prem14a
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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

     
Filed by the Registrant þ    
Filed by a Party other than the Registrant o    
Check the appropriate box:
   
þ Preliminary Proxy Statement
   
o Definitive Proxy Statement
   
o Definitive Additional Materials
   
o Soliciting Material Pursuant to § 240.14a-11(c) or § 240.14a-12

FINISAR CORPORATION


(Name of Registrant as Specified In Its Charter)

     Payment of Filing Fee (Check the appropriate box):

     o No Fee required.
     þ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

       (1)  Title of each class of securities to which transaction applies:

Common stock, $0.001 par value


       (2)  Aggregate number of securities to which transaction applies:

135,000,000 (estimate; subject to adjustment)


       (3)  Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rules 0-11:

$1.42


       (4)  Proposed maximum aggregate value of transaction:

$191,700,000.00


       (5)  Total fee paid:

$24,288.39


     o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

       (1) Amount Previously Paid:


       (2) Form, Schedule or Registration Statement No.:


       (3) Filing Party:


       (4) Date Filed:


 


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(FINISAR LOGO)
1308 Moffett Park Drive
Sunnyvale, California 94089

                    , 2004

Dear Stockholder:

      You are cordially invited to attend the 2004 annual meeting of stockholders on                     , 2004, at 10:00 a.m., local time, at the Prime Hotel, 1300 Chesapeake Terrace, Sunnyvale, California 94089. Among other matters to be voted on at this year’s annual meeting, you will be asked to approve the issuance of Finisar common stock in connection with the acquisition by Finisar of the fiber optics business of Infineon Technologies AG. As consideration for the purchase of the assets of Infineon’s fiber optics business, Finisar will issue approximately 135,000,000 shares of its common stock, which would represent approximately 38% of the outstanding shares of Finisar common stock on a post-transaction basis.

      The board of directors has unanimously approved the acquisition by Finisar of Infineon’s fiber optics business and recommends that you vote “FOR” the proposal relating to the issuance of Finisar common stock in connection with the transaction as described in the attached proxy statement. The proxy statement provides you with detailed information about the transaction and the other matters to be voted on at the annual meeting of stockholders. We urge you to read the proxy statement carefully in its entirety, including the risk factors beginning on page 16, before you vote.

      Your vote is very important regardless of the number of shares that you own. You may vote by mailing a completed proxy card, by telephone or over the Internet. Voting by any of these methods will ensure your representation at the meeting. We request that you vote promptly even if you plan to attend the meeting. A copy of our Annual Report for the fiscal year ended April 30, 2004 is also enclosed for your information.

      We strongly support the transaction with Infineon and enthusiastically recommend that you vote in favor of the proposals presented to you for approval.

  Very truly yours,
 
  (-s- Jerry S. Rawls)
  JERRY S. RAWLS
  President and Chief Executive Officer


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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held                         , 2004

To the Stockholders:

      Please take notice that the 2004 annual meeting of the stockholders of Finisar Corporation, a Delaware corporation, will be held on                     ,                     , 2004, at 10 a.m., local time, at the Prime Hotel, 1300 Chesapeake Terrace, Sunnyvale, California, for the following purposes:

        1. To consider and vote upon a proposal to approve the issuance of shares of Finisar common stock in connection with the acquisition of the fiber optics business of Infineon Technologies AG pursuant to the Master Sale and Purchase Agreement dated as of April 29, 2004 between Finisar Corporation and Infineon Technologies AG;
 
        2. To elect two Class II directors to hold office for a three-year term and until their respective successors are elected and qualified;
 
        3. To consider and vote upon an amendment to Finisar’s Certificate of Incorporation to increase the number of authorized shares of Finisar common stock from 500,000,000 to 800,000,000;
 
        4. To consider and vote upon an amendment to the Finisar 1999 Employee Stock Purchase Plan to increase the number of shares of Finisar common stock authorized for issuance under such plan and adoption of the International Employee Stock Purchase Plan;
 
        5. To consider, approve and ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending April 30, 2005; and
 
        6. To transact such other business as may properly come before the meeting or any adjournment or postponement of the meeting.

      These items of business are described in the attached proxy statement. Stockholders of record at the close of business on                     , 2004 are entitled to notice of, and to vote at, the meeting and any adjournment or postponement. As of that date, there were                      shares of Finisar common stock outstanding. Each share of Finisar common stock is entitled to one vote on each matter properly brought before the meeting. For ten days prior to the meeting, a complete list of stockholders entitled to vote at the meeting will be available for examination by any stockholder, for any purpose relating to the meeting, during ordinary business hours at our principal offices located at 1308 Moffett Park Drive, Sunnyvale, California 94089.

      Your vote is very important, regardless of the number of shares that you own. Please vote as soon as possible to make sure that your shares are represented at the meeting. To vote your shares, you may complete and return the enclosed proxy card or you may be able to submit your proxy or voting instructions by telephone or the Internet. If you are a holder of record, you may also cast your vote in person at the annual meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct them on how to vote your shares.

  By order of the Board of Directors,
 
  (-s- Stephen K. Workman)
  STEPHEN K. WORKMAN
  Secretary

Sunnyvale, California

                    , 2004

      IMPORTANT: Please fill in, date, sign and promptly mail the enclosed proxy card in the accompanying postage-paid envelope to assure that your shares are represented at the meeting. If you attend the meeting, you may choose to vote in person even if you have previously sent in your proxy card.


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General
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Administration
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Securities Subject to the Purchase Plan
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Offering Periods and Purchase Rights
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Eligibility and Participation
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Payroll Deductions and Stock Purchases
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Purchase Price
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Special Limitations
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Termination of Purchase Rights
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Stockholder Rights
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Assignability
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Changes in Control
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Share Pro-Ration
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Amendment and Termination
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New Plan Benefits
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Prior Purchases
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Non-U.S. Income Tax Consequences
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Accounting Treatment
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QUESTIONS AND ANSWERS ABOUT THE PROPOSED ACQUISITION

AND OTHER MATTERS TO BE VOTED ON AT THE 2004 ANNUAL MEETING
 
Q: Why am I receiving these materials?
 
A: Our board of directors is providing these proxy materials to you in connection with our 2004 annual meeting of stockholders, which will take place on                     , 2004. Stockholders are invited to attend the annual meeting and are requested to vote on the proposals described in this proxy statement.
 
Q: What information is contained in these materials?
 
A: The information included in this proxy statement relates to the proposals to be voted on at the annual meeting, the voting process, the compensation of directors and our most highly paid officers, and certain other required information. The information contained in the sections of this proxy statement entitled “Description of the Infineon Fiber Optics Business” and “Infineon Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Infineon Fiber Optics Business” has been provided by Infineon Technologies AG (“Infineon”). Our Annual Report for the fiscal year ended April 30, 2004, proxy card and return envelope are also enclosed.
 
Certain financial information included in this proxy statement is denominated in Euros. As of                     , 2004, the exchange rate was approximately            U.S. dollar per Euro. See the Section entitled “Selected Historical and Pro Forma Combined Financial Statements — Exchange Rate Information” for additional information regarding the U.S. dollar/Euro exchange rate.
 
Q: What proposals will be voted on at the 2004 Annual Meeting?
 
A: There are five proposals scheduled to be voted on at the annual meeting:
 
• the approval of the issuance of Finisar common stock to Infineon in connection with Finisar’s acquisition of Infineon’s fiber optics business unit (the “Infineon Fiber Optics Business”);
 
• the election of two Class II directors to hold office for a three-year term and until their respective successors are elected and qualified;
 
• the approval of an amendment to Finisar’s Certificate of Incorporation to increase the number of authorized shares of Finisar common stock;
 
• the approval of an amendment to the Finisar 1999 Employee Stock Purchase Plan to increase the number of shares reserved for issuance thereunder and adoption of the International Employee Stock Purchase Plan; and
 
• the ratification of the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending April 30, 2005.
 
Q: How does Finisar’s board of directors recommend that I vote?
 
A: Our board of directors recommends that you vote your shares “FOR” approval of the issuance of common stock to Infineon in connection with the acquisition of the Infineon Fiber Optics Business; “FOR” the election of the two nominees to the Board of Directors; “FOR” approval of the amendment to the Certificate of Incorporation; “FOR” approval of the amendment to the 1999 Stock Option Plan; “FOR” approval of the amendment to the 1999 Employee Stock Purchase Plan; and “FOR” the ratification of the appointment of Ernst & Young LLP as our independent auditors.
 
Q: What is the voting requirement to approve each of the proposals?
 
A: In the election of directors, the two persons receiving the highest number of “FOR” votes will be elected. The proposals regarding the issuance of common stock to Infineon, the amendment to the 1999 Employee Stock Purchase Plan and the ratification of the independent auditors each require the affirmative “FOR” vote of a majority of those shares present and entitled to vote at the annual meeting. The proposal regarding the amendment to Finisar’s Certificate of Incorporation requires the affirmative “FOR” vote of a majority of the outstanding shares of Finisar common stock. Two stockholders of Finisar, Jerry S. Rawls, our President and Chief Executive Officer, and Frank H. Levinson, Chairman of the Board and Chief Technical Officer, are parties to voting agreements with Infineon and have

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agreed to vote all of their shares of Finisar common stock in favor of the proposal to issue shares of Finisar common stock to Infineon.
 
Q: What is the Infineon Fiber Optics acquisition?
 
A: Pursuant to a purchase agreement dated April 29, 2004, Finisar has agreed to acquire the Infineon Fiber Optics Business based in Berlin, Germany for approximately 135,000,000 shares of Finisar common stock. The transaction involves the acquisition of facilities, product lines, equipment and intellectual property, including approximately 450 patent families, as well as approximately 1,200 employees. The shares of Finisar common stock to be issued to Infineon in connection with the acquisition would represent approximately 38% of the outstanding shares of Finisar common stock on a post-transaction basis. Under the listing rules of the Nasdaq Stock Market (“Nasdaq”), before consummating the acquisition we must first obtain stockholder approval for the issuance of the shares since the number of shares to be issued will exceed 20% of our outstanding shares.
 
Q: Will Finisar stockholders receive any consideration as a result of the acquisition of the Infineon Fiber Optics Business?
 
A: No. Finisar stockholders will not receive any consideration as a result of the acquisition of the Infineon Fiber Optics Business.
 
Q: When do you expect to complete the acquisition of the Infineon Fiber Optics Business?
 
A: We are working to complete the acquisition of the Infineon Fiber Optics Business as quickly as possible. Pending customary regulatory approvals and the approval of Finisar’s stockholders, the acquisition is expected to close in the third calendar quarter of 2004.
 
For a description of the conditions to completion of the acquisition, see the section entitled “The Purchase Agreement — Conditions to Completion of the Acquisition” on page      .
 
Q: Why is it necessary to amend Finisar’s Certificate of Incorporation?
 
A: As of June 30, 2004, Finisar had a total of 276,463,329 authorized but unissued shares of its common stock. Of these shares, 121,314,987 are currently reserved for future issuance under our equity compensation plans and upon conversion of outstanding convertible notes. If the issuance of shares in connection with the acquisition of the Infineon Fiber Optics Business is approved by the stockholders and consummated and the proposed amendment to the 1999 Employee Stock Purchase Plan to increase the maximum number of shares issuable under the plan is approved, only 5,148,342 shares of our common stock will remain unissued and unreserved. In order to ensure that sufficient shares will be available for issuance in connection with potential future equity financing transactions or acquisitions, or for other corporate purposes, the board of directors has approved, subject to stockholder approval, an amendment to Finisar’s Certificate of Incorporation to increase the number of authorized shares of common stock from 500,000,000 to 800,000,000.
 
Q: Why is it necessary to amend the Finisar 1999 Employee Stock Purchase Plan?
 
A: The acquisition of the Infineon Fiber Optics Business will add approximately 1,200 employees to our workforce, an increase of approximately 43%. As of June 30, 2004, only 149,371 shares remained available under the 1999 Employee Stock Purchase Plan. The board of directors believes that in order to successfully attract and retain the best possible employees, we must continue to offer competitive equity incentive programs. To accommodate the substantial increase in the number of our employees, we believe it is prudent to amend our 1999 Employee Stock Purchase plan to increase the maximum number of shares of common stock that may be issued under the plan. Approval of the amendment to the plan is not a condition to the completion of the acquisition of the Infineon Fiber Optics Business.
 
Q: What shares can be voted?
 
A: All shares that you own as of the close of business on                     , 2004 (the “Record Date”) may be voted by you. You may cast one vote per share of common stock that you held on the Record Date.

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These shares include shares that are: (1) held directly in your name as the stockholder of record and (2) held for you as the beneficial owner through a stockbroker, bank or other nominee.
 
Q: What is the difference between holding shares as a stockholder of record and as a beneficial owner?
 
A: Most of our stockholders hold their shares through a stockbroker, bank or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held as stockholder of record and those owned beneficially.
 
Stockholders of Record
 
If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being sent directly to you by Finisar. As the stockholder of record, you have the right to grant your voting proxy directly to Finisar or to vote in person at the annual meeting. We have enclosed a proxy card for you to use.
 
Beneficial Owners
 
If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name, and these proxy materials are being forwarded to you by your broker or nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker on how to vote and are also invited to attend the annual meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the annual meeting. Your broker or nominee has enclosed a voting instruction card for you to use in directing the broker or nominee regarding how to vote your shares. You may also vote by telephone as described below under “How can I vote my shares without attending the annual meeting?” If you are a beneficial owner and do not provide the stockholder of record with voting instructions, your shares may constitute broker non-votes, as described in the section entitled “The Annual Meeting of Finisar Stockholders — Voting of Proxies; Abstentions; and Broker Non-Votes.”
 
Q: How can I vote my shares in person at the 2004 annual meeting?
 
A: Shares held directly in your name as the stockholder of record may be voted in person at the annual meeting. If you choose to do so, please bring the enclosed proxy card or proof of identification. Even if you plan to attend the annual meeting, we recommend that you vote your shares in advance as described below so that your vote will be counted if you later decide not to attend the annual meeting. Shares held in street name may be voted in person by you only if you obtain a signed proxy from the record holder giving you the right to vote the shares.
 
Q: How can I vote my shares without attending the 2004 annual meeting?
 
A: Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct your vote without attending the annual meeting by telephone or completing and mailing your proxy card or voting instruction card in the enclosed pre-paid envelope. You may also be able to direct your vote via the Internet. Please refer to the enclosed materials for details.
 
Q: Can I change my vote?
 
A: You may change your proxy instructions at any time prior to the vote at the annual meeting. You may accomplish this by signing and delivering a new proxy card or voting instruction card bearing a later date (which automatically revokes your earlier proxy instructions) or, if you are a stockholder of record, by attending the annual meeting and voting in person. Attendance at the annual meeting will not cause your previously granted proxy to be revoked unless you specifically so request.
 
Q: How are votes counted?
 
A: In the election of directors, you may vote “FOR” both of the nominees or your vote may be “WITHHELD” with respect to one or both of the nominees. You may vote “FOR,” “AGAINST” or

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“ABSTAIN” for each of the other proposals. If you fail to respond or if you “ABSTAIN” from the vote on the amendment to the Certificate of Incorporation, it will have the same effect as a vote “AGAINST.” If you “ABSTAIN” from the vote on any of the other proposals, it will have no effect on the outcome of the proposal. If you sign your proxy card or broker voting instruction card with no further instructions, your shares will be voted in accordance with the recommendations of the board.
 
Q: What does it mean if I receive more than one proxy or voting instruction card?
 
A: It means your shares are registered differently or are in more than one account. Please provide voting instructions for all proxy and voting instruction cards you receive.
 
Q: Where can I find the voting results of the 2004 annual meeting?
 
A: We will announce preliminary voting results at the annual meeting and publish final results in our Quarterly Report on Form 10-Q for the second quarter of fiscal 2005.

WHO CAN HELP ANSWER YOUR QUESTIONS

      If you have any questions about the proposed transaction with Infineon or how to submit your proxy card, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, you should contact:

     
Finisar Corporation
1308 Moffett Park Drive
Sunnyvale, CA 94089
Attn: Investor Relations
(408) 542-5050
Email: Investor.relations@finisar.com
 
MacKenzie Partners, Inc.
105 Madison Avenue
New York, NY 10016
(800) 322-2885 (toll-free)
Email: proxy@mackenziepartners.com

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SUMMARY OF THE PROXY STATEMENT

      This summary highlights selected information in this proxy statement and may not contain all information that is important to you. You should carefully read this entire proxy statement and the other documents we refer to in their entirety for a more complete understanding of the proposed acquisition of the Infineon Fiber Optics Business and related transactions and the other matters to be voted upon at the specified meeting. You should also read the documents attached to this proxy statement, including the purchase agreement which is attached as Annex A.

Proposal 1:

Approval of the Issuance of Finisar Common Stock in Connection with

the Acquisition of the Infineon Fiber Optics Business

      At the annual meeting of Finisar’s stockholders, you will be asked to approve the issuance of Finisar common stock to Infineon in connection with the acquisition of the Infineon Fiber Optics Business.

The Companies

 
Finisar Corporation (see page 59)
1308 Moffet Park Drive
Sunnyvale, CA 94089
www.finisar.com
408-542-1000

      Finisar is a leading provider of fiber optic subsystems and network performance test and monitoring systems. These products enable high-speed data communications for networking and storage applications over Gigabit Ethernet local area networks, or LANs, Fiber Channel storage area networks, or SANs, and metropolitan access networks, or MANs, using IP and SONET/ SDH-based protocols. Finisar is focused on the application of digital fiber optics to provide a broad line of high-performance, reliable, value-added optical subsystems for data networking and storage equipment manufacturers. Finisar’s line of optical subsystems supports a wide range of network applications, transmission speeds, distances, physical mediums and configurations. Finisar also provides network performance test and monitoring systems to original equipment manufacturers for testing and validating equipment designs and to operators of networking and storage data centers for testing, monitoring and troubleshooting the performance of their systems. Finisar’s headquarters is in Sunnyvale, California.

 
The Infineon Fiber Optics Business (see page 60)

      The business being sold by Infineon to Finisar (which we refer to as the Infineon Fiber Optics Business) consists of substantially all of the assets, liabilities and operating activities of the fiber optic business unit of Infineon. Headquartered in Berlin, Germany, the Infineon Fiber Optics Business develops, produces and markets solutions for the data communications, telecommunications and automotive industries.

      The Infineon Fiber Optics Business has operations in Germany, the Czech Republic, Japan, Hong Kong, Taiwan and the United States. Two wholly-owned subsidiaries of Infineon, Infineon Fiber Optics GmbH (“IF FO”) and Infineon Technologies Trutnov s.r.o. (“IF Trutnov”), are engaged exclusively in the conduct of the Infineon Fiber Optics Business. Infineon and other of its direct and indirect subsidiaries are also engaged in supporting the Infineon Fiber Optics Business.

      The Infineon Fiber Optics Business has been active in the fiber optics industry for many years and is currently one of the world’s leading manufacturers of active fiber optic components. In the fiscal year ended September 30, 2003, the Infineon Fiber Optics Business generated net sales of 108 million.

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Summary of the Acquisition of the Infineon Fiber Optics Business (see page 35)

      Pursuant to the purchase agreement, Finisar will acquire all of the outstanding equity of IF FO and IF Trutnov and will purchase certain other assets and assume certain liabilities of Infineon and other subsidiaries of Infineon related to the Infineon Fiber Optics Business. As consideration for the acquisition of the Infineon Fiber Optics Business, Finisar will issue to Infineon approximately 135,000,000 shares of Finisar common stock, subject to adjustment in accordance with the purchase agreement, representing, as of June 30, 2004, approximately 38% of the outstanding common stock of Finisar on a post-transaction basis.

Recommendation of the Finisar Board of Directors

      The Finisar board of directors unanimously recommends that Finisar stockholders vote “FOR” approval of the issuance of shares of Finisar common stock in connection with the acquisition of the Infineon Fiber Optics Business.

Reasons for the Acquisition (see page 39)

      Finisar’s board of directors determined that the acquisition of the Infineon Fiber Optics Business would create a stronger and more competitive industry participant, based on potential benefits that include:

  •  the immediate addition of substantial incremental revenue;
 
  •  the complementary nature of the companies’ markets, products, technologies and customers;
 
  •  a more diversified product portfolio;
 
  •  complementary customer relationships and distribution channels;
 
  •  potential synergies to be realized through the rationalization of the combined company’s product development efforts, facilities and sales and marketing activities;
 
  •  the immediate expansion of Finisar’s presence in Europe;
 
  •  the acquisition of important intellectual property; and
 
  •  the opportunity to strengthen Finisar’s management capabilities.

      The Finisar board also recognized a number of risks and uncertainties inherent in the acquisition but concluded that, on balance, the potential benefits outweighed the risks associated with the transaction.

Opinion of Finisar’s Financial Advisor (see page 41)

      In connection with the proposed acquisition of the Infineon Fiber Optics Business, the Finisar board of directors received a written opinion from Deutsche Bank Securities Inc. (“Deutsche Bank”), Finisar’s financial advisor, as to the fairness, from a financial point of view, to Finisar of the purchase price to be paid by Finisar for the acquisition of the Infineon Fiber Optics Business. The full text of Deutsche Bank’s written opinion, dated April 29, 2004, is attached to this proxy statement as Annex B. We encourage you to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken. Deutsche Bank’s opinion is addressed to the Finisar board of directors and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matter relating to the acquisition.

Risks Relating to the Acquisition and Other Risk Factors (see page 16)

      In considering whether to vote your shares in favor of the issuance of Finisar common stock to Infineon in connection with the acquisition of the Infineon Fiber Optics Business, you should consider various risks relating to the acquisition, including risks relating to the integration of the businesses and risks related to the companies’ respective businesses. We urge you to read carefully the risk factors described in the section entitled “Risk Factors” on pages 16 through 32 in making your decision.

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Conditions to Completion of the Acquisition (see page 52)

      The obligations of Finisar and Infineon to complete the acquisition of the Infineon Fiber Optics Business are subject to satisfaction or waiver of the following closing conditions:

  •  Finisar stockholders must approve the issuance of Finisar common stock in connection with the acquisition;
 
  •  applicable notification and waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and under the applicable merger control regulations of Germany and the Czech Republic must have been satisfied;
 
  •  the shares of Finisar common stock to be issued in connection with the acquisition must have been authorized for listing on Nasdaq, subject to official notice of issuance; and
 
  •  no change, condition, event or development shall have occurred with respect to either party that has had or could reasonably be expected to have a material adverse effect on such party (subject to certain specified limitations) unless such party agrees to indemnify the other party against resulting losses (subject to specified limitations and threshold amounts).

Termination of the Purchase Agreement (see page 53)

      The purchase agreement may be terminated before the transactions are completed:

  •  by mutual written consent of Finisar and Infineon;
 
  •  by either party, if the conditions to closing have not been fulfilled by October 29, 2004 through no fault of the terminating party;
 
  •  by either party, if the required approval of the stockholders of Finisar is not obtained; or
 
  •  by either party, in the event of any change, condition, event or development shall have occurred that has had, or could reasonably be expected to have, a material adverse effect on the other party (subject to certain specified limitations) unless the other party agrees to indemnify the first party against resulting losses (subject to certain specified limitations and threshold amounts).

Indemnification Provisions (see page 53)

      The purchase agreement contains detailed provisions regarding indemnification obligations of the parties. Specifically, the purchase agreement provides that Finisar will be required to indemnify Infineon for any losses arising from any breach of a representation or warranty of Finisar, any failure by Finisar to comply with a covenant, or, with respect to any losses arising from the liabilities that will be assumed by Finisar. Infineon will be required to indemnify Finisar for any losses arising from any breach of a representation or warranty by Infineon, any failure by Infineon to comply with a covenant and the operations of the Infineon Fiber Optics Business prior to the closing date. These indemnification obligations are subject to certain limitations and thresholds which are specified in the purchase agreement.

Non-Compete Provisions (see page 54)

      Infineon has agreed that it will not compete with the business it will sell to Finisar for a period of three years following the closing of the acquisition, except in limited circumstances set forth in detail in the purchase agreement. In addition, for a period of one year following the closing of the acquisition, neither party will be permitted to solicit any employee of the other party to terminate his or her employment with the other party for employment by such party.

Regulatory Approvals (see page 48)

      The acquisition is subject to the notification and waiting period requirements of the HSR Act and antitrust laws of certain other jurisdictions. Finisar and Infineon filed the required information under the HSR

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Act with the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice on June 15, 2004, and the waiting period expired on July 15, 2004. Infineon and Finisar have also made the required filings with regulatory authorities in the Czech Republic and Germany.

No Appraisal Rights (see page 49)

      Under applicable law, Finisar stockholders do not have the right to an appraisal of the value of their shares in connection with the acquisition of the Infineon Fiber Optics Business.

Proposal 2:

Election of Directors

(see pages 81 through 85)

      At the annual meeting, Harold E. Hughes, Jr. and Frank H. Levinson will stand for reelection to serve as Class II directors for a three-year term ending at the annual meeting of the stockholders to be held in 2007.

Proposal 3:

Amendment to Finisar’s Certificate of Incorporation

(see pages 86 through 87)

      At the annual meeting, stockholders will be asked to approve an amendment to Finisar’s Certificate of Incorporation to increase the number of authorized shares of Finisar common stock from 500,000,000 to 800,000,000.

Proposal 4:

Amendment to the Finisar 1999 Employee Stock Purchase Plan

and Adoption of the International Employee Stock Purchase Plan
(see pages 88 through 93)

      At the annual meeting, stockholders will be asked to approve an amendment to Finisar’s 1999 Employee Stock Purchase Plan to increase the number of shares of Finisar common stock authorized for issuance under such plan.

Proposal 5:

Ratification of Appointment of Independent Auditors

(see page 94)

      At the annual meeting, stockholders will be asked to ratify the appointment of Ernst & Young LLP as Finisar’s independent auditors for the fiscal year ending April 30, 2005.

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

      This proxy statement and the documents incorporated by reference into this proxy statement contain “forward-looking statements” within the “safe harbor‘ provisions of the Private Securities Litigation Reform Act of 1995 with respect to Finisar’s financial condition, results of operations and business and the expected impact of the acquisition on of the Infineon Fiber Optics Business on Finisar’s financial performance. Words such as “anticipates,” “expects,” intends,” “plans, “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” and similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Many of the important factors that will determine these results and values are beyond Finisar’s ability to control or predict. Finisar stockholders are cautioned not to put undue reliance on any forward-looking statements. Except as otherwise required by law, Finisar does not assume any obligation to update any forward-looking statements. In evaluating the acquisition, you should carefully consider the discussion of risks and uncertainties in the section entitled “Risk Factors” beginning on page 16 of this proxy statement.

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SELECTED HISTORICAL AND PRO FORMA

COMBINED FINANCIAL INFORMATION

      The following selected historical financial information of Finisar and the Infineon Fiber Optics Business has been derived from the respective historical consolidated financial statements of the respective entity, and should be read in conjunction with such consolidated financial statements and the notes thereto, included elsewhere in this proxy statement, or incorporated herein by reference. The historical financial data of the Infineon Fiber Optics Business as of March 31, 2004 and for the six months ended March 31, 2004 and 2003 is unaudited and has been prepared on the same basis as the historical information in the audited financial statements. Such unaudited financial information, in the opinion of management of the Infineon Fiber Optics Business, contains all adjustments, consisting only of normal, recurring adjustments, necessary for the fair presentation of the results of operations for such periods. The selected unaudited pro forma condensed combined financial information of Finisar and the Infineon Fiber Optics Business is derived from the unaudited pro forma condensed combined financial statements included elsewhere in this proxy statement and should be read in conjunction with such pro forma statements and the notes thereto.

      The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the acquisition of the Infineon Fiber Optics Business had been consummated on the dates specified therein, nor is it necessarily indicative of future operating results or financial position of the combined business. See “Finisar Corporation Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page F-2.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF FINISAR

                                           
Fiscal Years Ended April 30,

2004 2003 2002 2001 2000





(In thousands, except per share data)
Statement of Operations Data:
                                       
Revenues
  $ 185,618     $ 166,482     $ 147,265     $ 188,800     $ 67,147  
Cost of revenues
    143,585       130,501       136,626       131,551       34,190  
Amortization of acquired developed technology
    19,239       21,983       27,119       10,900        
     
     
     
     
     
 
Gross profit (loss)
    22,794       13,998       (16,480 )     46,349       32,957  
     
     
     
     
     
 
Operating expenses:
                                       
 
Research and development
    62,193       60,295       54,372       33,696       13,806  
 
Sales and marketing
    20,063       20,232       21,448       16,673       7,122  
 
General and administrative
    16,738       15,201       19,419       10,160       3,516  
 
Amortization of (benefit from) deferred stock compensation
    (105 )     (1,719 )     11,963       13,542       5,530  
 
Acquired in-process research and development
    6,180             2,696       35,218        
 
Amortization of goodwill and other purchased intangibles
    572       758       129,099       53,122        
 
Impairment of goodwill and intangibles
          10,586                    
 
Restructuring costs
    382       9,378                    
 
Other acquisition costs
    222       198       3,119       1,130        
     
     
     
     
     
 
Total operating expenses
    106,245       114,929       242,116       163,541       29,974  
     
     
     
     
     
 
Income (loss) from operations
    (83,451 )     (100,931 )     (258,596 )     (117,192 )     2,983  
Interest income (expense), net
    (25,701 )     (6,699 )     (68 )     14,217       3,252  
Other income (expense), net
    (4,347 )     (51,314 )     1,360       18,546       (99 )
     
     
     
     
     
 
Income (loss) before income taxes and cumulative effect of an accounting change
    (113,499 )     (158,944 )     (257,304 )     (84,429 )     6,136  
Provision (benefit) for income taxes
    334       229       (38,566 )     1,020       3,255  

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Fiscal Years Ended April 30,

2004 2003 2002 2001 2000





(In thousands, except per share data)
Income (loss) before cumulative effect of an accounting change
    (113,833 )     (159,173 )     (218,738 )     (85,449 )     2,881  
Cumulative effect of an accounting change to adopt SFAS 142
          (460,580 )                  
     
     
     
     
     
 
Net income (loss)
  $ (113,833 )   $ (619,753 )   $ (218,738 )   $ (85,449 )   $ 2,881  
     
     
     
     
     
 
Net income (loss) per share — basic:
                                       
 
Before cumulative effect of an accounting change
  $ (0.53 )   $ (0.82 )   $ (1.21 )   $ (0.53 )   $ 0.03  
 
Cumulative effect of an accounting change to adopt SFAS 142
  $     $ (2.35 )   $     $     $  
 
Income (loss) per share
  $ (0.53 )   $ (3.17 )   $ (1.21 )   $ (0.53 )   $ 0.03  
Net income (loss) per share — diluted:
                                       
 
Income (loss) per share before cumulative effect of an accounting change
  $ (0.53 )   $ (0.82 )   $ (1.21 )   $ (0.53 )   $ 0.02  
 
Cumulative per share effect of an accounting change to adopt SFAS 142
  $     $ (2.35 )   $     $     $  
 
Income (loss) per share
  $ (0.53 )   $ (3.17 )   $ (1.21 )   $ (0.53 )   $ 0.02  
Shares used in per share calculations:
                                       
   
Basic
    216,117       195,666       181,136       160,014       113,930  
   
Diluted
    216,117       195,666       181,136       160,014       144,102  
Pro forma amounts assuming the change in accounting principle was applied retroactively (unaudited):
                                       
 
Net income (loss)
  $ (113,833 )   $ (619,753 )   $ (90,957 )   $ (32,857 )   $ 2,881  
 
Net income (loss) per share — basic
  $ (0.53 )   $ (3.17 )   $ (0.50 )   $ (0.21 )   $ 0.03  
 
Net income (loss) per share — diluted
  $ (0.53 )   $ (3.17 )   $ (0.50 )   $ (0.21 )   $ 0.02  
Shares used in computing pro forma net income (loss) per share:
                                       
   
Basic
    216,117       195,666       181,136       160,014       113,930  
   
Diluted
    216,117       195,666       181,136       160,014       144,102  
                                         
As of April 30,

2004 2003 2002 2001 2000





(In thousands)
Balance Sheet Data:
                                       
Cash, cash equivalents and short-term investments
  $ 143,398     $ 119,438     $ 144,097     $ 146,111     $ 320,735  
Working capital
    172,892       149,967       222,603       249,000       342,711  
Total assets
    494,705       423,606       1,041,281       1,029,995       364,920  
Long-term portion of notes payable and capital lease obligations, and other long-term liabilities
    233,732       101,531       106,869       45,354       524  
Convertible preferred stock
                      1        
Total stockholders’ equity
    202,845       274,980       879,002       941,851       352,422  

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SELECTED HISTORICAL CONDENSED COMBINED

FINANCIAL DATA OF THE INFINEON FIBER OPTICS BUSINESS(1)
                                           
Six Months
Ended
March 31, Fiscal Year Ended September 30,


2004 2003 2003 2002 2001





(Euro in thousands)
Statement of Operations Data:
                                       
 
Net sales
    54,186       45,438       107,840       113,958       164,446  
 
Operating loss
    (27,205 )     (41,991 )     (68,731 )     (80,474 )     (43,404 )
 
Interest expense
    (268 )     (519 )     (734 )     (1,764 )     (1,563 )
 
Net loss
    (27,893 )     (42,895 )     (69,653 )     (82,915 )     (45,656 )
                           
As of September 31,
As of March 31,
2004 2003 2002



(Euro in thousands)
Balance Sheet Data:
                       
 
Cash and cash equivalents
    36       198       573  
 
Inventories
    26,227       24,860       38,570  
 
Property, plant and equipment, net
    31,984       38,657       53,719  
 
Total assets
    90,716       94,543       121,167  
 
Accumulated deficit
    (225,428 )     (197,535 )     (127,882 )
 
Total business equity
    37,244       37,412       43,373  


(1)  The financial statements for the Infineon Fiber Optics Business included in this proxy statement have been specially prepared on a “carve-out” basis and consist of operations that are conducted in subsidiaries that also have operations related to Infineon businesses other than the Infineon Fiber Optics Business. Such financial statements have not been prepared on a regular basis for other purposes. Infineon has prepared full, audited financial statements for the Infineon Fiber Optics Business for the fiscal years ended September 30, 2003, 2002 and 2001, as well as unaudited financial statements for the six months ended March 31, 2004 and 2003, which are included in this proxy statement. Because the preparation of financial statements for years prior to 2001 would be burdensome, costly and time-consuming, Finisar requested and received a waiver from the SEC with respect to the requirement that selected financial data for the Infineon Fiber Optics Business for the fiscal years ended September 30, 2000 and 1999 be included in this proxy statement.

