<PAGE>


                        SECURITES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

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

                                    FORM 10-Q

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

                  For the quarterly period ended October 31, 1999

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

            For the transition period from ___________ to ___________

                          Commission File No. 000-27999

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

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

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

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

                                 not applicable
--------------------------------------------------------------------------------
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last 
 Report)

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

       As of October 31, 1999, there were 33,646,298 shares of the registrant's
no par value Common Stock outstanding.



<PAGE>


                               FINISAR CORPORATION

                                      INDEX


<TABLE>
<CAPTION>

 PART I      FINANCIAL INFORMATION                                                                      Page(s)
                                                                                                        -------
<S>          <C>                                                                                        <C>

 Item 1.      Financial Statements

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

                  Condensed Statements of Operations (unaudited) for the fiscal quarter and six
                  months ended October 31, 1999 and 1998........................................            4

                  Condensed Statements of Cash Flows (unaudited) for the six months ended
                  October 31,1999 and 1998......................................................            5

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


 Item 2.      Management's Discussion and Analysis of Financial Condition and Results of
              Operations........................................................................        12-30


 Item 3.      Quantitative and Qualitative Disclosure About Market Risk.........................           31


 PART II      OTHER INFORMATION


 Item 1.      Legal Proceedings.................................................................           32

 Item 2.      Changes in Securities and Use of Proceeds.........................................           32

 Item 6.      Exhibits and Reports on Form 8-K..................................................           33

 Signatures.....................................................................................           34

 Index to Exhibits..............................................................................           35
</TABLE>


                                       2

<PAGE>



PART I  -      FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
                                                                                     Pro Forma
                                                                                    Stockholders'
                                                                                      Equity at
                                                        October 31,     April 30,     October 31,
                                                           1999           1999           1999
                                                         --------       --------       --------
 ASSETS                                                 (unaudited)                   (unaudited)
<S>                                                     <C>             <C>         <C>
Current assets:

     Cash and cash equivalents ....................      $  3,162       $  5,044
     Accounts receivable, trade (net) .............         7,227          6,653
     Accounts receivable, other ...................           274              3
     Inventories ..................................        10,862          5,236
     Income tax receivable ........................           148             --
     Deferred income taxes ........................         1,047          1,047
     Prepaid expenses .............................           642            194
                                                         --------       --------
         Total current assets .....................        23,362         18,177
Property, equipment and improvements (net) ........         4,145          2,482
Other assets ......................................           470            296
                                                         --------       --------
         Total assets .............................      $ 27,977       $ 20,955
                                                         ========       ========

 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable .............................         3,442          1,394
     Accrued compensation .........................         1,780          1,499
     Other accrued liabilities ....................         2,389          1,476
     Income tax payable ...........................         1,319            743
     Capital lease obligations, current portion ...            21             54
                                                         --------       --------
         Total current liabilities ................         8,951          5,166
Notes payable, long-term portion ..................        11,015         11,015
Capital lease obligations, long-term portion ......            22             17
Other long-term liabilities .......................           105             --
Preferred stock ...................................        26,260         26,260          2,640
Stockholders' equity:
Common stock ......................................        19,539          4,304         43,159
 Deferred stock compensation ......................       (12,924)        (1,975)       (12,924)
 Notes receivable from stockholders ...............        (3,546)        (1,521)        (3,546)

 Retained earnings (accumulated deficit) ..........       (21,445)       (22,311)       (21,445)
                                                         --------       --------       --------
         Total stockholders' equity (deficit) .....       (18,376)       (21,503)      $  5,244
                                                         --------       --------       ========
         Total liabilities and stockholders' equity      $ 27,977       $ 20,955
                                                         ========       ========
</TABLE>




                                       3

<PAGE>


PART I  -      FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
                                                        Three Months Ended           Six Months Ended
                                                            October 31,                October 31,
                                                     -----------------------      -----------------------
                                                       1999           1998          1999           1998
                                                     --------       --------      --------       --------
<S>                                                  <C>            <C>           <C>            <C>     
Revenues ......................................      $ 16,077       $  7,402      $ 29,956       $ 14,196
Cost of revenues ..............................         7,878          3,058        14,130          5,724
                                                     --------       --------      --------       --------

    Gross profit ..............................         8,199          4,344        15,826          8,472

Operating expenses:
    Research and development ..................         3,333          1,764         6,173          3,158
    Sales and marketing .......................         1,895            871         3,437          1,704
    General and administrative ................           864            421         1,623            719
    Amortization of deferred stock compensation         1,723             99         2,010             99
                                                     --------       --------      --------       --------
       Total operating expenses ...............         7,815          3,155        13,243          5,680
                                                     --------       --------      --------       --------
Income from operations ........................           384          1,189         2,583          2,792
Interest income, net ..........................           (84)            17          (173)            10
Other non-operating income (expense), net .....           (28)            --           (56)            25
                                                     --------       --------      --------       --------

Income before income taxes ....................           272          1,206         2,354          2,827
Provision for income taxes ....................           659            458         1,488          1,026
                                                     --------       --------      --------       --------
Net income (loss) .............................      $   (387)      $    748      $    866       $  1,801
                                                     ========       ========      ========       ========
Net Income (loss) per share:
   Basic ......................................      $  (0.01)      $   0.02      $   0.03       $   0.04
                                                     ========       ========      ========       ========
   Diluted ....................................      $  (0.01)      $   0.02      $   0.02       $   0.04
                                                     ========       ========      ========       ========
Shares used in per share computations:
   Basic ......................................        29,550         41,845        29,507         41,823
                                                     ========       ========      ========       ========
   Diluted ....................................        29,550         43,069        43,029         42,434
                                                     ========       ========      ========       ========
</TABLE>



                                       4


<PAGE>


PART I  -      FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS

                               FINISAR CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                            (unaudited, in thousands)


<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                         -------------------------
                                                                         October 31,   October 31,
                                                                            1999          1998
                                                                           -------       -------
<S>                                                                        <C>           <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income ..........................................................      $   866       $ 1,801
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
      Amortization of deferred stock compensation ...................        2,010            99
      Depreciation and amortization .................................          404           156
Changes in operating assets & and liabilities:
      Accounts receivable ...........................................         (845)       (2,481)
      Inventories ...................................................       (5,626)       (1,096)
      Prepaid and other assets ......................................         (622)         (328)
      Accounts payable ..............................................        2,048           717
      Accrued compensation ..........................................          281           933
      Other accrued liabilities .....................................        1,268           313
      Income taxes, net .............................................          428             4
                                                                           -------       -------
          Net cash provided by operating activities .................          212           118
                                                                           -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................       (2,317)         (608)
                                                                           -------       -------
          Net cash (used in) investing activities ...................       (2,317)         (608)
                                                                           -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of loans ................          251            65
Principal payments on loans .........................................           --           (58)
Principal payments on lease obligations .............................          (28)          (17)
                                                                           -------       -------
          Net cash provided (used in) financing activities ..........          223           (10)
                                                                           -------       -------
          Net (decrease) in cash and equivalents ....................      $(1,882)      $  (500)
Cash and cash equivalents, beginning of period ......................      $ 5,044       $   722
                                                                           -------       -------
Cash and cash equivalents, end of period ............................      $ 3,162       $   222
                                                                           =======       =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the period for
    Interest ........................................................          387            24
    Income taxes ....................................................        1,060         1,029
    Supplemental disclosure of non-cash financing activities:
         Loans to related parties for stock option exercises ........        2,036           322
</TABLE>



                                       5

<PAGE>


PART I  -      FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS

                               FINISAR CORPORATION
                     Notes to Condensed Financial Statements
                                   (unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

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

INTERIM FINANCIAL INFORMATION AND BASIS OF PRESENTATION

         The interim financial information at October 31, 1999 and for the three
months and six months ended October 31, 1999 and 1998 is unaudited but, in the
opinion of management, has been prepared on the same basis as the annual
financial statements and includes all adjustments (consisting only of normal
recurring adjustments) that Finisar considers necessary for a fair presentation
of its financial position at such date and its operating results and cash flows
for those periods. Results for the interim period are not necessarily indicative
of the results to be expected for the entire year, or any future period.

