory, and a $2.2 million increase in accounts receivable. The use of cash in operating activities in the six months ended October 31, 2004 was primarily a result of operating losses of $43.3 million, and working capital uses of cash of $15.9 million, partially offset by $34.2 million of non-cash charges.

Net cash provided in investing activities totaled $2.6 million in the six months ended October 31, 2005 compared to a use of $14.3 million of cash in the six months ended October 31, 2004. The use of cash for investing activities in the six months ended October 31, 2005 was primarily related to facility improvements and purchases of equipment at our 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 six months ended October 31, 2004 consisted primarily of payments related to our purchase of the assets of Honeywell’s VCSEL Optical Products business unit of $5.7 million and payments related to our purchase of assets of Data Transit Corp. of $500,000. Net cash used also consisted of purchases of plant, property and equipment of $10.9 million.

Net cash provided by financing activities was $63,000 in the six months ended October 31, 2005 compared to a use of $1.3 million of cash in the six months ended October 31, 2005. Cash provided by financing activities in six months ended October 31, 2005 included $373,000 from the exercise of stock options offset by payment of borrowings of $310,000. Cash used in financing activities in the six months ended October 31, 2004 consisted primarily of $2.0 million of payments on other long-term liabilities offset by proceeds of $286,000 from the exercise of employee stock options, net of repurchase of unvested shares, and by proceeds of $467,000 from payments received on stockholder notes receivables.

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. Costs 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 of our assets, including our 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. On October 20, 2005, we amended our agreement with Silicon Valley Bank to increase the letter of credit facility to $20 million. Costs related to the amended credit facility amendment consisted of a loan fee of 0.50% of the credit facility amount, or $100,000, plus the bank’s out of pocket expenses. This letter of credit facility will be available to us through October 26, 2006. At October 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 October 31, 2005, we had contractual obligations of $311.0 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	$	1,359	$	1,359	$	—	$	—	$	—
Long-term debt		250,250		—		100,250		150,000		—
Lease commitment under sale-leaseback agreement		49,989		2,995		6,193		6,475		34,326
Operating leases		7,996		4,275		2,097		1,574		50
Purchase obligations		1,390		1,390		—		—		—

Total contractual obligations	$	310,984	$	10,019	$	108,540	$	158,049	$	34,376

Short-term debt consists of a convertible promissory note in the principal amount of $1.0 million due in fiscal 2006, related to our fiscal 2005 acquisition of I-TECH and $359,000 of current debt obligations assumed as part of the acquisition of InterSAN, Inc.

Long-term debt consists of 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. Annual interest payments on the convertible subordinated notes is approximately $9.0 annually.

Lease commitment under sale-leaseback agreement includes $11.8 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 $1.4 million have been expensed and recorded on the balance sheet as non-cancelable purchase obligations as of October 31, 2005.

Off-Balance-Sheet Arrangements

At October 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.

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 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 $15.8 million and $34.9 million in the three and six months ended October 31, 2005, respectively. 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.

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 October 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 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.

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 31, 2005, we acquired 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. Our future results of operation have been and will continue to be substantially influenced by the operations of the new business, and we continue to be 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 have been and continue to 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.

	•		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 six 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 14 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 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 47.0% and 47.6% of our revenues in the three months and six months ended October 31, 2005, respectively. 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.

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.

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 are also relying on Infineon to manufacture transceiver and transponder products for us until we are able to transfer manufacturing operations to our own 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;

	•		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 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 October 2005, 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. During the first quarter of fiscal 2006 we reclassified $4.2 million of an investment associated with the Infineon acquisition to goodwill as the investment was deemed to have no value. During the three and six months ended October 31, 2005 we recognized $516,000 and $1.0 million, respectively, of losses related to another investment accounted for under the equity method. We may be required to write off all or a portion of the $16.2 million in such investments remaining on our balance sheet as of October 31, 2005 in future periods and to recognize additional losses related to certain of our investments.

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. The Court held hearings on April 13, 2005 and September 6, 2005 to determine the form, substance and program of class notice and the scheduling of a fairness hearing for final approval of the settlement. The court 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.

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 have been taken and are continuing to be 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 weaknesses 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. In connection with the pending litigation, substantial management time has been, and will continue to be, expended. In addition, we have incurred, and we expect to continue to incur, substantial legal expenses in connection with these pending lawsuits. These costs and this diversion of resources could significantly harm our business.

Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products

The networking industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We 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 business and future operating results may be adversely affected by events outside 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 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 October 31, 2005, our executive officers and directors and certain entities affiliated with them beneficially owned approximately 34.4 million shares of our common stock, or approximately 11.6% 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 11.5% 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;

	•		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 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

	•		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 $517,000 and $1,039,000 in the three and six months ended October 31, 2005 and $432,000 and $793,000 in the three and six months ended October 31, 2004 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.

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 first two quarters of fiscal 2006, management made substantial progress in the execution of the remediation plan identified in the 2005 Form 10-K. Among other things, we took the following actions:

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

	•		In the first quarter, we engaged Deloitte & Touche LLP to provide consulting services in support of our tax accounting and reporting functions, and hired a Director of Taxation;

	•		we reconciled our accounts related to all inventory on consignment at customer locations, which totaled $1.2 million as of October 31, 2005, and, in the first quarter, we 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 both quarters to assure that revenue was properly recognized.

