FINISAR CORP - 10-Q Quarterly Report

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

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

At August 18, 2003, there were 212,667,563 shares of the registrant’s common stock, $.001 par value, issued and outstanding.

Finisar Corporation was incorporated in the state of California on April 17, 1987. In November 1999, Finisar Corporation reincorporated in the state of Delaware.

Finisar Corporation designs, manufactures, and markets fiber optic subsystems and components and network test and monitoring systems for high-speed data communications.

The accompanying unaudited condensed consolidated financial statements as of July 31, 2003, and for the three month periods ended July 31, 2003 and 2002, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission, and include the accounts of Finisar Corporation and its wholly-owned subsidiaries (collectively, “Finisar” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position at July 31, 2003 and its operating results and cash flows for the three month periods ended July 31, 2003 and 2002. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes for the fiscal year ended April 30, 2003.

The balance sheet at April 30, 2003 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The Company maintains its financial records on the basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the period (thirteen-week periods). For ease of reference, all references to period end dates have been presented as though the period ended on the last day of the calendar month. The first three quarters of fiscal 2003 end on July 28, 2002, October 27, 2002 and January 26, 2003, respectively, and the first three quarters of fiscal 2004 end on July 27, 2003, October 26, 2003 and January 25, 2004, respectively.

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

The Company follows SEC Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements.” Specifically, the Company 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. Product revenue is generally recorded at the time of shipment when title and risk of loss pass to the customer, unless the Company has future unperformed obligations or customer

acceptance is required, in which case revenue is not recorded until such obligations have been satisfied or customer acceptance has been received.

At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with sales, recorded as a component of cost of revenues. The Company also provides an allowance for estimated customer returns, which has been netted against revenues.

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has determined that it operates in two segments consisting of optical subsystems and components, and network test and monitoring systems.

Financial instruments which potentially subject Finisar to concentrations of credit risk include cash, cash equivalents, short-term and restricted investments and accounts receivable. Finisar places its cash, cash equivalents and short-term and restricted investments with high-credit quality financial institutions. Such investments are generally in excess of FDIC insurance limits. Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. In many instances, the Company sells to contract manufacturers for the ultimate end customer equipment supplier. Generally, Finisar does not require collateral or other security to support customer receivables. Finisar performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have been within management’s expectations. At April 30, 2003, one optical subsystems and components customer represented 10.3% of total accounts receivable. At July 31, 2003, one optical subsystems and components customer represented 10.0% of total accounts receivable. No other customer represented more than 10.0% of total accounts receivable in either period.

Finisar sells products primarily to customers located in North America. During the three months ended July 31, 2003, revenues from three optical subsystems and components customers represented 16.3%, 11.2% and 10.4%, respectively, of revenues. During the three months ended July 31, 2002, revenues from one optical subsystems and components customer accounted for 10.1% of net revenues. No other customer accounted for more than 10.0% of revenues in either period.

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

Advertising costs are expensed as incurred. Advertising is used infrequently in marketing the Company’s products. Advertising costs were $46,000 and $196,000 in the three months ended July 31, 2003 and 2002, respectively.

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

Short-term investments consist of interest bearing securities with maturities of greater than 90 days from the date of purchase and an equity security. Pursuant to Statement of Financial Accounting Standard No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), the Company has classified its short-term investments as available-for-sale. Available-for-sale securities are stated at market value, which approximates fair value, and unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are included in accumulated other comprehensive income until realized. A decline in the market value of the security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. In the quarter ended July 31, 2003, the Company recorded an other-than-temporary decline of $528,000 in the value of one equity security holding.

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

The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. For entities in which the Company holds an interest of greater than 20% or in which the Company does have the ability to exercise significant influence, the Company uses the equity method. In determining if and when a decline in the market value of these investments below their carrying value is other-than-temporary, the Company evaluates the market conditions, offering prices, trends of earnings and cash flows, price multiples, prospects for liquidity and other key measures of performance. The Company’s minority investments in private companies are generally made in exchange for preferred stock with a liquidation preference that is intended to help protect the underlying value of its investment. In the first quarter of fiscal 2004, the Company recorded an impairment charge of $1.6 million for its minority equity investments in two development stage companies.

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities, approximate fair value because of their short maturities. Fair value for investments in public companies is determined using quoted market prices for those securities.

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

The Company permanently writes down the cost of inventory that the Company specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company defines obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using management’s best estimate of future demand at the time, based upon information then available to the Company. The Company uses a twelve-month demand forecast and, in addition to the demand forecast, the Company also considers: (1) parts and subassemblies that can be used in alternative finished products, (2) parts and subassemblies that are unlikely to be engineered out of the Company’s products, and (3) known design changes which would reduce the Company’s ability to use the inventory as planned.