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

FISCAL PERIODS

         In fiscal 2000, the Company began to maintain its financial records on
the basis of a fiscal year ending on April 30, with fiscal quarters ending on
the Sunday closest to the end of the period (thirteen week periods). For ease of
reference, all references to period end dates have been presented as though the
period ended on the last day of the calendar month. The first and second
quarters of fiscal 2000 ended on August 1, 1999 and October 31, 1999,
respectively.

USE OF ESTIMATES

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

REVENUE RECOGNITION

         Revenue is recognized at the time of product shipment, net of
allowances for estimated returns. Warranty expenses are also estimated and
provided for at the time of shipment.

CONCENTRATIONS OF CREDIT RISK

         Financial instruments which potentially subject Finisar to
concentrations of credit risk include cash and cash equivalents and accounts
receivable. Finisar places its cash and cash equivalents with high-credit
quality financial institutions. At times, such investments may be in excess of
FDIC insurance limits. Concentrations of credit risk, with respect to accounts
receivable, exist to the extent of amounts presented in the financial
statements. Accounts receivable from two customers represented 33.8% and 16.0%
of the total balance at April 30, 1999 and 26.3% and 

                                       6

<PAGE>

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

29.3% at October 31, 1999, respectively. Generally, Finisar does not require
collateral or other security to support customer receivables. Finisar performs
periodic credit evaluations of its customers and maintains an allowance for
potential credit losses based on historical experience and other information
available to management. Losses to date have been within management's
expectations.

CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS

         Finisar sells products primarily to customers located in North America.
During the second quarter and first half of fiscal 2000, sales to two customers
totaled 55.3% and 54.7% of total revenues, respectively. Sales to these
customers in the second quarter and first half of fiscal 1999 represented 49.6%
and 50.7% of total revenues, respectively.

RESEARCH AND DEVELOPMENT

        Research and development expenditures are charged to operations as
incurred.

CASH AND CASH EQUIVALENTS

         Finisar's cash equivalents consist of money market funds with qualified
financial institutions. Finisar considers all highly liquid investments with an
original maturity from the date of purchase of three months or less to be cash
equivalents.

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

STOCK-BASED COMPENSATION

         Finisar accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").

NET INCOME PER SHARE

         Basic and diluted net income per share are presented in accordance 
with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), for all periods 
presented. Pursuant to Securities and Exchange Commission Staff Accounting 
Bulletin No. 98, common shares and convertible preferred shares issued or 
granted for nominal consideration prior to the effective date of Finisar's 
initial public offering are required to be included in the calculation of 
basic and diluted net income per share as if they had been outstanding for 
all periods presented. To date, Finisar has not had any issuances or grants 
for nominal consideration.

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


                                       7

<PAGE>

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY

          All of the shares of convertible redeemable preferred stock were
automatically converted into common stock and redeemable preferred stock upon
completion of the initial public offering on November 17, 1999 (see Subsequent
Events). Unaudited pro forma stockholders' equity at October 31, 1999, as
adjusted for the assumed conversion of such shares, is disclosed on the
condensed balance sheets. Such pro forma disclosure excludes the net proceeds
from the Company's initial public offering which will be presented in the
financial statements for the quarter ending January 31, 2000.

COMPREHENSIVE INCOME

         Effective May 1, 1998, Finisar adopted Financial Accounting 
Standards Board ("FASB") Statement of Financial Accounting Standard No. 130, 
"Reporting Comprehensive Income". Comprehensive income is equal to net income 
for all periods presented and has been disclosed in the statement of 
stockholders' equity.

SEGMENT REPORTING

         Effective May 1, 1998, Finisar adopted Statement of Financial 
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise 
and Related Information" ("SFAS 131"). SFAS 131 superseded SFAS No. 14, 
"Financial Reporting for Segments of a Business Enterprise." SFAS 131 
establishes standards for the way that public business enterprises report 
information about operating segments in interim financial reports. SFAS 131 
also establishes standards for related disclosures about products and 
services, geographic areas, and major customers. The adoption of SFAS 131 did 
not affect Finisar's results of operations or financial position.

EFFECT OF NEW ACCOUNTING STATEMENTS

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

         In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities
capitalize certain costs related to internal use software once certain criteria
have been met. Finisar is required to implement SOP 98-1 for the year ending
April 30, 2000. Adoption of SOP 98-1 is not expected to have a material effect
on Finisar's financial condition or results of operations.


                                       8

<PAGE>


P
ART I  -      FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS

                               FINISAR CORPORATION
               Notes to Condensed Financial Statements (CONTINUED)
                                   (unaudited)

2.       NET INCOME PER SHARE

         The following table presents the calculation of basic and diluted and
pro forma basic and pro forma diluted net income (loss) per share:


<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED         SIX MONTHS ENDED
                                                           OCTOBER 31,               OCTOBER 31,
                                                         (UNAUDITED)                 (UNAUDITED)
                                                     1999          1998          1999          1998
                                                     ----          ----          ----          ----
<S>                                               <C>            <C>           <C>           <C>     
Numerator:
   Net income (loss) .......................      $   (387)      $    748      $    866      $  1,801
                                                  =========      ========      ========      ========
Historical:
Denominator for basic net income (loss) per
   share:
   Weighted-average shares outstanding-basic        29,550         41,845        29,507        41,823

Effect of dilutive securities:                          --
   Employee stock options ..................            --            369         1,345           185
   Stock subject to repurchase .............            --            855         3,196           427
   Convertible redeemable preferred stock ..            --             --         8,981            --
                                                  ---------      ---------     ---------     ---------
Dilutive potential common shares ...........            --          1,224        13,522           612
                                                  ---------      ---------     ---------     ---------
Denominator for diluted net income (loss)
   per share ...............................        29,550         43,069        43,029        42,434
                                                  =========      ========      ========      ========
Basic net income (loss) per share ..........      $  (0.01)      $   0.02      $   0.03      $   0.04
                                                  =========      ========      ========      ========
Diluted net income (loss) per share ........      $  (0.01)      $   0.02      $   0.02      $   0.04
                                                  =========      ========      ========      ========
</TABLE>




3.      INVENTORIES

        Inventories consist of the following (in thousands):


<TABLE>
<CAPTION>
                                                October 31, 1999    April 30, 1999
                                                ----------------    --------------
                                                  (unaudited)          (audited)
             <S>                                <C>                 <C>    
             Raw materials.....................     $ 6,214              $ 2,908
             Work-in-process...................       4,309                1,763
             Finished goods....................         339                  565
                                                    -------              -------
                     Total inventories ........     $10,862              $ 5,236
                                                    =======              =======
</TABLE>



                                       9

<PAGE>



PART I  -      FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS

                               FINISAR CORPORATION
               Notes to Condensed Financial Statements (CONTINUED)
                                   (unaudited)