Exchange Rate Information

      The table below shows the average U.S. dollar/ Euro exchange rate for the periods shown, based on the interbank market exchange rate expressed in U.S $1.00 per Euro.

                                                         
Average Exchange Rate

6 Months Ended
March 31,

Exchange Rate 12 Months Ended September 30,
March 31, 2004 2004 2003
Currency Euro Euro Euro 2003 2002 2001







U.S. Dollar
  $ 1.00       0.8215       0.8209       0.9665       0.9254       1.0906       1.1255  

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL DATA OF FINISAR

      The following information has been derived from the unaudited pro forma condensed combined financial statements set forth elsewhere in this proxy statement and should be read in connection with that information.

      The selected unaudited pro forma condensed combined financial information illustrates the estimated effects of the transaction as if the acquisition of the Infineon Fiber Optics Business had occurred on May 1, 2003 for the statement of operations information and on April 30, 2004 for the balance sheet information. The unaudited pro forma condensed combined financial information has been prepared based on the purchase method of accounting and does not include the impact of non-recurring charges directly attributable to the transaction.

      The selected unaudited pro forma condensed combined financial information is based on estimates and assumptions that are preliminary. The following information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the acquisition of the Infineon Fiber Optics Business had been consummated on the dates specified, nor is it necessarily indicative of future operating results or financial position of the combined business.

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FINISAR CORPORATION

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended April 30, 2004
(In thousands, except per share data)
                                     
Historical

Infineon Fiber Pro forma Finisar
Finisar Optics Business Adjustments(1) Pro forma




(In thousands, except per share amounts)
Revenue
  $ 185,618     $ 135,776     $     $ 321,394  
Cost of revenue
    143,585       138,091             281,676  
Amortization of acquired developed technology
    19,239             9,223       28,462  
     
     
     
     
 
Gross profit
    22,794       (2,315 )     (9,223 )     11,256  
     
     
     
     
 
Operating expenses:
                               
 
Research and development
    62,193       28,378             90,571  
 
Selling, general and administrative
    36,801       33,468             70,269  
 
Amortization of (benefit from) deferred stock compensation
    (105 )                 (105 )
 
Acquired in-process research and development
    6,180                   6,180  
 
Impairment of goodwill and other purchased intangibles
    572                   572  
 
Restructuring costs
    382       506             888  
 
Other acquisition costs
    222                   222  
     
     
     
     
 
Total operating expenses
    106,245       62,352             168,597  
     
     
     
     
 
   
Loss from operations
    (83,451 )     (64,667 )     (9,223 )     (157,341 )
Interest income
    3,171                   3,171  
Interest expense
    (28,872 )     (584 )           (29,456 )
Other income (expense), net
    (4,347 )     542             (3,805 )
     
     
     
     
 
Loss before income taxes
    (113,499 )     (64,709 )     (9,223 )     (187,431 )
Provision (benefit) for income taxes
    334       317             651  
     
     
     
     
 
Net loss
  $ (113,833 )   $ (65,026 )   $ (9,223 )   $ (188,082 )
     
     
     
     
 
Net loss per share basic and diluted
  $ (0.53 )                   $ (0.54 )
Shares used in computing net loss per share
    216,117                       351,117  


(1)  See notes to Finisar Corporation unaudited pro forma condensed combined financial statements beginning on page F-6.

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FINISAR CORPORATION

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of April 30, 2004
(In thousands)
                                   
Historical

Infineon Fiber
Optics Pro forma Finisar
Finisar Business Adjustments(1) Pro forma




(In thousands)
ASSETS
Current assets:
                               
 
Cash and cash equivalents
  $ 69,872     $ 44     $ (44 )   $ 69,872  
 
Short-term investments
    73,526                   73,526  
 
Restricted investments, short-term
    6,329                   6,329  
 
Accounts receivable, net of allowance for doubtful accounts
    28,481       15,971             44,452  
 
Accounts receivable, other
    11,314                   11,314  
 
Inventories
    34,717       31,926             66,643  
 
Prepaid expenses
    4,736       6,223             10,959  
 
Deferred income taxes
    2,045       318             2,363  
     
     
     
     
 
Total current assets
    231,020       54,481       (44 )     285,457  
Property, plant and improvements, net
    107,736       38,934             146,670  
Restricted investments, long-term
    8,921                   8,921  
Purchased intangible assets, net
    47,961             46,113       94,074  
Goodwill, net
    60,620               118,921       179,541  
Minority investments
    24,227       16,497             40,724  
Other assets
    14,220       516             14,736  
     
     
     
     
 
Total assets
  $ 494,705     $ 110,429     $ 164,990     $ 770,124  
     
     
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
                               
 
Accounts payable
    29,460       9,497             38,957  
 
Accrued compensation
    4,376       3,359             7,735  
 
Non-cancelable purchase obligations
    7,038                   7,038  
 
Other accrued liabilities
    14,464       14,434       5,000       33,898  
 
Income tax payable
    790                   790  
 
Short-term loan from Infineon
          28,363       (28,363 )     0  
 
Current portion of long-term liabilities
    2,000                   2,000  
     
     
     
     
 
Total current liabilities
    58,128       55,653       (23,363 )     90,418  
Long-term liabilities:
                               
 
Convertible notes
    229,493                   229,493  
 
Other long-term liabilities
    2,194                   2,194  
 
Pension liabilities
          9,439             9,439  
 
Deferred income taxes
    2,045                   2,045  
     
     
     
     
 
Total long-term liabilities
    233,732       9,439             243,171  
Commitments and contingent liabilities Stockholders’ equity:                                
 
Common stock
    222             135       357  
 
Additional paid-in capital
    1,259,759       320,604       (66,553 )     1,513,810  
 
Notes receivable from stockholders
    (481 )                 (481 )
 
Deferred stock compensation
    (162 )                 (162 )
 
Accumulated other comprehensive income
    710       (853 )     853       710  
 
Accumulated deficit
    (1,057,203 )     (274,414 )     253,919       (1,077,698 )
     
     
     
     
 
Total stockholders’ equity
    202,845       45,337       188,353       436,536  
     
     
     
     
 
Total liabilities and stockholders’ equity
  $ 494,705     $ 110,429     $ 164,990     $ 770,124  
     
     
     
     
 


(1)  See notes to Finisar Corporation unaudited pro forma condensed combined financial statements beginning on page F-6.

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RISK FACTORS

      Following the acquisition, Finisar and the Infineon Fiber Optics Business will operate as a combined company in a rapidly changing market environment that involves significant risks, many of which will be beyond our control. In addition to the other information contained in, or incorporated by reference into, this proxy statement, you should carefully consider the risks described below in evaluating whether to vote your shares to approve the issuance of Finisar common stock to Infineon in connection with the acquisition.

Risks Related to the Acquisition

 
We may not realize the benefits we expect from the acquisition.

      The integration of the Infineon Fiber Optics Business with our business will be complex, time-consuming and expensive and may disrupt our ongoing business operations. We will need to overcome significant challenges in order to realize the expected benefits and synergies from the acquisition. These challenges include the timely, efficient and successful execution of a number of post-transaction activities, including:

  •  integrating the operations of the Infineon Fiber Optics Business with Finisar’s operations;
 
  •  retaining and assimilating the key personnel of the Infineon Fiber Optics Business;
 
  •  integrating product offerings;
 
  •  coordinating sales and marketing efforts to effectively communicate the capabilities of the combined company;
 
  •  demonstrating to the customers of Finisar and the Infineon Fiber Optics Business that the combination will not result in adverse changes in product quality or customer service;
 
  •  coordinating and rationalizing research and development activities of the combined company to achieve the timely introduction of new products with reduced costs;
 
  •  preserving important relationships of both Finisar and the Infineon Fiber Optics Business and resolving potential conflicts that may arise; and
 
  •  creating and implementing uniform standards, controls, procedures, policies and information systems.

      The execution of these post-transaction activities will involve significant risks and may not be successful. Risks associated with these activities include:

  •  the potential disruption of Finisar’s ongoing business operations and distraction of its management from the day-to-day operational matters, as well as other strategic opportunities;
 
  •  a potential strain on Finisar’s financial and managerial controls and reporting systems and procedures;
 
  •  unanticipated expenses and potential delays related to integration of the operations, technology and other resources of the Infineon Fiber Optics Business;
 
  •  the inability of the combined company to increase product sales;
 
  •  the failure of key markets for the combined company’s products to develop to the extent or as rapidly as currently expected;
 
  •  the impairment of relationships with employees or the inability to retain key employees;
 
  •  greater than anticipated costs and expenses related to restructuring, including employee severance or relocation costs and costs related to vacating facilities; and
 
  •  potential unknown liabilities associated with the acquisition and the combined operations that may not be fully covered by indemnification obligations of Infineon.

      Finisar may not succeed in addressing these risks or other problems that may be encountered in connection with the acquisition. The inability to successfully integrate the operations, technology and

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personnel of Finisar and the Infineon Fiber Optics Business, or any significant delay in achieving integration, could have a material adverse effect on the business and results of operations of Finisar after the acquisition and, as a result, on the market price of Finisar’s common stock.
 
To be successful, Finisar must retain and motivate key employees, which will be more difficult in light of uncertainty related to the acquisition, and our failure to do so could seriously harm the combined company.

      To be successful, Finisar must retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and information technology support positions. Employees of Finisar or the Infineon Fiber Optics Business may experience uncertainty about their future role with the combined company both before and after strategies with regard to the combined business are announced or executed. This potential uncertainty may adversely affect Finisar’s ability to attract and retain key personnel. After the closing of the acquisition, we must continue to motivate our employees and keep them focused on the strategies and goals of the combined company, which may be particularly difficult due to the potential distractions of the transaction or the loss of key employees due to such uncertainties.

 
If customers delay or defer purchasing decisions as a result of the acquisition, the operating results and prospects of the combined company could be adversely affected.

      Finisar cannot assure you that the customers of either company will continue their current buying patterns. Customers of Finisar or the Infineon Fiber Optics Business may delay or defer purchasing decisions in response to the announcement of the proposed acquisition. Any such delay or deferral in purchasing decisions by such customers could have a material adverse effect on the business or operating results of Finisar and the combined company, regardless of whether the acquisition is ultimately completed.

 
Finisar expects to incur significant costs associated with the acquisition which could adversely affect its future liquidity and operating results.

      Finisar estimates that it will incur transaction costs of approximately $5.0 million associated with the acquisition, which will be included as a part of the total purchase costs for accounting purposes. These amounts are estimates and could increase. In addition, Finisar believes that the combined entity may incur charges to operations, in amounts that are not currently estimable, in the fiscal quarter in which the acquisition is completed or in subsequent quarters, to reflect costs associated with integrating the two companies. The combined company may incur additional material charges in subsequent quarters to reflect additional costs associated with the transaction. These costs associated with the acquisition could adversely affect the future liquidity and operating results of Finisar.

 
Finisar and Infineon may be unable to obtain the required regulatory approvals for completing the transaction and the transaction may not close.

      The applicable waiting period under the HSR Act expired on July 15, 2004. However, in addition to the U.S. antitrust requirements under the HSR Act, the acquisition is subject to compliance with certain foreign antitrust laws which require Finisar and Infineon to make filings with applicable foreign governmental authorities. Antitrust regulators may require Finisar, Infineon or the combined company to agree to operating restrictions, before or after receipt of Finisar stockholder approval for the issuance of Finisar common stock to Infineon. If any agreements regarding operating restrictions are required under applicable law or by governmental authorities, such restrictions may jeopardize or delay the completion of the acquisition or lessen the potential benefits of the transaction.

 
The acquisition may be completed even though material adverse changes may result from the announcement of the acquisition, industry-wide changes or other causes.

      In general, Finisar can refuse to complete the acquisition if there is a material adverse change affecting the Infineon Fiber Optics Business between the date of the purchase agreement, April 29, 2004, and the

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closing of the transaction, and Infineon has similar rights in the event of a material adverse change affecting Finisar. However, certain types of adverse changes will not prevent the acquisition from going forward, even if they would have a material adverse effect on the Infineon Fiber Optics Business or Finisar, including:

  •  adverse changes, events, developments or effects reasonably attributable to the execution or announcement of the purchase agreement;
 
  •  changes in Finisar’s stock price or trading volume, in and of itself;
 
  •  failure by Finisar or the Infineon Fiber Optics Business to achieve projected revenue or operating results;
 
  •  adverse changes, events, developments or effects arising from or relating to general business or economic conditions or the general conditions of the industry in which the Infineon Fiber Optics Business operates, which are not specific to the Infineon Fiber Optics Business or changes resulting from conditions affecting the industry in which Finisar operates, which are not specific to Finisar;
 
  •  any adverse change, result, event, development or effect arising from or relating to any change in United States generally accepted accounting principles;
 
  •  any outbreak or escalation of hostilities involving the United States or Germany or the occurrence of any act of terrorism (except acts directed specifically at the Infineon Fiber Optics Business, in the case of Infineon, or Finisar or its subsidiaries, in the case of Finisar); and
 
  •  adverse changes, conditions, events or developments which have lead to, or would reasonably be expected to lead to, losses which, in the aggregate, do not exceed  25 million.

      If adverse material changes affecting the Infineon Fiber Optics Business occur, but Finisar must still complete the acquisition, Finisar’s stock price may suffer.

 
The acquisition will result in substantial dilution to our current stockholders.

      The issuance of shares of Finisar common stock in connection with the acquisition will significantly dilute the voting power and ownership percentage of our existing stockholders. In connection with the transaction, we will issue to Infineon shares of Finisar common stock representing, as of June 30, 2004, approximately 38% of the outstanding shares of Finisar common stock, on a post-transaction basis. Immediately following the acquisition, our existing stockholders will hold approximately 62% of our outstanding equity.

 
The number of shares issuable in connection with the acquisition will not be adjusted, even if there is a change in the price of our common stock.

      The number of shares to be issued in connection with the acquisition is fixed and will not be adjusted based upon changes in the value of Finisar common stock. As a result, before the completion of the acquisition, the value of the Finisar common stock to be issued to Infineon in the transaction will vary as the market price of the Finisar common stock changes, while the value of the assets purchased from Infineon will be unaffected by these factors.

      For example, on April 29, 2004, the date of the purchase agreement, the value of the Finisar common stock to be issued to Infineon in connection with the acquisition, as measured by the closing sales price of Finisar common stock on such date, was approximately $244.5 million, and on                     , 2004, the value of the Finisar common stock to be issued to Infineon, as measured by the closing sales price of Finisar common stock on such date, was approximately $           million. At the time of the annual meeting of Finisar stockholders, Finisar stockholders will not know the specific dollar value of the Finisar common stock to be issued to Infineon in exchange for the acquisition of the Infineon Fiber Optics Business.

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Future sales of substantial amounts of Finisar common stock by Infineon could cause the market price for Finisar common stock to significantly decline.

      Subject to certain restrictions on transfer which apply following completion of the acquisition, Infineon may sell substantial amounts of Finisar common stock in the public market or in private sales which could cause the market price of Finisar common stock to fall, and could make it more difficult for us to raise capital through public offerings or other sales of our capital stock. Additionally, Infineon will have certain registration rights with respect to the Finisar common stock issued to it in connection with the acquisition, which will increase the number of shares of Finisar common stock available for resale in the public market.

Risks Related to the Combined Company Following the Acquisition

      The following risks relate specifically to the impact of the acquisition on the continuing business operations of the combined company.

 
The combined company will have a history of losses and may experience losses in the future.

      Finisar and the Infineon Fiber Optics Business have each experienced losses in the past and we expect that the combined company will continue to experience losses in the future due to significant costs and operating expenses. In order to achieve profitability, the combined company will need to generate significant revenues to achieve profitability. We cannot be certain that the combined company will be able to achieve or sustain profitability in the future. A failure by the combined company to significantly increase revenue and substantially reduce costs would adversely affect the business and operating results of Finisar.

 
Following the acquisition, the rate at which Finisar utilizes its cash resources will significantly increase, which may adversely affect Finisar’s financial condition.

      Following the acquisition, the costs and operating expenses of the combined company will be significantly greater than the costs and operating expenses of Finisar before the acquisition. As a result, the combination of Finisar and the Infineon Fiber Optics Business will substantially increase the rate at which Finisar will utilize its available cash resources. Failure to generate substantial cost savings through the integration of the two businesses will significantly harm Finisar’s financial position.

 
As a result of the acquisition, Finisar will be a substantially larger and geographically dispersed organization, and if Finisar’s management is unable to effectively manage the combined company after the acquisition, its operating results will suffer.

      As a result of the acquisition, Finisar will acquire approximately 1,200 new employees, most of whom are located in Germany and the Czech Republic. Currently, most of Finisar’s employees are based at or near Finisar’s headquarters in Sunnyvale, California and at its manufacturing facility in Malaysia. As a result, the combined company will face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. The inability to successfully manage the substantially larger and geographically dispersed organization, or any significant delay in achieving successful management, could have a material adverse effect on the combined company and, as a result, on the market price of Finisar’s common stock.

      In addition, the expansion of our international operations which will result from the acquisition will increase our exposure to a number of other risks, including following:

  •  import or export licensing and product certification requirements;
 
  •  tariffs, duties, price controls and other restrictions on foreign currencies or trade barriers imposed by foreign countries;
 
  •  potential adverse tax consequences;
 
  •  greater difficulty in accounts receivable collection and longer collection periods;

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  •  seasonal reductions in business activity in some parts of the world;
 
  •  burdens of complying with a wide variety of foreign laws, particularly with respect to intellectual property, license requirements and environmental requirements;
 
  •  the impact of recessions in economies outside of the United States;
 
  •  unexpected changes in regulatory or certification requirements for optical systems or networks; and
 
  •  political and economic instability, terrorism and war.

      While we expect our international revenues and expenses to be denominated predominantly in U.S. dollars, a portion of our international revenues and expenses may be denominated in foreign currencies in the future. Therefore, fluctuations in the value of foreign currencies could have a negative impact on the profitability of our global operations, which would seriously harm our business, financial condition and results of operations.

 
Finisar will be dependent on Infineon for services, facilities and the supply of components following the acquisition.

      Infineon currently provides services and facilities and supplies components to its subsidiary, IF FO, under a number of agreements. Following the acquisition, certain of these agreements will remain in effect as between Infineon and IF FO (as a subsidiary of Finisar), including agreements pursuant to which:

  •  Infineon will continue to provide accounting and information services to IF FO during a transition period following the closing of the acquisition;
 
  •  Infineon will continue to supply integrated circuits to IF FO following the closing;
 
  •  Infineon will continue to supply plastic optical fiber, or POF, components to IF FO following the closing;
 
  •  Infineon will continue to provide development services related to certain materials and integrated circuits used in IF FO’s products following the closing; and
 
  •  IF FO will continue to occupy certain facilities owned by Infineon following the closing.

Finisar will be dependent on support from Infineon under these agreements for varying periods following the closing of the acquisition. Should Infineon fail, for any reason, to provide such support, the business and operating results of the combined company would likely be harmed.

 
The combined company may not be able to obtain certain patent licenses from third parties with whom Infineon currently has patent cross licenses.

      Infineon currently holds patent cross licenses with various third parties that may be applicable to the Infineon Fiber Optics Business. We cannot guarantee that the combined company will be able to obtain these patent licenses from these third parties, or that the combined company will be able to obtain these licenses on favorable terms. If the combined company is not able to obtain licenses from these third parties, we may be subject to litigation to defend against infringement claims from these third parties.

 
The combined company may face continued competition from Infineon following the acquisition.

      In connection with the acquisition, Infineon has agreed generally that it will not compete with the fiber optics business to be acquired by Finisar for a period of three years following the completion of the transaction. There are a number of circumstances, however, in which Infineon will be permitted to compete with the combined company. In particular, Infineon will be permitted, subject to certain restrictions, to invest in certain businesses that may compete with the combined company. Further, Infineon will be permitted to compete with the combined company outside of the scope of the business to be acquired by Finisar from Infineon. Any of these activities may have a negative impact on the ability of the combined company to sell its products and, therefore, have a negative effect on its operating results.

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If Finisar is unable to successfully integrate Infineon employees into the Finisar corporate and employee culture after the acquisition, potential synergies could be lost or diminished.

      The combined company will face challenges inherent in merging distinct employee and corporate cultures into an integrated whole. The inability to successfully integrate employee and corporate cultures, or any significant delay in achieving a successful integration, could adversely affect the combined company’s ability to retain and attract personnel, could result in the loss or decrease of efficiency and/or the synergies expected to be achieved as a result of the acquisition, and could have a material adverse effect on the combined company and the market price of Finisar’s common stock after the completion of the transactions.

 
If Finisar is unable to reach agreement with various employee unions and works councils, it could materially affect the ability of the combined company to function effectively.

      It is possible that various issues regarding terms of employment pursuant to collective bargaining agreements and/or agreements with works councils will not be successfully resolved, or that such resolutions will be delayed. As a result, employee relations could suffer after the acquisition, which could have a material adverse effect on the combined company.

 
The combined company may incur costs and experience disruptions complying with environmental laws and regulations.

      The manufacturing operations to be acquired by Finisar in the acquisition involve the use of various hazardous materials and will be subject to a variety of governmental laws and regulations related to the use, storage, recycling, labeling, reporting, treatment, transportation, handling, discharge and disposal of such hazardous materials. Although we believe that the operations of the Infineon Fiber Optics Business conform to presently applicable environmental laws and regulations, we may incur costs in order to comply with current or future environmental laws and regulations, including costs associated with permitting, investigation and remediation of hazardous materials and installation of capital equipment relating to pollution abatement, production modification and/or hazardous materials management. Although Infineon has agreed to indemnify us against losses arising from pre-existing conditions, such indemnification is subject to various conditions and limitations, and any failure of the former Infineon Fiber Optics Business to comply with environmental laws and regulations could have a material adverse effect on our operations.

 
The acquisition may result in a substantial annual limitation on our net operating loss carry forwards and tax credits.

      As of April 30, 2004, we had federal net operating loss carryforwards of approximately $320.1 million and state net operating loss carryforwards of approximately $149.0 million. The issuance of our common stock in connection with the acquisition of the Infineon Fiber Optics Business may result in a “change of ownership” of Finisar for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). If a “change of ownership” occurs, our ability to utilize our net operating loss carryforwards and tax credits in the future could be subject to a substantial annual limitation. In this event, we could experience increased liability for income taxes and some of our net operating losses and tax credits could expire unutilized.

 
The concentration of ownership of shares of Finisar common stock and certain provisions of the stockholder agreement entered into by Finisar and Infineon could delay or prevent a change of control of Finisar.

      Upon completion of the acquisition of the Infineon Fiber Optics Business, Infineon will own shares of Finisar common stock representing, as of June 30, 2004, approximately 38% of the outstanding shares of Finisar common stock on a post-transaction basis. As a result of its ownership position, Infineon will be able to substantially influence the outcome of matters requiring stockholder approval. Pursuant to the stockholder agreement entered into by Finisar and Infineon, Infineon will be obligated to vote its shares in favor of the election of directors designated by the Finisar board of directors. The concentration of ownership of our shares

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of common stock, combined with the voting requirements for the election of directors contained in the stockholder agreement, could have the effect of delaying or preventing a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, unless the transaction is approved by the board of directors.

Risks Related to Finisar

      The following risks related to Finisar’s current business will also apply to the business operations of the combined company following the acquisition of the Infineon Fiber Optics Business and, in some cases, may be exacerbated as a result of the acquisition.

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

      We incurred net losses of $113.8 million, $619.8 million and $218.7 million in our fiscal years ended April 30, 2004, 2003 and 2002, respectively. Our operating results for future periods are subject to numerous uncertainties, and we cannot assure you that we will be able to achieve or sustain profitability.

      Our quarterly and annual operating results have fluctuated substantially in the past and are likely to fluctuate significantly in the future due to a variety of factors, some of which are outside of our control. Accordingly, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future performance. Some of the factors that could cause our quarterly or annual operating results to fluctuate include market acceptance of our products, market demand for the products manufactured by our customers, the introduction of new products and manufacturing processes, manufacturing yields, competitive pressures and customer retention.

      We may experience a delay in generating or recognizing revenues for a number of reasons. Orders at the beginning of each quarter typically represent a small percentage of expected revenues for that quarter and are generally cancelable at any time. Accordingly, we depend on obtaining orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure to ship these products by the end of a quarter may adversely affect our operating results. Furthermore, our customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified timeframes without significant penalty. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business. It is likely that in some future quarters our operating results will again decrease from the previous quarter or fall below the expectations of securities analysts and investors. In this event, it is likely that the trading price of our common stock would significantly decline.

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

      We will be required to generate cash sufficient to pay our indebtedness and other liabilities, including all amounts due on our outstanding 2 1/2% and 5 1/4% convertible subordinated notes due 2010 and 2008, respectively, and to conduct our business operations. We may not be able to cover our anticipated debt service obligations from our cash flow. This may materially hinder our ability to make payments on the notes. Our ability to meet our future debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Accordingly, we cannot assure you that we will be able to make required principal and interest payments on the notes when due.

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

      We believe that our existing balances of cash, cash equivalents and short-term investments will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months.

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We may, however, require additional financing to fund our operations in the future or to repay the principal of our outstanding 2 1/2% and 5 1/4% convertible subordinated notes due 2010 and 2008, respectively. The significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we continue to experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, we could be required to significantly reduce or restructure our business operations.
 
Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or non-cancelable purchase commitments.

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

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

      We experienced a significant decline in revenues and operating results during fiscal 2002. While revenues recovered to some extent in fiscal 2003 and fiscal 2004, they have not yet reached levels required to operate on a profitable basis due primarily to higher fixed expenses related to a number of acquisitions, low gross margins and continued high levels of spending for research and development in anticipation of future revenue growth. While we continue to expect future revenue growth, we have taken steps to reduce our operating expenses in order to conserve our cash, and we may be required to take further action to reduce expenses. These expense reduction measures may adversely affect our ability to market our products, introduce new and improved products and increase our revenues, which could adversely affect our business and cause the price of our stock to decline. In order to be successful in the future, we must reduce our operating and product expenses, while at the same time completing our key product development programs and penetrating new customers.

 
We are dependent on widespread market acceptance of two product families, and our revenues will decline if the market does not continue to accept either of these product families.

      We currently derive substantially all of our revenue from sales of our optical subsystems and components and network test and monitoring systems. We expect that revenue from these products will continue to account for substantially all of our revenue for the foreseeable future. Accordingly, widespread acceptance of these products is critical to our future success. If the market does not continue to accept either our optical subsystems and components or our network test and monitoring systems, our revenues will decline significantly. Factors that may affect the market acceptance of our products include the continued growth of the markets for LANs, SANs, and MANs and, in particular, Gigabit Ethernet and Fibre Channel-based technologies, as well as the performance, price and total cost of ownership of our products and the availability, functionality and price of competing products and technologies.

      Many of these factors are beyond our control. In addition, in order to achieve widespread market acceptance, we must differentiate ourselves from our competition through product offerings and brand name recognition. We cannot assure you that we will be successful in making this differentiation or achieving widespread acceptance of our products. Failure of our existing or future products to maintain and achieve widespread levels of market acceptance will significantly impair our revenue growth.

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We depend on large purchases from a few significant customers, and any loss, cancellation, reduction or delay in purchases by these customers could harm our business.

      A small number of customers have accounted for a significant portion of our revenues. For example, sales to our top three customers represented 39% of our revenues in fiscal 2004, and sales to Cisco Systems represented 22%. The Infinion Fiber Optics Business also has depended upon a small number of customers for a significant portion of its 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 limiting the number of our potential customers. Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically important to our business. We cannot assure you that we will be able to retain our largest customers, that we will be able to attract additional customers or that our customers will be successful in selling their products that incorporate our products. We have in the past experienced delays and reductions in orders from some of our major customers. In addition, our customers have in the past sought price concessions from us, and we expect that they will continue to do so in the future. Cost reduction measures that we have implemented during the past several quarters, and additional action we may take to reduce costs, may adversely affect our ability to introduce new and improved products which may, in turn, adversely affect our relationships with some of our key customers. Further, some of our customers may in the future shift their purchases of products from us to our competitors or to joint ventures between these customers and our competitors. The loss of one or more of our largest customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with additional customers or future price concessions that we may make could significantly harm our business.

 
Because we do not have long-term contracts with our customers, our customers may cease purchasing our products at any time if we fail to meet our customers’ needs.

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

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

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

 
Our market is subject to rapid technological change, and to compete effectively we must continually introduce new products that achieve market acceptance.

      The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards with respect to the protocols used in data communications networks. We expect that new technologies will emerge as competition and the need for higher and more cost-effective bandwidth increases. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. In addition, a slowdown in demand for existing products ahead of a new product introduction could result in a writedown in the value of inventory on hand related to existing products. We have in the past experienced a slowdown in demand for existing products and delays in new product development and such delays may occur in the future. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in the expectation of a new product release or if there is any delay in development or introduction of our new products or enhancements of our products, our operating results would suffer. We also may not be able to

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develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:

  •  changing product specifications and customer requirements;
 
  •  unanticipated engineering complexities.
 
  •  expense reduction measures we have implemented, and others we may implement, to conserve our cash and attempt to accelerate our return to profitability;
 
  •  difficulties in hiring and retaining necessary technical personnel;
 
  •  difficulties in reallocating engineering resources and overcoming resource limitations; and
 
  •  changing market or competitive product requirements.

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

 
Continued competition in our markets may lead to a reduction in our prices, revenues and market share.

      The markets for optical components and subsystems and network test and monitoring systems for use in LANs, SANs and MANs are highly competitive. Our current competitors include a number of domestic and international companies, many of which have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. Other companies, including some of our customers, may enter the market for optical subsystems and network test and monitoring systems. We may not be able to compete successfully against either current or future competitors. Increased competition could result in significant price erosion, reduced revenue, lower margins or loss of market share, any of which would significantly harm our business. For optical subsystems, we compete primarily with Agilent Technologies, Inc., Infineon, JDS Uniphase Corporation, Luminent, Inc., Molex, Optical Communications Products, Inc., Picolight, Inc., Premise Networks and Stratos Lightwave, Inc. For network test and monitoring systems, we compete primarily with Ancot Corporation, I-Tech Corporation, Network Associates, Inc. and Xyratex International. Our competitors continue to introduce improved products with lower prices, and we will have to do the same to remain competitive. In addition, some of our current and potential customers may attempt to integrate their operations by producing their own optical components and subsystems and network test and monitoring systems or acquiring one of our competitors, thereby eliminating the need to purchase our products. Furthermore, larger companies in other related industries, such as the telecommunications industry, may develop or acquire technologies and apply their significant resources, including their distribution channels and brand name recognition, to capture significant market share.

 
Decreases in average selling prices of our products may reduce gross margins.

      The market for optical subsystems is characterized by declining average selling prices resulting from factors such as increased competition, overcapacity, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. We have in the past experienced, and in the future may experience, substantial period-to-period fluctuations in operating results due to declining average selling prices. We anticipate that average selling prices will decrease in the future in response to product introductions by competitors or us, or by other factors, including price pressures from significant customers. Therefore, in order to achieve and sustain profitable operations, we must continue to develop and introduce on a timely basis new products that incorporate features that can be sold at higher average selling

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prices. Failure to do so could cause our revenues and gross margins to decline, which would result in additional operating losses and significantly harm our business.

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

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

      Our gross profit margins vary among our product families, and are generally higher on our network test and monitoring systems than on our optical subsystems. Our gross margins are generally lower for newly introduced products and improve as unit volumes increase. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and our ability to reduce product costs, and these fluctuations are expected to continue in the future.

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

      Since October 2000, we have completed the acquisition of six privately-held companies and certain businesses and assets from three other companies, including the recently completed acquisition of the VCSEL Optical Products business unit from Honeywell International Inc. We continue to review opportunities to acquire other businesses, products or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities, and we from time to time make proposals and offers, and take other steps, to acquire businesses, products and technologies. Several of our past acquisitions, as well as our pending acquisition of the Infineon Fiber Optics Business, have been material, and acquisitions that we may complete in the future may be material. In six of our nine acquisitions, we issued stock as all or a portion of the consideration. We are obligated to release additional shares from escrow and to issue additional shares in connection with one of the acquisitions upon the occurrence of certain contingencies and the achievement of certain milestones, and we have agreed to issue shares in connection with the pending acquisition of the Infineon Fiber Optics Business. The issuance of stock in these and any future transactions has or would dilute stockholders’ percentage ownership.

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

  •  problems assimilating the purchased operations, technologies or products;
 
  •  unanticipated costs associated with the acquisition;
 
  •  diversion of management’s attention from our core business;
 
  •  adverse effects on existing business relationships with suppliers and customers;
 
  •  risks associated with entering markets in which we have no or limited prior experience; and
 
  •  potential loss of key employees of purchased organizations.

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

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acquisitions diminish in the future, we may be required to record additional write downs of goodwill, intangible assets or other assets associated with such acquisitions, which would adversely affect our operating results.
 
Our customers often evaluate our products for long and variable periods, which causes the timing of our revenues and results of operations to be unpredictable.

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

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

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

  •  increased risks related to the operations of our manufacturing facilities in Malaysia and China;
 
  •  greater risks of disruption in the operations of our Asian contract manufacturers and more frequent instances of shipping delays; and
 
  •  the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities.
 
We may lose sales if our suppliers fail to meet our needs.

      We currently purchase several key components used in the manufacture of our products from single or limited sources. We 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 generally have no long-term contracts for any of our components. As a result, a supplier can discontinue supplying components to us without penalty. If a supplier discontinued supplying a component, our business may be harmed by the resulting product manufacturing and delivery delays. We are also subject to potential delays in the development by our suppliers of key components which may affect our ability to introduce new products.

      We use rolling forecasts based on anticipated product orders to determine our component requirements. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. If we overestimate our component requirements, we may have excess inventory, which would increase our costs. If

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we underestimate our component requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would significantly harm our business.
 