Aside from ongoing steps taken to implement the remediation plan, there was no change in our internal control over financial reporting during the quarter ended October 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

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. The Court held hearings on April 13, 2005 and September 6, 2005 to determine the form, substance and program of class notice and the scheduling of a fairness hearing for final approval of the settlement. The court 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, the Company is required to pay significant monetary damages, its business would be substantially harmed.

On September 6^,2005, the Company filed an action in the United States District Court for the District of Delaware against Agilent Technologies, Inc. (“Agilent”). The lawsuit alleges that Agilent willfully infringes the Company’s U.S. Patents No. 5,019,769 and No. 6,941,077, relating to our digital diagnostics technology, by developing, manufacturing, using, importing, selling and/or offering to sell optoelectronic transceivers that embody one or more of the claims of the patents. The complaint seeks damages for lost profits of at least $1.1 billion based on Agilent’s sales of infringing products. The Company also seeks to treble those damages based on the willful nature of Agilent’s infringement and to obtain an injunction against future infringement. On October 24, 2005, the Company filed an amended complaint adding allegations of infringement of our U.S. Patents No. 6,952,531 and No. 6,957,021, two patents that also relate to our digital diagnostic technology. On December 7, 2005, Agilent answered the complaint denying infringement and asserting patent invalidity. Agilent filed counterclaims against the Company seeking a declaration that our patents are not infringed and are invalid.

On October 6, 2005, The Epoch Group, Inc. (“Epoch”) sued the Company in the United States District Court for the Central District of California. Epoch’s complaint, as amended on November 28, 2005, alleges that the Company violated federal antitrust laws, the Lanham Act and committed defamation per se by, among other things, disparaging Plaintiff’s products and services, maintaining secret prices and purchasing competing companies. The amended complaint seeks damages in the amount of $5 million. The Company intends to vigorously defend itself, and intends to file a motion to dismiss the amended complaint in its entirety. The federal action is based largely on facts similar to those alleged by Epoch in a pending action against the Company filed on February 22, 2005 in the California Superior Court for the County of Ventura. In the state action, Epoch alleges interference with contract and unfair business practices and seeks damages of approximately $5 million. The state court complaint alleges, among other things, that the Company interfered with an Epoch sale contract with EMC Corporation by offering EMC a secret discount on the Company’s products. On April 5, 2005, the Company filed a cross-complaint against Epoch alleging interference with prospective economic advantage, unfair competition, misappropriation of trade secrets, civil conspiracy, unfair competition and trade libel and seeking damages of at least $1 million. Trial in the state action has been set for February 25, 2006. We believe that Epoch’s lawsuits are without merit, and we intend to defend the lawsuits and pursue our cross-complaint vigorously. Because of the inherent uncertainty of litigation, however, we cannot predict the outcome of these lawsuits. An adverse outcome could require us to pay substantial monetary damages which could harm our business.

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

At the annual meeting of our stockholders held on October 14, 2005, the following matters were considered and voted upon:

(a) Jerry S. Rawls and Dominique Trempont were elected as Class III directors to serve on our Board of Directors for a three-year term expiring at the 2008 annual meeting of stockholders and until their respective successors are duly elected and qualified. The number of shares voted and withheld for such nominees were as follows:


Name	For		Withheld
Jerry S. Rawls		270,894,920		1,794,360

Dominique Trempont		270,937,241		1,752,039

In addition to Messrs. Rawls and Trempont, as of the date of the meeting the following directors each had a term of office that continued after the meeting: David C. Fries, Roger C. Ferguson, Frank H. Levinson, Larry D. Mitchell, and Robert N. Stephens.

(b) A proposal to amend and restate our 1999 Stock Option Plan was approved by a vote of 95,491,246 shares for, 52,079,652 shares against, and 345,072 shares abstaining, with 124,773,316 broker non-votes.

(c) The appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending April 30, 2006 was approved and ratified by a vote of 271,845,184 shares for, 560,695 shares against, and 283,401 shares abstaining.


	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:		3
Consolidated Balance Sheets as of October 31, 2005 and April 30, 2005		3
Consolidated Statements of Operations for the three and six month periods ended October 31, 2005 and 2004		4
Consolidated Statements of Cash Flows for the six month periods ended October 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		25
Item 3. Quantitative and Qualitative Disclosure About Market Risk		45
Item 4. Controls and Procedures		45
PART II OTHER INFORMATION
Item 1. Legal Proceedings		46
Item 4. Submission of Matters to a Vote of Security Holders		48
Item 6. Exhibits		49
Signatures		50
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


	October 31, 2005
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Purchased technology	$	102,466	$	(80,912	)	$	21,554
Trade name		3,625		(2,805	)		820
Customer relationships		5,243		(1,047	)		4,196

Total	$	111,334	$	(84,764	)	$	26,570


	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


Year	Amount
2006 remaining	$	7,414
2007		7,105
2008		5,851
2009		3,264
2010 and beyond		2,936

	$	26,570

10.33		Resignation Agreement by and between Finisar Corporation and Kevin Cornell, effective as of August 4, 2005 (incorporated by reference to Exhibit 10.33 to Registrant’s Current Report on Form 8-K filed August 8, 2005)

10.34		Finisar Corporation 2005 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed October 19, 2005)

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


	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: December 9, 2005


Exhibit
Number		Description
10.33		Resignation Agreement by and between Finisar Corporation and Kevin Cornell, effective as of August 4, 2005 (incorporated by reference to Exhibit 10.33 to Registrant’s Current Report on Form 8-K filed August 8, 2005)

10.34		Finisar Corporation 2005 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed October 19, 2005)

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