4.       PROPERTY AND EQUIPMENT

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


<TABLE>
<CAPTION>
                                                                  OCTOBER 31,   APRIL 30,
                                                                     1999          1999
         <S>                                                      <C>           <C>
         Computer equipment and software......................      $1,257          $840
         Office equipment, furniture, and fixtures............         555           445
         Machinery and equipment..............................       3,199         1,795
                                                                    ------        ------
         Total capital equipment..............................       5,011         3,080
         Accumulated depreciation and amortization............        (866)         (598)
                                                                    ------        ------
         Property and equipment, net..........................      $4,145        $2,482
                                                                    ======        ======
</TABLE>


5.       INCOME TAXES

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

6.       DEFERRED COMPENSATION

         In connection with the grant of certain stock options to employees,
Finisar recorded deferred stock compensation of $2.4 million during fiscal 1999
and $13.0 million during the three months ended October 31, 1999, representing
the difference between the deemed value of our common stock for accounting
purposes and the option exercise price of these options at the date of grant.
Deferred compensation is presented as a reduction of stockholders' equity, with
graded amortization recorded over the five year vesting period. The amortization
expense relates to options awarded to employees in all operating expense
categories. The following table summarizes the amount of deferred compensation
expense which Finisar has recorded and expects to record in future periods.
Amounts to be recorded in future periods could decrease if options for which
accrued but unvested compensation has been recorded are forfeited (thousands):


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



                                       10

<PAGE>

7.       Subsequent Events

         On November 12, 1999, the Company sold 9,305,000 shares of stock in an
initial public offering, including the over-allotment of an additional 1,155,000
shares. Of the shares sold, 699,767 were from selling shareholders. Net proceeds
to the Company from the remaining 8,605,233 shares sold total approximately
$150 million net of the underwriters discount and estimated offering expenses.

        In December 1999, the Company amended its Lease Agreement for its main
facility in Sunnyvale, CA , to include an additional 23,198 square feet of space
at the same physical location. As a result, the Company's main facility now
consists of 75,011 square feet at a monthly rental of $120,018 plus additional
costs associated with taxes, insurance and maintenance.


                                       11

<PAGE>


PART I  -    FINANCIAL INFORMATION


ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
            RESULTS OF OPERATIONS

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

OVERVIEW

         We are a leading provider of fiber optic subsystems and network
performance test systems which enable high-speed data communications over local
area networks, or LANs, and storage area networks, or SANs. We are focused on
providing high-performance, reliable, value-added optical subsystems for
networking and storage equipment manufacturers that develop and market systems
based on Gigabit Ethernet and Fibre Channel protocols. Our line of optical
subsystems supports a wide range of network applications, transmission speeds,
distances and mediums. We also provide unique network performance test systems
which assist networking and storage equipment manufacturers in the design of
reliable, high-speed networking systems and the testing and monitoring of the
performance of these systems.

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

         The market for optical subsystems is characterized by declining average
selling prices, or ASPs, resulting from factors such as increased competition,
the introduction of new products and increased unit volumes as manufacturers
continue to deploy network and storage systems. We anticipate that our ASPs will
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 and warranty
expense. We outsource the majority of our assembly operations, and we conduct
manufacturing engineering, supply chain management, quality assurance and
documentation control at our facility in Sunnyvale, California. Accordingly, a
significant portion of our cost of revenues consists of payments to our contract
manufacturers. There can be no assurance that we will be able to reduce our cost
of revenues to keep pace with anticipated decreases in ASPs.

         Our gross profit margins vary among our product families, and our gross
margins are generally higher on our network performance test systems than on our
optical subsystems. We expect that our overall gross margins will fluctuate from
period to period as a result of shifts in product mix, anticipated decreases in
ASPs 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.
Accordingly, we expect that our research and development expenses will increase
in future periods.

         Sales and marketing expenses consist primarily of commissions paid to
manufacturers' representatives, salaries and related expenses for personnel
engaged in sales, marketing and field support activities and other costs 


                                       12

<PAGE>

P
ART I - FINANCIAL INFORMATION 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS (CONTINUED)

associated with the promotion of our products. We intend to pursue aggressive
selling and marketing campaigns and to expand our direct sales organization. We
therefore expect that our sales and marketing expenses will increase in future
periods.

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

RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
                                                           Three Months Ended        Six Months Ended
                                                               October 31,               October 31,
                                                           ------------------        ------------------
                                                            1999         1998         1999        1998
                                                           -----        -----        -----        -----
<S>                                                        <C>          <C>          <C>          <C>   
 Revenues ...........................................      100.0%       100.0%       100.0%       100.0%
 Cost of revenues ...................................       49.0         41.3         47.2         40.3
                                                           -----        -----        -----        -----
     Gross profit ...................................       51.0         58.7         52.8         59.7

 Operating expenses:
     Research and development .......................       20.7         23.8         20.6         22.2
     Sales and marketing ............................       11.8         11.8         11.5         12.0
     General and administrative .....................        5.4          5.7          5.4          5.1
                                                           -----        -----        -----        -----
     Total operating expenses .......................       37.9         41.3         37.5         39.3
                                                           -----        -----        -----        -----
 Operating income ...................................       13.1         17.4         15.3         20.4
 Interest income (expense), net .....................       (0.5)         0.2         (0.5)         0.1
 Other income, net ..................................       (0.2)          --         (0.2)         0.1
                                                           -----        -----        -----        -----
Income before income taxes ..........................       12.4         17.6         14.6         20.6
 Provision for income taxes .........................        4.1          6.2          5.0          7.2
                                                           -----        -----        -----        -----
 Net income (excluding amortization of deferred stock
 compensation) ......................................        8.3%        11.4%         9.6%        13.4%
                                                           =====        =====        =====        =====
</TABLE>



                                       13

<PAGE>


PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS

RESULTS OF OPERATIONS (CONTINUED)

        The following table highlights certain aspects of the Company's revenues
for the three-month and six-month periods ended October 31, 1999 and 1998.
Finisar operates in one industry segment, the design, manufacture, and marketing
of fiber optic subsystems and network performance test systems for high-speed
data communications:


<TABLE>
<CAPTION>
                                          Three Months Ended             Six Months Ended
                                             October 31,                   October 31,
                                      -------------------------      -------------------------
                                         1999           1998           1999            1998
                                      ---------       ---------      ---------       ---------
<S>                                   <C>             <C>            <C>             <C>      
Revenues (thousands):
    Optical subsystems .........      $  10,828       $   4,566      $  20,308       $   8,232
    Test instruments ...........          5,249           2,836          9,648           5,964
                                      ---------       ---------      ---------       ---------
                 Total .........      $  16,077       $   7,402      $  29,956       $  14,196
                                      =========       =========      =========       =========
Geographic coverage (thousands):
    North America ..............      $  15,437       $   6,796      $  28,442       $  13,467
    Rest of World ..............            640             606          1,514             729
                                      ---------       ---------      ---------       ---------
                 Total .........      $  16,077       $   7,402      $  29,956       $  14,196
                                      =========       =========      =========       =========
As a percent of revenues:
    Optical subsystems .........           67.4%           61.7%          67.8%           58.0%
    Test instruments ...........           32.6            38.3           32.2            42.0
                                      ---------       ---------      ---------       ---------
                 Total .........          100.0%          100.0%         100.0%          100.0%
                                      =========       =========      =========       =========
Geographic coverage:
    North America ..............           96.0%           91.8%          94.9%           94.9%
    Rest of World ..............            4.0             8.2            5.1             5.1
                                      ---------       ---------      ---------       ---------
                 Total .........          100.0%          100.0%         100.0%          100.0%
                                      =========       =========      =========       =========
</TABLE>


COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998

REVENUES

       Revenues increased 117% from $7.4 million for the three months ended
October 31, 1998 to $16.1 million for the three months ended October 31, 1999.
This reflects a 137% increase in sales of optical subsystems from $4.6 million
for the three months ended October 31, 1998 to $10.8 million for the three
months ended October 31, 1999 and a 85% increase in sales of test instruments
from $2.8 million for the three months ended October 31, 1998 to $5.2 million
for the three months ended October 31, 1999. Sales of optical subsystems
represented 67.4% of total revenues for the quarter as compared to 61.7% in the
prior year while sales of test instruments represented 32.6% compared to 38.3%
in the prior year.