We have made and may continue to make strategic investments which may not be successful and may result in the loss of all or part of our invested capital.

      Through fiscal 2004, we recorded minority equity investments in early-stage technology companies, totaling $43.5 million. We intend to review additional opportunities to make strategic equity investments in pre-public companies where we believe such investments will provide us with opportunities to gain access to important technologies or otherwise enhance important commercial relationships. We have little or no influence over the early-stage companies in which we have made or may make these strategic, minority equity investments. Each of these investments in pre-public companies involves a high degree of risk. We may not be successful in achieving the financial, technological or commercial advantage upon which any given investment is premised, and failure by the early-stage company to achieve its own business objectives or to raise capital needed on acceptable economic terms could result in a loss of all or part of our invested capital. In fiscal 2003, we wrote off $12.0 million in two investments which became impaired. In fiscal 2004, we wrote off $1.6 million in two additional investments, and we may be required to write off all or a portion of the $24.6 million in such investments remaining on our balance sheet as of April 30, 2004 in future periods.

 
We are subject to pending legal proceedings.

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

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The new requirements of Section 404 of the Sarbanes-Oxley Act will increase our operating expenses, and our pending acquisition of the Infineon Fiber Optics Business will increase the cost of compliance and increase the risks of achieving timely compliance

      Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual review and evaluation of our internal control systems, and attestation of these systems by our independent auditors. We are currently undergoing a review of our internal control systems and procedures and considering improvements that will be necessary in order for us to comply with the requirements of Section 404 by the end of our fiscal year ending April 30, 2005. This evaluation process will require us to hire additional personnel and outside advisory services and will result in additional accounting and legal expenses, all of which will cause our operating expenses to increase. In addition, the evaluation and attestation processes required by Section 404 are new and untested, and we may encounter problems or delays in completing the implementation of improvements and receiving a favorable review and attestation by our independent auditors. Our pending acquisition of the Infineon Fiber Optics Business will increase the cost and complexity of our compliance under Section 404 and increase the risks of achieving timely compliance.

 
Because of competition for technical personnel, we may not be able to recruit or retain necessary personnel.

      We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, technical, sales and marketing, finance and manufacturing personnel. In particular, we may need to increase the number of technical staff members with experience in high-speed networking applications as we further develop our product lines. Competition for these highly skilled employees in our industry is intense. Our failure to attract and retain these qualified employees could significantly harm our business. The loss of the services of any of our qualified employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel could hinder the development and introduction of and negatively impact our ability to sell our products. In addition, employees may leave our company and subsequently compete against us. Moreover, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We have been subject to claims of this type and may be subject to such claims in the future as we seek to hire qualified personnel. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits.

 
Our products may contain defects that may cause us to incur significant costs, divert our attention from product development efforts and result in a loss of customers.

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

 
Our failure to protect our intellectual property may significantly harm our business.

      Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements to establish and protect our proprietary rights. We license certain of our proprietary technology, including our digital diagnostics technology, to customers who include current and potential competitors, and we rely largely on provisions of our licensing agreements to protect our intellectual property rights in this technology. Although a number of patents have been issued to us, we have obtained a number of other patents as a result of our acquisitions, and we have filed applications for additional patents, we cannot assure you that any patents

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will issue as a result of pending patent applications or that our issued patents will be upheld. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources and could significantly harm our business.
 
Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products.

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

 
Our executive officers and directors and entities affiliated with them own a large percentage of our voting stock and Infineon will acquire a large block of our common stock upon consummation of the pending acquisition, which will result in a substantial concentration of control and could have the effect of delaying or preventing a change in our control.

      As of June 30, 2004, our executive officers, directors and entities affiliated with them beneficially owned approximately 36.3 million shares of our common stock, or approximately 16.1% of the outstanding shares. These stockholders, acting together, may be able to substantially influence the outcome of matters requiring approval by stockholders, including the election or removal of directors and the approval of mergers or other business combination transactions. In addition, upon the completion of the pending acquisition of the Infineon Fiber Optics Business, Infineon will hold approximately 38% of our outstanding stock. Accordingly, following the acquisition, Infineon will be able to substantially influence the outcome of matters requiring stockholder approval, and Infineon, our executive officers, directors and entities affiliated with them, voting together, would be able to control the outcome of such matters. 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.

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Delaware law, our charter documents and our stockholder rights plan contain provisions that could discourage or prevent a potential takeover, even if such a transaction would be beneficial to our stockholders.

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

  •  authorizing the board of directors to issue additional preferred stock;
 
  •  prohibiting cumulative voting in the election of directors;
 
  •  limiting the persons who may call special meetings of stockholders;
 
  •  prohibiting stockholder actions by written consent;
 
  •  creating a classified board of directors pursuant to which our directors are elected for staggered three-year terms;
 
  •  permitting the board of directors to increase the size of the board and to fill vacancies;
 
  •  requiring a super-majority vote of our stockholders to amend our bylaws and certain provisions of our certificate of incorporation; and
 
  •  establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

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

      In addition, in September 2002, our board of directors adopted a stockholder rights plan under which our stockholders received one share purchase right for each share of our common stock held by them. Subject to certain exceptions, the rights become exercisable when a person or group (other than certain exempt persons) acquires, or announces its intention to commence a tender or exchange offer upon completion of which such person or group would acquire, 20% or more of our common stock without prior board approval. Should such an event occur, then, unless the rights are redeemed or have expired, our stockholders, other than the acquiror, will be entitled to purchase shares of our common stock at a 50% discount from its then-Current Market Price (as defined) or, in the case of certain business combinations, purchase the common stock of the acquiror at a 50% discount. Because the acquisition of the Infineon Fiber Optics Business was approved by our board of directors, the rights will not become exercisable as a result of the issuance of our common stock to Infineon pursuant to the purchase agreement.

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

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

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

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certain that the insurance we maintain against these events would be adequate, in which case our business would suffer.

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

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

  •  trends in our industry and the markets in which we operate;
 
  •  changes in the market price of the products we sell;
 
  •  changes in financial estimates and recommendations by securities analysts;
 
  •  acquisitions and financings;
 
  •  quarterly variations in our operating results;
 
  •  the operating and stock price performance of other companies that investors in our common stock may deem comparable; and
 
  •  purchases or sales of blocks of our common stock.

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

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THE ANNUAL MEETING OF FINISAR STOCKHOLDERS

General

      Finisar is furnishing this proxy statement to holders of its common stock in connection with the solicitation of proxies by the board of directors for use at the 2004 annual meeting of stockholders to be held on                     , 2004, and at any adjournment, postponement or continuation thereof. This proxy statement is first being furnished to stockholders of Finisar on or about                     , 2004.

Date, Time and Place

      The annual meeting of stockholders will be held on                     , 2004, at 10:00 a.m., local time, at the Prime Hotel, 1300 Chesapeake Terrace, Sunnyvale, California 94089.

Matters to be Considered at the Annual Meeting

      At the annual meeting, we are asking holders of Finisar common stock to: (1) approve the issuance of Finisar common stock in connection with the acquisition of the Infineon Fiber Optics Business, (2) elect two Class II directors to hold office for a three-year term and until their respective successors are elected and qualified, (3) approve an amendment to Finisar’s Certificate of Incorporation, (4) approve an amendment to the Finisar 1999 Employee Stock Purchase Plan, and (5) ratify the appointment of Ernst & Young LLP as Finisar’s independent auditors for the fiscal year ending April 30, 2005.

Record Date

      Finisar has fixed the close of business on                     , 2004 as the record date for determination of Finisar stockholders entitled to notice of and to attend and vote at the annual meeting.

Vote Required

      As of the close of business on                     , 2004, there were                      shares of Finisar common stock outstanding and entitled to vote. A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present at the annual meeting if shares representing a majority of the votes entitled to be cast are represented in person or by proxy. If a quorum is not present at the annual meeting, we expect that the meeting will be adjourned or postponed to solicit additional proxies. Votes for and against, abstentions and “broker non-votes” will each count as being present to establish a quorum. A “broker non-vote” occurs when a broker is not permitted to vote because the broker does not have instructions from the beneficial owner of the shares.

      The approval of the issuance of Finisar common stock in connection with the acquisition of the Infineon Fiber Optics Business, the amendment to the Finisar 1999 Employee Stock Purchase Plan and the ratification of the appointment of Ernst & Young LLP as Finisar’s independent auditors for the fiscal year ending April 30, 2005 each require the affirmative vote of holders of shares representing a majority of the shares of Finisar common stock represented in person or by proxy and entitled to vote at the annual meeting. For the election of directors, the two persons receiving the highest number of votes will be elected. The affirmative vote of the holders of a majority of the shares of Finisar common stock issued and outstanding as of the record date is required to approve the proposal to amend Finisar’s Certificate of Incorporation. Jerry S. Rawls, our President and Chief Executive Officer, and Frank H. Levinson, our Chairman of the Board and Chief Technical Officer, who collectively held approximately 15.5% of our outstanding common stock on June 30, 2004, have entered into agreements to vote their shares in favor of the issuance of Finisar common stock in connection with the acquisition of the Infineon Fiber Optics Business.

Voting of Proxies; Abstentions; and Broker Non-Votes

      All shares of Finisar common stock represented by properly executed proxies received before or at the annual meeting will, unless the proxies are revoked, be voted in accordance with the instructions indicated on

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those proxies. If no instructions are indicated on a properly executed proxy card, the shares will be voted “FOR” approval of the issuance of shares of Finisar common stock in connection with the acquisition of the Infineon Fiber Optics Business, “FOR” the election of management’s nominees for membership on our board of directors and “FOR” the other proposals discussed in this proxy statement. You are urged to mark the box on the card to indicate how to vote your shares.

      If your shares are held in an account at a brokerage firm or bank, that brokerage firm or bank will not be permitted to vote your shares with respect to any of the proposals unless you provide instructions as to how to vote your shares. If an executed proxy card is returned by a broker or bank holding shares which indicates that the broker or bank has not received voting instructions and does not have discretionary authority to vote on the proposals, the shares will be considered present at the meeting for purposes of determining the presence of a quorum, but will not be considered to have been voted in favor of the proposals. Your broker or bank will vote your shares on those proposals only if you provide instructions on how to vote by following the information provided to you by your broker. Please note that if your shares are held of record by a broker, bank or nominee and you wish to vote at the meeting, you will not be permitted to vote in person unless you first obtain a proxy issued in your name from the record holder.

      A properly executed proxy marked abstain, although counted for purposes of determining whether there is a quorum and for purposes of determining the aggregate voting power and number of shares represented and entitled to vote at the stockholders’ meeting, will not be voted. Accordingly, because the affirmative vote of holders of a majority of the shares of Finisar common stock issued and outstanding as of the record date is required for approval of the amendment of our Certificate of Incorporation, a proxy marked abstain, as well as a failure to vote or a broker non-vote, will have the effect of a vote against that proposal at the annual meeting.

      A stockholder may revoke his or her proxy at any time before it is voted by:

  •  notifying in writing the Secretary of Finisar at 1308 Moffet Park Drive, Sunnyvale, California 94089, that you wish to revoke your proxy;
 
  •  granting a subsequently dated proxy; or
 
  •  appearing in person and voting at the annual meeting if you are a holder of record.

      Attendance at the annual meeting will not in and of itself constitute revocation of a proxy.

Voting By Telephone or Via the Internet

      If you hold your shares directly registered in your name with American Stock Transfer & Trust Company, you may vote by telephone or via the Internet. To vote by telephone, call 1-800-PROXIES. Instructions for voting via the Internet are set forth on the enclosed proxy card if you hold your shares directly registered in your name with American Stock Transfer & Trust Company. Many banks and brokerage firms have a process for their beneficial owners to provide instructions over the telephone or via the Internet. Your voting form from your broker or bank will contain instructions for voting.

      Votes submitted by telephone or via the Internet must be received by 11:59 p.m. Eastern Time on                     , 2004. Submitting your proxy by telephone or via the Internet will not affect your right to vote in person should you decide to attend the annual meeting.

Solicitation of Proxies

      Finisar will bear the cost of soliciting proxies. In addition to soliciting stockholders by mail, we will request banks and brokers, and other custodians, nominees and fiduciaries, to solicit their customers who hold our stock registered in the names of such persons and will reimburse them for their reasonable, out-of-pocket costs. We may use the services of our officers, directors and others to solicit proxies, personally or by telephone, without additional compensation.

      Finisar has retained MacKenzie Partners, Inc. to assist in the solicitation of proxies. Finisar will pay MacKenzie Partners approximately $12,500 for its services, in addition to reimbursement for its out-of-pocket expenses.

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PROPOSAL 1:

APPROVAL OF THE ISSUANCE OF FINISAR COMMON STOCK IN CONNECTION WITH THE

ACQUISITION OF THE INFINEON FIBER OPTICS BUSINESS

Background of the Acquisition

      Since October 2000, we have completed acquisitions of six privately-owned companies and of certain businesses and assets from three other companies, including the acquisition of the VCSEL Optical Products business unit from Honeywell International Inc. that was completed in March 2004. We continuously review opportunities to acquire other businesses, products and technologies that would complement our current products or technologies, expand the breadth of our markets or enhance our technical capabilities, and we from time to time make proposals and offers, and take other steps, to acquire businesses, products and technologies.

      On March 20, 2002, Jerry S. Rawls, Finisar’s President and Chief Executive Officer, met with Erwin Wolf, Head of the Infineon Fiber Optics Group, at a trade conference in Anaheim, California and discussed, generally, the possibility of a strategic combination of Finisar and the Infineon Fiber Optics Business.

      On November 20, 2002, Mr. Wolf and Mark Tyndall, Vice President, Business Development and Strategic Marketing of Infineon’s Communications Business Group, met with Mr. Rawls at Finisar’s offices in Sunnyvale, California and again discussed the possibility of a strategic combination. No further discussions were planned at that time.

      On September 23, 2003, Mr. Rawls sent a letter to Ulrich Schumacher, then the Chief Executive Officer of Infineon, suggesting that the parties meet again to discuss a potential strategic combination.

      On November 3, 2003, Mr. Tyndall and Thomas Seifert, then Chief Executive Officer of Infineon’s Wireline Communications Business Group, met with Mr. Rawls at Finisar’s offices in Sunnyvale, California regarding a potential combination, and the parties tentatively agreed that a further meeting to explore a possible combination in more depth would be appropriate.

      On November 28, 2003, Mr. Tyndall of Infineon advised Mr. Rawls by telephone that Infineon had determined to engage an investment banking firm to conduct a formal process for soliciting potential purchasers of the Infineon Fiber Optics Business.

      On December 23, 2003, a representative of Citigroup Global Markets Deutschland AG & Co., KGaA (together with its affiliates, “Citigroup”) contacted Mr. Rawls of Finisar, advised him that Citibank had been engaged as Infineon’s financial advisor and generally described the procedure that Infineon intended to implement regarding the solicitation of potential purchasers.

      On January 7, 2004, Citigroup delivered to Finisar a proposed form of confidentiality and nondisclosure agreement with respect to Finisar’s review of confidential information of Infineon. On January 14 and 15, 2004, Finisar and Citigroup negotiated certain provisions of the agreement, and on January 15, 2004, Finisar and Infineon executed the agreement.

      On January 16, 2004, Citigroup forwarded to Finisar a confidential information memorandum regarding the Infineon Fiber Optics Business.

      On January 19, 2004, Citigroup forwarded to Finisar a letter describing the procedures that Infineon intended to follow with respect to the submission of proposals to acquire the Infineon Fiber Optics Business, due diligence review by potential purchasers and other process-related matters.

      On February 4, 2004, Finisar entered into an engagement letter with Deutsche Bank pursuant to which Deutsche Bank agreed to act as Finisar’s financial advisor in connection with the potential acquisition of the Infineon Fiber Optics Business.

      On February 6, 2004, Finisar delivered to Infineon a letter dated February 5, 2004 containing a preliminary, non-binding indication of interest in acquiring the Infineon Fiber Optics Business.

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      On February 8, 2004, in response to a request from Citigroup, Deutsche Bank, on behalf of Finisar, delivered to Citigroup a written clarification of Finisar’s February 5, 2004 letter.

      On February 9, 2004, Citigroup advised Deutsche Bank that, on the basis of its preliminary indication of interest, Finisar would be invited to proceed with preliminary on-site due diligence at the facilities of the Infineon Fiber Optics Business in Europe.

      On February 12, 2004, Citigroup delivered to Finisar a letter setting forth a proposed schedule for management presentations, site visits and data room access. Thereafter, Citigroup and Deutsche Bank had several telephone conversations and exchanged correspondence regarding the arrangements for such meetings.

      Between February 17, 2004 and February 20, 2004, Mr. Rawls, Stephen K. Workman, Finisar’s Senior Vice President and Chief Financial Officer, Fariba Danesh, Finisar’s Senior Vice President and Chief Operating Officer, Anders Olsson, Finisar’s Senior Vice President, Engineering, Gabriel P. Kralik, Finisar’s General Counsel, and representatives of Deutsche Bank, held a series of meetings with representatives of Infineon and Citigroup.

      Between February 17, 2004 and February 20, 2004, Messrs. Workman and Kralik, together with representatives of Deutsche Bank, Ernst & Young, Finisar’s independent auditors, Taylor Wessing, Finisar’s German counsel, and Giese & Partner, Finisar’s Czech counsel, reviewed documents made available by Infineon at a data room in Munich.

      On February 18, 2004, representatives from Finisar, Deutsche Bank, Taylor Wessing and Ernst & Young attended a management presentation by Arno Paetzold, Infineon’s Senior Director of Mergers & Acquisitions, Mr. Wolf, other senior managers of the Infineon Fiber Optics Business, including Gustav Müller, Director of Technology, Ayad Abul-Ella, Director of Modules, Gerhard Eisenacher, Director of Components, Christian Winkelmeyr, Director of Plastic Optical Fiber, Martin Schell, Head of Production, and Barbara Fischer, Head of Business Administration, and representatives of Citigroup, at Infineon’s facility in Munich at which the Infineon representatives presented an overview of the Infineon Fiber Optics Business. Thereafter, Messrs. Rawls and Olsson and Ms. Danesh visited Infineon’s facility in Regensburg, Germany. Later that evening, Messrs. Rawls and Olsson and Ms. Danesh of Finisar and representatives of Deutsche Bank met with Messrs. Paetzold, Wolf, Winkelmeyr, Schell and Müller of Infineon and representatives of Citigroup to discuss the potential acquisition transaction.

      On February 19, 2004, Messrs. Rawls and Olsson and Ms. Danesh of Finisar, together with representatives of Deutsche Bank, visited Infineon’s facility in Trutnov, Czech Republic.

      On February 20, 2004, Mr. Olsson and Ms. Danesh of Finisar visited Infineon’s facility in Munich, and Messrs. Rawls and Olsson and Ms. Danesh, together with representatives of Deutsche Bank, visited Infineon’s facility in Berlin.

      On February 23, 2004, Frank H. Levinson, Finisar’s Chairman and Chief Technical Officer, and another Finisar representative visited Infineon’s facility in Longmont, Colorado with Mr. Wolf of Infineon.

      On February 25, 2004, Finisar’s board of directors held its regular quarterly meeting. At the meeting, management and representatives of Deutsche Bank reported to the board on their preliminary discussions with Infineon regarding the potential acquisition, the results of Finisar’s preliminary due diligence review and preliminary financial analyses prepared by Deutsche Bank.

      On March 3, 2004, Citigroup delivered a draft of a proposed purchase agreement to Finisar and Deutsche Bank.

      On March 5, 2004, Messrs. Workman and Olsson and Ms. Danesh of Finisar, together with representatives of Deutsche Bank, had telephone conversations with Mr. Schell of Infineon and representatives of Citigroup regarding additional production and operational due diligence.

      On March 9, 2004, Finisar’s board of directors held a special meeting principally for the purpose of discussing the status of the potential Infineon transaction. The board discussed the strategic rationale for the potential acquisition and reviewed additional financial analyses prepared by Deutsche Bank. After its

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discussion, the board authorized management to continue discussions with Infineon and conduct additional due diligence.

      Between March 12, 2004 and March 19, 2004, Citigroup delivered drafts of various exhibits to the purchase agreement and other ancillary transaction documents to Finisar and Deutsche Bank.

      On March 15, 2004, Messrs. Rawls, Workman, Levinson and Olsson of Finisar, together with representatives of Deutsche Bank, had telephone conversations with Messrs. Abul-Ella, Schell and Winkelmeyr and Ms. Fischer of Infineon and representatives of Citigroup regarding additional financial due diligence.

      On March 22, 2004, Finisar’s board of directors held a special meeting principally for the purpose of further consideration of the potential Infineon transaction. Management made a further presentation regarding the strategic rationale of the potential acquisition, and representatives of Deutsche Bank presented and discussed updated financial analyses.

      On March 23, 2004, representatives of Deutsche Bank had telephone conversations with representatives of Citigroup regarding the status of the negotiation and due diligence process.

      On March 23, 2004, Finisar’s board of directors held another special meeting for the purpose of further consideration of the potential Infineon transaction. Representatives of Deutsche Bank reported to the board on their discussions with Citigroup, and management and the Deutsche Bank representatives presented revised financial analyses addressing issues discussed at the March 22, 2004 board meeting. After discussion, the board authorized management to proceed with discussions with Infineon and conduct additional due diligence.

      On March 24, 2004, Finisar delivered to Citigroup a proposal for the acquisition of the Infineon Fiber Optics Business, together with a revised draft of the purchase agreement.

      On March 29, 2004, Citigroup advised Deutsche Bank that, on the basis of its March 24, 2004 proposal, Finisar would be invited to proceed with further due diligence and the negotiation of definitive transaction documents with respect to the proposed acquisition.

      On April 1, 2004, Citigroup delivered to Finisar and its advisors a revised draft of the purchase agreement.

      On April 1, 2004, Deutsche Bank delivered to Citigroup a letter containing a proposed schedule for further due diligence and negotiation and a list of additional requested due diligence materials regarding Infineon.

      Between April 2, 2004 and April 20, 2004, Citigroup forwarded to Deutsche Bank for delivery to Finisar updated drafts of various exhibits to the purchase agreement and other ancillary transaction documents, which Deutsche Bank delivered to Finisar.

      On April 5, 2004, representatives of Gray Cary Ware & Freidenrich LLP (“Gray Cary”), Finisar’s United States’ counsel, and Taylor Wessing had a telephone conference with Mr. Paetzold, Rudolf von Moreau, Corporate Legal Counsel of Infineon, and representatives of Freshfields Bruckhaus Deringer (“Freshfields”), Infineon’s counsel, to discuss the process and schedule for negotiation of the purchase agreement and ancillary transaction documents.

      On April 6, 2004, Gray Cary delivered to Freshfields a memorandum identifying a number of key issues based on Infineon’s April 1 draft of the purchase agreement.

      On April 7, 2004, Messrs. Rawls, Levinson and Olsson of Finisar, together with representatives of Deutsche Bank, had a telephone conference with Messrs. Abul-Ella and Eisenacher of Infineon, and representatives of Citigroup, principally concerning Infineon’s parallel optics, or PAROLI, and bi-directional fiber transmission, or BIDI, product lines.

      On April 7, 2004, Mr. Workman of Finisar, together with representatives of Gray Cary, Taylor Wessing and Deutsche Bank, had a telephone conference with Messrs. Paetzold and von Moreau of Infineon and

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representatives of Freshfields and Citigroup to discuss and negotiate certain provisions of the draft purchase agreement.

      On April 8, 2004, Citigroup forwarded to Deutsche Bank for delivery to Finisar additional due diligence materials regarding Infineon, which Deutsche Bank delivered to Finisar.

      On April 9, 2004, Gray Cary forwarded to Infineon and its legal and financial advisors a revised draft of the purchase agreement and preliminary comments on various ancillary transaction documents.

      On April 13, 2004, Citigroup advised Deutsche Bank that Infineon was prepared to continue discussions with Finisar regarding the proposed transaction, proposed a schedule for further due diligence and negotiations and delivered a proposal regarding the scope of additional due diligence materials that it was prepared to make available to Finisar.

      Between April 14, 2004 and April 17, 2004, Finisar, Infineon and their respective financial and legal advisors had a series of telephone conversations and exchanged correspondence regarding the arrangements for further meetings for the purpose of further due diligence and negotiations.

      On April 19, 2004, Freshfields delivered to Gray Cary a request for certain information and materials in connection with Infineon’s due diligence review of Finisar.

      Between April 19, 2004 and April 29, 2004, representatives of Finisar, Infineon and their respective financial and legal advisors held a series of meetings at Infineon’s offices in Europe and Freshfields’ office in Berlin.

      On April 19, 2004, Messrs. Levinson and Olsson, other Finisar personnel and representatives of Deutsche Bank visited Infineon’s Berlin facilities and met with Infineon personnel regarding technical and operational matters principally related to the modules segment of the Infineon Fiber Optics Business.

      On April 20, 2004, Mr. Levinson and other Finisar personnel and representatives of Deutsche Bank visited Infineon’s facility in Trutnov, Czech Republic and met with Infineon personnel regarding technical and operational matters related to Infineon’s Trutnov assembly operations.

      On April 21, 2004, Messrs. Rawls and Olsson, other representatives of Finisar and representatives of Deutsche Bank visited Infineon’s facility in Regensburg, Germany and met with Infineon personnel regarding technical, operational and sales matters related to Infineon’s plastic optical fiber, or POF, operations. Also on April 21, 2004, Mr. Levinson of Finisar and representatives of Deutsche Bank visited Infineon’s facility in Berlin and met with Infineon personnel regarding technical and operational matters related to Infineon’s module operations, and other representatives of Finisar visited Infineon’s VCSEL facilities in Munich. Later on April 21, 2004, Messrs. Rawls and Levinson of Finisar met with Mr. Seifert of Infineon to discuss various aspects of the proposed transaction.

      Between April 22, 2004 and April 25, 2004, representatives of Gray Cary, Taylor Wessing and Deutsche Bank, on behalf of Finisar, and Messrs. Paetzold and von Moreau of Infineon and representatives of Freshfields and Citigroup held a series of meetings to negotiate the terms of the purchase agreement and ancillary transaction documents. Representatives of the Finisar management team and other Infineon management personnel participated in portions of these meetings and held a series of separate meetings to discuss and negotiate various business, operational and financial terms of the purchase agreement, including the number of shares of Finisar common stock to be issued to Infineon.

      On April 22, 2004, Finisar and Infineon executed a confidentiality and nondisclosure agreement with respect to Infineon’s review of confidential information of Finisar. Thereafter, Finisar provided various materials to Infineon and its advisors responsive to Freshfields’ request of April 19, 2004.

      On April 24, 2004, Finisar’s board of directors held a special meeting to discuss the status of the potential Infineon transaction. Finisar management and representatives of Deutsche Bank and Gray Cary reported to the board on the status of the ongoing negotiations and due diligence activities and presented updated financial analyses.

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      On April 24, 2004, Messrs. Rawls and Workman of Finisar and representatives of Deutsche Bank met with Messrs. Seifert, Paetzold, Wolf and Abul-Ella of Infineon and representatives of Citigroup and delivered a management overview of Finisar, its business operations and operating results.

      On April 26, 2004, Finisar and Infineon entered into a letter agreement pursuant to which Infineon agreed to negotiate exclusively with Finisar with respect to the sale of the Infineon Fiber Optics Business until April 29, 2004 and to discontinue any other negotiations then in progress.

      Between April 27, 2004 and April 29, 2004, Mr. Workman of Finisar and representatives of Gray Cary, Taylor Wessing and Deutsche Bank held a series of further meetings with Messrs. Paetzold and von Moreau of Infineon and representatives of Freshfields and Citigroup (with periodic participation by other representatives of Finisar and Infineon management) to continue negotiation of the terms of the purchase agreement and ancillary transaction documents.

      On April 28, Mr. Levinson visited the facility of ParoLink Technologies Co. Ltd. (“ParoLink”), a 56% owned joint venture of the Infineon Fiber Optics Business, located in Hsinchu, Taiwan.

      On April 29, 2004, a special meeting of Finisar’s board of directors was held. At the meeting, management and Finisar’s financial and legal advisors summarized the terms of the proposed acquisition that had been negotiated with Infineon. Management reported to the board on the financial due diligence review that had been conducted by management and Ernst & Young, Finisar’s independent auditors. A representative of Gray Cary reported on the results of the legal due diligence review and also reviewed certain key terms of the purchase agreement and ancillary transaction agreements. Finisar management and representatives of Deutsche Bank reviewed with the board updated financial analyses regarding the proposed acquisition and responded to questions from the directors. Representatives of Deutsche Bank orally delivered to the board Deutsche Bank’s opinion (subsequently confirmed in writing) that the purchase price to be paid by Finisar in the proposed transaction was fair, from a financial point of view, to Finisar. The board considered and discussed the risks and benefits of the proposed transaction, taking into account the terms of the purchase agreement and reports regarding the business, technical, financial and legal due diligence, concluded that the proposed transaction was in the best interests of Finisar and its stockholders and approved the acquisition and the purchase agreement.

      On April 29, 2004, following the Finisar board meeting, representatives of Finisar and Infineon executed and delivered the purchase agreement and ancillary transaction documents.

      On April 29, 2004, Finisar and Infineon issued a joint press release announcing the signing of the purchase agreement. Thereafter, Finisar hosted a conference call to discuss the transaction and to accept questions from representatives of the fiber optics industry and the financial community.

Recommendation of the Finisar Board of Directors

      After careful consideration, Finisar’s board of directors unanimously determined that the acquisition of the Infineon Fiber Optics Business, and the issuance of shares of Finisar common stock in consideration therefore, is fair to, and in the best interests of, Finisar and its stockholders. The Finisar board of directors unanimously recommends that Finisar stockholders vote “FOR” the issuance of shares of Finisar common stock in connection with the acquisition of the Infineon Fiber Optics Business.

Reasons for the Acquisition

      In reaching its decision, the board of directors met on several occasions, consulted with Finisar’s senior management and its financial and legal advisors, reviewed various materials and considered a number of factors, including the following:

  •  information regarding the Infineon Fiber Optics Business, its historical financial performance, operating performance and management experience;
 
  •  the views of Finisar’s senior management regarding the Infineon Fiber Optics Business and its integration with Finisar;

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  •  results of the due diligence investigation conducted by Finisar’s management, independent auditors and legal and financial advisors;
 
  •  the structure and terms of the acquisition and its potential effect on Finisar stockholder value, including the following:

  •  the number of shares of Finisar common stock to be issued in connection with the acquisition and the dilutive effect of such issuance on existing Finisar stockholders;
 
  •  estimates of the capital and resources that will be required to complete the acquisition and the integration of the Infineon Fiber Optics Business; and
 
  •  the opinion of Deutsche Bank to Finisar’s board of directors (the full text of which is attached as Annex B and which describes the assumptions made, matters considered and limitations on the review undertaken in connection with the opinion) stating that, as of April 29, 2004, the purchase price to be paid by Finisar for the proposed acquisition was fair, from a financial point of view, to Finisar, and the financial presentation made to the Finisar board of directors in connection with the delivery of the opinion;

  •  the prospects of Finisar on a stand-alone basis, as an alternative to pursuing the acquisition; and
 
  •  possible alternative means of achieving the anticipated benefits of the acquisition, including the possibility of one or more strategic combinations with other companies.

      As result of its review of this information and consideration of these and other factors, the Finisar board determined that the acquisition of the Infineon Fiber Optics Business and its combination with Finisar would create a stronger, more competitive industry participant, based on potential benefits that include:

  •  the immediate addition of substantial incremental revenue and (following a period of integration) the potential for realizing additional operating income;
 
  •  the complementary nature of the markets, products, technologies and customers of Finisar and the Infineon Fiber Optics Business;
 
  •  the more diversified product portfolio that will result from the combination of the companies’ product lines and which may help reduce period-to-period fluctuations in revenues;
 
  •  the opportunity to accelerate revenue growth as a result of being able to offer a wider range of products to a greater number of key customers;
 
  •  the potential ability of the combined entity to capitalize on complementary customer relationships and distribution channels;
 
  •  the potential ability of the combined company to effectively develop new products by sharing technologies and intellectual property;
 
  •  the potential ability to realize synergies related to:

  •  the rationalization of the combined company’s product development efforts, potentially reducing research and development expenses as a percent of revenues;
 
  •  the rationalization of operations at the combined company’s facilities, potentially reducing operating expenses; and
 
  •  the sale of more products to the same customers, potentially reducing sales and marketing expenses as a percent of revenues;

  •  the immediate expansion of Finisar’s presence in Europe;
 
  •  the acquisition of important intellectual property, including approximately 450 patent families; and
 
  •  the opportunity to strengthen Finisar’s management capabilities, particularly in the areas of marketing, engineering and operations.

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      The Finisar board also recognized a number of risks and uncertainties inherent in the proposed acquisition of the Infineon Fiber Optics Business, including:

  •  the risk that the acquisition may not be consummated;
 
  •  the risk that some or all of the potential benefits of the acquisition may not be realized;
 
  •  the risk that Finisar would not be successful in integrating the products, technologies and organizations of the two businesses;
 
  •  the risks associated with diverting management resources from day-to-day operational matters, as well as other strategic opportunities;
 
  •  the risk of management and employee disruption associated with the acquisition, including the risk that, despite the efforts of management, key personnel might not remain employed with the combined company;
 
  •  the risk that the acquisition and related integration activities may require more capital and resources than anticipated; and
 
  •  the other factors described in this proxy statement under the section titled “Risk Factors.”

      The foregoing discussion of the factors that the Finisar board of directors considered is not intended to be exhaustive, but is intended to include the material factors considered by the board. Finisar’s board of directors did not find it practical to, and did not, quantify or otherwise assign relative weight to the specific factors considered, and individual directors may have given different weight to different factors. After considering the various factors, the board of directors concluded that, on balance, the potential benefits of the acquisition to Finisar and its stockholders outweighed the risks associated with the transaction and voted unanimously to approve the acquisition and the purchase agreement and to recommend that the Finisar stockholders vote in favor of the issuance of Finisar common stock to Infineon in connection with the acquisition.