GROSS PROFIT

         Gross profit increased from $4.3 million for the three months ended
October 31, 1998 to $8.2 million for the three months ended October 31, 1999. As
a percentage of revenues, gross profit decreased from 58.7% for

                                       14

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS

RESULTS OF OPERATIONS (CONTINUED)

the three months ended July 31, 1998 to 50.1% for the three months ended July 
31, 1999. This decrease in gross profit margin reflects lower average pricing 
for optical subsystems as a result of increased shipment levels and a higher 
percentage of total revenue from the sale of optical subsystems which 
generally have lower gross margins than test system products.

RESEARCH AND DEVELOPMENT

        Research and development expenses increased 89% from $1.8 million for 
the three months ended October 31, 1998 to $3.3 million for the three months 
ended October 31, 1999. This increase was primarily related to higher 
compensation expense resulting from higher manpower levels and increased 
expenditures for materials purchased for product development programs. With 
total revenues increasing by 117%, research and development expenses as a 
percent of revenues decreased to 20.7% from 23.8% in the prior year.

SALES AND MARKETING

       Sales and marketing expenses increased 118% from $871,000 for the three
months ended October 31, 1998 to $1.9 million for the three months ended October
31, 1999. This increase in spending was in line with an increase of 117% in
total revenues. As a result, sales and marketing expenses as a percent of total
revenue was unchanged at 11.8%.

GENERAL AND ADMINISTRATIVE

        General and administrative expenses increased 105% from $421,000 for 
the three months ended October 31, 1998 to $864,000 for the three months 
ended October 31, 1999. The increase was related to higher compensation 
expense resulting from higher manpower levels and increased expenses for 
professional services, primarily legal and accounting services. As a 
percentage of revenues, general and administrative expenses decreased from 
5.7% for the three months ended October 31, 1998 to 5.4% for the three months 
ended October 31, 1999.

OTHER NON-OPERATING INCOME (EXPENSE)

        Interest expense, net of interest income, of $84,000 for the second 
quarter ended October 31, 1999, compares to net interest income of $17,000 in 
the prior year. The higher expense in the current period is related to 
interest expense on borrowings of $11.0 million commencing in November of 
1998.

AMORTIZATION OF DEFERRED COMPENSATION

        The non-cash charges for amortization of deferred compensation of 
$1.7 million for the three months ended October 31, 1999 and $99,000 in the 
three months ended October 31, 1998 was related to the issuance of stock 
options to employees prior to the Company's initial public offering on 
November 12, 1999, and represents the difference between the deemed value of 
common stock for accounting purposes and the option exercise price of these 
options at the date of grant (see Note 6).

                                       15

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS

RESULTS OF OPERATIONS (CONTINUED)

COMPARISON OF THE SIX MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998

REVENUES

        Revenues increased 111% from $14.2 million for the six months ended 
October 31, 1998 to $30.0 million for the six months ended October 31, 1999. 
This reflects a 147% increase in sales of optical subsystems from $8.2 
million for the six months ended October 31, 1998 to $20.3 million for the 
six months ended October 31, 1999 and a 62% increase in sales of test 
instruments from $6.0 million for the six months ended October 31, 1998 to 
$9.6 million for the six months ended October 31, 1999. Sales of optical 
subsystems represented 67.8% of total revenues for the period as compared to 
58.0% in the prior year while sales of test instruments represented 32.2% 
compared to 42.0% in the prior year.

GROSS PROFIT

        Gross profit increased from $8.5 million for the six months ended 
October 31, 1998 to $15.8 million for the six months ended October 31, 1999. 
As a percentage of revenues, gross profit decreased from 59.7% for the six 
months ended October 31, 1998 to 52.8% for the six months ended October 31, 
1999. The lower gross margin reflects lower average pricing for optical 
subsystems as a result of increased shipment levels and a higher percentage 
of total revenue from the sale of optical subsystems which generally have 
lower gross margins than test system products instruments.

RESEARCH AND DEVELOPMENT

        Research and development expenses increased 95% from $3.2 million for 
the six months ended October 31, 1998 to $6.2 million for the six months 
ended October 31, 1999. The increase was primarily related to higher 
compensation expense resulting from higher manpower levels and increased 
expenditures for materials purchased for product development programs. With 
total revenues increasing by 111%, research and development expenses as a 
percent of revenues decreased from 22.2% for the six months ended October 31, 
1998 to 20.6% for the three months ended October 31, 1999.

SALES AND MARKETING

       Sales and marketing expenses increased 102% from $1.7 million for the six
months ended October 31, 1998 to $3.4 million for the first six months ended
October 31, 1999. This increase in spending was in line with an increase of 111%
in total revenues. As a result, sales and marketing expenses as a percent of
total revenue decreased slightly to 11.5% of total revenues from 12.0% in the
prior year.

GENERAL AND ADMINISTRATIVE

        General and administrative expenses increased 126% from $719,000 for 
the six months ended October 31, 1998 to $1.6 million for the six months 
ended October 31, 1999. The increase was related to higher compensation 
expense resulting from higher manpower levels and increased expenses for 
professional services, primarily legal and accounting services. As a 
percentage of revenues, general and administrative expenses increased from 
5.1% for the six months ended October 31, 1998 to 5.4% for the six months 
ended October 31, 1999.

                                       16

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS

RESULTS OF OPERATIONS (CONTINUED)

OTHER NON-OPERATING INCOME (EXPENSE)

        Interest expense, net of interest income, of $173,000 for the six 
months ended October 31, 1999, compares to net interest income of $10,000 in 
the prior year. The higher expense in the current period is related to 
interest expense on borrowings of $11.0 million commencing in November of 
1998.

AMORTIZATION OF DEFERRED COMPENSATION

        The non-cash charges for amortization of deferred compensation of 
$2.0 million for the six months ended October 31, 1999, and $99,000 in the 
six months ended October 31, 1998 was related to the issuance of stock 
options to employees prior to the Company's initial public offering on 
November 12, 1999, and represents the difference between the deemed value of 
common stock for accounting purposes and the option exercise price of these 
options at the date of grant (see Note 6).

LIQUIDITY AND CAPITAL RESOURCES

        At October 31, 1999, the Company had working capital of $14.4 million,
including $3.2 million in cash and cash equivalents. For the six-month period
ended October 31, 1999, the Company's operating activities generated $212,000 in
cash. Cash from operating activities includes net income of $866,000 offset by
non-cash charges related to depreciation and amortization of $2.4 million. An
increase in inventories of $5.6 million was partially offset by an increase of
$2.0 million in accounts payable and $1.3 million in accrued liabilities.

        The Company considers cash flow from operations and available sources of
liquidity to be adequate to meet business requirements in the foreseeable
future, including planned capital expenditure programs, working capital
requirements, and any Year 2000 remediation plans.

        The Company has maintained an unsecured line of credit totaling $6.5
million with Fleet Bank which matures on October 31, 2003. No borrowings were
ever made under this credit facility. A term loan totaling $11.0 million with
Fleet Bank also matures on October 31, 2003 with principal payments beginning on
April 30, 2001. The Company repaid this term loan upon completion of an initial
public offering in November 1999.

IMPACT OF YEAR 2000

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

         GENERAL READINESS ASSESSMENT. The year 2000 problem can affect the
computers, software and other equipment that we use in our operations. As a
result, we have instituted a year 2000 compliance plan, implemented

                                       17

<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS

IMPACT OF YEAR 2000 (CONTINUED)

by a team of our internal information technology staff responsible for
monitoring the assessment and remediation of our year 2000 projects and
reporting that status to our executive staff. This project team is continuing to
assess the potential effect and costs of remediating the year 2000 problem for
our internal systems. To date, we have not obtained verification or validation
from any independent third parties of our processes to assess and correct any of
our year 2000 problems or the costs associated with these activities.

         ASSESSMENT OF FINISAR'S PRODUCTS. We have assessed the ability of our
products to operate properly in the year 2000. We believe that our current
products are year 2000 compliant. Accordingly, we do not believe that the year
2000 issue presents a material exposure as it relates to our products.

         ASSESSMENT OF INTERNAL INFRASTRUCTURE. We believe that we have
identified most of the major computers, software applications and related
equipment used in connection with our internal operations that need to be
evaluated to determine if they must be modified, upgraded or replaced to
minimize the possibility of a material disruption to our business. Based on a
review of these computer systems, we have determined that, except for certain
computers that run under the Microsoft Windows95 operating system, our computer
systems and applications are compliant with the year 2000 format. We expect to
remediate any remaining year 2000 problems prior to December 31, 1999.

         SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, telephone switches, security systems and other common
devices, may be affected by the year 2000 problem. We have assessed the
potential effect of the year 2000 problem on our office and facilities equipment
and have determined that no problems exist that cannot be remediated by the
replacement of relatively inexpensive equipment.

        COSTS OF REMEDIATION. We estimate the total cost to us of completing any
required modifications, upgrades or replacements of our internal systems will
not exceed $100,000, most of which we expect to incur during calendar year 1999.
Based on the activities described above, we do not believe that the year 2000
problem will have a material adverse effect on our business or operating
results.

         SUPPLIERS. As part of our review of the year 2000 problem, we have
contacted third-party suppliers of components and key contractors used in the
assembly of our products to identify and, to the extent possible, resolve issues
involving the year 2000 problem. However, we have limited or no control over the
actions of these third-party suppliers and subcontractors. Thus, while we expect
that we will be able to resolve any significant year 2000 problems with these
third parties, there can be no assurance that these suppliers will resolve any
or all year 2000 problems before the occurrence of a material disruption to the
operation of our business. Any failure on the part of these third parties to
timely resolve year 2000 problems with their systems in a timely manner could
have a material adverse effect on our business. We expect to complete this
process before December 31, 1999.

          MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We expect to identify
and resolve all year 2000 problems that could materially adversely affect our
business operations before December 31, 1999. However, we believe that it is not
possible to determine with complete certainty that all year 2000 problems
affecting us have been identified or corrected. The number of devices and
systems that could be affected and the interactions among these devices and
systems are too numerous to address. In addition, no one can accurately predict
whether failures will occur as a result of the year 2000 problem or the
severity, timing, duration or financial consequences of these potential
failures. As a result, we believe that the following consequences are possible:

-        a significant number of operational inconveniences and inefficiencies
         for us, our contract manufacturers and our customers that will divert
         management's time and attention and financial and human resources from
         ordinary business activities;

                                       18

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

IMPACT OF YEAR 2000 (CONTINUED)

-    possible business disputes and claims, including claims under product 
     warranty, due to year 2000 problems experienced by our customers and 
     incorrectly attributed to our products, which we believe will be 
     resolved in the ordinary course of business; and

-    a few serious business disputes alleging that we failed to comply with the
     terms of contracts or industry standards of performance, some of which
     could result in litigation or contract termination.

         CONTINGENCY PLANS. While we have not yet fully developed a
comprehensive contingency plan to address situations that may result if we are
is unable to achieve year 2000 readiness of our critical operations, such a plan
is likely to include the accelerated replacement of affected equipment or
software which could have a material adverse impact on our financial results and
operations.

         DISCLAIMER. The discussion of our efforts and expectations relating to
year 2000 compliance are forward-looking statements. Our ability to achieve year
2000 compliance, and the level of incremental costs associated therewith, could
be adversely affected by, among other things, the availability and cost of
contract personnel and external resources, third-party suppliers' ability to
modify proprietary software and unanticipated problems not identified in the
ongoing compliance review.

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE

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

  OUR OPERATING RESULTS ARE SUBJECT TO MANY FACTORS, SOME OF WHICH ARE OUTSIDE
       OF OUR CONTROL, THAT COULD CAUSE OUR QUARTERLY AND ANNUAL OPERATING
            RESULTS TO FLUCTUATE AND OUR STOCK PRICE TO BE VOLATILE

         Our quarterly and annual operating results have fluctuated in the past
and are likely to fluctuate significantly in the future due to a variety of
factors, some of which are outside of our control. Accordingly, we believe that
period-to-period comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance. Some of the
factors that could cause our quarterly or annual operating results to fluctuate
include:

     -    demand for and market acceptance of our products and our customers'
          products;

     -    continued development of the LAN, SAN and extended network markets;

     -    our ability to develop, introduce, ship and support new products and
          product enhancements and to manage product transitions;

     -    announcements and new product introductions by our competitors;

     -    timing and size of orders for our products;

     -    loss or addition of one or more significant customers;

                                       19


<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

     -    our ability to attain and maintain production volumes and quality
          levels for our products, including our ability to obtain sufficient
          supplies of long lead-time and sole or limited sourced components for
          our products;

     -    changes in our product mix or the distribution channels through which
          we sell our products;

     -    timing of the qualification process for our products by potential or
          existing customers; and

     -    increases in manufacturing cost, including the prices of components we
          purchase.

         We may experience a delay in generating or recognizing revenues for a
number of reasons. Orders at the beginning of each quarter typically do not
equal expected revenues for that quarter and are generally cancelable at any
time. Accordingly, we depend on obtaining orders in a quarter for shipment in
that quarter to achieve our revenue objectives. Failure to ship these products
by the end of a quarter may adversely affect our operating results. Furthermore,
our customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty. Because we base our operating expenses on anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term, any delay in generating or recognizing forecasted revenues could
significantly harm our business.

         It is likely that in some future quarters our operating results may
fall below the expectations of securities analysts and investors. In this event,
the trading price of our common stock would significantly decline.