Opinion of Finisar’s Financial Advisor

      Deutsche Bank has acted as financial advisor to Finisar in connection with the acquisition. At the April 29, 2004 meeting of Finisar’s board of directors, Deutsche Bank delivered its oral opinion, subsequently confirmed in writing as of the same date, to Finisar’s board of directors to the effect that, as of the date of such opinion, based upon and subject to the assumptions made, matters considered and limits of the review undertaken by Deutsche Bank, the purchase price to be paid by Finisar for the acquisition of the Infineon Fiber Optics Business was fair, from a financial point of view, to Finisar. Based on the closing price of Finisar’s common stock on April 28, 2004 (the last trading day prior to the date of Deutsche Bank’s opinion), the equity value of the total consideration offered by Finisar to Infineon was approximately $263.3 million. The implied enterprise value for the Infineon Fiber Optics Business, computed as the common equity market value as adjusted for debt and cash, was $255 million.

      The full text of Deutsche Bank’s written opinion, dated April 29, 2004, which sets forth, among other things, the assumptions made, matters considered and limits on the review undertaken by Deutsche Bank in connection with the opinion, is attached as Annex B to this proxy statement and is incorporated herein by reference. Finisar stockholders are urged to read the Deutsche Bank opinion in its entirety. The summary of the Deutsche Bank opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the Deutsche Bank opinion.

      In connection with Deutsche Bank’s role as financial advisor to Finisar, and in arriving at its opinion, Deutsche Bank, among other things, reviewed certain publicly available financial and other information concerning Infineon, the Infineon Fiber Optics Business and Finisar and information concerning each company’s business, operations, financial forecasts (relating to the business, earnings, cash flow, assets and liabilities of each company) prepared and furnished to it by the Infineon Fiber Optics Business, Infineon and Finisar. Deutsche Bank has also held discussions with members of the senior managements of the Infineon

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Fiber Optics Business, Infineon and Finisar regarding the businesses and prospects of their respective companies, including but not limited to, the Infineon Fiber Optics Business. In addition, Deutsche Bank:

  •  compared certain financial information for Finisar and the Infineon Fiber Optics Business with similar information for selected companies whose securities are publicly traded;
 
  •  reviewed the financial terms of selected recent business acquisitions which it deemed comparable in whole or in part;
 
  •  reviewed the terms of the purchase agreement and certain related documents; and
 
  •  performed other studies and analyses and considered other factors as it deemed appropriate.

      In preparing its opinion, Deutsche Bank did not assume responsibility for the independent verification of, and did not independently verify, the accuracy or completeness of any information, whether publicly available or furnished to it, concerning the Infineon Fiber Optics Business, Infineon or Finisar, including, without limitation, any financial information, forecasts or projections considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, Deutsche Bank assumed and relied upon the accuracy and completeness of all such information. Deutsche Bank did not conduct a physical inspection of any of the properties or assets, and did not prepare or obtain any independent evaluation or appraisal of any of the assets or liabilities of the Infineon Fiber Optics Business, Infineon or Finisar. With respect to the financial forecasts and projections, including the analyses and forecasts of certain cost savings, operating efficiencies, revenue effects and financial synergies expected by Finisar to be achieved as a result of the acquisition (collectively referred to as the synergies), made available to Deutsche Bank and used in its analyses, Deutsche Bank has assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of the Infineon Fiber Optics Business, Infineon or Finisar, as the case may be, as to the matters covered thereby. In rendering its opinion, Deutsche Bank expressed no opinion as to the reasonableness of any financial data or estimates, forecasts or projections, including the synergies, or the assumptions on which they were based. Deutsche Bank’s opinion is necessarily based upon economic, market and other conditions as in effect on, and the information made available to it, or otherwise used, as of, the date of its opinion and is without regard to any market, economic, financial, currency exchange, legal or other circumstance or event of any kind or nature which may exist or occur after such date.

      In rendering its opinion, Deutsche Bank assumed that, in all respects material to its analysis:

  •  the representations and warranties of Finisar and Infineon contained in the purchase agreement were true and correct;
 
  •  Finisar and Infineon will each perform all of the covenants and agreements to be performed by it under the purchase agreement;
 
  •  all conditions to the obligations of each of Finisar and Infineon to consummate the acquisition will be satisfied without any waiver thereof;
 
  •  all material governmental, regulatory or other approvals and consents required in connection with the consummation of the acquisition will be obtained; and
 
  •  in connection with obtaining any necessary governmental, regulatory, or other approvals and consents, or any amendments, modifications or waivers to any agreements, instruments or orders to which Finisar, the Infineon Fiber Optics Business or Infineon is a party or subject or by which it is bound, no limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would be materially adverse to Finisar or the Infineon Fiber Optics Business or materially reduce the contemplated benefits of the acquisition to Finisar.

      Set forth below is a brief summary of certain financial analyses performed by Deutsche Bank in connection with its opinion and reviewed with the Finisar board of directors at its meeting on April 29, 2004:

      Analysis of Selected Publicly Traded Companies. Deutsche Bank compared financial information and commonly used valuation measurements for the Infineon Fiber Optics Business to corresponding information

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and measurements for a group of seven publicly traded companies in the fiber optics industry, which Deutsche Bank refers to as the selected companies, consisting of:

  •  Avanex Corporation;
 
  •  Bookham Technology PLC;
 
  •  Coherent Communications Systems Corp.;
 
  •  Finisar Corporation;
 
  •  JDS Uniphase Corporation;
 
  •  Oplink Communications, Inc.; and
 
  •  Optical Communication Products, Inc.

      To calculate the trading multiples for the selected companies, Deutsche Bank used publicly available information concerning historical and projected financial performance, including published historical financial information and earnings estimates reported by equity research analysts, and certain internal analyses and other financial information prepared and furnished to it by Finisar.

      Deutsche Bank’s analysis of the selected companies yielded the referral multiple ranges and the resultant implied enterprise value ranges set forth in the chart below.

                                                         
Implied
Implied Enterprise Value
Mean Enterprise Range
Referral (Excluding Median Value (Excluding JDS
Companies JDS and (Excluding JDS Range and Oplink)
Referral Multiples Multiple Range Mean Oplink) Median and Oplink) (Millions) (Millions)








Enterprise value to last twelve months revenue
    1.6x-7.0 x     4.2 x     3.2 x     4.4 x     3.4 x   $ 220-951     $ 220-624  
Enterprise value to calendar 2004E revenue
    1.3x-6.4 x     2.9 x     1.9 x     2.2 x     1.7 x     173-852       173-376  
Enterprise value to calendar 2005E revenue
    1.1x-5.5 x     2.4 x     1.6 x     1.8 x     1.7 x     173-872       173-343  

      However, because of the inherent differences between the business, operations and prospects of the Infineon Fiber Optics Business and the business, operations and prospects of the selected companies, Deutsche Bank believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the comparable company analysis and accordingly also made qualitative judgments concerning differences between the financial and operating characteristics and prospects of the Infineon Fiber Optics Business and the selected companies that would affect the public trading values of each. Accordingly, using the mean and median multiples as a general guide, Deutsche Bank calculated a range of implied enterprise values for calendar year 2004 of $200 million to $300 million based on revenue multiples for calendar year 2004 of 1.5x to 2.2x applied to 2004 estimated revenue of the Infineon Fiber Optics Business provided by Finisar’s management. Deutsche Bank compared this range of values to the implied enterprise value for the Infineon Fiber Optics Business of approximately $255 million based on the value of the transaction consideration as of April 28, 2004.

      Analysis of Selected Precedent Transactions. Deutsche Bank reviewed the financial terms, to the extent publicly available, of twelve completed mergers and acquisition transactions since December 2001 involving

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companies in the fiber optics industry, which Deutsche Bank refers to as the selected transactions. The transactions reviewed were:
         
Date Announced Acquiror Target



01/26/04
  Finisar Corporation   Honeywell International Inc. — VCSEL Optical Products
09/21/03
  Bookham Technology PLC   New Focus, Inc.
07/02/03
  Stratos Lightwave, Inc.   Sterling Holding Company
05/12/03
  Avanex Corporation   Alcatel, S.A. — Optical Components Business
05/12/03
  Avanex Corporation   Corning Incorporated — Optical Components Business
01/22/03
  EMCORE Corporation   Agere Systems, Inc. — West Coast Optoelectronics Unit
10/22/02
  Triquint Semiconductor, Inc.   Agere Systems, Inc. — Optoelectronics Business
10/07/02
  Bookham Technology PLC   Nortel Networks Corporation — Optical Transmitter, Receiver and Amplifier Business
05/23/02
  Intel Corporation   New Focus, Inc. — Tunable Laser Unit
01/24/02
  Stratos Lightwave, Inc.   Tsunami Optics, Inc.
12/19/01
  Investor AB   Unaxis Holding AG — Leybold Optics division
12/19/01
  JDS Uniphase Corporation   IBM Corporation — Optical Transceiver Business

      Deutsche Bank calculated various financial multiples based on certain publicly available information for each of the selected transactions. As noted in the chart below, Deutsche Bank in a separate analysis adjusted the equity purchase price of stock transactions to reflect changes in the acquiror’s share price since the date of the announcement. Deutsche Bank’s analysis of the selected transactions yielded the referral multiple ranges set forth in the chart below.

                         
Referral
Precedent
Transactions
Referral multiples Multiple Range Mean Median




Enterprise value to last twelve month revenue, unadjusted
    0.1x-4.7x       1.7x       0.9x  
Enterprise value to last twelve month revenue, adjusted
    0.2x-2.8x       1.3x       1.4x  

      Because the reasons for and the circumstances surrounding each of the transactions analyzed were so diverse and because of the inherent differences between the business, operations, financial conditions and prospects of the Infineon Fiber Optics Business and the business, operations, financial conditions and prospects of the companies included in the analysis, Deutsche Bank believed that that a purely quantitative precedent transactions analysis would not be particularly meaningful in the context of the acquisition. Deutsche Bank believed that the appropriate use of a precedent transactions analysis in this instance involves qualitative judgments concerning the differences between the characteristics of these transactions and the acquisition which would affect the acquisition values of the acquired companies and the Infineon Fiber Optics Business. Using mean and median multiples as a general guide, Deutsche Bank calculated a range of implied enterprise values for the last twelve months of $190 million to $310 million based on revenue multiples for the last twelve months of 1.4x to 2.3x applied to the last twelve months revenue of the Infineon Fiber Optics Business provided by management of the Infineon Fiber Optics Business. Deutsche Bank compared this range of values to the implied enterprise value for the Infineon Fiber Optics Business of approximately $255 million based on the value of the transaction consideration as of April 28, 2004.

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      All the multiples for the selected transactions were based on public information available at the time of the announcement of such transaction, without taking into account differing market and other conditions during the approximately two-year period during which the selected transactions occurred, other than adjustments made to the stock portion of the nominal transaction values for the price changes in the acquiror’s share price from the time of announcement of each of the selected transactions to the date of Deutsche Bank’s opinion.

      Premia Analysis. Deutsche Bank reviewed information related to publicly disclosed all stock, all cash and stock and cash combination transactions in the United States provided by Securities Data Corporation, involving technology companies in the $100-$500 million range between January 1, 2001 and April 25, 2004. For each transaction, Deutsche Bank reviewed the premium or discount to the acquired company’s per share market price one day prior, twenty days prior and thirty days prior to the announcement of such transaction, in each case represented by the acquisition price in such transaction. The following summarizes the results:

                         
One Day Prior Twenty Day Prior Thirty Day Prior



Mean
    38 %     44 %     57 %
Median
    32 %     33 %     48 %

      However, because of the inherent differences between the business, operations and prospects of the Infineon Fiber Optics Business and the business, operations and prospects of the companies included in the analysis, Deutsche Bank believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the premia analysis and accordingly also made qualitative judgments concerning differences between the financial and operating characteristics and prospects of the Infineon Fiber Optics Business and the companies included in the analysis that would affect the public trading values of each. Accordingly, using the mean and median multiples as a general guide, Deutsche Bank calculated a range of implied enterprise values of $250 million to $420 million based on premia ranging from 25% to 40%. Deutsche Bank compared this range of values to the implied enterprise value for the Infineon Fiber Optics Business of approximately $255 million based on the value of the transaction consideration as of April 28, 2004.

      Relative Contribution Analysis. Deutsche Bank analyzed the relative contributions of the Infineon Fiber Optics Business and Finisar to the pro forma income statement of the combined company based on Finisar’s management projections and publicly available projections for Finisar.

      Standalone Analysis. Based on the fiscal years 2004, 2005 and 2006 projections for both the Infineon Fiber Optics Business and Finisar, and not taking into account potential synergies, Deutsche Bank observed the following:

                         
Implied Enterprise
Contribution of the Value of the
Finisar’s Infineon Fiber Infineon Fiber
Contribution to Optics Business to Optics Business
Combined Company Combined Company (Millions)



Pro forma FY2004E revenue
    58 %     42 %   $ 382  
Pro forma FY2005E revenue
    64 %     36 %     291  
Pro forma FY2005E gross profit
    88 %     12 %     72  
Pro forma FY2006E revenue
    65 %     35 %     284  
Pro forma FY2006E gross profit
    78 %     22 %     149  

      However, because of the inherent uncertainties embodied in the estimates and assumptions regarding the business, operations and prospects of the combined company, Deutsche Bank believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of this contribution analysis and accordingly also made qualitative judgments concerning the financial and operating characteristics and prospects of the Infineon Fiber Optics Business and Finisar operating as a combined company. Accordingly, using the relative contribution percentages as a general guide, Deutsche Bank calculated a range of implied enterprise values of $200 million to $300 million based on a range of the contribution by the Infineon Fiber Optics Business to the combined company of 27% to 36% prior to adjusting for each company’s respective net debt position.

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Deutsche Bank compared this range of values to the implied enterprise value for the Infineon Fiber Optics Business of approximately $255 million based on the value of the transaction consideration as of April 28, 2004.

      Deutsche Bank noted that it also reviewed the contribution of each of the Infineon Fiber Optics Business and Finisar to estimated gross profit for fiscal year 2004, estimated operating income for fiscal years 2004, 2005 and 2006, and estimated EBITDA for fiscal years 2004, 2005 and 2006. The results of the analysis were not meaningful.

      Synergy Analysis. Based on the fiscal years 2005 and 2006 projections for both the Infineon Fiber Optics Business and Finisar, and assuming full realization of estimated synergies as a result of the acquisition, Deutsche Bank observed the following:

                         
Implied Enterprise
Contribution of the Value of the
Finisar’s Infineon Fiber Infineon Fiber
Contribution to Optics Business to Optics Business
Combined Company Combined Company (Millions)



Pro forma FY2005E revenue
    64 %     36 %   $ 291  
Pro forma FY2005E gross profit
    80 %     20 %     129  
Pro forma FY2006E revenue
    65 %     35 %     284  
Pro forma FY2006E gross profit
    70 %     30 %     229  
Pro forma FY2006E operating income
    41 %     59 %     751  
Pro forma FY2006E EBITDA
    56 %     44 %     420  

      However, because of the inherent uncertainties embodied in the estimates and assumptions regarding the business, operations and prospects of the combined company, Deutsche Bank believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of this contribution analysis and accordingly also made qualitative judgments concerning the financial and operating characteristics and prospects of the Infineon Fiber Optics Business and Finisar operating as a combined company. Accordingly, using the relative contribution percentages as a general guide, Deutsche Bank calculated a range of implied enterprise values of $250 million to $350 million based on a range of the contribution by the Infineon Fiber Optics Business to the combined company of 32% to 40% prior to adjusting for each company’s respective net debt position. Deutsche Bank compared this range of values to the implied enterprise value for the Infineon Fiber Optics Business of approximately $255 million based on the value of the transaction consideration as of April 28, 2004.

      Deutsche Bank noted that it also reviewed the contribution of each of the Infineon Fiber Optics Business and Finisar to estimated operating income for fiscal year 2005 and estimated EBITDA for fiscal year 2005. The results of the analysis were not meaningful.

      The above analyses exclude any non-recurring expenses relating to the acquisition due to the difficulty of quantifying and attributing non-recurring expenses relating to the acquisition, Finisar or the Infineon Fiber Optics Business. Any such expenses would only be attributable to the pro forma combined company.

      The preceding summary describes all analyses and factors that Deutsche Bank deemed material in its presentation to Finisar’s board of directors, but is not a comprehensive description of all analyses performed and factors considered by Deutsche Bank in connection with preparing its opinion. The preparation of a fairness opinion is a complex process involving the application of subjective business judgment in determining the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, is not readily susceptible to summary description. Deutsche Bank believes that its analyses must be considered as a whole and that considering any portion of its analyses and of the factors considered without considering all analyses and factors could create a misleading view of the process underlying its opinion. In arriving at its fairness determination, Deutsche Bank did not assign specific weights to any particular analyses.

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      In conducting its analyses and arriving at its opinion, Deutsche Bank used a variety of generally accepted valuation methods. The analyses were prepared solely for the purpose of enabling Deutsche Bank to provide its opinion to the Finisar board of directors as to the fairness, from a financial point of view, to Finisar of the purchase price to be paid by Finisar to Infineon in the acquisition and do not purport to be appraisals or necessarily to reflect the prices at which businesses or securities actually may be sold, which are inherently subject to uncertainty. In connection with its analyses, Deutsche Bank made, and was provided by Infineon, Finisar and management of the Infineon Fiber Optics Business with, numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond Finisar’s or Infineon’s control. Analyses based on estimates or forecasts of future results are not necessarily indicative of actual past or future values or results, which may be significantly more or less favorable than those suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of Infineon, Finisar, or their respective advisors, neither Finisar nor Deutsche Bank nor any other person assumes responsibility if future results or actual values are materially different from these forecasts or assumptions.

      The terms of the acquisition were determined through negotiations between Finisar and Infineon and were approved by the Finisar board of directors. Although Deutsche Bank provided advice to Finisar during the course of these negotiations, the decision to enter into the acquisition was solely that of the Finisar board of directors. As described above, the opinion and presentation of Deutsche Bank to the Finisar board of directors were only one of a number of factors taken into consideration by the Finisar board of directors in making its determination to approve the acquisition. Deutsche Bank’s opinion was provided to the Finisar board of directors to assist it in connection with its consideration of the acquisition and does not constitute a recommendation to any stockholder as to how to vote with respect to the acquisition or any other matter.

      Finisar selected Deutsche Bank as financial advisor in connection with the acquisition based on Deutsche Bank’s qualifications, expertise, reputation and experience in mergers and acquisitions. Finisar has retained Deutsche Bank pursuant to an engagement letter dated February 4, 2004. Deutsche Bank will be paid a reasonable and customary fee for its services as financial advisor to Finisar in connection with the acquisition, a substantial portion of which is contingent upon consummation of the acquisition.

      Regardless of whether the acquisition is consummated, Finisar has agreed to reimburse Deutsche Bank for reasonable fees and disbursements of Deutsche Bank’s counsel and Deutsche Bank’s reasonable travel and other out-of-pocket expenses incurred in connection with the acquisition or otherwise arising out of the retention of Deutsche Bank under the engagement letter.

      Finisar has also agreed to indemnify Deutsche Bank and certain related persons to the full extent lawful against certain liabilities, including certain liabilities under the federal securities laws arising out of its engagement or the acquisition.

      Deutsche Bank is an internationally recognized investment banking firm experienced in providing advice in connection with mergers and acquisitions and related transactions. Deutsche Bank and its affiliates have, from time to time, provided investment banking, commercial banking (including extension of credit) and other financial services to Finisar or its affiliates for which they have received compensation. Deutsche Bank and its affiliates may actively trade securities and other instruments and obligations of Finisar or Infineon for their own account or the account of their customers. Accordingly, Deutsche Bank may at any time hold a long or short position in such securities, instruments and obligations. As of the date of Deutsche Bank’s opinion, Deutsche Bank beneficially owned approximately 1.9% of Finisar’s outstanding common stock. As of the date hereof, Deutsche Bank beneficially owns 2.0% of Finisar’s outstanding common stock.

Completion and Effectiveness of the Acquisition

      The acquisition of the Infineon Fiber Optics Business is expected to be completed on the fifth business day after all of the closing conditions set forth in the purchase agreement have been satisfied or waived, including approval of the issuance of shares of Finisar common stock in connection with the acquisition by Finisar’s stockholders. We expect to complete the acquisition during the third calendar quarter of 2004.

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However, because the acquisition is subject to governmental approvals and other conditions, we cannot predict exactly when the closing will occur.

Business and Assets to be Acquired

      Pursuant to the purchase agreement, Finisar will acquire all of the outstanding capital stock of IF FO, with facilities in Germany, and IF Trutnov, with facilities in the Czech Republic, two wholly-owned subsidiaries of Infineon engaged exclusively in the Infineon Fiber Optics Business, and will purchase certain other assets and assume certain liabilities of Infineon and other Infineon subsidiaries related to the Infineon Fiber Optics Business. Among other things, Finisar will acquire certain facilities, product lines, employees and equipment, as well as intellectual property, including approximately 450 patent families owned by IF FO. The purchase agreement also provides that certain supply and development agreements between Infineon and IF FO will continue in effect following the completion of the acquisition of the Infineon Fiber Optics Business.

Consideration

      As consideration for the acquisition of the Infineon Fiber Optics Business, Finisar will issue to Infineon approximately 135,000,000 shares of Finisar common stock, subject to adjustment in accordance with the purchase agreement, representing, as of June 30, 2004 approximately 38% of the outstanding common stock of Finisar on a post-transaction basis.

Finisar Board of Directors Following the Acquisition

      Following the acquisition, the board of directors of Finisar will consist of seven members, including Thomas Seifert, Chief Executive Officer of Infineon’s Memory Products Business Group, and Finisar’s current directors, Roger C. Ferguson, Harold E. Hughes, Jr., Frank H. Levinson, Larry D. Mitchell and Jerry S. Rawls.

Regulatory Matters; Antitrust Clearances

      As a condition to the obligations of Finisar and Infineon to complete the acquisition, the waiting period under the HSR Act must have expired or been terminated. Finisar and Infineon made the required filings under the HSR Act with the Department of Justice and the Federal Trade Commission on June 15, 2004, and the waiting period expired on July 15, 2004.

      In addition to the U.S. regulatory antitrust requirements under the HSR Act, the acquisition is subject to foreign antitrust laws and foreign governmental approval requirements, which will require the companies to make filings with applicable foreign governmental authorities. Finisar and Infineon have made the required filings with regulatory authorities in the Czech Republic and Germany.

      Antitrust regulators may require Finisar, Infineon or the combined company to agree to operating restrictions. If any agreements regarding operating restrictions are required under applicable law or by governmental authorities, such restrictions may jeopardize or delay the completion of the acquisition or lessen the potential benefits of the transaction. In addition, even if regulatory approvals are obtained, any federal, state or foreign governmental entity or any private person may challenge the acquisition at any time before or after its completion.

Accounting Treatment

      The acquisition of the Infineon Fiber Optics Business will be accounted for as a “purchase” for accounting and financial reporting purposes, in accordance with accounting principles generally accepted in the United States. After the acquisition, the results of operations of the Infineon Fiber Optics Business will be included in the consolidated financial statements of Finisar. The purchase price will be allocated based on the fair values of the assets acquired and the liabilities assumed. Pursuant to Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets,” goodwill arising from the acquisition will not be subject to amortization over its estimated useful life.

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Rather, goodwill will be subject to at least annual assessment for impairment based on a fair value test. Identified intangible assets with finite lives will be amortized over those lives. A final determination of the intangible asset values and required purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not yet been made. We will determine the fair value of assets and liabilities and will make appropriate business combination accounting adjustments following the consummation of the acquisition. However, for purposes of preparing the unaudited pro forma information included in this proxy statement, we have made a preliminary determination of the purchase price allocations, based upon current estimates and assumptions, which are subject to revision following consummation of the transaction.

Appraisal Rights

      Under Delaware law, Finisar stockholders are not entitled to appraisal rights as a result of the acquisition of the Infineon Fiber Optics Business or to demand payment for their shares under applicable law.

Listing on The Nasdaq Stock Market of Shares to be Issued in the Acquisition

      It is a condition to the closing of the acquisition that the shares of Finisar common stock to be issued to Infineon shall have been authorized for listing on Nasdaq, subject to official notice of issuance.

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THE PURCHASE AGREEMENT

      This section of the proxy statement is a summary of the material terms of the purchase agreement, a copy of which is attached as Annex A to this proxy statement. The following description does not purport to be complete and is qualified in its entirety by reference to the purchase agreement. You should refer to the full text of the purchase agreement for details concerning the terms of the acquisition.

General

      Pursuant to the purchase agreement, Finisar will acquire IF FO and IF Trutnov, two wholly-owned subsidiaries of Infineon engaged exclusively in the Infineon Fiber Optics Business, and will purchase certain other assets and assume certain liabilities of the Infineon Fiber Optics Business. Among other things, Finisar will acquire certain facilities, product lines, employees and equipment, as well as intellectual property, including approximately 450 patent families owned by IF FO. As consideration for the acquisition of the Infineon Fiber Optics Business, Finisar will issue to Infineon shares of Finisar common stock, representing approximately 38% of the outstanding common stock of Finisar on a post-transaction basis. The purchase agreement also provides that certain supply and development agreements between Infineon and IF FO will continue in effect following the completion of the acquisition. These agreements are described below in the section entitled “Other Agreements Related to the Acquisition.”

      The acquisition of the Infineon Fiber Optics Business will be completed on the fifth business day after all of the closing conditions set forth in the purchase agreement have been satisfied or waived, including approval by Finisar’s stockholders of the issuance of shares of Finisar common stock in connection with the acquisition, or on such other date as the parties shall agree upon. We expect to complete the acquisition during the third calendar quarter of 2004. However, because the acquisition is subject to governmental approvals and other conditions, we cannot predict exactly when the closing will occur.

Consideration

      The purchase agreement provides that, as consideration for the Infineon Fiber Optics Business, Finisar will issue to Infineon 135,000,000 shares of Finisar common stock, such number of shares to be:

  •  reduced by the number of shares equal in value to any financial debt obligations of the Infineon Fiber Optics Business as of the last day of the calendar month preceding the closing (the “Effective Date”);
 
  •  increased by the number of shares equal in value to the cash, cash equivalents and intercompany receivables of the Infineon Fiber Optics Business as of the Effective Date;
 
  •  increased or reduced by the number of shares equal in value to the amount by which the working capital of the Infineon Fiber Optics Business as of the Effective Date exceeds or falls below specified amounts;
 
  •  reduced by the number of shares equal in value to certain assets of the Infineon Fiber Optics Business that will be retained by Infineon, measured as of the Effective Date; and
 
  •  increased or reduced by the number of shares equal in value to the average daily earnings or loss before interest and taxes of the Infineon Fiber Optics Business during the last fiscal quarter preceding the closing date multiplied by the number of days between the Effective Date and the closing date.

Representations and Warranties (Guarantees)

      The purchase agreement contains customary representations and warranties (referred to in the purchase agreement as guarantees) of each of Finisar and Infineon, subject to qualifications set forth in the purchase agreement, relating to the following matters:

  •  the authorization, execution, delivery and enforceability of the purchase agreement;
 
  •  absence of conflicts under charters or bylaws and required consents or approvals;

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  •  capital structure;
 
  •  the absence of bankruptcy proceedings;
 
  •  the existence, validity, and status of material contracts and agreements;
 
  •  intellectual property used to conduct each business;
 
  •  litigation;
 
  •  insurance;
 
  •  material assets;
 
  •  the existence and status of permits related to each business;
 
  •  employment matters;
 
  •  the preparation of financial statements and the accuracy thereof;
 
  •  the timely filing of documents and financial statements with the Securities and Exchange Commission (the “SEC”) and the accuracy of information contained therein;
 
  •  the absence material adverse changes or events;
 
  •  the timely filing of tax returns and other tax — related matters;
 
  •  environmental matters;
 
  •  actions taken by Finisar’s board of directors with respect to the Rights Agreement, dated as of September 25, 2002, between Finisar and American Stock Transfer & Trust Company;
 
  •  the opinion of Finisar’s financial advisor; and
 
  •  payments of finders’ fees.

Covenants and Agreements

      The purchase agreement provides that, until the completion of the acquisition or the termination of the purchase agreement, Infineon will, and will use commercially reasonable efforts to cause its subsidiaries to:

  •  preserve relationships with customers, vendors and others having business dealings with the Infineon Fiber Optics Business;
 
  •  preserve the assets of the Infineon Fiber Optics Business in good working condition, reasonable wear and tear excepted;
 
  •  maintain insurance for the Infineon Fiber Optics Business in effect;
 
  •  maintain accounting procedures consistent with past practice; and
 
  •  operate the Infineon Fiber Optics Business in the ordinary course consistent with past practices.

      In addition, the purchase agreement provides that, until the completion of the acquisition or the termination of the purchase agreement, Infineon will not take any of the following actions with respect to the Infineon Fiber Optics Business without consulting with Finisar, except in the ordinary course of business and consistent with past practices:

  •  permit any of its material assets to be subjected to any mortgage, pledge, lien, security, interest, encumbrance or charge of any kind, except for those arising by operation of law;
 
  •  make any material capital expenditure exceeding an amount of 500,000 or enter into any material contract or material commitment with onerous terms which are not consistent with past practices;
 
  •  grant any increase in wages, salaries, bonus or other remuneration of any employee;

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  •  cancel or waive any claims or rights of substantial value;
 
  •  enter into any agreement relating to the acquisition or disposition of any material assets or interest in companies or businesses, except for sales of products in the ordinary course of business;
 
  •  enter into any agreements with customers or suppliers which involve payment obligations of more than 500,000 per annum; or
 
  •  undertake an obligation, whether or not in writing, to do any of the foregoing.

      The purchase agreement also provides that, effective upon the completion of the acquisition, Finisar will:

  •  assume the obligations of Infineon under a letter of comfort issued to Bayerische Hypotheken-und Vereinsbank AG for the benefit of IF Trutnov to enable IF Trutnov to provide security for customs duties and indemnify Infineon from any obligations or liabilities arising out of the letter of comfort after the closing;
 
  •  procure insurance coverage for the Infineon Fiber Optics Business; and
 
  •  take actions to remove the name “Infineon” from any assets or properties of the Infineon Fiber Optics Business, cease using the name “Infineon” in marketing materials or in any other way in business activities as soon as practicable after the closing, but in no event later than six months after the closing.

      The purchase agreement also contains covenants regarding the preparation and filing of this proxy statement and the meeting of Finisar’s stockholders. The parties agreed that:

  •  Finisar would file this proxy statement as promptly as practicable after the date of the purchase agreement, and Infineon would provide information concerning Infineon that Finisar reasonably requests in connection with the preparation of the proxy statement;
 
  •  the proxy statement will include the recommendation of Finisar’s board of directors that Finisar’s stockholders vote in favor of the issuance of Finisar common stock to Infineon in connection with the acquisition; provided, however, that the board of directors may withdraw, modify or change such recommendation to the extent the board of directors determines in good faith after consultation with independent legal counsel that the failure to withdraw, modify or change its recommendation would cause the board of directors to breach its fiduciary duties to Finisar’s stockholders under applicable law;
 
  •  Finisar will use its best efforts to hold the meeting of its stockholders as soon as practicable after the proxy statement is cleared by the SEC; and
 
  •  Finisar will use its reasonable efforts to solicit from its stockholders proxies in favor of the issuance of Finisar common stock to Infineon and shall take all other action necessary or advisable to secure the vote or consent of its stockholders required under Delaware law.

Conditions to the Completion of the Acquisition

      The obligations of Finisar and Infineon to complete the acquisition are subject to satisfaction or waiver of the following closing conditions:

  •  Finisar stockholders must approve the issuance of Finisar common stock in connection with the acquisition;
 
  •  applicable notification and waiting period requirements under the HSR Act and under the applicable merger control regulations of Germany and the Czech Republic must have been satisfied;
 
  •  the shares of Finisar common stock to be issued in connection with the acquisition shall have been authorized for listing on Nasdaq, subject to official notice of issuance; and
 
  •  no change, condition, event or development shall have occurred with respect to the other party (or, in the case of Infineon, the Infineon Fiber Optics Business) that has had or could reasonably be expected

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  to have a material adverse effect on such party; provided, however that none of the following shall be deemed in themselves, either alone or in combination, to constitute a material adverse effect:

  •  adverse changes, events, developments or effects reasonably attributable to the execution or announcement of the purchase agreement;
 
  •  changes in Finisar’s stock price or trading volume;
 
  •  failure by Finisar or the Infineon Fiber Optics Business to achieve projected revenue or operating results;
 
  •  adverse changes, events, developments or effects arising from or relating to general business or economic conditions or the general conditions of the industry in which the Infineon Fiber Optics Business operates which are not specific to the Infineon Fiber Optics Business or changes resulting from conditions affecting the industry in which Finisar operates which are not specific to Finisar;
 
  •  any adverse change, result, event, development or effect arising from or relating to any change in United States generally accepted accounting principles;
 
  •  any outbreak or escalation of hostilities involving the United States or Germany or the occurrence of any act of terrorism (except acts directed specifically at the Infineon Fiber Optics Business, in the case of Infineon, or Finisar or its subsidiaries, in the case of Finisar); and
 
  •  adverse changes, conditions, events or developments which have lead to, or would reasonably be expected to lead to, losses which in the aggregate, do not exceed 25 million.

      Notwithstanding the occurrence of an event having a material adverse effect on one of the parties, the other party shall be obligated to proceed with the transaction, if the affected party agrees to (i) share any resulting losses of the other party in excess of 25 million not otherwise covered by the affected party’s representations and warranties on a 50:50 basis and (ii) indemnify the affected party for all resulting losses exceeding 50 million.

Termination

      The purchase agreement may be terminated before the transactions are completed:

  •  by mutual consent of Finisar and Infineon;
 
  •  by either party, if the conditions to closing have not been fulfilled by October 29, 2004 through no fault of the terminating party;
 
  •  by either party, if the required approval of the stockholders of Finisar is not obtained; or
 
  •  by either party, in the event of any change, condition, event or development shall have occurred that has had, or could reasonably be expected to have, a material adverse effect on the other party (subject to the limitations described above) unless the other party agrees to indemnify the first party against resulting losses (subject to the limitations and threshold amounts described above).