OUR SUCCESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE EMERGING HIGH-SPEED
         LAN, SAN AND EXTENDED NETWORK MARKETS

         Our optical subsystem and network performance test systems products are
used exclusively in high-speed local area networks, or LANs, storage area
networks, or SANs, and extended networks. Accordingly, widespread adoption of
high-speed LANs, SANs and extended networks is critical to our future success.
The markets for high-speed LANs, SANs and extended networks have only recently
begun to develop and are rapidly evolving. Because these markets are new and
evolving, it is difficult to predict their potential size or future growth rate.
Potential end-user customers who have invested substantial resources in their
existing data storage and management systems may be reluctant or slow to adopt a
new approach, like high-speed LANs, SANs or extended networks. Our success in
generating revenue in these emerging markets will depend, among other things, on
the growth of these markets. There is significant uncertainty as to whether
these markets ultimately will develop or, if they do develop, that they will
develop rapidly. If the markets for high-speed LANs, SANs or extended networks
fail to develop or develop more slowly than expected, or if our products do not
achieve widespread market acceptance in these markets, our business would be
significantly harmed.

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

         We have based our product offerings principally on Fibre Channel and
Gigabit Ethernet standards and our future success is substantially dependent on
the continued market acceptance of these standards. If an alternative technology
is adopted as an industry standard within our target markets, we would have to
dedicate significant time and resources in redesigning our products to meet this
new industry standard. We cannot assure you that we will be successful in
re-designing our products. Our products comprise only a part of an entire
networking system, and we depend on the companies that provide other components
to support industry standards as they evolve. The failure of these companies,
many of which are significantly larger than we are, to support these industry
standards could 

                                       20

<PAGE>

PART I - FINANCIAL INFORMATION 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

negatively impact market acceptance of our products. Moreover, if we introduce a
product before an industry standard has become widely accepted, we may incur
significant expenses and losses due to lack of customer demand, unusable
purchased components for these products and the diversion of our engineers from
future product development efforts. In addition, because we may develop some
products prior to the adoption of industry standards, we may develop products
that do not comply with the eventual industry standard. Our failure to develop
products that comply with industry standards would limit our ability to sell our
products. Finally, if new standards evolve, we may not be able to successfully
design and manufacture new products in a timely fashion, if at all, that meet
these new standards.

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

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

         A small number of customers have accounted for a significant portion of
our revenues. Our success will depend on our continued ability to develop and
manage relationships with significant customers. Although we are attempting to
expand our customer base, we expect that significant customer concentration will
continue for the foreseeable future.

         The markets in which we sell our products are dominated by a relatively
small number of systems manufacturers, thereby reducing the number of our
potential customers. Our dependence on large orders from a relatively small
number of customers makes our relationship with each customer critically
important to our business. We cannot assure you that we will be able to retain
our largest customers, that we will be able to attract additional customers or
that our customers will be successful in selling their products which
incorporate our products. We have in the past experienced delays and reductions
in orders from some of our major customers. In addition, our customers have in
the past and will in the future seek price concessions from us. Further, our
customers may in the future shift their purchases of certain products from us to
our competitors or to joint ventures between these customers and our
competitors. The loss of one or more of our largest customers, any reduction or
delay in sales to these customers, our inability to successfully develop
relationships with additional customers or any further price concessions could
significantly harm our business.

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

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

     -    our customers can stop purchasing our products at any time without
          penalty;

     -    our customers are free to purchase products from our competitors; and

     -    our customers are not required to make minimum purchases.

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


                                       21

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

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

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

     -    changing product specifications and customer requirements;

     -    difficulties in hiring and retaining necessary technical personnel;

     -    difficulties in reallocating engineering resources and overcoming
          resource limitations;

     -    difficulties with contract manufacturers;

     -    changing market or competitive product requirements; and

     -    unanticipated engineering complexities.

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

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

         The markets for optical subsystems and network performance test systems
for use in LANs, SANs and extended networks are highly competitive. Our current
competitors include a number of domestic and international companies, many of
which have substantially greater financial, technical, marketing, distribution
resources and brand name recognition than we have. We expect that more
companies, including some of our customers, will enter the market for optical
subsystems and network performance test systems. We may not be able to compete
successfully against either current or future competitors. Increased competition
could result in significant price erosion, reduced revenue, lower margins or
loss of market share, any of which would significantly harm our business. For
optical subsystems, we compete primarily with Agilent Technologies, Inc., Cielo
Communications, Inc., International Business Machines Inc. and Vixel
Corporation. For network performance test systems, we compete primarily with
Ancot Corporation, I -Tech Corporation and Xyratex International. Our
competitors continue to introduce improved 

                                       22

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PART I - FINANCIAL INFORMATION ITEM 

2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
   OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

products with lower prices, and we will have to do the same to remain
competitive. In addition, our current and potential customers may attempt to
integrate their operations by producing their own optical subsystems and network
performance test systems or acquiring one of our competitors, thereby
eliminating the need to purchase our products. Furthermore, larger companies in
other related industries, such as the telecommunications industry, may develop
or acquire technologies and apply their significant resources, including their
distribution channels and brand name recognition, to capture significant market
share.

WE EXPECT AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY
         REDUCE GROSS MARGINS OR REVENUES, AND, AS A RESULT, WE MUST CONTINUE TO
         REDUCE OUR PRODUCT COSTS IN ORDER TO PRICE OUR PRODUCTS COMPETITIVELY

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

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

WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING

         In April 1999, Methode Electronics, a manufacturer of electronic
component devices, filed a lawsuit against us and another manufacturer alleging
that our optoelectronic products infringe four patents held by Methode. The
lawsuit seeks monetary damages and injunctive relief. We believe that we have
strong defenses against Methode's lawsuit, and we intend to defend the suit
vigorously. However, the litigation is in the preliminary stage, and we cannot
predict its outcome. The litigation process is inherently uncertain and we may
not prevail. Patent litigation is particularly complex and can extend for a
protracted time, which can substantially increase the cost of such litigation.
In connection with the Methode litigation, we have incurred, and expect to
continue to incur, substantial legal fees and expenses. The Methode litigation
has also diverted, and is expected to continue to divert, the efforts and
attention of some of our key management and technical personnel. As a result,
our defense of this litigation, regardless of its eventual outcome, has been,
and will likely continue to be, costly and time consuming. Should the outcome of
the litigation be adverse to us, we could be required to pay significant
monetary damages to Methode and could be enjoined from selling those of our
products found to infringe Methode's patents unless and until we are able to
negotiate a license from Methode. In the event that we obtain a license from
Methode, we would likely be required to make royalty payments with respect to
sales of our products covered by the license. Any such royalty payments would
increase our cost of revenues and reduce our gross profit. If we are required to
pay significant monetary damages, are enjoined from selling any of our products
or are required to make royalty payments pursuant to any such license agreement,
our business would be significantly harmed.

                                       23

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PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

OUR CUSTOMERS OFTEN EVALUATE OUR PRODUCTS FOR LONG AND VARIABLE PERIODS WHICH
CAUSES THE TIMING OF PURCHASES AND OUR RESULTS OF OPERATIONS TO BE UNPREDICTABLE

         The period of time between our initial contact with a customer and the
receipt of an actual purchase order may span a year or more. During this time,
customers may perform, or require us to perform, extensive and lengthy
evaluation and testing of our products before purchasing and using them in their
equipment. Our customers do not typically share information on the duration or
magnitude of these qualification procedures. The length of these qualification
processes also may vary substantially by product and customer, and, thus, cause
our results of operations to be unpredictable. While our potential customers are
qualifying our products and before they place an order with us, we may incur
substantial sales and marketing expenses and expend significant management
effort. Even after incurring such costs we ultimately may not sell any products
to such potential customers. In addition, these qualification processes often
make it difficult to obtain new customers, as customers are reluctant to expend
the resources necessary to qualify a new supplier if they have one or more
existing qualified sources. Once our products have been qualified, our
agreements with our customers have no minimum purchase commitments. Failure of
our customers to incorporate our products into their systems would significantly
harm our business.

WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR ASSEMBLY
         REQUIREMENTS AND WE NEED TO EXPAND THESE REQUIREMENTS

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

         If the demand for our products grows, we will need to increase our
material purchases, contract manufacturing capacity and internal test and
quality assurance functions. Any disruptions in product flow could limit our
revenue, adversely affect our competitive position and reputation and result in
additional costs or cancellation of orders under agreements with our customers.

         In addition, we are considering sourcing a significant portion of our
contract manufacturing internationally. Additional risks associated with
international contract manufacturing include:

     -    unexpected changes in regulatory requirements;

     -    legal uncertainties regarding liability, tariffs and other trade
          barriers;

     -    inadequate protection of intellectual property in some countries;

     -    greater incidence of shipping delays;

     -    limited oversight of manufacturing operations;

                                       24

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

     -    potential political and economic instability; and

     -    currency fluctuations.

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

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

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

         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.

BECAUSE SUBSTANTIALLY ALL OF OUR REVENUE IS DERIVED FROM SALES OF TWO PRODUCT
         FAMILIES, WE ARE DEPENDENT ON WIDESPREAD MARKET ACCEPTANCE OF THESE
         PRODUCT FAMILIES

         We currently derive substantially all of our revenue from sales of our
optical subsystems and network performance test systems. We expect that revenue
from these products will continue to account for substantially all of our
revenue for the foreseeable future. Accordingly, widespread acceptance of these
products is critical to our future success. If the market does not continue to
accept either our optical subsystems or our network performance test systems,
our revenues will decline significantly. Factors that may affect the market
acceptance of our products include the continued growth of the markets for LANs,
SANs and extended versions of these networks and, in particular, Gigabit
Ethernet and Fibre Channel-based technologies as well as the performance, price
and total cost of ownership of our products and the availability, functionality
and price of competing products and technologies. Many of these factors are
beyond our control. In addition, in order to achieve widespread market
acceptance, we must differentiate ourselves from the competition through product
offerings and brand name recognition. We cannot assure you that we will be
successful in making this differentiation or achieving widespread acceptance of
our products. Failure of our existing or future products to maintain and achieve
widespread levels of market acceptance will significantly impair our revenue
growth.

IF WE LOSE QUALIFIED PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED
         PERSONNEL, WE MAY NOT BE SUCCESSFUL

         We believe our future success will depend in large part upon our
ability to attract and retain highly skilled managerial, technical, sales and
marketing, finance and manufacturing personnel. In particular, we will need to
increase the number of technical staff members with experience in high-speed
networking applications as we further develop our product lines. Competition for
these highly skilled employees in our industry is intense. Our failure to 

                                       25

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

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 may be
subject to claims of this type in the future as we seek to hire qualified
personnel and some of these claims may result in material litigation. We 
could incur substantial costs in defending ourselves against these claims, 
regardless of their merits.

CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND WILL REQUIRE US TO INCUR
         COSTS TO UPGRADE OUR INFRASTRUCTURE

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

OUR PRODUCTS MAY CONTAIN DEFECTS

         Networking products frequently contain undetected software or hardware
defects when first introduced or as new versions are released. Our products are
complex and defects may be found from time to time. In addition, our products
are often embedded in or deployed in conjunction with our customers' products
which incorporate a variety of components produced by third parties. As a
result, when problems occur, it may be difficult to identify the source of the
problem. These problems may cause us to incur significant damages or warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relation problems or
loss of customers, all of which would harm our business.

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

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

                                       26

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

property rights or to determine the validity and scope of the proprietary rights
of others. This litigation could result in substantial costs and diversion of
resources and could significantly harm our business.

CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
         SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR
         PRODUCTS

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

WE MUST CONTINUE TO DEVELOP AND EXPAND OUR DIRECT SALES OPERATION AND RESELLER
         DISTRIBUTION CHANNELS TO INCREASE REVENUE

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

IF WE OR OUR SUPPLIERS, MANUFACTURERS, CUSTOMERS OR SERVICE PROVIDERS FAIL TO BE
         YEAR 2000 COMPLIANT, OUR BUSINESS MIGHT BE SEVERELY DISRUPTED

         See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Year 2000 Compliance."

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
         TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES

                                       27

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

         We expect to review opportunities to buy other businesses or
technologies that would complement our current products, expand the breadth of
our markets or enhance our technical capabilities, or that may otherwise offer
growth opportunities. While we have no current agreements or negotiations
underway, we may buy businesses, products or technologies in the future. If we
make any future acquisitions, we could issue stock that would dilute existing
stockholders' percentage ownership, incur substantial debt or assume contingent
liabilities. Our experience in acquiring other business and technologies is
limited. Potential acquisitions also involve numerous risks, including:

     -    problems assimilating the purchased operations, technologies or
          products;

     -    unanticipated costs associated with the acquisition;

     -    diversion of management's attention from our core business;

     -    adverse effects on existing business relationships with suppliers and
          customers;

     -    risks associated with entering markets in which we have no or limited
          prior experience; and

     -    potential loss of key employees of purchased organizations.

         We cannot assure you that we would be successful in overcoming problems
encountered in connection with such acquisitions, and our inability to do so
could significantly harm our business.

CONTROL  BY OUR EXISTING STOCKHOLDERS WILL LIMIT YOUR ABILITY TO INFLUENCE THE
         OUTCOME OF MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DISCOURAGE
         POTENTIAL ACQUISITIONS OF OUR BUSINESS BY THIRD PARTIES

         Our executive officers, directors and 5% or greater stockholders
beneficially own 32,800,948 shares or approximately 64.8% of the outstanding
shares of common stock. These stockholders, acting together, would be able to
control all matters requiring approval by stockholders, including the election
or removal of directors and the approval of mergers or other business
combination transactions. This concentration of ownership could have the effect
of delaying or preventing a change in our control or otherwise discouraging a
potential acquirer from attempting to obtain control of us, which in turn could
have an adverse effect on the market price of our common stock or prevent our
stockholders from realizing a premium over the market price for their shares of
common stock.

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

         Historically, substantially all of our sales have been made to
customers in North America. To address expanding international markets, we have
recently established relationships with distributors in Japan, the United
Kingdom and Israel. The growth of our distribution channels outside of North
America will be subject to a number of risks and uncertainties, including:

     -    the difficulties and costs of obtaining regulatory approvals for our
          products;

     -    unexpected changes in regulatory requirements;

     -    legal uncertainties regarding liability, tariffs and other trade
          barriers;

     -    inadequate protection of intellectual property in some countries;

                                       28

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

     -    increased difficulty in collecting delinquent or unpaid accounts;

     -    potentially adverse tax consequences;

     -    adoption of different local standards; and

     -    potential political and economic instability.

         Any of these factors could significantly harm our existing
international operations and business or significantly impair our ability to
expand into international markets.

         Our international sales currently are U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets. In
the future, we may elect to invoice some of our international customers in local
currency. Doing so will subject us to fluctuations in exchange rates between the
U.S. dollar and the particular local currency.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DISCOURAGE POTENTIAL
         ACQUISITIONS OF OUR BUSINESS BY THIRD PARTIES

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

     -    authorizing the board to issue additional preferred stock;

     -    prohibiting cumulative voting in the election of directors;

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

     -    prohibiting stockholder actions by written consent;

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

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

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

         Currently, our corporate headquarters and contract manufacturers are
located in Northern California. Northern California historically has been
vulnerable to certain natural disasters and other risks, such as earthquakes,
fires and floods, which at times have disrupted the local economy and posed
physical risks to our and our manufacturers' property. We presently do not have
redundant, multiple site capacity in the event of a natural disaster. In the
event of such disaster, our business would suffer.

                                       29

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE (CONTINUED)

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

         Sales of substantial amounts of our common stock in the public 
market following our initial public offering, or the appearance that a large 
number of shares is available for sale, could cause the market price of our 
common stock to decline. The number of shares of common stock available for 
sale in the public market is limited by lock-up agreements under which the 
holders of substantially all of the shares of common stock and options and 
warrants to purchase common stock outstanding prior to the offering have 
agreed not to sell or otherwise dispose of any of their shares for a period 
of 180 days after the date of our initial public offering without the prior 
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Upon 
the expiration of these lock-up agreements and assuming the full exercise of 
all vested options to purchase common stock outstanding on October 31, 1999, 
approximately 40 million shares of common stock will become eligible for sale 
simultaneously. Moreover, Merrill Lynch may, in its sole discretion and at 
any time without notice, release all or any portion of the securities subject 
to lock-up agreements. In addition to the adverse effect a price decline 
could have on holders of common stock, that decline would likely impede our 
ability to raise capital through the issuance of additional shares of common 
stock or other equity securities.

OUR STOCK PRICE IS VOLATILE 

         The trading price of our stock has fluctuated substantially since 
our initial public offering. The stock market in general, and the Nasdaq 
National Market and stocks of technology companies in particular, have 
experienced extreme price and volume fluctuations. This volatility is often 
unrelated or disproportionate to the operating performance of these 
companies. Broad market and industry factors may adversely affect the market 
price of our common stock, regardless of our actual operating performance. In 
the past, following periods of volatility in the market price of a company's 
securities, securities class-action litigation has often been initiated 
against these companies. This litigation, if initiated, could result in 
substantial costs and a diversion of management's attention and resources, 
which would significantly harm our business.

                                       30

<PAGE>

PART I - FINANCIAL INFORMATION


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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









                                       31

<PAGE>


PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

         In April 1999, Methode Electronics, a manufacturer of electronic
component devices, filed a lawsuit against us and another manufacturer,
Hewlett-Packard Co., in the United States District Court for the Northern
District of Illinois alleging that our optoelectronic products infringe four
patents held by Methode. The original complaint seeks monetary damages and
injunctive relief. In July 1999, we and Hewlett-Packard filed a motion, which
was opposed by Methode, to transfer the case to the United States District Court
for the Northern District of California. In August 1999, the Court granted our
motion. On October 18, 1999, Methode filed a motion seeking leave to file an
amended complaint. The proposed amended complaint alleges infringement of a
fifth Methode patent and also alleges that we breached our obligations under a
license and supply agreement with Methode by failing to provide Methode with
unspecified information regarding new technology related to the products
licensed under the agreement. The proposed amended complaint purports to seek
compensatory damages of at least $224,280,000 plus interest for the alleged
breach of contract. Based on consultation with our counsel, it is our position
that the Methode patents are invalid, unenforceable and/or not infringed by our
products. The United States Patent and Trademark Office has determined that all
of the claims asserted by Methode in one of the patents are invalid, although
this determination is not final and is subject to further administrative review.
We also believe, based on consultation with our counsel, that the breach of
contract claim that Methode seeks to include in the amended complaint is without
merit and that , in any event, the proposed amended complaint grossly overstates
the amount of damages that Methode could possible have suffered as a result of
any such breach. We believe that we have strong defenses against Methode's
lawsuit. In addition, we have filed a counterclaim against Methode asserting,
among other things, that one of our founders, Frank H. Levinson, is the primary
inventor of the technology that is the subject of all five patents, that Methode
improperly obtained the patents based on our disclosure of the technology to
Methode and that we are the rightful owner or co-owner of the patents. We intend
to defend Methode's lawsuit and pursue our counterclaim vigorously. However, the
litigation is in the preliminary stage, and we cannot predict its outcome with
certainty. The litigation process is inherently uncertain. Patent litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. In connection with the
Methode litigation, we have incurred, and expect to continue to incur,
substantial legal fees and expenses. The Methode litigation has also diverted,
and is expected to continue to divert, the efforts and attention of some of our
key management and technical personnel. As a result, our defense of this
litigation, regardless of its eventual outcome, has been, and will likely
continue to be, costly and time consuming. Should the outcome of the litigation
be adverse to us, we could be required to pay significant monetary damages to
Methode and could be enjoined from selling those of our products found to
infringe Methode's patents unless and until we are able to negotiate a license
from Methode. In the event we obtain a license from Methode, we would likely be
required to make royalty payments with respect to sales of our products covered
by the license. Any such payments would increase our cost of revenues and reduce
our gross profit. If we are required to pay significant monetary damages, are
enjoined from selling any of our products or are required to make substantial
royalty payments pursuant to any such license agreement, our business would be
significantly harmed.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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

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

                                       32

<PAGE>

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (CONTINUED)

offering, $11,444,960 of which was paid by Finisar and $930,690 of which was
paid by the selling shareholders. Other expenses of the offering incurred by
Finisar are estimated at $1,200,000.

         The net proceeds to Finisar from the sale of the 8,605,233 shares 
sold by it in the offering, after deducting the underwriting discount and the 
estimated offering expenses, were approximately $150 million. To date, $11.0 
million of these net proceeds have been used to repay bank loans and another 
$2.6 million was used to redeem the preferred stock that was converted to 
common stock in the offering. The balance of the net proceeds will be used 
for general corporate purposes, including capital expenditures and working 
capital. Pending such uses, the remaining net proceeds of the offering have 
been invested in short-term, interest-bearing, investment-grade securities.

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


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

        a. Exhibits.

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

        b. Reports

           None




                                       33

<PAGE>


                                   SIGNATURES

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

DATE: December 27, 1999         FINISAR CORPORATION

                                     (Registrant)

                                By:  /S/JERRY S. RAWLS                  
                                    -------------------------------------------
                                     Jerry S. Rawls,
                                     President and Chief Executive 
                                     Officer

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








                                       34

<PAGE>


EXHIBIT INDEX

 EXHIBIT                                      DESCRIPTION OF DOCUMENT
  NUMBER

       27.1 Financial Data Schedule











                                       35





<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          APR-30-2000
<PERIOD-START>                             AUG-02-1999
<PERIOD-END>                               OCT-31-1999
<CASH>                                           3,162
<SECURITIES>                                         0
<RECEIVABLES>                                    7,731
<ALLOWANCES>                                     (230)
<INVENTORY>                                     10,862
<CURRENT-ASSETS>                                23,362
<PP&E>                                           5,481
<DEPRECIATION>                                   (866)
<TOTAL-ASSETS>                                  27,977
<CURRENT-LIABILITIES>                            8,951
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                     26,260
<COMMON>                                        19,539
<OTHER-SE>                                    (37,915)
<TOTAL-LIABILITY-AND-EQUITY>                    27,977
<SALES>                                         16,077
<TOTAL-REVENUES>                                16,077
<CGS>                                          (7,878)
<TOTAL-COSTS>                                  (7,878)
<OTHER-EXPENSES>                                 7,815
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                    272
<INCOME-TAX>                                     (659)
<INCOME-CONTINUING>                              (387)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     (387)
<EPS-BASIC>                                      (.01)
<EPS-DILUTED>                                    (.01)
        

</TABLE>