Indemnification

      General. In general, Infineon and Finisar will each be required to indemnify the other for losses arising from breaches of its representations and warranties set forth in the purchase agreement.

      Limitations. The parties’ indemnification obligations are subject to a number of limitations and qualifications, including the following:

  •  Subject to certain exceptions, indemnification claims must be asserted by December 31, 2005;
 
  •  No individual indemnification claim may be made for less than 500,000 (“De Minimus Claims”), or until the aggregate amount of all claims (excluding De Minimus Claims) exceeds 5 million (the “Deductible”);

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  •  The aggregate indemnification liability of either party is limited to an amount equal to 20% of the consideration paid by Finisar for the Infineon Fiber Optics Business (the “Liability Cap”); and
 
  •  Infineon may elect to satisfy its indemnification obligation in cash or by the return of shares of Finisar common stock, valued at a per share price of $1.98 (the average closing sale price of the common stock for the five trading days ending on April 29, 2004, the date the purchase agreement was signed).

      Special Indemnification Provisions. In addition to these general indemnification obligations, the purchase agreement contains the following special indemnification provisions:

  •  Subject to various limitations and qualifications, Infineon is required to indemnify Finisar for certain specified environmental liabilities arising out of conditions existing at or prior to the closing date. Any liability subject to such indemnification shall be shared by Finisar and Infineon, as follows, based on the time when such liability is first asserted:
                 
Year After the
Closing Date Finisar Infineon



Year 1
    20 %     80 %
Year 2
    30 %     70 %
Year 3
    50 %     50 %
Year 4
    70 %     30 %
Thereafter
    100 %     0 %

  •  Subject to various limitations and qualifications, Infineon is required to indemnify Finisar for the payment of taxes relating to the Infineon Fiber Optics Business for accounting periods ending before the Effective Date;
 
  •  Infineon is required to indemnify Finisar against losses arising out of certain pending litigation and claims, to the extent such losses relate to the operation of the Infineon Fiber Optics Business through the closing date. Finisar is required to indemnify Infineon against losses arising out of such litigation and claims, to the extent such losses relate to the operation of the Infineon Fiber Optics Business after the closing date. The parties’ respective obligations under these provisions are not subject to the exclusion of De Minimus Claims or to the Deductible or the Liability Cap; and
 
  •  Finisar is required to indemnify Infineon against liabilities arising out of certain restructuring activities that Finisar may initiate after the closing date. Finisar’s obligations under this provision are not subject to the exclusion of De Minimum Claims or to the Deductible or the Liability Cap.

Non-Compete Agreement

      Under the purchase agreement, Infineon agreed that, for a period of three years following the closing of the acquisition, it will not, directly or indirectly, manufacture, develop or sell any fiber optical products similar to or derivative of the products being sold or under development by the Infineon Fiber Optics Business as of the closing date. Infineon will not be prevented, however, from:

  •  holding, directly or indirectly, ownership of an equity interest not greater than 20% in an entity engaged in such competing activities; and
 
  •  acquiring, directly or indirectly, shares in, or the assets or undertaking of, any entity which carries on such competing activities, provided (i) that such competing activities do not constitute the principal activities of the entity or business acquired, and (ii) that Infineon shall cease to carry on, or have such competing business cease carrying on, such competing activities within one year from completion of the relevant acquisition, unless (a) the competing business or interest therein was acquired by Infineon as part of a larger acquisition and the value properly attributable to the competing activities did not at the date of acquisition amount to more than 20% of the value of such larger acquisition taken as a whole; or (b) the revenues of the competing business during four consecutive calendar quarters prior to the acquisition were less than 50% of the revenues of Finisar in the corresponding period.

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      In addition, Finisar and Infineon each agreed that, for a period of one year following the closing date, it will not solicit for employment any employees of or consultants to the other party or its subsidiaries (except, in Infineon’s case, employees of the Infineon Fiber Optics Business). In the case of certain identified key employees of the Infineon Fiber Optics Business, Infineon’s non-solicitation obligations extend for two years following the closing date.

Amendments and Waivers

      The parties may amend the purchase agreement by execution of a written instrument at any time before or after approval of the issuance of shares of Finisar common stock by Finisar’s stockholders; provided, however, that after Finisar’s stockholders have approved the issuance of Finisar common stock in connection with the acquisition, the parties may not amend the purchase agreement in any manner that, by law or in accordance with the rules of Nasdaq, requires further approval by the Finisar stockholders without the approval of the Finisar stockholders first having been obtained. At any time prior to the closing of the acquisition, either party may, to the extent legally allowed, extend the time for performance of any of the obligations or other acts of the other party or waive compliance with any of the agreements or conditions for the benefit of such party contained in the purchase agreement.

Fees and Expenses

      Whether or not the transactions contemplated by the purchase agreement are completed, each party will pay all fees and expenses incurred by it in connection with the transactions contemplated by the purchase agreement. Finisar will be responsible for the payment of any sales, transfer or stamp taxes payable in connection with the transactions contemplated by the purchase agreement.

Applicable Law; Dispute Resolution

      The purchase agreement is to be governed by, and construed in accordance with, the laws of the Federal Republic of Germany. All disputes arising in connection with the purchase agreement or its validity will be finally settled by three arbitrators in accordance with the Arbitration Rules of the German Institution of Arbitration, in arbitration proceedings in Munich conducted in the English language.

OTHER AGREEMENTS RELATED TO THE ACQUISITION

Voting Agreements

      In connection with the execution of the purchase agreement, Jerry S. Rawls, Finisar’s President and Chief Executive Officer, and Frank H. Levinson, Finisar’s Chairman and Chief Technical Officer, have entered into voting agreements with Infineon pursuant to which, among other things, each of them agreed, solely in his capacity as a stockholder, to vote all of his shares of Finisar common stock (i) in favor of the acquisition of the Infineon Fiber Optics Business and the purchase agreement, and any matter which would, or could reasonably by expected to, facilitate the acquisition (including the issuance of the shares of Finisar common stock to Infineon) and (ii) against any action, proposal, agreement or transaction in opposition to or in competition with consummation of the acquisition and the purchase agreement or which would, or could reasonably be expected to, prohibit, delay, interfere with or discourage the acquisition. In addition, each of these stockholders agreed to be present in person or by proxy at all Finisar stockholder meetings so that all of their voting securities will be counted for the purpose of determining the presence of a quorum. As of June 30, 2004, Messrs. Rawls and Levinson owned an aggregate of 34.7 million shares of Finisar common stock, representing approximately 15.5% of the outstanding shares.

      Pursuant to these voting agreements, subject to certain exceptions, Messrs. Rawls and Levinson also agreed not to transfer the Finisar common stock and options owned or acquired, either directly or indirectly, by them or their voting rights with respect to such shares until the earlier of the termination of the purchase agreement or the completion of the acquisition of the Infineon Fiber Optics Business, unless such transfer is made in compliance with the voting agreements.

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      In addition, pursuant to these voting agreements, Messrs. Rawls and Levinson each agreed, following the closing of the acquisition, to be present and vote their shares in favor of the election of the nominee of Infineon (designated pursuant to the stockholder agreement discussed below) as a member of the Finisar board of directors at each meeting of Finisar stockholders at which directors are to be elected.

      Except for the provisions relating to the election to Finisar’s board of directors of a nominee designated by Infineon, these voting agreements will terminate upon the earlier to occur of the termination of the purchase agreement or the completion of the acquisition. The voting agreements will terminate in their entirety at such time as Infineon holds less than 5% of Finisar’s outstanding voting stock.

Stockholder Agreement

      In connection with the execution of the purchase agreement, Finisar and Infineon have entered into a stockholder agreement to provide for certain rights and obligations of the parties with respect to the shares of Finisar common stock to be issued to Infineon in connection with the acquisition of the Infineon Fiber Optics Business, and certain related corporate matters. The principal terms of the stockholder agreement are summarized below.

      Board Representation. The stockholder agreement provides that Finisar will cause Infineon’s designated representative to be elected to serve as a member of the Finisar board of directors, effective immediately after the closing of the acquisition and, thereafter, will cause Infineon’s designated representative to be nominated for election to the board at annual meetings of the stockholders. Infineon has designated Thomas Seifert, Chief Executive Officer of its Memory Products Business Group, to serve as its initial representative on the Finisar board.

      Voting Obligations of Infineon. The stockholder agreement provides that Infineon will vote its shares of Finisar common stock for the election of the nominees for director designated by Finisar’s board of directors at each meeting of Finisar’s stockholders at which directors are to be elected. The stockholder agreement also provides that, in the event of any proposed transaction between Finisar and Infineon that is submitted to Finisar’s stockholders for approval, Infineon will vote its shares of Finisar common stock in the same proportion as all shares that are not owned by Infineon are voted with regard to such proposed transaction.

      Standstill Restrictions. The stockholder agreement provides that, except with the prior approval of a majority of the members of Finisar’s board of directors (excluding any director designated for election by Infineon), subject to certain exceptions, Infineon will not:

  •  acquire, either directly or indirectly, agree to acquire or make a tender or exchange offer to acquire any voting securities of Finisar;
 
  •  solicit proxies in respect of any voting securities of Finisar;
 
  •  enter into any arrangement or agreement with respect to the voting of voting securities of Finisar; or
 
  •  form or join a group for the purpose of voting, holding, purchasing or disposing of voting securities of Finisar, or taking any of the other prohibited actions described above.

      These standstill restrictions will be suspended in the event that any person or group, without the prior approval of the Finisar board of directors, commences a tender offer for Finisar securities, acquires more than 20% of the then-outstanding voting securities of Finisar or commences or publicly announces its intention to seek to effect a transaction that would result in a change of control of Finisar.

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      Restrictions on Transfer. The stockholder agreement provides for the following restrictions on the transfer of voting securities of Finisar by Infineon:

  •  Infineon may not transfer any shares to certain specified direct competitors of Finisar;
 
  •  Except with the approval of a majority of the members of Finisar’s board of directors (excluding any director designated for election by Infineon) Infineon may not sell or transfer:

  •  more than 30,000,000 shares during the first three-month period commencing on the closing date; or
 
  •  more than 15,000,000 shares during any consecutive three-month period thereafter (provided that any shares not sold, as so permitted, during any three-month period will be eligible for sale in subsequent periods); and

  •  Infineon is required to cooperate with Finisar in order to effect the orderly disposition of shares that it is permitted to sell.

      Termination. The rights and obligations of the parties under the stockholder agreement will terminate at such time as Infineon owns less than 5% of the outstanding voting securities of Finisar.

Registration Rights Agreement

      Finisar and Infineon have entered into a registration rights agreement, the principal terms of which are summarized below.

      Registration Rights; Demand Registration Rights; Piggyback Registration Rights. Finisar will use its commercially reasonable efforts to cause the securities acquired by Infineon in connection with the acquisition to be registered under the Securities Act as soon as practicable following the closing of the acquisition, but in no case later than 15 business days after the closing date. Infineon also has the right to demand that Finisar file up to five registration statements covering the securities acquired by Infineon pursuant to the acquisition and will also have piggyback registration rights effective upon the closing of the transaction, subject, in the latter case, to certain limitations related to underwriter cut-backs. These registration rights, including the demand and piggyback registration rights, will terminate on the date when all registrable securities held by Infineon may be sold immediately under Rule 144(k) under the Securities Act during any 90-day period.

      Market Stand-off. In connection with any public offering of securities of Finisar and upon the request of the underwriters managing any underwritten offering, Infineon will not dispose of Finisar securities held as of the date of the stockholder agreement or acquired after that date for a period of 90 days after the effective date of the registration statement for any such offering, except as part of the registered offering.

Transition Agreements

      In March 2004, as part of an internal reorganization, Infineon transferred to its subsidiary, IF FO, a portion of the Infineon Fiber Optics Business formerly conducted directly by Infineon. In connection with this transfer, Infineon and IF FO entered into a number of agreements (the “Transition Agreements”) under which Infineon agreed to provide services and facilities and supply components to IF FO. For additional information regarding this reorganization, see “Description of the Infineon Fiber Optics Business — History; the Carve-Out Transactions” on page 60.

      In the purchase agreement, Finisar and Infineon agreed that certain of the Transition Agreements would be terminated, that others would be modified and, as so modified, would remain in effect as between Infineon and IF FO (as a subsidiary of Finisar) and that others would be renegotiated, in some cases subject to agreed-upon principles.

      The principal Transition Agreements that will remain in effect, in their current form or as amended or renegotiated, are:

  •  transition services agreements, pursuant to which Infineon will continue to provide accounting and information services to IF FO during a transition period following the closing;

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  •  a distribution agreement under which Infineon provides certain demand fulfillment and logistic services for IF FO, which Finisar may elect to extend for up to six months following the closing;
 
  •  a chip supply agreement under which Infineon will continue to supply integrated circuits to IF FO following the closing;
 
  •  a product supply agreement, under which Infineon will continue to supply plastic optical fiber, or POF, components to IF FO following the closing;
 
  •  development agreements under which Infineon will continue to provide development services related to certain materials and integrated circuits used in IF FO’s products following the closing; and
 
  •  rental agreements pursuant to which IF FO will continue to occupy certain facilities owned by Infineon following the closing.

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DESCRIPTION OF FINISAR

      Finisar is a leading provider of fiber optic subsystems and network performance test and monitoring systems. These products enable high-speed data communications for networking and storage applications over Gigabit Ethernet local area networks, or LANs, Fibre Channel storage area networks, or SANs, and metropolitan access networks, or MANs using IP and SONET/ SDH-based protocols. Finisar is focused on the application of digital fiber optics to provide a broad line of high-performance, reliable, value-added optical subsystems for data networking and storage equipment manufacturers. Finisar’s line of optical subsystems supports a wide range of network applications, transmission speeds, distances, physical mediums and configurations. Finisar also provides network performance test and monitoring systems to original equipment manufacturers for testing and validating equipment designs and to operators of networking and storage data centers for testing, monitoring and troubleshooting the performance of their systems.

      Additional information regarding Finisar is contained in our filings with the SEC. See “Where You Can Find More Information” on page 105.

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DESCRIPTION OF THE INFINEON FIBER OPTICS BUSINESS

      The information contained in this section and in the section entitled “Infineon Management’s Discussion and Analysis of Financial Condition and Results of Operation of the Infineon Fiber Optics Business” has been provided by Infineon.

Overview

      The Infineon Fiber Optics Business consists of the fiber optic modules, components and plastic optical fiber, or POF, business of Infineon. Headquartered in Berlin, Germany, the Infineon Fiber Optics Business develops, produces and markets solutions for the data communications, telecommunications and automotive industries.

      The Infineon Fiber Optics Business has operations in Germany, the Czech Republic, Japan, Hong Kong, Taiwan and the United States. Two wholly-owned subsidiaries of Infineon, IF FO and IF Trutnov, are engaged exclusively in the conduct of the Infineon Fiber Optics Business. Infineon and other of its direct and indirect subsidiaries are also engaged in supporting the Infineon Fiber Optics Business.

      The Infineon Fiber Optics Business has been active in the fiber optics industry for many years and is currently one of the world’s leading manufacturers of active fiber optic components. In the fiscal year ended September 30, 2003, the Infineon Fiber Optics Business generated net sales of 108 million.

History; the Carve-out Transactions

 
History

      In 1982, Siemens AG (“Siemens”) entered the market for optical components with its first 1.3 mm LED-based multi-mode transceiver. Two years later, Siemens founded its “Werk für optische Bauelemente,” or plant for optical components, in Munich. The production of components started one year later in Berlin. In 1997, the optical component business of Siemens was integrated into the Siemens Semiconductor Group, which was later carved-out as part of Infineon in 1999. Beginning in 1999, the Infineon Fiber Optics Business was conducted as an integrated part of Infineon.

 
The Carve-Out Transactions

      In 2001, the Infineon Fiber Optics Business transferred its chip-on-board production to AEMtec GmbH (“AEMtec”), based in Berlin, Germany, in exchange for 42.7% of the shares in AEMtec. The remainder of the shares in AEMtec are held by three private individuals. The chip-on-board technology of AEMtec focuses on fiber optics, automotive, industrial and medical applications. AEMtec is a leading supplier of assembled optical and electrical multi-chip-components. AEMtec is a key supplier of components to the Infineon Fiber Optics Business for use in its PAROLI® parallel optics products.

      In 2002, the Infineon Fiber Optics Business transferred its passive dense wavelength division multiplexing, or DWDM, business to OpTun Inc. (“Optun”), based in Haifa, Israel, in exchange for 16.5% of the shares in OpTun. In addition to Infineon, three venture funds hold shares in privately held OpTun. OpTun focuses on passive optical DWDM components based on planar silica on silicon technology. OpTun offers a range of monolithic integrated optical components based on a pending patent, which enables monolithic integration of passive optical components.

      In November 2003, the Infineon Fiber Optics Business and United Epitaxy Company Ltd. (“UEC”) formed the ParoLink joint venture located in Hsinchu, Taiwan. The joint venture is targeted at manufacturing and developing laser and receiver optochips. The Infineon Fiber Optics Business holds 56.0% of the outstanding shares of the joint venture, which is based at the UEC facility in Taiwan and is expected to become an optochip supplier for the Infineon Fiber Optics Business. UEC is a high-volume manufacturer of LED chips for illumination purposes.

      On March 26, 2004, the German operations of the Infineon Fiber Optics Business, including the operations in Berlin, Munich and Regensburg, were contributed into a separate legal entity called IF FO.

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      The figure below illustrates the legal structure of the Infineon Fiber Optics Business as it currently exists as part of Infineon following the carve-out transactions described above.

(GRAPH)

      The existing shareholdings in ParoLink and IF Trutnov, currently held by Infineon Technologies Holding B.V., as well as the shareholdings in IF FO, OpTun and AEMtec, currently held by Infineon, will be transferred to Finisar at the closing of the acquisition of the Infineon Fiber Optics Business. The assets and operations of the Infineon Fiber Optics Business in the United States and Asia will be transferred to Finisar at the closing through an asset sale.

Markets and Applications

      Fiber optics refers to the technology associated with the transmission of information using glass or plastic fiber as the carrier of the information and light pulses as the medium passing through the fiber. Compared to conventional copper wires, fiber optics transmission allows substantially higher capacity for data transmission and is not subject to electromagnetic interference.

      A fiber optic network consists of active and passive components. Passive optical components are silicon based fibers, connectors, splitters and filters. Active optical components are devices for electro-optical and opto-electrical conversion of data streams. Modules are integrated devices that include active optical components (lasers and photodiodes), microelectronic devices (integrated circuits) and micromechanics (lenses and housing).

      The Infineon Fiber Optics Business is a leading supplier of:

  •  Optical modules for data communication;
 
  •  Optical components and transceivers for fiber-based access;
 
  •  Optical modules for automotive applications; and
 
  •  Plastic optical fiber, or POF, products.
 
Overview of Optical Networks

      The fiber optic market can be described in two dimensions: transmission distance and target market. Distances range from short-reach storage area networks, or SANs, local area networks, or LANs, and fiber access networks, i.e., Fiber-to-the-Home, or FTTH, to medium-reach metro area networks, or MANs, and long-reach wide area networks, or WANs. For SAN/ LAN applications, transceivers with a wavelength of 850nm, and occasionally 1310nm, are used. MAN applications primarily use 1310nm devices, while a wavelength of 1550nm is used for longer distances. FTTH applications use wavelengths of 1310nm, 1490nm and 1550nm.

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      The second dimension categorizes transceivers by the target market. The two main markets are data communications, or datacom, and telecommunications, or telecom. Datacom is divided into enterprise networks and storage networks. A third and emerging market is the fiber access market, with Fiber-to-the-Home (subscriber) and Fiber-to-the-Premise (central office) applications. These networks use different protocols and standards as illustrated in the following table:

 
Overview of Standards
       
Network Protocol/Standard


Datacom
   
 
Storage
  Fiber Channel (FC)
 
Enterprise
  Ethernet
Telecom
  SONET/ SDH
Fiber access
  PON, Ethernet first mile
Automotive
  MOST®, IEEE 1394b, byteflight®, Flexray
Home networking
  IEEE 1394b

      A special segment of the market for fiber optic transceivers is the market for POF transceivers. Currently, POF transceivers are primarily used for fiber networks in automobiles, controlling functions such as safety systems and multi-media applications. MOST® (Media Oriented Systems Transport) is the established high-speed networking standard for multi-media applications in automobiles and has been developed in close collaboration with leading automobile manufacturers, IC suppliers and the Infineon Fiber Optics Business. Safety systems are covered by the byteflight® transceiver. byteflight® is a protocol developed by the BMW Group for safety applications and is currently deployed in five different models of BMW automobiles. IEEE 1394b and Flexray are new standards under development. Home networking encompasses the market for Fiber-in-the Home, or FITH, applications, whereas fiber access comprises the Fiber-to-the-Home and Fiber-to-the-Premise applications.

 
General Market Characteristics

      According to market studies prepared by RHK, Inc. (“RHK”), an industry market research firm, sales of optical components in 2000 were approximately $9 billion. This was followed by a steep decline in sales due to the collapse of the “.com” and telecom industries which led to a significant reduction of investment in networks. As the deployment of fiber optic networks slowed, a large portion of the demand for optical components in 2001 and 2002 was filled from excess inventory. During 2003, usable components from excess inventory were substantially exhausted and demand started to level off. After ten consecutive quarters of decline, a 9% quarter-over-quarter increase in sales was realized in the third quarter of 2003, according to RHK. In addition, the fiber access market started to grow in 2002, primarily in Korea and Japan, and has since contributed to a stable sequential growth in sales quarter-to-quarter. The market for POF products, comprised mainly of automotive applications, began to increase in 2001 with the introduction of plastic fiber-based links in both the high-end and mid-class automobiles of European manufacturers.

      There is generally no seasonality to the markets in which the Infineon Fiber Optics Business operates.

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Products

      The Infineon Fiber Optics Business product line consists of three product families: Modules, Components and POF products.

             
Product Family Modules Components POF




Products
  • Standard transceivers and transponders   • BIDI® transceivers and components   • Plastic fiber transceivers
    • PAROLI® modules   • Discrete components    
Infineon Fiber Optics Business net sales (%) for fiscal 2003
       62.2%        6.4%        31.4%
Applications
  • Telecom equipment   • Fiber-to-the-Home   • Automotive multimedia (MOST®)
    • Datacom equipment (enterprise and storage)   • Telecom equipment   • Automotive security (byteflight®)
Typical customers
  • OEMs, EMS   • OEMs, EMS   • Automotive connector suppliers

      Within the Modules product family, the Infineon Fiber Optics Business provides a full range of transceivers and transponders to the datacom market, which is further divided into the enterprise and storage markets, and the telecom market, primarily for short range transmission. In addition, using its PAROLI® parallel optics products, the Infineon Fiber Optics Business produces modules used for system-to-system high speed connection and rack-to-rack connection. The Modules product family accounted for approximately 62.2% of net sales of the Infineon Fiber Optics Business in the fiscal year ended September 30, 2003.

      The Components product family consists primarily of BIDI® products, which allow bi-directional fiber transmission mainly used in Fiber-to-the-Home applications. A small proportion of Components sales consists of discrete components, which are single components like lasers or diodes, mainly sold to manufacturers of telecom equipment. Sales to third parties represent only a part of the components produced by the Infineon Fiber Optics Business as the major proportion of these discrete components are used in the production of Modules products, and sales of these components are reflected in sales of Modules. The Components product family represented approximately 6.4% of net sales of the Infineon Fiber Optics Business to third parties in fiscal 2003, excluding components used in Modules.

      The POF product family includes transceivers used for optical networks inside automobiles, including media systems and brake/airbag systems. The principal advantage of using optical fiber and optical components in these applications, compared to traditional copper wiring, is the high speed of data transmission combined with the lack of electromagnetic interference, or EMI. Data transmission using copper wiring results in EMI problems. In addition, using optical fiber networks can save up to 30 kg of weight in an automobile. The POF product family represented approximately 31.4% of net sales of the Infineon Fiber Optics Business in fiscal 2003.

Customers

      The Infineon Fiber Optics Business typically sells its products to distributors, electronic manufacturing services, or EMS, and original equipment manufacturers, or OEMs, as well as automotive suppliers. During fiscal 2003, sales to distributors, EMS and OEM/key accounts were 20%, 20% and 60%, respectively, of net sales. Two customers, Tyco and Alcatel, each accounted for more than 10% of sales in fiscal 2003.

      As of May 27, 2004, the Infineon Fiber Optics Business had 32 million in firm backlog orders.

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Suppliers

      The key raw materials used by the Infineon Fiber Optics Business to manufacture products tend to be available from only a small number of suppliers. In order to avoid reliance on any single source, the Infineon Fiber Optics Business generally seeks to qualify at least two suppliers for each raw material. Exceptions to this policy may exist when new products are brought to market, or when low prices allow for high safety stocks. Because of the need to get new products to market quickly, the Infineon Fiber Optics Business will initially work with single suppliers before later qualifying alternate sources. The only other exceptions to this policy are with respect to the byteflight® protocol developed by the BMW Group for safety applications. byteflight® uses ELMOS as a sole source supplier. There currently are no plans to seek an additional source for byteflight® products. In addition, UEC is currently the only qualified supplier of LED chips for POF products. The Infineon Fiber Optics Business is currently seeking a second supplier for LED chips.

      To ensure the availability of key raw materials at prices and quality levels which are commercially acceptable, the Infineon Fiber Optics Business seeks to work closely with its suppliers. Manufacturing capacity reserved for the Infineon Fiber Optics Business and pricing terms are negotiated on a regular basis according to forecast volumes.

Competition

      The markets in which the Infineon Fiber Optics Business operates remained highly competitive in 2003, although there has been some consolidation in the industry.

      The Infineon Fiber Optics Business competes with major international companies such as: Agilent Technologies, Inc.; Avanex Corporation; Bookham Technology plc.; Delta; Eudyma Devices, Inc. (a joint venture of Sumitomo Electric Industries, Ltd. and Fujitsu Quantum Devices, Ltd.); Finisar; Intel Corporation; JDS Uniphase Corporation; Mitsubishi Electric Corporation; Optical Communication Products, Inc.; Photon; Picolight; Sigmalincs; and TriQuint Semiconductor, Inc. The Infineon Fiber Optics Business believes that technological advancement, quality, reliable on-time delivery, the ability to customize products quickly, product cost and flexible manufacturing capacities are the main factors that distinguish competitors in its markets.

Overview of Operations

      The Infineon Fiber Optics Business is headquartered in Berlin, Germany and has manufacturing facilities in Berlin, Munich and Regensburg, Germany, and Trutnov, Czech Republic. In addition, since November 2003 the Infineon Fiber Optics Business has participated in the ParoLink joint venture with UEC for production of optochips.

      The production facilities for the Infineon Fiber Optics Business are divided into wafer manufacturing (VCSEL in Munich), wafer assembly (Berlin) and the assembly of transceivers and components (Trutnov). The Berlin facility also houses a pilot line for the development of new products and processes. The assembly and testing of transceivers, components and PAROLIs® takes place in Trutnov. The POF production line is located in Regensburg and will be retained by Infineon after the acquisition of the Infineon Fiber Optics Business by Finisar.

      In all of its regional offices, the Infineon Fiber Optics Business has regional marketing managers and application engineers who provide commercial and technical support to the respective regional sales forces driving the design-in-process as well as the day-to-day negotiations.

      The ParoLink joint venture with UEC is currently ramping-up production of wafers, which are anticipated to substitute optochips, currently sourced from OSRAM Opto Semiconductor GmbH (OSRAM Opto Semiconductor) and other third parties, by September 30, 2004.

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Research and Development

      The research and development department of the Infineon Fiber Optics Business has approximately 100 researchers and is organized into functions for each separate product segment, focusing on specific product development. The research and development department has combined experience of approximately 1,000 man years within the area of fiber optics. The Infineon Fiber Optics Business expended 25.6 million on research and development activities in fiscal 2003.

      The research and development department of the Infineon Fiber Optics Business has operations in Berlin, Munich and Regensburg, Germany, as well as in Longmont, Colorado.

      The Infineon Fiber Optics Business has established ongoing relationships with research institutes, universities and other companies within the fiber optics industry and is actively involved in several projects. The Infineon Fiber Optics Business is continuously communicating with standard setting bodies, including the following:

  •  ANSI
 
  •  10 Gigabit Ethernet Alliance
 
  •  IEEE 802.3, Ethernet and Fast Ethernet, 10 GBE
 
  •  IEEE 802.3: ah
 
  •  InfiniBand
 
  •  OIF-Forum
 
  •  IEEE 1394b

      For certain projects, which follow highly innovative approaches with higher risks, the Infineon Fiber Optics Business receives funding from the German government. In addition, proposals have been submitted for participation in European Community and regional funding programs.

      The Infineon Fiber Optics Business uses the Infineon Development Handbook, a well documented product development procedure developed by Infineon. Through this process, the early involvement of various Infineon Fiber Optics Business functions, e.g. research and development, marketing, production, quality and procurement, is intended to ensure that the project is aligned with the Infineon Fiber Optics Business strategy. As a result, all product development projects are undertaken by cross-sectional project teams with joint responsibility.

Proprietary Rights and Licenses

      All intellectual property used by the Infineon Fiber Optics Business is part of the Infineon Fiber Optics Business intellectual property portfolio and consists of several hundred patent families and several trademarks. Patents and trademarks have been obtained in all key markets and are crucial to the conduct of the Infineon Fiber Optics Business. In connection with the sale of the Infineon Fiber Optics Business, all patents that are solely applied by the Infineon Fiber Optics Business will be transferred to IF FO. The patents which are or will be also used by other Infineon units will be retained by Infineon and will be licensed to the Infineon Fiber Optics Business.

      In addition to the intellectual property portfolio, the Infineon Fiber Optics Business has developed extensive proprietary knowledge and skills, particularly with respect to VSCEL design and production capabilities and the wafer scale assembly process.

Sales and Marketing

 
Sales By Product Family and Region

      The Infineon Fiber Optics Business sales organization is organized along three product families: Modules, Components and POF products. In fiscal 2003, Modules, primarily including various transceiver modules and

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PAROLI® products, accounted for approximately 62.2% of net sales. Components, including BIDI® and discrete components, constituted 6.4% of net sales, and POF, which includes transceivers for automotive applications, accounted for 31.4% of net sales. The following chart sets forth sales of the Infineon Fiber Optics Business by product family for the fiscal years 2001, 2002 and 2003.

(PERFORMANCE GRAPH)

      Geographically, the Infineon Fiber Optics Business design-in and sales for datacom applications takes place mainly in the United States while design-in and sales for telecom and automotive applications takes place mainly in Europe. Asia contributes the highest growth rate, mainly driven by sales to EMS companies such as Flextronics and Solectron with manufacturing sites in Asia for assembly of OEM equipment.

 
Key User Markets

      The Infineon Fiber Optics Business divides its markets into enterprise, storage, telecommunications, automotive fiber optics and fiber access applications.

      Sales to major OEMs are made through various contract types, ranging from one-year contracts to spot orders. One-year contracts are normally concluded as framework agreements with detailed information about terms and conditions pursuant to longer negotiations with the customers. Quarterly orders are submitted through a standardised request procedure, through which the supplier has one week to prepare a supply proposal and to which the customer responds thereafter. E-bidding is an online bidding procedure where the supplier has only four hours to submit a binding sale offer. Finally, the Infineon Fiber Optics Business also sells products through spot orders, normally to EMS customers and distributors. Quarterly orders represent the most common contract type, followed by spot orders and one-year contracts. E-bidding represents only a minor share.

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Employees

      On March 31, 2004, the Infineon Fiber Optics Business employed approximately 1,200 people. A majority of the blue collar workforce is based in Trutnov. The table below gives an overview of the regional breakdown and the split of blue and white collar workers for the following periods:

                                                   
As of September 30,

As of
March 31,
2002 2003 2004



Blue White Blue White Blue White
collar collar collar collar collar collar






Germany
    162       286       102       242       115       231  
 
— Berlin
    131       210       78       187       90       178  
 
— Munich
    22       61       18       37       17       36  
 
— Regensburg
    9       15       8       18       8       17  
US
    0       30       0       27       0       27  
 
— Longmont
    0       16       0       17       0       18  
 
— San Jose
    0       14       0       10       0       9  
Trutnov
    469       143       524       124       690       128  
Tokyo, HK and Taipei
    0       6       0       4       0       4  
     
     
     
     
     
     
 
Total
    416       465       626       397       805       390  

      In fiscal 2003, the workforce in Berlin was reduced by 54 employees due to declining sales and the relocation of the PAROLI® volume production to Trutnov. While the workforce in Germany declined from fiscal 2002 to fiscal 2003 and is expected to further decline in fiscal 2004, the number of blue collar workers in Trutnov is increasing as production is increasing. The decrease of employees in Munich and San Jose is mainly driven by further cost reduction measures.

Environmental Matters

      The Infineon Fiber Optics Business production sites are matrix certified according to EN/ ISO 14.001. The environmental management system is designed to eliminate or to minimise the negative impact of the manufacturing processes on the environment, the employees and third parties.

      In 1998, the Berlin site was certified according to EN/ ISO 14.001, and since 2000 has been included in the company-wide matrix certification of Infineon. The Regensburg site was certified in 1997 and has been included in the matrix certification in 2000. Since 2002, Trutnov has been part of the Infineon-wide matrix certification according to EN/ ISO 14001.

Legal Proceedings

      The Infineon Fiber Optics Business is involved in litigation from time to time in the ordinary course of business. Based on information presently known to management of the Infineon Fiber Optics Business, the Infineon Fiber Optics Business does not believe that the resolution of such pending matters will have a material adverse effect on the Infineon Fiber Optics Business, although the resolution of such matters could have a material adverse effect on the results of operations or cash flows of the Infineon Fiber Optics Business in the year of settlement.

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INFINEON MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS OF THE INFINEON FIBER OPTICS BUSINESS

      You should read the following information together with the “Infineon Fiber Optics Business Selected Historical Combined Financial Data” and the audited combined financial statements and related notes of the Infineon Fiber Optics Business as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 and the unaudited condensed combined financial statements and related notes as of March 31, 2004 and for the six months ended March 31, 2004 and 2003, each included in this proxy statement as well as the other financial information for the Infineon Fiber Optics Business included elsewhere in this proxy statement.

      The following discussion contains forward-looking statements that involve risks and uncertainties and assumes that the Infineon Fiber Optics Business will continue as a wholly-owned operation of Infineon. Accordingly, actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including, among other things, operational, management and other changes to the Infineon Fiber Optics Business effected by Finisar following the acquisition.

Overview

      The Infineon Fiber Optics Business develops, produces and markets fiber optic modules, components and POF products, for the data communications, telecommunications and automotive industries. The Infineon Fiber Optics Business is part of the Wireline Communications Business Group (COM) of Infineon.

      The Infineon Fiber Optics Business has been active in the fiber optics industry for many years and is currently one of the world’s leading manufacturers of active fiber optic components.

      The Infineon Fiber Optics Business is headquartered in Berlin, Germany and has operations in Germany, the Czech Republic, Japan, Hong Kong, Taiwan and the United States.

Components of Results of Operations

 
Net Revenues

      The revenues of the Infineon Fiber Optics Business are principally derived from sales of fiber optic modules, components and POF products which are used in various communication applications.

      The Infineon Fiber Optics Business recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

      The Infineon Fiber Optics Business sells its products to domestic markets and internationally through distributors and Infineon’s direct sales force. The evaluation and qualification cycle for modules may span six to 18 months, while the sales cycle for POF products is usually longer.

      A large portion of the sales of the Infineon Fiber Optics Business are concentrated with a relatively small number of customers. Although the Infineon Fiber Optics Business is attempting to expand its customer base, it is expected that significant customer concentration will continue for the foreseeable future.

      The market for modules and POF products is characterized by declining average selling prices resulting from factors such as overcapacity, increased competition and high volume expectations. The Infineon Fiber Optics Business anticipates that average selling prices will continue to decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty.

 
Costs of Goods Sold

      The Infineon Fiber Optics Business’s cost of goods sold consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead (including equipment depreciation), warranty expense, and inventory adjustments for obsolete and excess inventory.

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Gross Profit (Loss)

      The gross profit margins of the Infineon Fiber Optics Business vary among its product families and are generally higher for POF products than for Modules and Components products. Overall gross margins have fluctuated from period to period as a result of overall revenue levels, shifts in production mix, the introduction of new products, decreases in average selling prices and the Infineon Fiber Optics Business’s ability to reduce product costs.

 
Research and Development Expenses

      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. The Infineon Fiber Optics Business charges all research and development expenses to operations as incurred.

 
Selling, General and Administrative Expenses

      Selling activities for the Infineon Fiber Optics Business are conducted through the Infineon sales organizations.

      Sales and marketing expenses consist primarily of commissions paid to manufacturer’s representatives, salaries and related expenses for personnel engaged in sales, marketing and field support activities and other costs associated with the promotion of the products and corporate expenses of the Infineon Fiber Optics Business.

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

 
Restructuring Charges

      Restructuring costs generally consist of termination costs for employees associated with the formal restructuring plan of the Infineon Fiber Optics Business described below.

 
Equity in Earnings of Associated Companies

      The financial results of associated companies in which the Infineon Fiber Optics Business has an ownership interest of 20% or more, but which it does not control, are included in the combined financial results of the Infineon Fiber Optics Business. Associated companies are accounted for using the equity method of accounting, with results of each associated company for each fiscal quarter allocated to the next proceeding fiscal quarter of the Infineon Fiber Optics Business. These associated companies are AEMtec located in Germany and ParoLink located in Taiwan.

 
Interest Expense

      The operations of the Infineon Fiber Optics Business have historically been financed largely through investments by and loans from Infineon. Interest expense includes interest charges on certain financial liabilities to Infineon.

 
Income Taxes

      The income tax expense of the Infineon Fiber Optics Business was calculated as if it had filed separate tax returns in each of the applicable tax jurisdictions.

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Geographical Breakdown

      The following is a summary of the operations of the Infineon Fiber Optics Business by geographic area for the following fiscal periods:

                           
Year Ended September 30,

2001 2002 2003



(Euro in thousands)
Net sales:
                       
 
Germany
    36,943       37,305       48,873  
 
Other Europe
    14,305       18,048       10,989  
 
NAFTA
    77,831       33,493       31,117  
 
APAC
    8,494       12,594       8,080  
 
Japan
    24,459       11,550       8,329  
 
Other
    2,414       968       452  
     
     
     
 
Total
    164,446       113,958       107,840  
     
     
     
 
                   
As of
September 30,

2002 2003


(Euro in
thousands)
Long-lived assets:
               
 
Germany
    25,086       15,705  
 
Europe
    27,188       22,102  
 
USA
    1,445       850  
     
     
 
Total
    53,719       38,657  
     
     
 

      Revenues from external customers are based on the customer’s billing location. Long-lived assets are property, plant and equipment located in each geographic area.

Product Trends

      The boom in sales of optical components in 2000 was followed by a steep decline in sales until the beginning of 2003. The collapse of the “dot.com” and telecom industry led to a significant reduction of investment in networks. As the deployment of fiber optic networks slowed, a large portion of the demand for optical components in 2001 and 2002 was filled from excess inventory. During 2003, usable components from excess inventory were exhausted and the steep decline in demand started to level off.

      After ten consecutive quarters of decline, a 9% quarter-on-quarter increase in industry sales was realized in the third quarter of 2003, according to RHK. In addition, the fiber access market started to grow in 2002, primarily in Asia, and has since contributed to a stable sequential growth in sales quarter-to-quarter. The market for POF products, comprised mainly of automotive applications, began to increase in 2001 with the introduction of plastic fiber-based links in both the high-end and mid-class automobiles of European manufacturers.

Restructuring Charges

      In response to the environment described above, restructuring charges of 476,000 and 458,000 were recorded during the fiscal years ended September 30, 2001 and 2002, respectively, in connection with Infineon’s “Impact” restructuring programs. In 2002, the Infineon Fiber Optics Business announced a restructuring plan to reduce its fixed costs through a reduction in employees and over-all cost-cutting measures. As a result, by September 30, 2003, 54 employees in Berlin had been terminated. The Infineon Fiber Optics Business intends to terminate 26 more employees in Berlin in fiscal 2004, which would reduce

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total headcount in Berlin by approximately 25% from 320 to approximately 240 employees. In connection with these measures, a restructuring charge of 4.2 million was recognized during the fiscal year ended September 30, 2003. At March 31, 2004, the accrued liability of the Infineon Fiber Optics Business from these employee terminations was 3.2 million.

Economic Dependency

      The combined financial statements of the Infineon Fiber Optics Business have been prepared on the basis of the business continuing to operate as a going concern. Due to the losses incurred and the cash used in operating activities to date, the Infineon Fiber Optics Business has been economically dependent upon Infineon for providing the necessary financing to fund its operating losses and meet its capital requirements.

Critical Accounting Policies and Estimates

      The results of operations and financial condition of the Infineon Fiber Optics Business are dependent upon accounting methods, assumptions and estimates that the Infineon Fiber Optics Business uses as a basis for the preparation of its combined financial statements. The preparation of the combined financial statements of the Infineon Fiber Optics Business requires its management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The management of the Infineon Fiber Optics Business bases its estimates and judgments on historical experience, current economic and industry conditions and various other factors that are believed to be reasonable under the circumstances. This forms the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      Historically, as part of Infineon, the management of the Infineon Fiber Optics Business has applied Infineon’s group accounting policies to prepare the combined financial statements of the Infineon Fiber Optics Business. The Infineon Fiber Optics Business has identified the following critical accounting policies and related assumptions, estimates and uncertainties, which it believes are essential to understanding the underlying financial reporting risks and the impact that these accounting methods, assumptions, estimates and uncertainties have on its reported financial results:

  •  carve-out assumptions;
 
  •  valuation of inventory;
 
  •  recoverability of long-lived assets; and
 
  •  income taxes.
 
Carve-out Assumptions

      The combined financial statements of the Infineon Fiber Optics Business have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are derived from Infineon’s historical accounting records. They are presented on a “carve-out” basis to include the historical operations applicable to the Infineon Fiber Optics Business and the historical basis of its assets and liabilities.

      The combined financial statements of the Infineon Fiber Optics Business includes all revenues and expenses attributable to its business. Specifically identifiable operating expenses or revenues of the Infineon Fiber Optics Business are charged or credited directly to it without allocation or apportionment. The combined statement of operations includes depreciation expense for all property, plant and equipment owned and operated by the Infineon Fiber Optics Business. Expenditures related and indirectly attributable to the Infineon Fiber Optics Business which have been incurred by Infineon are allocated to the Infineon Fiber Optics Business. These allocated expenditures include charges for facilities, functions, and services provided by shared Infineon facilities for the Infineon Fiber Optics Business, expenses for certain functions and services

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performed by centralized Infineon departments, a portion of Infineon’s general corporate expenses, and certain research and development expenses. Allocation methods include proportionate allocation on the basis of assets, production volumes, usage, sales, and employee headcount.

      Due to the significant relationship between Infineon and the Infineon Fiber Optics Business, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated third parties. Management of the Infineon Fiber Optics Business believes the assumptions underlying the combined financial statements are reasonable. However, these allocations and estimates are not necessarily indicative of the costs that would have resulted if the Infineon Fiber Optics Business had been operated on a stand-alone basis, nor are they indicative of future costs either after the acquisition by Finisar or otherwise.

      Unless otherwise noted, all assets and liabilities specifically identifiable with the Infineon Fiber Optics Business are included in the preparation of the combined financial statements. The following assumptions and allocations are used for those assets and liabilities not specifically identifiable to the Infineon Fiber Optics Business:

 
Trade Accounts Payable

      Trade accounts payable include identifiable payables from specific vendors and service suppliers of the Infineon Fiber Optics Business as well as an allocation of payables from Infineon-specified vendors based on material consumption and days payable outstanding.

 
Other Current and Accrued Liabilities

      Other current and accrued liabilities include direct payroll obligations and payroll obligations, which are allocated based on head count of the Infineon Fiber Optics Business.

 
Pension Liabilities

      Pension expenses and related liabilities are measured based on actuarial computations and are determined based on the actual number of employees of the Infineon Fiber Optics Business that participate in Infineon’s defined benefit pension plans.

 
Investments By and Advances from Infineon

      Because a direct ownership relationship does not exist among the various entities comprising the Infineon Fiber Optics Business, Infineon’s investments and advances represent Infineon’s interest in the recorded net assets of the Infineon Fiber Optics Business, and are shown as business equity in lieu of shareholder’s equity in the financial statements of the Infineon Fiber Optics Business. The Infineon Fiber Optics Business has historically been dependent upon Infineon for its financing and capital requirements. Infineon uses a centralized approach to cash management and the financing of operations. The Infineon Fiber Optics Business has historically utilized Infineon’s centralized cash management services for its operations. As a result, none of Infineon’s cash, cash equivalents, or direct indebtedness have been allocated to the financial statements of the Infineon Fiber Optics Business. All transactions between Infineon and the Infineon Fiber Optics Business, including purchases of inventory, charges and cost allocations for facilities, functions and services performed by Infineon for the Infineon Fiber Optics Business, are reflected in this amount. In addition, Infineon has provided the Infineon Fiber Optics Business with a short-term loan. The historical capital structure of the Infineon Fiber Optics Business may not necessarily be indicative of the capital that it would require as a separate company or following the acquisition by Finisar.

 
Valuation of Inventory

      As a matter of policy, the Infineon Fiber Optics Business values inventory at the lower of cost or market. It reviews the recoverability of inventory based on regular monitoring of the amount and composition of the inventory positions, current economic events and market conditions, projected future product demand and the

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pricing environment. This evaluation is inherently judgmental and requires material estimates, including both forecasted product demand and pricing environment, both of which may be susceptible to significant change.

      If the market value of inventory at the balance sheet date decreases to below its cost, the difference is written off to cost of goods sold. The Infineon Fiber Optics Business recorded such write downs, including scrap, in the fiscal years 2002 and 2003, as a result of the downturn in the fiber optic industry which decreased the sale price of certain products to below their cost to manufacture.

      In future periods, additional write-downs of inventory may be necessary due to (1) reduced demand for fiber optic products, (2) increased industry capacity resulting from either technological improvements or new facilities, (3) technological obsolescence due to rapid developments of new products and technological improvements or (4) changes in economic or other events and conditions that impact the market price for products. These factors could result in adjustments to the valuation of inventory in future periods and negatively impact the future operating results of the Infineon Fiber Optics Business.

 
Recoverability of Long-lived Assets

      The Infineon Fiber Optics Business is particularly capital-intensive and requires a significant investment in property, plant and equipment. Due to constant technological change in the semiconductor industry, the period over which the Infineon Fiber Optics Business can use equipment to manufacture saleable products is generally short. The following estimated useful lives are used to depreciate property, plant and equipment of the Infineon Fiber Optics Business:

         
Years

Buildings
    10  
Technical equipment and machinery
    3-10  
Other plant and office equipment
    1-10  

      Although the depreciation recognized decreases the book value of the property, plant and equipment of the Infineon Fiber Optics Business over time, this may not necessarily reflect the value which is recoverable from these assets at a specific point in time.

      The management of the Infineon Fiber Optics Business reviews long-lived assets, including property, plant and equipment and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Estimated fair value is generally based on either appraised value or measured by discounted estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows

 
Income Taxes

      The income tax expense in the combined statements of operations of the Infineon Fiber Optics Business has been calculated using a separate return basis, although the Infineon Fiber Optics Business, with the exception of IF Trutnov, is included in Infineon’s tax returns. Under this method, income taxes are allocated to members of the Infineon group by applying SFAS No. 109, Accounting for Income Taxes, to each member of the group as if it were a separate tax paying entity. The asset and liability method is used to recognize deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Investment tax credits are recognized as a reduction of tax expenses for the period in which the tax credits arise.

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      The gross deferred tax asset for the tax loss carry forward consists primarily of the loss, which would have been available on a separate company basis for the fiscal years 2002 and 2003, respectively. For the fiscal years ended September 30, 2001, 2002 and 2003, the Infineon Fiber Optics Business incurred German tax losses in the amounts of 49.9 million, 85.7 million and 73.1 million. Such tax losses will be utilized by Infineon in its future tax returns, and therefore, are not available to the Infineon Fiber Optics Business in future years.

      Pursuant to SFAS No. 109, the Infineon Fiber Optics Business has assessed its deferred tax asset and the need for a valuation allowance. Such an assessment considers whether it is more likely than not that some portion or all of the deferred tax assets may not be realized. The assessment requires considerable judgment on the part of management of the Infineon Fiber Optics Business, with respect to, among other things, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The ultimate realization of deferred tax assets is dependent upon the ability of the Infineon Fiber Optics Business to generate the appropriate character of future taxable income sufficient to utilize loss carry-forwards or tax credits before their expiration. Since the Infineon Fiber Optics Business had incurred a cumulative loss in certain tax jurisdictions over a three year period as of September 30, 2001, 2002 and 2003, the impact of forecasted future taxable income is excluded from such an assessment, pursuant to the provisions of SFAS No. 109. As a result of this assessment, the Infineon Fiber Optics Business established a full valuation allowance at September 30, 2001, 2002 and 2003, respectively, since it is more likely than not that the Infineon Fiber Optics Business will realize no benefit in the future.

Results of Operations of the Infineon Fiber Optics Business

 
Comparison of the Six Months Ended March 31, 2004 and 2003

      Net Sales. Net sales of the Infineon Fiber Optics Business increased 19% from 45.4 million in the six months ended March 31, 2003 to 54.2 million in the six months ended March 31, 2004. This increase reflects a 21% increase in sales to third parties, partially offset by a 8% decrease in sales to related parties.

      Sales of modules increased 3% from 28.1 million in the six months ended March 31, 2003 to 28.9 million in the six months ended March 31, 2004. This increase reflects higher sales volumes due to production ramp-up and a more favourable product mix.

      Sales of components increased 3% from 3.9 million in the six months ended March 31, 2003 to 4.0 million in the six months ended March 31, 2004. This increase reflects higher sales volumes due to production ramp-up and a more favourable product mix, partially offset by a negative price change.

      Sales of POF products increased 60% from 13.3 million in the six months ended March 31, 2003 to 21.3 million in the six months ended March 31, 2004. This increase reflects increased volumes due to production ramp-up.

      Sales to customers representing at least 10% of total revenues during the six months ended March 31, 2004 and 2003 were as follows:

                                 
Six Months Six Months
Ended Ended
March 31, March 31,


2003 2004 2003 2004




(Euro (Percent of
in millions) total revenues)
Tyco
    9.6       16.5       21 %     30 %
Alcatel
    3.3       6.2       7 %     11 %

      Costs of Goods Sold. Costs of goods sold decreased 3% from 57.1 million or 125.8% of net sales in the six months ended March 31, 2003 to 55.2 million or 101.9% of net sales in the six months ended March 31, 2004. During the six months ended March 31, 2004, the Infineon Fiber Optics Business reversed previously established warranty accruals in an amount of 5.7 million for potential claims which after a two-year period did not materialize and are no longer deemed necessary. In addition, costs of goods sold benefitted from a shift from products for which production is being ramped up to products in stable volume production.

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      Research and Development Expenses. Research and development expenses decreased 11% from 13.7 million in the six months ended March 31, 2003 to 12.2 million in the six months ended March 31, 2004. The decrease in research and development expenses was primarily due to costs in the prior period related to the DWDM business that was sold to Optun in 2003 and the completion of development activities for PAROLI® products.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 7% from 13.5 million or 29.6% of net sales in the six months ended March 31, 2003 to 14.5 million or 26.8% of net sales in the six months ended March 31, 2004. Selling expenses remained constant, while there was an increase in the amount of general and administrative expenses allocated to the Infineon Fiber Optics Business by Infineon.

      Equity in earnings of associated companies. The equity in earnings of associated companies decreased 7% from 171,000 in 2003 to 159,000 in 2004, which primarily reflects lower earnings by AEMtec.

      Interest Expense. Interest expense decreased to 0.4 million in the six months ended March 31, 2004 from 0.6 million in the six months ended March 31, 2003, which reflects the lower average outstanding loan to Infineon during the period.

      Income Taxes. Income taxes were 0.4 million in both six month periods ended March 31, 2004 and 2003.

      Net Loss. Due to the factors described above, net loss decreased from 42.9 million in the six months ended March 31, 2003 to 27.9 million in the six months ended March 31, 2004.

 
Comparison of Fiscal Years Ended September 30, 2003 and 2002

      Net Sales. Net sales decreased 5% from 113.9 million in the fiscal year 2002 to 107.8 million in the fiscal year 2003. This decrease reflects a 6% decrease in sales to third parties from 109.1 million in the fiscal year 2002 to 102.3 million in the fiscal year 2003, partially offset by a 12% increase in sales to related parties, from 4.9 million in the fiscal year 2002 to 5.5 million in the fiscal year 2003.

      Sales of modules decreased 10% from 75.5 million in the fiscal year 2002 to 67.0 million in the fiscal year 2003. This decrease reflects a 33% decline in average prices for modules, partially offset by higher volumes.

      Sales of components decreased 45% from 12.5 million in the fiscal year 2002 to 6.9 million in the fiscal year 2003. This decrease reflects a 20% decline in average prices for components and lower volumes.

      Sales of POF products increased 26% from 26.9 million in the fiscal year 2002 to 33.9 million in the fiscal year 2003. This increase reflects higher volumes due to production ramp-up.

      Sales to customers representing at least 10% of total revenues during the fiscal year 2002 and the fiscal year 2003 were as follows:

                                 
Fiscal Years Fiscal Years
Ended Ended
September 30, September 30,


2002 2003 2002 2003




(Euro (Percent of
in millions) total
revenues)
Tyco
    22.0       27.1       19 %     25 %
Alcatel
    13.7       15.5       12 %     14 %

      Costs of Goods Sold. Costs of goods sold decreased 13% from 138.5 million, or 121.5% of net sales, in the fiscal year 2002 to 120.0 million, or 111.3% of net sales, in the fiscal year 2003. These figures include cost of goods sold allocated from Infineon of 7.1 million in the fiscal year 2003 up from 6.2 million in the fiscal year 2002. The decrease in costs of goods sold primarily reflects non-recurring inventory write-offs in the prior period and increased utilization of capacity.

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      Research and Development Expenses. Research and development expenses decreased 3% from 26.3 million in the fiscal year 2002 to 25.6 million in the fiscal year 2003, mainly due to reduced spending in conjunction with over-all cost-cutting measures. The reduced spending offset the impact of reductions in economic development funding from various governmental entities of 1.2 million compared to the prior year. Research and development expenses as a percentage of net sales increased from 23% in the fiscal year 2002 to 24% in the fiscal year 2003 mainly due to the decrease in sales.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 7% from 29.4 million or 26% of net sales in the fiscal year 2002 to 27.4 million or 25% of net sales in the fiscal year 2003. This decrease was mainly due to cost-cutting programs implemented in the prior year.

      Restructuring Charges. Restructuring charges increased from 0.5 million in the fiscal year 2002 to 4.2 million in the fiscal year 2003. The restructuring charges incurred in the fiscal year 2003 increased due to an accrued liability from employee terminations of 3.5 million.

      Equity in earnings of associated companies. The equity in earnings of associated companies increased 136% from 145,000 in 2002 to 342,000 in 2003 due to increased earnings from AEMtec.

      Other Operating Income. Other operating income increased from 0.04 million in 2002 to 0.3 million in 2003 mainly due to favorable effects of foreign currency translations.

      Interest Expense. Interest expense decreased to 0.7 million in the fiscal year 2003 from 1.8 million in the fiscal year 2002 mainly due to the partial repayment of a short-term loan from Infineon.

      Income Taxes. Income taxes decreased to 0.2 million in the fiscal year 2003 from 0.7 million in the fiscal year 2002. The decrease was mainly due to a lower loss before taxes and lower taxes in foreign tax jurisdiction compared to the prior year.

      Net Loss. For the reasons discussed above, net loss decreased from 82.9 million in the fiscal year 2002 to 69.7 million in the fiscal year 2003.

 
Comparison of Fiscal Years Ended September 30, 2002 and 2001

      Net Sales. Net sales decreased 31% from 164.4 million in the fiscal year 2001 to 114.0 million in the fiscal year 2002. This decrease reflects a 24% decrease in sales to third parties from 143.6 million in the fiscal year 2001 to 109.1 million in the fiscal year 2002 and a 76% decrease in sales to related parties, from 20.8 million in the fiscal year 2001 to 4.9 million in the fiscal year 2002.

      Sales of modules decreased 33% from 111.1 million in the fiscal year 2001 to 74.5 million in the fiscal year 2002. This decrease reflects declining average sales prices, weakened demand for telecom and datacom applications and a shift in product mix from 1x9 form factor products to a pluggable solution which sells at a lower average price.

      Sales of components decreased 57% from 29.0 million in the fiscal year 2001 to 12.5 million in the fiscal year 2002. This decrease reflects declining average sales prices and lower demand for telecom discrete components. In addition, as part of the Infineon Fiber Optics Business’s strategy to increase focus on fiber access, a higher proportion of components were used for production of modules instead of sales to third parties.

      Sales of POF products increased 320% from 6.4 million in the fiscal year 2001 to 26.9 million in the fiscal year 2002. This increase reflects higher POF volumes due to production ramp-up.

      Other products represented 18.0 million of sales in the fiscal year 2001. These sales halted following the fiscal year 2001 and no revenue was recorded for such products in fiscal year 2002.

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      Sales to customers representing at least 10% of total revenues during the fiscal year 2001 and the fiscal year 2002 were as follows:

                                 
Fiscal Years Fiscal Years
Ended Ended
September 30, September 30,


2001 2002 2001 2002




(Euro in (Percent of
millions) total
revenues)
Siemens ICN
    18.5       4.0       11 %     4 %
Tyco
    4.2       22.0       3 %     19 %

      Costs of Goods Sold. Costs of goods sold increased from 96.4% of net sales in the fiscal year 2001 to 121.6% of net sales in the fiscal year 2002. The increase in costs of goods sold primarily reflected lower sales volumes and higher idle capacity costs, which were partially offset by inventory write-offs in 2002.

      Research and Development Expenses. Research and development expenses increased 31% from 20.1 million in the fiscal year 2001 to 26.3 million in the fiscal year 2002. The increase was mainly due to an increase in engineering headcount for new products such as 10G, SFP, Tri-port BIDI, and byteflight. Research and development expenses as a percentage of net sales increased from 12% in the fiscal year 2001 to 23% in the fiscal year 2002.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 2% from 30.1 million or 18.3% of net sales in the fiscal year 2001 to 29.4 million or 25.8% of net sales in the fiscal year 2002. Most of this decrease was due to cost reduction measures, IT costs savings and process optimatizations in selling and marketing functions.

      Restructuring Charges. Restructuring charges held constant at 0.5 million between the fiscal year 2001 and the fiscal year 2002.

      Equity in earnings of associated companies. The equity in earnings of associated companies increased 87.5% from 80,000 in 2001 to 150,000 in 2002. This increase was primarily due to increased earnings from AEMtec.

      Other Operating Income. Other operating income decreased from 1.2 million in 2001 to 40,000 in 2002. The decrease was primarily the result of Infineon allocating extra cost to the Infineon Fiber Optics Business under its central cost apportionment.

      Interest Expense. Interest expense increased to 1.8 million in the fiscal year 2002 from 1.6 million in the fiscal year 2001. The increase in interest expense was mainly due to a higher average outstanding loan which IF Trutnov received from Infineon BV, a wholly-owned subsidiary of Infineon.

      Income Taxes. Income taxes held constant at 0.7 million between the fiscal year 2002 and the fiscal year 2001.

      Net Loss. For the reasons discussed above, net loss increased from 45.7 million in the fiscal year 2001 to 82.9 million in the fiscal year 2002.

Liquidity and Capital Resources

      The Infineon Fiber Optics Business is dependent upon Infineon for its financing and capital requirements. Infineon uses a centralized approach to cash management and the financing of operations. The Infineon Fiber Optics Business utilizes Infineon’s centralized cash management services for its operations. As a result, none of Infineon’s cash, cash equivalents, or direct indebtedness have been allocated to the Infineon Fiber Optics Business in the combined financial statements. All inter-company transactions, including purchases of inventory, charges and cost allocations for facilities, functions and services performed by Infineon for the Infineon Fiber Optics Business are reflected in the investment by and the advances from Infineon. In addition, Infineon has provided the Infineon Fiber Optics Business with a short-term loan payable to Infineon BV. The loan accrues interest at 2.40% per annum.

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     Six Months Ended March 31, 2004

      As of March 31, 2004, the principal sources of liquidity for the Infineon Fiber Optics Business were 28.7 million in investments by and advances from Infineon. In addition, grants by governmental entities for research and development supplied 0.4 million in additional liquidity.

      Net cash used by operating activities totaled 21.6 million in the six months ended March 31, 2004. The use of net cash in operating activities in the six months ended March 31, 2004 was primarily a result of a net loss for the six month period.

      Net cash used in investing activities totaled 6.8 million in the six months ended March 31, 2004 due to purchases of equipment needed for different production lines and R&D labs worldwide.

      Net cash provided by financing activities totaled 28.2 million in the six months ended March 31, 2004, which was primarily derived from investments by and advances from Infineon.

     Fiscal Years Ended September 30, 2003 and 2002

      As of September 30, 2003, the principal sources of liquidity for the Infineon Fiber Optics Business were 65.5 million in investments by and advances from Infineon. For the fiscal year 2002, the principal sources of liquidity for the Infineon Fiber Optics Business were 64.7 million in investments by and advances from Infineon. In addition, grants by governmental entities for research and development purposes supplied 1.9 million and 1 million in additional liquidity for the fiscal years 2002 and 2003, respectively.

      Net cash used by operating activities totaled 34.4 million in the fiscal year 2002 and 47.9 million in the fiscal year 2003. The use of net cash in operating activities in each of these fiscal years was primarily a result of net losses incurred by the Infineon Fiber Optics Business. The Infineon Fiber Optics Business used more net cash in operating activities in the fiscal year 2003 compared to the fiscal year 2002 due to the payment of accounts payable and accrued expenses and a lower net loss.

      Net cash used in investing activities totaled 15.0 million in the fiscal year 2002 due to the purchase of property, plant and equipment. Net cash used in investing activities in the fiscal year 2003 totaled 7.0 million, inclusive of 5.4 million for the purchase of property, plant and equipment and 1.5 million from investment in associated and related companies.

      Net cash provided by financing activities totaled 47.5 million in the fiscal year 2002 and 54.5 million in the fiscal year 2003. Net cash provided by financing activities in the fiscal year 2003 and 2002 was primarily due to investments by and advances from Infineon. This investment by Infineon was set off by payment on the short-term loan from Infineon in both years.

Future Capital Requirements

      The Infineon Fiber Optics Business will require capital in the future mainly to finance its operating activities and capital expenditures.

      In the fiscal year 2004 the Infineon Fiber Optics Business plans to spend approximately 8 million related to capital expenditures and approximately 25 million related to research and development expenditures.

      Due to the losses incurred and the cash used in operating activities to date, the Infineon Fiber Optics Business has historically been economically dependent upon Infineon for providing the necessary financing to fund its operating losses and meet its capital requirements. Upon the acquisition of the Infineon Fiber Optics Business by Finisar, the Infineon Fiber Optics Business will be reliant on Finisar for the financing of its operations.

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Contractual Obligations and Commercial Commitments

      Operating leases consist of facilities in Regensburg and Perlach, which the Infineon Fiber Optics Business leases under a service agreement from Infineon. These leases are cancelable with notice periods of up to nine months.

      As of September 30, 2003, the Infineon Fiber Optics Business had unconditional purchase commitments due in less than one year of 12.2 million.

Off-Balance Sheet Arrangements

      At March 31, 2004, the Infineon Fiber Optics Business did not have off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which addresses consolidation by business enterprises of variable interest entities which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without support from other parties and (2) the equity investors lack one or more of the defined essential characteristics of a controlling financial interest. Interpretation No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the participating parties. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”, which replaces the original FASB Interpretation No. 46 and addresses consolidation by business enterprises of certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This delayed the effective date of this Interpretation for variable interest entities created before February 1, 2003 for the Infineon Fiber Optics Business until October 1, 2003. The Infineon Fiber Optics Business has evaluated the impact of the provisions of Interpretation 46, and it believes it will not have a material impact on the financial statements of the Infineon Fiber Optics Business.

      In July 2003, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 03-5, “Applicability of AICPA Statement of Position 97-2 (“SOP 97-2”) to Non-Software Deliverables” (“EITF 03-5”). The consensus was reached that SOP 97-2 is applicable to non-software deliverables if they are included in an arrangement that contains software that is essential to the functionality of the non-software deliverables. This consensus is to be applied to the fiscal year of the Infineon Fiber Optics Business beginning October 1, 2003. The Infineon Fiber Optics Business has evaluated the impact of the provisions of the EITF 03-5 and believes it will not have a material impact on the financial statements of the Infineon Fiber Optics Business.

      In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106”, which revises employers’ disclosures about pension plans and other postretirement benefit plans. SFAS No. 132 (revised 2003) requires additional disclosures to those in the original SFAS No. 132, which it replaces. SFAS No. 132 (revised 2003) is effective for the Infineon Fiber Optics Business year ending September 30, 2004, with interim-period disclosures requirements effective for the Infineon Fiber Optics Business from January 1, 2004. The Infineon Fiber Optics Business does not expect the adoption of SFAS No. 132 (revised 2003) to have a material effect on its combined financial statements.

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Qualitative and Quantitative Disclosures About Market Risk

 
Investments

      The Infineon Fiber Optics Business invests in equity instruments of privately held companies for business and strategic purposes. These investments are included in long-term investments and are accounted for under the cost method when ownership is less than 20% and the Infineon Fiber Optics Business does not have the ability to exercise significant influence. For entities in which the Infineon Fiber Optics Business holds greater than 20% ownership, or where it has the ability to exercise significant influence, the equity method is used. For these non-quoted investments, the policy of the management of the Infineon Fiber Optics Business is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values.

 
Interest Rate Sensitivity

      The fair value of the Infineon Fiber Optics Business’ short-term loan approximates its carrying value as the interest rate approximates that which could be obtained currently on the market. The fair values of the cash and cash equivalents, receivables, related-party receivables and payables and other financial instruments of the Infineon Fiber Optics Business approximate their carrying values due to their short-term nature.

 
Foreign Currency Sensitivity

      The Infineon Fiber Optics Business operates internationally, giving rise to exposure to changes in foreign currency exchange rates. The Infineon Fiber Optics Business does not currently use any derivative instruments. However, the Infineon Fiber Optics Business continues to review this issue and may consider hedging certain foreign exchange risks through the use of currency forwards or options in the future.

 
Supply Sensitivity

      The Infineon Fiber Optics Business is exposed to commodity price risks with respect to raw materials used in the manufacture of its products. Supplier concentration risks arise from the persisting consolidation in the supplier market, especially with respect to highly specialized technologies and processes. The associated company AEMtec is a significant supplier for the Infineon Fiber Optics Business. In the fiscal years 2001, 2002 and 2003, AEMtec accounted for more than 10% of the total purchases of the Infineon Fiber Optics Business. AEMtec supplies printed circuit board assemblies to the Infineon Fiber Optics Business. Purchases during the fiscal years 2001, 2002 and 2003 from this vendor amounted to 13.875 million, 12.833 million and 13.807 million, respectively, which represented 8.8%, 8.8% and 11.5% of the total cost of goods sold for the respective years.

      The Infineon Fiber Optics Business seeks to minimize these risks through its sourcing policies and operating procedures. It does not utilize derivative financial instruments to manage any remaining exposure to fluctuations in commodity price.

 
Counterparty Sensitivity

      Financial instruments that expose the Infineon Fiber Optics Business to credit risk consist primarily of trade receivables. Concentrations of credit risks with respect to trade receivables are limited to a degree by Infineon’s credit approval and monitoring procedures. The Infineon Fiber Optics Business establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. As disclosed above, two customers individually accounted for more than 10% of the Infineon Fiber Optics Business. Sales during the fiscal years 2002 and 2003 to these customers amounted to 35.7 million and 42.6 million, respectively, which represented 31% and 40% of the total sales for the respective years.

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PROPOSAL 2:

ELECTION OF DIRECTORS

General

      Our board of directors is currently composed of six directors. Our Certificate of Incorporation provides that the terms of office of the members of the board of directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 2006, Class II, whose term will expire at the annual meeting of stockholders to be held in 2004, and Class III, whose term will expire at the annual meeting of stockholders to be held in 2005. At each annual meeting of stockholders, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following their election.

Nominees and Directors

      The following table sets forth for our current directors, including the nominees for Class II directors to be elected at this meeting, information concerning their age and background as of                     , 2004.

                     
Director
Name Position With Finisar Age Since




Class II directors nominated for election at the 2004 Annual Meeting of Stockholders:
Harold E. Hughes, Jr.
  Director     58       2004  
Frank H. Levinson
  Chairman of the Board and Chief Technical Officer     51       1988  
Class III directors whose terms expire at the 2005 Annual Meeting of Stockholders:
Michael C. Child
  Director     49       1998  
Jerry S. Rawls
  Director, President and Chief Executive Officer     60       1989  
Class I directors whose terms expire at the 2006 Annual Meeting of Stockholders:
Roger C. Ferguson
  Director     61       1999  
Larry D. Mitchell
  Director     61       1999  
 
Nominees for Election for a Three Year Term expiring at the 2007 Annual Meeting of Stockholders

      Harold E. Hughes, Jr. was elected to our board of directors on June 2, 2004. Mr. Hughes has been an independent consultant since 2000. Mr. Hughes was employed by Intel Corporation, a semiconductor manufacturer, from 1974 through 1997 where he held several positions, including Chief Financial Officer (1989-1992) and Treasurer (1979-1986). From 1997 to 2000, Mr. Hughes founded and served as CEO of Pandesic, LLC, a firm providing web-based SAP systems. Mr. Hughes also serves as a director of Xilinx, Inc., a provider of programmable logic solutions, Berkeley Technology Ltd., formerly known as London Pacific Group, a financial services company, Rambus, Inc., a semiconductor company, and Remec Inc., a communications company. Mr. Hughes holds a B.S. in Economics from the University of Wisconsin and an M.B.A. from the University of Michigan.

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

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     Directors Continuing in Office until the 2005 Annual Meeting of Stockholders

      Michael C. Child has been a member of our board of directors since November 1998. Mr. Child has been employed by TA Associates, Inc., a venture capital investment firm, since July 1982 where he currently serves as a Managing Director. Mr. Child holds a B.S. in Electrical Engineering from the University of California at Davis and an M.B.A. from the Stanford Graduate School of Business.

      Jerry S. Rawls has served as a member of our board of directors since March 1989 and as our Chief Executive Officer since August 1999. Mr. Rawls has also served as our President since April 2003 and previously held that title from April 1989 to September 2002. From September 1968 to February 1989, Mr. Rawls was employed by Raychem Corporation, a materials science and engineering company, where he held various management positions including Division General Manager of the Aerospace Products Division and Interconnection Systems Division. Mr. Rawls holds a B.S. in Mechanical Engineering from Texas Tech University and an M.S. in Industrial Administration from Purdue University.

 
Directors Continuing in Office until the 2006 Annual Meeting of Stockholders

      Roger C. Ferguson has been a member of our board of directors since August 1999. From June 1999 to December 2001, Mr. Ferguson served as Chief Executive Officer of Semio Corp., an early stage software company. Mr. Ferguson has served as a principal in VenCraft, LLC, a venture capital partnership, since July 1997. From August 1993 to July 1997, Mr. Ferguson was Chief Executive Officer of DataTools, Inc., a database software company. From 1987 to 1993, Mr. Ferguson served as Chief Operating Officer for Network General Inc., a network analysis company. Mr. Ferguson also serves as the Chairman of the Board of Directors of Semio Corp. Mr. Ferguson holds a B.A. in Psychology from Dartmouth College and an M.B.A. from the Amos Tuck School at Dartmouth.

      Larry D. Mitchell has been a member of our board of directors since October 1999. Mr. Mitchell has been retired since October 1997. From October 1994 to October 1997, he served as a site General Manager in Roseville, California for Hewlett-Packard. Mr. Mitchell also serves on the Board of Directors of Placer Sierra Bancshares and its wholly-owned subsidiary, Placer Sierra Bank. Mr. Mitchell holds a B.A. in Engineering Science from Dartmouth College and an M.B.A. from the Stanford Graduate School of Business.

Election of Infineon Representative Following the Acquisition

      In connection with the execution of the purchase agreement, Finisar and Infineon have entered into a stockholder agreement. See “Other Agreements Restated to the Acquisition — Stockholder Agreement.” The stockholder agreement provides, among other things, that, effective immediately after the closing of the acquisition, Finisar will cause Infineon’s designated representative to be elected to serve as a member of the Finisar board of directors. Thereafter, Finisar is required to cause Infineon’s representative to be nominated for election to the board of directors at future meetings of Finisar stockholders, so long as Infineon contains to hold more than 5% of the outstanding voting securities of Finisar. Infineon has designated Thomas Seifert, Chief Executive Officer of its Memory Products Business Group, to serve as its initial representative on the Finisar board. Mr. Child has informed us that he intends to resign from the board at the time Mr. Seifert is elected to the board.

Independence of Directors

      Our board has determined that, except for Mr. Rawls, our President and Chief Executive Officer, and Mr. Levinson, our Chairman and Chief Technical Officer, each of the current members of our board of directors is “independent” in accordance with the applicable listing standards of Nasdaq as currently in effect. Due to his affiliation with Infineon and Infineon’s substantial ownership of Finisar common stock following the acquisition, Mr. Seifert will not be independent under such standards.

Meetings of the Board of Directors

      During the fiscal year ended April 30, 2004, our board of directors held 16 meetings. During that period, the Audit Committee of the board held ten meetings, and the Compensation Committee of the board held three meetings. No director attended fewer than 75% of the total number of meetings of the board and all of the committees of the board on which such director served during that period.

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Corporate Governance and Board Committees

      Our board of directors has adopted a Code of Business Conduct and Ethics (the “Code”) that outlines the principals of legal and ethical business conduct under which Finisar does business. The Code, which is applicable to all directors, employees and officers of the Company, is available at http://investor.finisar.com/corpgov.cfm. Any substantive amendment or waiver of the Code may be made only by the board of directors upon a recommendation of the Audit Committee, and will be disclosed on our website. In addition, disclosure of any waiver of the Code for directors and executive officers will also be made by the filing of a Form 8-K with the SEC.

      The board has also adopted a written charter for each of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Each charter is available on the Company’s website at http://investor.finisar.com/corpgov.cfm. The charter for the Audit Committee is attached to in this proxy statement as Appendix C.

      The members of the Audit Committee during fiscal 2004 were Messrs. Child, Ferguson and Mitchell. In June 2004, Mr. Hughes was elected as an additional member of the Audit Committee. The functions of the Audit Committee include overseeing the quality of our financial reports and other financial information and our compliance with legal and regulatory requirements; appointing and evaluating our independent auditors, including reviewing their independence, qualifications and performance and reviewing and approving the terms of their engagement for audit services and non-audit services; and establishing and observing complaint procedures regarding accounting, internal auditing controls and auditing matters. Our board has determined that each member of the Audit Committee meets the independence criteria set forth in the applicable rules of Nasdaq and the SEC for audit committee membership. The board has also determined that all members of the Audit Committee possess the level of financial literacy required by applicable Nasdaq and SEC rules and that at least two members of the Audit Committee, Messrs. Ferguson and Hughes, are qualified as “audit committee financial experts” as defined by the SEC. For additional information about the Audit Committee, see “Report of the Audit Committee” below.

      The members of the Compensation Committee during fiscal 2004 were Messrs. Child and Ferguson. In June 2004, Messrs. Hughes and Mitchell were elected as additional members of the Compensation Committee. The Compensation Committee reviews and approves the compensation and benefits of our executive officers and establishes and reviews general policies relating to compensation and benefits of our employees. Each of the members of the Compensation Committee is independent for purposes of the Nasdaq rules. For additional information about the Compensation Committee, see “Report of the Compensation Committee on Executive Compensation” and “Executive Compensation and Other Matters” below.

      The Nominating and Corporate Governance Committee was established in June 2004. The members of the Nominating and Corporate Governance Committee are Messrs. Ferguson, Hughes and Mitchell. Each of the members of the Nominating and Corporate Governance Committee is independent for purposes of the Nasdaq rules. The Nominating and Corporate Governance Committee considers qualified candidates for appointment and nomination for election to the board of directors and makes recommendations concerning such candidates, develops corporate governance principles for recommendation to the board of directors and oversees the regular evaluation of our directors and management.

Director Nominations

      Nominations of candidates for election as directors may be made by the board of directors or by stockholders. The Nominating and Corporate Governance Committee is responsible for, among other things, the selection and recommendation to the board of directors of nominees for election as directors.

      When considering the nomination of directors for election at an annual meeting, the Nominating and Corporate Governance Committee reviews the needs of the board of directors for various skills, background, experience and expected contributions and the qualification standards established from time to time by the Nominating and Corporate Governance Committee. When reviewing potential nominees, including incumbents, the Nominating and Corporate Governance Committee considers the perceived needs of the board of

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directors, the candidate’s relevant background, experience and skills and expected contributions to the board of directors. The Nominating and Corporate Governance Committee also seeks appropriate input from the Chief Executive Officer in assessing the needs of the board of directors for relevant background, experience and skills of its members.

      The Nominating and Corporate Governance Committee’s goal is to assemble a board of directors that brings to Finisar a diversity of experience at policy-making levels in business and technology, and in areas that are relevant to Finisar’s global activities. Directors should possess the highest personal and professional ethics, integrity and values and be committed to representing the long-term interests of our stockholders. They must have an inquisitive and objective outlook and mature judgment. They must also have experience in positions with a high degree of responsibility and be leaders in the companies or institutions with which they are affiliated. Director candidates must have sufficient time available in the judgment of the Nominating and Corporate Governance Committee to perform all board and committee responsibilities that will be expected of them. Members of the board of directors are expected to rigorously prepare for, attend and participate in all meetings of the board of directors and applicable committees. Other than the foregoing, there are no specific minimum criteria for director nominees, although the Nominating and Corporate Governance Committee believes that it is preferable that a majority of the board of directors meet the definition of “independent director” set forth in Nasdaq and SEC rules. The Nominating and Corporate Governance Committee also believes it appropriate for one or more key members of the Company’s management, including the Chief Executive Officer, to serve on the board of directors.

      The Nominating and Corporate Governance Committee will consider candidates for directors proposed by directors or management, and will evaluate any such candidates against the criteria and pursuant to the policies and procedures set forth above. If the Nominating and Corporate Governance Committee believes that the board of directors requires additional candidates for nomination, the Nominating and Corporate Governance Committee may engage, as appropriate, a third party search firm to assist in identifying qualified candidates. All incumbent directors and nominees will be required to submit a completed directors’ and officers’ questionnaire as part of the nominating process. The process may also include interviews and additional background and reference checks for non-incumbent nominees, at the discretion of the Nominating and Corporate Governance Committee.

      The Nominating and Corporate Governance Committee will also consider candidates for directors recommenced by a stockholder, provided that any such recommendation is sent in writing to the board of directors, c/o Corporate Secretary, 1308 Moffett Park Drive, Sunnyvale, California 94089-1113; Fax: (408) 745-6097; Email address: corporate.secretary@finisar.com, at least 120 days prior to the anniversary of the date definitive proxy materials were mailed to stockholders in connection with the prior year’s annual meeting of stockholders and contains the following information:

  •  the candidate’s name, age, contact information and present principal occupation or employment; and
 
  •  a description of the candidate’s qualifications, skills, background and business experience during at least the last five years, including his or her principal occupation and employment and the name and principal business of any company or other organization where the candidate has been employed or has served as a director.

      The Nominating and Corporate Governance Committee will evaluate any candidates recommended by stockholders against the same criteria and pursuant to the same policies and procedures applicable to the evaluation of candidates proposed by directors or management.

      In addition, stockholders may make direct nominations of directors for election at an annual meeting, provided the advance notice requirements set forth in our bylaws have been met. Under our bylaws, written notice of such nomination, including certain information and representations specified in the bylaws, must be delivered to our principal executive offices, addressed to the Corporate Secretary, at least 120 days prior to the anniversary of the date definitive proxy materials were mailed to stockholders in connection with the prior year’s annual meeting of the stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been advanced by more than 30 days from the date contemplated at the

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time of the previous year’s proxy statement, such notice must be received not later than the close of business on the 10th day following the day on which the public announcement of the date of such meeting is first made.

Communications by Stockholders with Directors

      Stockholders may communicate with the board of directors, or any individual director, by transmitting correspondence by mail, facsimile or email, addressed as follows: Board of Directors or individual director, c/o Corporate Secretary, 1308 Moffett Park Drive, Sunnyvale, California 94089-1113; Fax: (408) 745-6097; Email Address: corporate.secretary@finisar.com. The Corporate Secretary will maintain a log of such communications and will transmit as soon as practicable such communications to the board of directors or to the identified director(s), although communications that are abusive, in bad taste or that present safety or security concerns may be handled differently, as determined by the Corporate Secretary.

Director Attendance at Annual Meetings

      We will make every effort to schedule our annual meeting of stockholders at a time and date to accommodate attendance by directors taking into account the directors’ schedules. All directors are encouraged to attend the Company’s annual meeting of stockholders. Three directors attended the Company’s 2003 annual meeting of stockholders.

Vote Required and Recommendation of the Finisar Board of Directors

      The term of the Class II directors will expire on the date of the upcoming annual meeting. Accordingly, two persons are to be elected to serve as Class II members of the board of directors at the meeting. Management’s nominees for election by the stockholders to those two positions are the current Class II members of the board of directors: Harold E. Hughes, Jr. and Frank H. Levinson. Please see “Nominees and Directors” above for information concerning the nominees. If elected, the nominees will serve as directors until our annual meeting of stockholders in 2007 and until their respective successors are elected and qualified. If any of the nominees declines to serve or becomes unavailable for any reason, or if a vacancy occurs before the election (although we know of no reason to anticipate that this will occur), the proxies may be voted for such substitute nominees as we may designate. The proxies cannot be voted for a greater number of persons than two.

      If a quorum is present and voting, the two nominees for Class II director receiving the highest number of votes will be elected as Class II directors. Abstentions and broker non-votes have no effect on the vote.

      The Board of Directors recommends a vote “FOR” the nominees named above.

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PROPOSAL 3:

APPROVAL OF AMENDMENT TO FINISAR’S CERTIFICATE OF INCORPORATION

Background

      Under Delaware law, we may only issue shares of our common stock to the extent such shares have been authorized for issuance under our Certificate of Incorporation. Our Certificate of Incorporation currently authorizes the issuance of up to 500,000,000 shares of our common stock. As of June 30, 2004, 223,536,671 shares of common stock were issued and outstanding, an aggregate of 58,647,020 unissued shares were reserved for issuance upon conversion of our outstanding 5 1/4% convertible subordinated notes due 2008 and our 2 1/2% convertible subordinated notes due 2010, and 62,667,967 unissued shares were reserved for issuance under our equity compensation plans, leaving 155,148,342 shares of common stock unissued and unreserved. In the event that the issuance of shares to Infineon in connection with the acquisition of the Infineon Fiber Optics Business is approved by the Finisar stockholders, the other conditions to the acquisition are satisfied or waived, and the acquisition is consummated, Finisar will issue approximately 135,000,000 shares of common stock to Infineon. If the stockholders approve Proposal 4 regarding the amendment of the 1999 Stock Purchase Plan, an aggregate of 15,000,000 additional shares will be reserved for issuance under this plan, leaving only 5,148,342 shares of common stock unissued and unreserved. In order to ensure sufficient shares of common stock will be available for issuance by Finisar, the board of directors has approved, subject to stockholder approval, an amendment to Finisar’s Certificate of Incorporation to increase the number of shares of common stock authorized for issuance from 500,000,000 to 800,000,000.

Purpose and Effect of the Amendment

      The purpose of the proposed amendment to the Certificate of Incorporation is to authorize additional shares of common stock which will be available for future issuance in the event the board of directors determines that it is necessary or appropriate to raise additional capital through the sale of equity securities, to acquire another company or its assets, to establish strategic relationships with corporate partners, to declare stock dividends, to provide equity incentives to employees or officers, or to issue or reserve shares of common stock for other corporate purposes. The availability of additional shares of common stock would be particularly important in the event that the board of directors needs to undertake any of the foregoing actions on an expedited basis in order to avoid the time and expense of seeking stockholder approval in connection with the contemplated issuance of common stock, where such approval might not otherwise be required. If the amendment is approved by the stockholders, the board does not intend to solicit further stockholder approval prior to the issuance of any additional shares of common stock, except as may be required by applicable law. The board of directors has no present agreement, arrangement or commitment to issue any of the shares for which approval is sought.

      The increase in the number of authorized shares of common stock will not have any immediate effect on the rights of existing stockholders. However, the board will have the authority to issue authorized common stock without requiring future stockholder approval of such issuances, except as may be required by applicable law and the rules of Nasdaq. To the extent that additional authorized shares are issued in the future, they may decrease the existing stockholders’ percentage equity ownership and, depending on the price at which they are issued, could be dilutive to the existing stockholders. The holders of common stock have no preemptive rights and the board of directors has no plans to grant such rights with respect to any such shares.

      The increase in the authorized number of shares of common stock and the subsequent issuance of such shares could have the effect of delaying or preventing a change in control of Finisar without further action by the stockholders. Shares of authorized and unissued common stock could, within the limits imposed by applicable law, be issued in one or more transactions which would make a change in control of Finisar more difficult, and therefore less likely. Any such issuance of additional stock could have the effect of diluting the earnings per share and book value per share of outstanding shares of common stock and such additional shares could be used to dilute the stock ownership or voting rights of a person seeking to obtain control of Finisar.

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      The board of directors is not currently aware of any attempt to take over or acquire Finisar. While it may be deemed to have potential anti-takeover effects, the proposed amendment to increase the authorized common stock is not prompted by any specific effort or takeover threat currently perceived by management.

      If the proposed amendment is approved by the stockholders, Article Fourth of our Certificate of Incorporation will be amended to read as follows:

        “A. Capitalization. The total number of shares of all classes of stock which the Corporation will have authority to issue is eight hundred five million (805,000,000), consisting of
 
        1. Five million (5,000,000) shares of Preferred Stock, par value one-tenth of one cent ($0.001) per share (the “Preferred Stock”); and
 
        2. Eight hundred million (800,000,000) shares of common stock, par value one-tenth of one cent ($0.001) per share (the “Common Stock”).”

Vote Required and Recommendation of the Finisar Board of Directors

      Approval of this proposal requires the affirmative vote of a majority of the issued and outstanding shares of common stock. Abstentions and broker non-votes will be counted as present for purposes of determining if a quorum is present but will have the same effect as a negative vote on this proposal.

      The board of directors unanimously recommends that the stockholders vote “FOR” approval of the amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock from 500,000,000 to 800,000,000 shares.

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PROPOSAL 4:

APPROVAL OF AMENDMENT TO THE FINISAR

1999 EMPLOYEE STOCK PURCHASE PLAN AND ADOPTION
OF THE INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN

General

      At the annual meeting, the stockholders will be asked to approve an amendment to the Finisar 1999 Employee Stock Purchase Plan (the “Purchase Plan”) to increase the number of shares of common stock reserved for issuance under the Purchase Plan by an additional 15,000,000 shares and to increase the automatic annual increase in the number of shares of common stock reserved for issuance under the Purchase Plan from 750,000 to 1,000,000 shares.

      The purpose of the amendment is to ensure that we will continue to have a sufficient reserve of common stock available under the Purchase Plan to provide eligible employees of the Company and any participating parent or subsidiary companies (whether now existing or subsequently established) with the opportunity to purchase shares of our common stock at semi-annual intervals through their accumulated periodic payroll deductions.

      We have also adopted a parallel International Employee Stock Purchase Plan (the “International Plan”) to facilitate the participation of our employees in foreign countries and assure compliance with the applicable laws and regulations of those foreign jurisdictions. The proposed amendment to the Purchase Plan and the International Plan were adopted by our board of directors in July 2004 and will become effective upon stockholder approval at the annual meeting.

      The following is a summary of the principal features of the Purchase Plan as modified by the proposed amendment. The terms of the International Plan are generally similar to the terms of the Purchase Plan. The summary, however, does not purport to be a complete description of all the provisions of the Purchase Plan. Any stockholder who wishes to obtain a copy of the actual plan documents may do so upon written request to our Corporate Secretary at our principal executive offices at 1308 Moffet Park Drive, Sunnyvale, California 94089.

Administration

      The Purchase Plan is administered either by our board of directors or by a committee of one or more board members appointed by the board. Any such appointed committee may have administrative authority as to the entire Purchase Plan or to any specified provisions delegated to it by the board. The term “plan administrator,” as used in this summary, will mean either our board of directors or such board committee, to the extent each such entity is acting within the scope of its administrative authority under the Purchase Plan.

Securities Subject to the Purchase Plan

      The maximum number of shares of common stock reserved for issuance over the term of the Purchase Plan is currently limited to 3,750,000 shares (excluding the 15,000,000 share increase which is the subject of this proposal). Subject to stockholder approval of this proposal, on the first day of May in each subsequent calendar year, beginning with calendar year 2005 and continuing through the 2010 calendar year, the share reserve will automatically increase by 1,000,000 shares of our common stock. The shares issuable under the Purchase Plan may be made available from authorized but unissued shares of our common stock or from shares of common stock repurchased by us, including shares repurchased on the open market. The reserved shares will also be used to fund stock purchases under the International Plan, and any shares issued under the International Plan will reduce, on a share-for-share basis, the number of shares available for subsequent issuance under the Purchase Plan.

      In the event that any change is made to our outstanding common stock (whether by reason of any recapitalization, stock dividend, stock split, exchange or combination of shares or other change in corporate structure effected without our receipt of consideration), appropriate adjustments will be made to (i) the

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maximum number and class of securities issuable under the Purchase Plan, (ii) the number and class of securities by which the share reserve is to increase automatically each calendar year, and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the Purchase Plan or the outstanding purchase rights thereunder.

Offering Periods and Purchase Rights

      Shares of our common stock will be offered under the Purchase Plan through a series of offering periods. No offering period may have a duration in excess of 27 months. Currently, there are two separate offering periods each year. The first offering period is of approximately 12 months duration and in general runs from December 16 to December 15 in the succeeding year. The second offering period is of approximately six months duration and in general runs from June 16 to December 15 each year. The 12-month offering period is comprised of two six-month purchase intervals. The first purchase interval will generally run from December 16 to June 15 in the succeeding year and the second interval will generally run from June 16 to December 15 each year. The six-month offering period which begins on or about June 16 each year will consist of a single six-month purchase interval coterminous with its six-month duration. The plan administrator may, however, establish a different duration for one or more offering periods or the purchase intervals within those periods or different beginning or ending dates for such offering periods or purchase intervals.

      At the time a participant joins an offering period, he or she will be granted a purchase right to acquire shares of our common stock on the last day of each purchase interval within that offering period. All payroll deductions collected from the participant for each purchase interval will be automatically applied to the purchase of common stock at the end of that purchase interval, subject to certain limitations.

Eligibility and Participation

      Any individual who is employed, whether in the United States or in any of our foreign locations, on a basis under which he or she is regularly expected to work for more than 20 hours per week for more than five months per calendar year in our employ or in the employ of any participating parent or subsidiary corporation (including any corporation which subsequently becomes such at any time during the term of the Purchase Plan) will be eligible to participate in the Purchase Plan. To the extent required by local law, foreign employees who are expected to work for less than 20 hours per week or less than five months per calendar year will be allowed to participate in the International Plan. Each individual who is an eligible employee on the start date of any offering period may enter that offering period on such start date.

      As of June 30, 2004, approximately 2,806 employees, including six executive officers, were eligible to participate in the Purchase Plan and the International Plan.

Payroll Deductions and Stock Purchases

      Each participant may authorize periodic payroll deductions in any multiple of 1% (up to a maximum of 20%) of his or her cash earnings to be applied to the acquisition of common stock semi-annually at the end of each purchase interval. Accordingly, on each semi-annual purchase date (generally June 15 and December 15 each year), the payroll deductions of each participant accumulated for the purchase interval ending on that purchase date will automatically be applied to the purchase of whole shares of common stock at the purchase price in effect for the participant for that purchase date. The plan administrator will have the discretionary authority to change the percentage contribution rates in effect for one or more subsequent offering periods. To the extent payroll deductions are prohibited under local law, participants in the International Plan may be permitted to pay for the shares by check or through other approved methods at the end of the purchase interval.

      Payroll deductions made in currency other than U.S. dollars will be converted into such dollars on the date or dates and at the exchange rate determined by the plan administrator prior to the start of the offering period in which those deductions are made.

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Purchase Price

      Unless such percentage is otherwise increased by the plan administrator prior to the commencement of an offering period, the purchase price of the common stock acquired on each semi-annual purchase date within that offering period will be equal to 85% of the lower of (i) the fair market value per share of our common stock on the start date of that offering period or (ii) the fair market value on the semi-annual purchase date.

      The fair market value per share of our common stock on any particular date under the Purchase Plan will be deemed to be equal to the closing selling price per share on such date on Nasdaq. On June 30, 2004, the fair market value of our common stock determined on such basis was $1.98 per share.

Special Limitations

      The Purchase Plan imposes certain limitations upon a participant’s rights to acquire common stock, including the following limitations:

  •  Purchase rights granted to a participant may not permit such individual to purchase more than $25,000 worth of our common stock (valued at the time each purchase right is granted) for each calendar year those purchase rights are outstanding at any time.
 
  •  Purchase rights may not be granted to any individual if such individual would, immediately after the grant, own or hold outstanding options or other rights to purchase, stock possessing 5% or more of the total combined voting power or value of all classes of our outstanding stock or the outstanding stock of any of our affiliates.
 
  •  Purchase rights granted to a participant at the beginning of a 12-month offering period may not permit a participant to purchase more than that number of whole shares of our common stock determined by dividing $25,000 by the fair market value per share of our common stock on the start date of the offering period.
 
  •  Purchase rights granted to a participant at the beginning of a six-month offering period may not permit a participant to purchase more than that number of whole shares of our common stock determined by dividing $12,500 by the fair market value of a share of our common stock on the start date of the offering period.

      The plan administrator may make appropriate adjustments to the number of shares purchasable per participant in an offering period in the event that offering period is of a longer or shorter duration than those indicated above.

Termination of Purchase Rights

      A participant may withdraw from the Purchase Plan at any time, and his or her accumulated payroll deductions will be refunded as soon as practicable after the withdrawal. In such event, the individual may not rejoin the Purchase Plan until the start of a new offering period.

      A participant’s purchase right will immediately terminate upon his or her cessation of employment or loss of eligible employee status. Any payroll deductions which a participant may have made for the purchase interval in which such cessation of employment or loss of eligibility occurs will be refunded and will not be applied to the purchase of common stock.

Stockholder Rights

      No participant will have any stockholder rights with respect to the shares covered by his or her purchase rights until the shares are actually purchased on the participant’s behalf and the participant has become a holder of record of the purchased shares. No adjustment will be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase.

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Assignability

      No purchase rights will be assignable or transferable by a participant, and the purchase rights will be exercisable only by the participant.

Change in Control

      If Finisar is acquired by a merger or a sale of all or substantially all of its assets or securities possessing more than 50% of the total combined voting power of its outstanding securities, then the successor entity (or its parent corporation) may assume Finisar’s obligations under the Purchase Plan and the outstanding purchase rights. In the event of such assumption, each purchase right will be appropriately adjusted to preclude any dilution or enlargement of benefits thereunder, and the accumulated payroll deductions will automatically be applied to the purchase of shares of common stock (or such other securities as may then be subject to the purchase rights) on the next scheduled purchase date.

      If the outstanding purchase rights are not assumed, we will accelerate the next purchase date in each of the then current offering periods to a date before the closing date on which Finisar is to be acquired, and the accumulated payroll deductions will automatically be applied to the purchase of shares of our common stock. The purchase price will be equal to 85% (or any higher percentage in effect for those offering periods) of the lower of (i) the fair market value per share of common stock on the start date of the offering period in which the participant is enrolled at the time of such acquisition or (ii) the fair market value per share of common stock on the date the shares are purchased.

Share Pro-Ration

      Should the total number of shares of common stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Purchase Plan, then the plan administrator will make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each participant, to the extent in excess of the aggregate purchase price payable for the common stock pro-rated to such individual, will be refunded.

Amendment and Termination

      Our board of directors may amend or terminate the Purchase Plan at any time. However, no amendment may adversely affect outstanding purchase rights, except to the extent necessary to qualify the Purchase Plan as an “employee stock purchase plan” pursuant to Section 423 of the Internal Revenue Code or to effect any required qualification or registration of the shares offered under the Purchase Plan pursuant to applicable federal, state or foreign securities laws. In addition, the board may not, without stockholder approval, (i) increase the number of shares issuable under the Purchase Plan (except permissible adjustments in the event of changes to our capitalization) or (ii) change the entities that may be designated by the board as participating corporations.

      The Purchase Plan may also be amended or terminated immediately upon action by our board of directors should the financial accounting rules currently applicable to employee stock purchase plans such as the Purchase Plan be subsequently revised so as to require us to recognize compensation cost in connection with the shares offered for purchase under the Purchase Plan.

New Plan Benefits

      No purchase rights will be granted, and no shares of our common stock will be issued under the Purchase Plan, on the basis of the share increase which is the subject of this proposal, unless such increase is approved by the stockholders at the annual meeting.

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Prior Purchases

      The table below shows, as to the listed individuals and specified groups, the number of shares of common stock purchased under the Purchase Plan during the fiscal year ended April 30, 2004, together with the weighted average purchase price paid per share.

                   
Number of Purchased Weighted Average
Name and Position Shares Purchase Price



Jerry S. Rawls
    0        
  President and Chief Executive Officer                
Kevin Cornell
    0        
  Senior Vice President and General Manager, Network Tools Division                
Fariba Danesh
    0        
  Senior Vice President and Chief Operating Officer                
Frank H. Levinson
    0        
  Chairman of the Board and Chief Technical Officer                
Stephen K. Workman
    0        
  Senior Vice President, Finance, Chief Financial Officer and Secretary                
All current executive officers as a group (7 persons)
    0        
All employees, including current officers who are not executive officers, as a group
    1,251,492     $ 1.14  

      As of June 30, 2004, 3,600,629 shares of our common stock had been issued under the Purchase Plan, and 149,371 shares (excluding the 15,000,000 share increase which is the subject to this proposal) remained available for future purchase.

Summary of U.S. Federal Income Tax Consequences

      The Purchase Plan is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. Under a plan which so qualifies, no taxable income will be recognized by a participant subject to U.S. taxation, and no deductions will be allowable to us, upon either the grant or the exercise of the purchase rights. Taxable income will not be recognized until there is a sale or other disposition of the shares acquired under the Purchase Plan or in the event a participant should die while still owning the purchased shares.

      If a participant sells or otherwise disposes of the purchased shares within two years after the start date of the offering period in which such shares were acquired or within one year after the purchase date on which those shares were actually acquired, then the participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the fair market value of the shares on the purchase date exceeded the purchase price paid for those shares, and we will be entitled to an income tax deduction, for the taxable year in which such disposition occurs, equal in amount to such excess.

      If a participant sells or disposes of the purchased shares more than two years after the start date of the offering period in which the shares were acquired and more than one year after the purchase date of those shares, then the participant will recognize ordinary income in the year of sale or disposition equal to the lesser of (i) the amount by which the fair market value of the shares on the sale or disposition date exceeded the purchase price paid for those shares or (ii) 15% of the fair market value of the shares on the start date of that offering period; and any additional gain upon the disposition will be taxed as a long-term capital gain. We will not be entitled to an income tax deduction with respect to such disposition.

      If a participant still owns the purchased shares at the time of death, the lesser of (i) the amount by which the fair market value of the shares on the date of death exceeds the purchase price or (ii) 15% of the fair market value of the shares on the start date of the offering period in which those shares were acquired will constitute ordinary income in the year of death.

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Non-U.S. Income Tax Consequences

      The income taxation consequences to participants and to us (or our foreign subsidiaries) with respect to participation in the International Plan may vary by country. Generally, participants are subject to taxation at the time of purchase. The employing foreign subsidiary may in some cases be entitled to a deduction in the tax year in which a participant recognizes taxable income, provided the subsidiary reimburses us for the cost benefit conferred under the International Plan.

Accounting Treatment

      Under current accounting principles applicable to employee stock purchase plans qualified under Section 423 of the Internal Revenue Code, the issuance of common stock under the Purchase Plan will not result in a compensation expense chargeable against our reported earnings. However, we must disclose, in pro-forma statements to our financial statements, the impact the purchase rights granted under the Purchase Plan would have upon our reported earnings were the value of those purchase rights treated as compensation expense.

      On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued an exposure draft of its Proposed Statement of Financial Accounting Standards for Share-Based Payments (the “Exposure Draft”) which, if approved by FASB without change, will substantially change the accounting treatment for the Purchase Plan beginning in calendar year 2005. Pursuant to the Exposure Draft, the fair value of each purchase right which is granted or vests under the Purchase Plan on or after January 1, 2005 will be charged as a direct compensation expense to our reported earnings over the offering period to which that purchase right pertains. The fair value of each purchase right will be determined as of its grant date.

Vote Required and Recommendation of the Finisar Board of Directors

      The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote this proposal is required for approval of the amendment to the Purchase Plan and the adoption of the International Plan. Abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum. Broker non-votes will have no effect on the outcome of this vote. Should stockholder approval not be obtained, then the proposed increase of 15,000,000 shares to the number of shares reserved for issuance under the Purchase Plan will not be implemented, no purchase rights will be granted on the basis of such increase, the annual increase in the share reserve will be limited to 750,000 shares and the International Plan will not be implemented. However, the Purchase Plan as in effect prior to the share increase which is the subject of this Proposal will continue to remain in effect, and stock purchases will continue to be made pursuant to the provisions of the Purchase Plan until the Purchase Plan terminates or the available share reserve is exhausted.

      The board believes that it is in our best interests to continue providing our employees with the opportunity to acquire an ownership interest in us through their participation in the Purchase Plan and thereby encourage them to remain in our employ and more closely align their interests with those of our stockholders. Therefore, the board unanimously recommends a vote “FOR” approval of the amendment to the Purchase Plan.

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PROPOSAL 5:

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

      The Audit Committee of Finisar’s board of directors has selected Ernst & Young LLP to serve as independent auditors to audit the consolidated financial statements of Finisar for the fiscal year ending April 30, 2005. Ernst & Young LLP has acted in such capacity since its appointment in fiscal 1999. A representative of Ernst & Young LLP is expected to be present at the annual meeting, with the opportunity to make a statement if the representative desires to do so, and is expected to be available to respond to appropriate questions.

      The following table sets forth the aggregate fees billed to Finisar for the fiscal years ended April 30, 2004 and April 30, 2003 by Finisar’s principal accounting firm, Ernst & Young LLP:

                 
Year Ended Year Ended
April 30, 2004 April 30, 2003


Audit fees(1)
  $ 934,545     $ 1,250,000  
Audit-related fees(2)
    146,744       292,000  
Tax fees(3)
    193,446       83,000  
All other fees(4)
    32,210        
     
     
 
Total Fees
  $ 1,306,946     $ 1,625,000  


(1)  Audit fees consist of fees billed for professional services rendered for the audit of Finisar’s consolidated annual financial statements and the review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Ernst & Young LLP in connection with statutory and regulatory filings or engagements, and attest services.
 
(2)  Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” This category includes fees related to field verification of royalties from licensees, employee benefit plan audits and, in fiscal 2004, consultations in connection with acquisitions, including the pending acquisition of the Infineon Fiber Optics Business, and consultations concerning financial reporting.
 
(3)  Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning.
 
(4)  All other fees consist of fees for products and services other than the services described above. In fiscal 2004, this category included fees related to the closure of a subsidiary and expatriate advisory services. There were no such fees in fiscal 2003.

      The Audit Committee has determined that all services performed by Ernst & Young LLP are compatible with maintaining the independence of Ernst & Young LLP. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent auditor and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval.

Vote Required and Recommendation of the Finisar Board of Directors

      The affirmative vote of a majority of the votes cast affirmatively or negatively at the annual meeting of stockholders at which a quorum representing a majority of all outstanding shares of our common stock is present and voting, either in person or by proxy, is required for approval of this proposal. Abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum. Neither abstentions nor broker non-votes will have any effect on the outcome of the proposal.

      The Board of Directors unanimously recommends a vote “FOR” the ratification of the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending April 30, 2005.

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PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP

BY FINISAR MANAGEMENT

      The following table sets forth information known to us regarding the beneficial ownership of our common stock as of June 30, 2004 by:

  •  each stockholder who is known by us to beneficially own more than 5% of our common stock;
 
  •  each of our executive officers listed on the Summary Compensation Table under “Executive Compensation and Related Matters;”
 
  •  each of our directors; and
 
  •  all of our executive officers and directors as a group:
                 
Shares of Common Stock
Beneficially Owned(1)

Name of Beneficial Owner(1) Number Percentage



Executive Officers and Directors:
               
Frank H. Levinson(2)
    28,561,319       12.75 %
Jerry S. Rawls(3)
    6,148,604       2.75  
Stephen K. Workman(4)
    749,082       *  
Fariba Danesh(5)
    479,693       *  
Kevin Cornell(6)
    80,000       *  
Larry D. Mitchell(7)
    112,500       *  
Roger C. Ferguson(8)
    108,000       *  
Michael C. Child(9)
    55,836       *  
Harold E. Hughes, Jr.
    0       *  
All executive officers and directors as a group (11 persons)(10)
    36,298,034       16.13 %


  * Less than 1%.

(1)  Unless otherwise indicated, the address of each of the named individuals is: c/o Finisar Corporation, 1308 Moffett Park Drive, Sunnyvale, CA 94089. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All shares of common stock subject to options exercisable within 60 days following June 30, 2004 are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage of ownership of that person. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other person. Accordingly, percent ownership is based on 223,536,671 shares of common stock outstanding as of June 30, 2004 plus any shares issuable pursuant to options held by the person or group in question which may be exercised within 60 days following June 30, 2004. Except as indicated in the other footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, these persons have sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by them.
 
(2)  Includes 21,636,319 shares held by the Frank H. Levinson Revocable Living Trust and 6,485,000 shares held by Seti Trading Co., Inc., a company owned 50% by the Frank H. Levinson Revocable Living Trust and 50% by a trust for which Mr. Levinson’s ex-wife serves as sole trustee. Does not include 2,654,618 shares held by the trustee of the Irrevocable Trust of Frank H. Levinson and Wynnette Levinson dated July 15, 1999, 300,000 shares held by Mr. Levinson’s adult children and 3,975,000 shares held by trusts for Mr. Levinson’s children, as to which shares Mr. Levinson disclaims beneficial ownership. Includes 440,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.

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(3)  Includes 2,832,401 shares held by The Rawls Family, L.P. Mr. Rawls is the president of the Rawls Management Corporation, the general partner of The Rawls Family, L.P. Includes 440,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.
 
(4)  Includes 207,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.
 
(5)  Includes 300,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.
 
(6)  Includes 80,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.
 
(7)  Includes 80,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.
 
(8)  Includes 18,000 shares which are subject to a right of repurchase in favor of Finisar which lapses over time and 8,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.
 
(9)  Includes 8,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.

(10)  Includes 18,000 shares subject to a right of repurchase in favor of Finisar and 1,563,000 shares issuable upon exercise of options exercisable within 60 days following June 30, 2004.

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EXECUTIVE COMPENSATION AND RELATED MATTERS

Executive Compensation

 
Summary Compensation Information

      The following table sets forth information concerning the compensation of our Chief Executive Officer and our four other most highly compensated executive officers, as of April 30, 2004, during the fiscal years ended April 30, 2004, 2003 and 2002.

Summary Compensation Table

                                                   
Long Term
Compensation
Awards
Annual Compensation

Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation







Jerry S. Rawls
    2004     $ 202,500           $ 6,075       200,000 (1)        
  President and Chief     2003       218,077             5,340       1,000,000 (1)      
  Executive Officer     2002       225,000             4,805              
Fariba Danesh(2)
    2004       301,346               7,534       750,000 (1)        
  Senior Vice President and     2003       20,827       100,000 (3)     274       750,000 (1)      
  Chief Operating Officer     2002                                  
Kevin Cornell(4)
    2004       217,854             500              
  Senior Vice President and     2003       40,312       44,727 (3)           400,000 (1)        
  General Manager — Network     2002                                
  Tools Division                                                
Frank H. Levinson(5)
    2004       202,500             8,253       200,000 (1)        
  Chief Technical Officer     2003       72,349             13,253       1,000,000 (1)        
        2002       22,551             608                
Stephen K. Workman
    2004       185,385               2,031       440,000 (1)        
  Senior Vice President,     2003       193,846             1,685              
  Finance, Chief Financial     2002       200,000             1,846              
  Officer and Secretary                                                


(1)  Option vests at the rate of 20% per year over a period of five years.
 
(2)  Ms. Danesh became Senior Vice President and Chief Operating Officer in April 2003.
 
(3)  Signing bonus.
 
(4)  Mr. Cornell became Senior Vice President and General Manager, Network Tools Division, in July 2003.
 
(5)  Mr. Levinson voluntarily agreed to forego the payment of salary during portions of fiscal 2002 and 2003.

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Stock Options Granted in Fiscal 2004

      The following table sets forth information regarding grants of stock options to the executive officers named in the Summary Compensation Table above during the fiscal year ended April 30, 2004. All of these options were granted under our 1999 Stock Option Plan. The percentage of total options set forth below is based on an aggregate of 25,028,803 options granted during the fiscal year. All options were granted at the fair market value of our common stock, as determined by the board of directors on the date of grant. Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the SEC and do not represent Finisar’s estimate or projection of the future common stock price.

Options Granted in Fiscal Year Ended April 30, 2004

                                                         
Individual Grants

Potential Realizable
% of Total Value at Assumed
Number of Options Deemed Annual Rates of Stock
Securities Granted to Value Per Price Appreciation for
Underlying Employees Exercise Share at Option Term
Options in Fiscal Price Expiration Date of
Name Granted(1) Year ($/Share) Date Grant 5% 10%








Jerry S. Rawls
    200,000       0.81     $ 1.95       8/27/13     $ 1.95     $ 245,268     $ 621,559  
Fariba Danesh
    100,000       0.41       1.95       8/27/13       1.95       122,634       310,779  
      650,000       2.64       2.18       9/5/13       2.18       891,143       3,258,333  
 
Kevin Cornell
                                         
Frank H. Levinson
    200,000       0.81       1.95       8/27/13       1.95       245,268       621,559  
Stephen K. Workman
    365,000       1.48       1.80       6/19/13       1.80       413,183       1,047,088  
      75,000       0.30       1.95       8/27/13       1.95       91,975       233,084  


(1)  These options vest at the rate of 20% per year over a period of five years.
 
Option Exercises and Fiscal 2004 Year-End Values

      The following table provides the specified information concerning exercises of options to purchase our common stock during the fiscal year ended April 30, 2004, and unexercised options held as of April 30, 2004, by the executive officers named in the Summary Compensation Table above.

Aggregate Option Exercises In Fiscal 2004 and Values at April 30, 2004

                                                 
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-The Money Options
Acquired Options at Fiscal Year End at Fiscal Year End(1)
on Value

Name Exercise Realized Exercisable(2) Unexercisable(2) Exercisable(2) Unexercisable(2)







Jerry S. Rawls
                200,000       1,000,000     $ 8,000     $ 32,000  
Fariba Danesh
                280,000       1,220,000       151,500       606,000  
Kevin Cornell
                80,000       320,000       74,400       297,600  
Frank H. Levinson
                200,000       1,000,000       8,000       32,000  
Stephen K. Workman
                119,000       321,000       0       0  


(1)  Based on a fair market value of $1.77, the closing price of our common stock on April 30, 2004, as reported by the Nasdaq National Market.
 
(2)  Stock options granted under the 1999 Stock Option Plan prior to our initial public offering of common stock in November 1999 are generally immediately exercisable at the date of grant, but shares received upon exercise of unvested options are subject to repurchase by Finisar. Options granted after the date of

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our initial public offering under the 1999 Plan are generally not immediately exercisable at the date of grant and vest at the rate of 20% per year over a period of five years.

Employment Contracts and Termination of Employment and Change-In-Control Arrangements

      Jerry S. Rawls, Frank H. Levinson, David Buse, Kevin Cornell, Fariba Danesh, Anders Olsson and Stephen K. Workman are eligible to participate in the Finisar Executive Retention and Severance Plan. This plan provides that in the event of a qualifying termination each of the participating executives will be entitled to receive (i) a lump sum payment equal to two years’ base salary (excluding bonus) and (ii) medical, dental and insurance coverage for two years, or reimbursement of premiums for COBRA continuation coverage during such period. A qualifying termination is defined as an involuntary termination other than for cause or a voluntary termination for good reason upon or within 18 months following a change in control, as such terms are defined in the executive severance plan. In addition, the plan provides that the vesting of stock options held by eligible officers will be accelerated as follows: (i) one year of accelerated vesting upon a change of control, if the options are assumed by a successor corporation, (ii) 100% accelerated vesting if the options are not assumed by a successor corporation, and (iii) 100% accelerated vesting upon a qualifying termination.

      Additionally, pursuant to the 1999 Stock Option Plan, upon a change in control, as defined therein, the vesting of options not assumed or substituted by the surviving corporation will accelerate and the options will become immediately exercisable and vested in full.

Compensation of Directors

      Non-employee directors receive an annual retainer of $17,500, $1,500 for attendance in person at each meeting of the board of directors or committee meeting (with meetings of the board of directors and all committees held within any 24 hour period considered to be a single meeting) and $500 for attendance at such meetings via telephone. In addition, members of the Audit Committee receive an annual retainer of $5,000, and the Chairman of the Audit Committee receives $2,500 for annual service in such capacity. Non-employee directors are also eligible to receive stock options. We reimburse directors for their reasonable expenses incurred in attending meetings of the board of directors.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

      The Compensation Committee for fiscal 2004 was composed of Michael C. Child and Roger C. Ferguson. No member of our Compensation Committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or Compensation Committee.

Certain Relationships and Related Transactions

      In March 1999, we granted Mr. Workman an option to purchase an aggregate of 200,000 shares of common stock, with an exercise price of $1.31 per share. Mr. Workman exercised this option in full in April 1999. The exercise price was paid by Mr. Workman by delivery to us of a promissory note in the principal amount of $252,000 bearing interest at the rate of 6% per annum, which was collateralized by shares of our common stock owned by Mr. Workman. This promissory note was paid in full in May 2004.

      Frank H. Levinson, our Chairman of the Board and Chief Technical Officer, is a member of the board of directors of Fabrinet, Inc. In June 2000, we entered into a volume supply agreement with Fabrinet under which Fabrinet serves as a contract manufacturer for us. In addition, Fabrinet purchases certain products from us. During the fiscal year ended April 30, 2004, we made payments of approximately $42.4 million to Fabrinet and Fabrinet made payments of approximately $2.1 million to us.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in

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ownership with the SEC. Such persons are required by SEC regulations to furnish Finisar with copies of all Section 16(a) forms filed by such person.

      Based solely on our review of such forms furnished to us and written representations from certain reporting persons, during the fiscal year ended April 30, 2004 we believe that all filing requirements applicable to our executive officers, directors and more than 10% stockholders were complied with, except that one statement of changes in beneficial ownership for each of Fariba Danesh, Frank H. Levinson, Jerry S. Rawls and Stephen K. Workman, each reporting one transaction, were filed late.

EQUITY COMPENSATION PLAN INFORMATION

      We currently maintain three compensation plans that provide for the issuance of our common stock to officers, directors, other employees or consultants. These consist of the 1999 Stock Option Plan and the Purchase Plan, which have been approved by our stockholders, and the 2001 Nonstatutory Stock Option Plan (the “2001 Plan”), which has not been approved by our stockholders. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of April 30, 2004:

                         
Number of Shares
Remaining
Number of Shares Available for
to Be Issued Future Issuance
Upon Exercise of Under Equity
Outstanding Weighted-Average Compensation
Options, Exercise Price of Plans (Excluding
Warrants and Outstanding Options, Shares Reflected
Rights Warrants and Rights in Column (a))
Plan Category(1) (a) (b) (c)




Equity compensation plans approved by stockholders
    41,057,605     $ 2.55       5,694,869 (2)
Equity compensation plan not approved by stockholders
    3,354,876     $ 3.90       2,199,770  


(1)  The information presented in this table excludes options assumed by Finisar in connection with acquisitions of other companies. As of April 30, 2004, 124,660 shares of our common stock were issuable upon exercise of these assumed options, at a weighted average exercise price of $2.11 per share.
 
(2)  Includes 750,086 shares that are reserved for issuance under the Purchase Plan.

Option Exchange Program

      On November 8, 2002, we announced that our board of directors had approved a voluntary stock option exchange program for eligible option holders. Under the program, eligible holders of Finisar’s options who elected to participate had the opportunity to tender for cancellation outstanding options in exchange for new options to be granted on a future date that is at least six months and one day after the date of cancellation. Members of our board of directors were not eligible to participate in the program. The option exchange program terminated on December 17, 2002. As of that date, holders of options to purchase an aggregate of 11,816,890 shares of common stock tendered their options for cancellation.

      On June 19, 2003, new options to purchase an aggregate of 11,144,690 shares of common stock were granted at an exercise price of $1.80 per share, the closing price for our common stock on that date. Each new option preserves the vesting schedule and the vesting commencement date of the option it replaced.

Material Features of the 2001 Nonstatutory Stock Option Plan

      As of April 30, 2004, 5,554,646 shares of our common stock were reserved for issuance under the 2001 Plan. The 2001 Plan was adopted by our board on February 16, 2001 and provides for the granting of nonstatutory stock options to employees and consultants with an exercise price per share not less than 85% of the fair market value of our common stock on the date of grant. However, no person is eligible to be granted

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an option under the 2001 Plan whose eligibility would require approval of the 2001 Plan by our stockholders. Options granted under the 2001 Plan generally have a ten-year term and vest at the rate of 20% of the shares on the first anniversary of the date of grant and 20% of the shares each additional year thereafter until fully vested. Some of the options that have been granted under the 2001 Plan are subject to full acceleration of vesting in the event of a change in control of Finisar.

REPORT OF THE COMPENSATION COMMITTEE

ON EXECUTIVE COMPENSATION

Compensation Philosophy

      The goals of our compensation policy are to attract, retain and reward executive officers who contribute to our overall success by offering compensation that is competitive in the networking industry, to motivate executives to achieve our business objectives and to align the interests of officers with the long-term interests of stockholders. We currently use salary, bonuses and stock options to meet these goals.

Forms of Compensation

      We provide our executive officers with a compensation package consisting of base salary, incentive bonuses and participation in benefit plans generally available to other employees. In setting total compensation, the Compensation Committee considers individual and company performance, as well as market information regarding compensation paid by other companies in our industry.

      Base Salary. Salaries for our executive officers are initially set based on negotiation with individual executive officers at the time of recruitment and with reference to salaries for comparable positions in the networking industry for individuals of similar education and background to the executive officers being recruited. We also give consideration to the individual’s experience, reputation in his or her industry and expected contributions to Finisar. Salaries are generally reviewed annually by the Compensation Committee and are subject to increases based on (i) the Compensation Committee’s determination that the individual’s level of contribution to Finisar has increased since his or her salary had last been reviewed and (ii) increases in competitive pay levels.

      Bonuses. It is our policy that a substantial component of each officer’s potential annual compensation take the form of a performance-based bonus. Bonus payments to officers other than the Chief Executive Officer are determined by the Compensation Committee, in consultation with the Chief Executive Officer, based on our financial performance and the achievement of the officer’s individual performance objectives. The Chief Executive Officer’s bonus is determined by the Compensation Committee, without participation by the Chief Executive Officer, based on the same factors.

      Long-Term Incentives. Longer term incentives are provided through stock options, which reward executives and other employees through the growth in value of our stock. The Compensation Committee believes that employee equity ownership is highly motivating, provides a major incentive for employees to build stockholder value and serves to align the interests of employees with those of stockholders. Grants of stock options to executive officers are based upon each officer’s relative position, responsibilities, historical and expected contributions to Finisar, and the officer’s existing stock ownership and previous option grants, with primary weight given to the executive officers’ relative rank and responsibilities. Initial stock option grants designed to recruit an executive officer to join Finisar may be based on negotiations with the officer and with reference to historical option grants to existing officers. Stock options are granted at an exercise price equal to the market price of our common stock on the date of grant and will provide value to the executive officers only when the price of our common stock increases over the exercise price.

      Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code restricts deductibility of executive compensation paid to our Chief Executive Officer and each of the four other most highly compensated executive officers holding office at the end of any year to the extent such compensation exceeds $1,000,000 for any of such officers in any year and does not qualify for an exception

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under Section 162(m) or related regulations. The Committee’s policy is to qualify its executive compensation for deductibility under applicable tax laws to the extent practicable. Income related to stock options granted under the 1999 Stock Option Plan generally qualifies for an exemption from these restrictions imposed by Section 162(m). In the future, the Committee will continue to evaluate the advisability of qualifying its executive compensation for full deductibility.

2004 Compensation

      Compensation for our Chief Executive Officer and other executive officers for fiscal 2004 was set according to the established compensation policy described above. At the end of fiscal 2004, we determined that no performance bonuses would be paid to our executive officers; however, we approved the reversal of a 10% salary reduction for the Chief Executive Officer and certain other executive officers that had been in effect since 2002, such reversal to be effective as of May 1, 2004.

  COMPENSATION COMMITTEE
 
  Michael C. Child
  Roger C. Ferguson
  Harold E. Hughes, Jr.
  Larry D. Mitchell

REPORT OF THE AUDIT COMMITTEE

      The Audit Committee currently consists of four directors, each of whom, in the judgment of the Board, is “independent” as defined under the listing standards for Nasdaq. The Audit Committee acts pursuant to a written charter that has been adopted by the Board of Directors. A copy of the charter is attached to this Proxy Statement as Appendix C.

      The primary purpose of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities by reviewing and reporting to the Board on the integrity of the financial reports and other financial information provided by Finisar to any governmental body or to the public, and on Finisar’s compliance with legal and regulatory requirements. Consistent with these functions, the Audit Committee encourages continuous improvement of, and fosters adherence to, Finisar’s financial policies, procedures and practices at all levels.

      The Audit Committee is responsible for retaining Finisar’s independent public accountants, evaluating their independence, qualifications and performance and approving in advance the engagement of the independent public accounting firm for all audit and non-audit services. Management is responsible for the financial reporting process, the preparation of consolidated financial statements in accordance with generally accepted accounting principles, the system of internal controls, and procedures designed to insure compliance with applicable laws and regulations. Finisar’s independent public accountants are responsible for auditing the financial statements. The Audit Committee meets with such independent public accountants and management to review the scope and the results of the annual audit, Finisar’s audited financial statements and other related matters as set forth in the charter. However, the members of the Audit Committee are not professionally engaged in the practice of accounting or auditing and the Audit Committee’s role does not include providing to stockholders, or others, special assurances regarding such matters.

      The Audit Committee has received from the auditors a formal written statement describing all relationships between the auditors and Finisar that might bear on the auditors’ independence consistent with Independence Standards Board Standard No. 1, which relates to the auditors’ independence from Finisar and its related entities, discussed with the auditors any relationship that may impact their objectivity and independence, and satisfied itself as to the auditors’ independence.

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      The Audit Committee has reviewed and discussed Finisar’s audited financial statements with management. The Audit Committee has discussed with Ernst & Young LLP, Finisar’s independent auditors, the matters required to be discussed by SAS 61 (Codification of Statements on Accounting Standards) which include, among other items, matters related to the conduct of the audit of Finisar’s financial statements. In addition, the Audit Committee has met with Ernst & Young LLP, with and without management present, to discuss the overall scope of Ernst & Young LLP’s audit, the result of their examinations, their evaluations of Finisar’s internal controls and the overall quality of Finisar’s financial reporting.

      Based on the review and discussions referred to above, the Audit Committee recommended to Finisar’s Board of Directors that Finisar’s audited financial statements be included in Finisar’s Annual Report on Form 10-K for the fiscal year ended April 30, 2004.

  AUDIT COMMITTEE
 
  Michael C. Child
  Roger C. Ferguson
  Harold E. Hughes, Jr.
  Larry D. Mitchell

      The foregoing Audit Committee Report shall not be deemed to be incorporated by reference into any filing of Finisar under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Finisar specifically incorporates such information by reference.

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COMPARISON OF STOCKHOLDER RETURN

      Set forth below is a line graph comparing the annual percentage change in the cumulative total return on our common stock with the cumulative total returns of the CRSP Total Return Index for the Nasdaq Stock Market and the Amex Networking Index for the period commencing on November 12, 1999 and ending on April 30, 2004.

COMPARISON OF CUMULATIVE TOTAL RETURN FROM

NOVEMBER 12, 1999 THROUGH APRIL 30, 2004(1):
FINISAR, NASDAQ INDEX AND AMEX NETWORKING INDEX

(LINE GRAPH)

                                                 

November 12, April 28, April 30, April 30, April 30, April 30,
1999 2000 2001 2002 2003 2004

 Finisar
  $ 100.00     $ 589.00     $ 236.05     $ 100.91     $ 14.69     $ 27.96  
 Nasdaq Index
  $ 100.00     $ 119.13     $ 65.09     $ 52.41     $ 45.80     $ 59.86  
 NWX
  $ 100.00     $ 139.61     $ 61.14     $ 29.33     $ 22.05     $ 32.19  


(1)  Assumes that $100.00 was invested on November 12, 1999, at the offering price on the date of our initial public offering, in our common stock and each index. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

      The SEC allows us to “incorporate by reference” the information we file with the SEC, which means that Finisar can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this proxy statement, and later information filed with the SEC will update this information. Finisar incorporates by reference the document listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act:

  •  Finisar’s Annual Report on Form 10-K for the fiscal year ended April 30, 2004.

      Any statement contained herein or in a document incorporated or deemed to be incorporated by reference into this document will be deemed to be modified or superseded for purposes of the document to the extent that a statement contained in this document or any other subsequently filed document that is deemed to be incorporated by reference into this document modifies or supersedes the statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this document.

WHERE YOU CAN FIND MORE INFORMATION

      You may request a copy of any of Finisar’s SEC filings, free of charge, by writing or telephoning Finisar at the following address:

Finisar Corporation

1308 Moffett Park Drive
Sunnyvale, CA 94089
Attn: Investor Relations
Tel: (408) 542-5050
Investor.relations@finisar.com

You must request this information no later than ten days before the date of the stockholders’ meeting or                     , 2004 to ensure timely delivery.

      Copies of reports, proxy statements and other information filed by Finisar with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at:

Judiciary Plaza

Room 1200
450 Fifth Street, N.W.
Washington, D.C. 20549
(202) 942-8090

      Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling the SEC at l-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding Finisar. The address of the SEC website is http://www.sec.gov.

      If you have any questions about the acquisition of the Infineon Fiber Optics Business or the other matters to be voted upon at the special meeting, please call Finisar Investor Relations at 408-542-5050.

STOCKHOLDER PROPOSALS TO BE PRESENTED

AT NEXT ANNUAL MEETING

      We have an advance notice provision under our bylaws for stockholder business to be presented at meetings of stockholders. Such provision states that in order for stockholder business to be properly brought before a meeting by a stockholder, such stockholder must have given timely notice thereof in writing to our Secretary. To be timely, a stockholder proposal must be received at our principal executive offices not less than 120 calendar days in advance of the one year anniversary of the date our proxy statement was released to stockholders in connection with the previous year’s annual meeting of stockholders; except that (i) if no

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annual meeting was held in the previous year, (ii) if the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year’s proxy statement or (iii) in the event of a special meeting, then notice must be received not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the meeting date was made.

      Proposals of stockholders intended to be presented at the next annual meeting of the stockholders of Finisar must be received by us at our offices at 1308 Moffett Park Drive, Sunnyvale, California 94089, no later than                     , 2005 and satisfy the conditions established by the SEC for stockholder proposals to be included in our proxy statement for that meeting.

OTHER MATTERS

      At the date of this proxy statement, the board of directors knows of no other business that will be conducted at the annual meeting of stockholders of Finisar other than as described in this proxy statement. If any other matter or matters are properly brought before the meeting, or any adjournment or postponement of the meeting, it is the intention of the persons named in the accompanying form of proxy to vote the proxy on such matters in accordance with their best judgment.

  By Order of the Board of Directors
 
  (-s- Stephen K. Workman)
  STEPHEN K. WORKMAN
  Secretary

                    , 2004

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INDEX TO FINANCIAL STATEMENTS

           
Page

Finisar Corporation Unaudited Pro Forma Condensed Combined Financial Statements
       
 
Introduction
    F-2  
 
Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended April 30, 2004
    F-4  
 
Unaudited Pro Forma Condensed Combined Balance Sheet as of April 30, 2004
    F-5  
 
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
    F-6  
Fiber Optics Business of Infineon Technologies AG and Subsidiaries Combined Financial Statements as of September 30, 2002 and 2003 and for each of the three years in the period ended September 30, 2003:
       
 
Independent Auditors’ Report
    F-9  
 
Combined Statements of Operations for the years ended September 30, 2001, 2002 and 2003
    F-10  
 
Combined Balance Sheets as of September 30, 2002 and 2003
    F-11  
 
Combined Statements of Business Equity for the Years ended September 30, 2001, 2002 and 2003
    F-12  
 
Combined Statements of Cash Flow for the years ended September 30, 2001, 2002 and 2003
    F-13  
 
Notes to the Combined Financial Statements
    F-14  
Fiber Optics Business of Infineon Technologies AG and Subsidiaries Condensed Combined Financial Statements as of March 31, 2003 and 2004 and for the six months ended March 31, 2003 and 2004 (unaudited):
       
 
Condensed Combined Statement of Operations for the six months ended March 31, 2003 and 2004 (unaudited)
    F-33  
 
Condensed Combined Balance Sheets as of September 30, 2003 and March 31, 2004 (unaudited)
    F-34  
 
Condensed Combined Statement of Business Equity for the six months ended March 31, 2003 and 2004 (unaudited)
    F-35  
 
Condensed Combined Statement of Cash Flows for the six months ended March 31, 2003 and 2004 (unaudited)
    F-36  
 
Notes to the Unaudited Condensed Combined Financial Statements
    F-37  

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FINISAR CORPORATION UNAUDITED PRO FORMA CONDENSED

COMBINED FINANCIAL STATEMENTS

Introduction:

      The following unaudited pro forma condensed combined financial statements give effect to the proposed acquisition of the fiber optics business of Infineon Technologies AG and Subsidiaries (the “Infineon Fiber Optics Business”) by Finisar Corporation (“Finisar”). The acquisition will be accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations” (SFAS 141). Under the purchase method of accounting, the total estimated purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible and intangible assets of the Infineon Fiber Optics Business acquired, based on their fair values as of the completion of the acquisition. Independent valuation specialists are currently conducting an independent valuation in order to assist the management of Finisar in determining the fair values of a significant portion of these assets. The preliminary work performed by the independent valuation specialists has been considered in management’s estimates of the fair values reflected in these unaudited pro forma condensed combined financial statements. A final determination of these fair values, which cannot be made prior to the completion of the acquisition, will include management’s consideration of a final valuation prepared by the independent valuation specialists. This final valuation will be based on the actual net tangible and intangible assets of the Infineon Fiber Optics Business that exist as of the date of completion of the acquisition.

      The unaudited pro forma condensed combined balance sheet as of April 30, 2004 gives effect to the proposed acquisition as if it occurred on April 30, 2004 and, due to the different fiscal period ends, combines the historical balance sheet of Finisar at April 30, 2004 and the historical balance sheet of the Infineon Fiber Optics Business at March 31, 2004. The Finisar consolidated balance sheet information was derived from its audited April 30, 2004 consolidated balance sheet included in its Annual Report on Form 10-K for the fiscal year ended April 30, 2004 and incorporated herein by reference. The Infineon Fiber Optics Business balance sheet information was derived from its audited September 30, 2003 consolidated balance sheet and the unaudited March 31, 2003 and 2004 condensed combined balance sheets included in this filing. The unaudited pro forma condensed combined statement of operations for the year ended April 30, 2004 is presented as if the transaction was consummated on May 1, 2003 and, due to the different fiscal period ends, combines the historical results of Finisar for the year ended April 30, 2004, which were derived from its audited April 30, 2004 consolidated statement of operations included in its Annual Report on Form 10-K for the fiscal year ended April 30, 2004 and incorporated herein by reference, and the historical results of the Infineon Fiber Optics Business for the twelve months ended March 31, 2004, which results were derived from its audited September 30, 2003 consolidated statement of operations and the unaudited March 31, 2003 and 2004 condensed combined statements of operations included in this filing.

      The unaudited pro forma condensed combined financial statements has been prepared by Finisar management for illustrative purposes only and are not necessarily indicative of the condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had Finisar and the Infineon Fiber Optics Business been a combined company during the specified period. The pro forma adjustments are based on the information available at the time of the preparation of this proxy statement. The unaudited pro forma condensed combined financial statements, including the notes thereto, is qualified in its entirety by reference to, and should be read in conjunction with, the historical consolidated financial statements of Finisar included in its Annual Report on Form 10-K for its fiscal year ended April 30, 2004 filed with the Securities and Exchange Commission on July 14, 2004; the historical combined financial statements of Infineon Fiber Optics Business for its fiscal year ended September 30, 2003 included in this proxy statement; and the unaudited condensed combined financial statements for the Infineon Fiber Optics Business as of March 31, 2003 and 2004 and for the six months ended March 31, 2003 and 2004 included in this proxy statement.

      Further, the unaudited pro forma condensed combined financial statements do not include any adjustments for liabilities resulting from integration planning, as management of Finisar is in the process

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of making these assessments and estimates of these costs are not currently known. However, liabilities ultimately may be recorded for severance or relocation costs related to employees of the Infineon Fiber Optics Business, costs of vacating certain leased facilities of the Infineon Fiber Optics Business or other costs associated with exiting activities of the Infineon Fiber Optics Business that would affect amounts in the pro forma condensed combined financial statements. In addition, Finisar may incur significant restructuring charges upon completion of the acquisition or in subsequent quarters for severance or relocation costs related to Finisar employees, costs of vacating certain leased facilities of Finisar or other costs associated with exiting activities of Finisar.

      There are no intercompany balances or transactions between Finisar and the Infineon Fiber Optics Business. Certain reclassifications have been made to conform the historical amounts of the Infineon Fiber Optics Business to Finisar’s presentation.

      These unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates of fair values. They do not include liabilities resulting from integration planning which are not presently estimable as discussed above. Amounts preliminarily allocated to intangible assets with definite lives may increase significantly, which could result in a material increase in amortization of intangible assets. Therefore, the actual amounts recorded as of the completion of the acquisition may differ materially from the information presented in these unaudited pro forma condensed combined consolidated financial statements. In addition to the receipt of the final valuation, changes in Finisar’s stock price, the impact of ongoing integration activities, the timing of completion of the acquisition and other changes in net tangible and intangible assets of the Infineon Fiber Optics Business that occur prior to completion of the acquisition could cause material differences in the information presented.

      The table below shows the average U.S. dollar/ Euro exchange rate for the periods shown, based on the interbank market exchange rate expressed in U.S.$1.00 per Euro.

                                         
Exchange Rate Average Exchange Rate


6 Months Ended 12 Months Ended 6 Months Ended
March 31, 2004 March 31, 2003 September 30, 2003 March 31, 2004




Currency Euro Euro Euro Euro





U.S. Dollar
  $ 1.00       0.8215       0.9665       0.9234       0.8209  

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FINISAR CORPORATION

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended April 30, 2004
(In thousands, except per share data)
<
                                     
Historical

Infineon Fiber Pro forma Finisar
Finisar Optics Business Adjustments(1) Pro forma




(In thousands, except per share
amounts)
Revenue
  $ 185,618     $ 135,776     $     $ 321,394