Property, plant, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Property, plant, equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally three years to seven years except property which is 40 years. Land is carried at acquisition cost and not depreciated. Leased land is depreciated over the life of the lease. The cost of equipment under capital leases is recorded at the lower of the present value of the minimum lease payments or the fair value of the asset and is amortized over the shorter of the term of the related lease or the estimated useful life of the asset.

Goodwill and other intangible assets result from acquisitions accounted for under the purchase method. Amortization of other intangibles has been provided on a straight-line basis over periods ranging from three to five years. Goodwill is not amortized.

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

The Company is required to perform an annual two-step impairment test of goodwill and indefinite-lived intangible assets. Should certain events or indicators of impairments occur between annual impairment tests, the Company performs the two-step impairment test of goodwill and indefinite-lived intangible at that date. In

the first step of the analysis, the Company’s assets and liabilities, including existing goodwill and other intangible assets, are assigned to its identified reporting units to determine their carrying value. For this purpose, the reporting units are determined to be the two business segments. If the carrying value of a reporting unit is in excess of its fair value, an impairment may exist and the Company must perform the second step of comparing the implied fair value of the goodwill to its carrying value to determine the impairment charge.

The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the particular investment.

The Company is contingently obligated to release from escrow additional stock consideration related to the acquisition of Transwave, subject to the satisfaction of certain conditions. Should such consideration become payable, any resulting goodwill will become subject to impairment testing at the time the goodwill is recorded.

Finisar accounts for employee stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company accounts for stock issued to non-employees in accordance with provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring, or in Conjunctions with Selling Goods, or Services”

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to employee stock benefits, including shares issued under the stock option plans and under the Company’s Employee Stock Purchase Plan (collectively “options”). For purposes of pro forma disclosures, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting periods and the amortization of deferred compensation has been added back. Pro forma information follows (in thousands, except per share amounts):

The fair value of the Company’s stock option grants prior to the Company’s initial public offering was estimated at the date of grant using the minimum value option valuation model. The fair value of the

Company’s stock options grants subsequent to the initial public offering was valued using the Black-Scholes valuation model based on the actual stock closing price on the day previous to the date of grant. These option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because Finisar’s stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The fair value of these options at the date of grant was estimated using the following weighted-average assumptions for the first quarter of fiscal 2004 and 2003: risk-free interest rates of 0.97% for fiscal 2004 and 1.70% for 2003; a dividend yield of 0%; a volatility factor of 1.33 for fiscal 2004, and 1.44 for fiscal 2003; and a weighted-average expected life of the option of 1.54 years and 1.60 years for fiscal 2004 and 2003, respectively.

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

Financial Accounting Standards Board Statement of Financial Accounting Standard No. 130, “Reporting Comprehensive Income” (“SFAS 130”) establishes rules for reporting and display of comprehensive income and its components. Other comprehensive income for the quarters ended July 31, 2003 and 2002 was a gain of $566,000 and a loss of $533,000, respectively. SFAS 130 requires unrealized gains or losses on the Company’s available-for-sale securities and foreign currency translation adjustments to be included in comprehensive income. As of July 31, 2003 and April 30, 2003, accumulated other comprehensive income was approximately $1,407,000 and $841,000, respectively. The amount of the change in net unrealized gain or loss on available-for-sale securities in the first quarter of fiscal 2004 and 2003 was a gain of approximately $347,000 and a loss of approximately $892,000, respectively. Foreign currency translation adjustments for the first quarter of fiscal 2004 and 2003 were gains of approximately $219,000 and $359,000, respectively. Accumulative other comprehensive income of $1,407,000 at July 31, 2003 is comprised of net unrealized gains of $638,000 on available-for-sale securities and cumulative translation adjustments of $769,000. Accumulated other comprehensive income of $841,000 at April 30, 2003 is comprised of net unrealized gains on available-for-sale securities of $291,000 and cumulative translation adjustments of $550,000.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity 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 from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provision of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is currently evaluating potential effect of FIN 46 on its operating results and financial position.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 sets out criteria for when revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. EITF 00-21 will be effective for fiscal periods beginning after June 15, 2003. The Company believes that the adoption of this standard will have no material impact on its financial statements.

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

In partial consideration for the purchase of certain assets from New Focus, Inc. for a total value of $12.1 million in May 2002, the Company delivered to New Focus a non-interest bearing convertible promissory note in the principal amount of $6.75 million which was convertible into shares of the Company’s common stock. On August 9, 2002, the note was converted into 4,027,446 shares of common stock. The remaining consideration, totaling $5.4 million, represents a minimum commitment with respect to royalty payments to be paid during the three years following the date of acquisition. Because such payments are not

fixed in time, they were not discounted as otherwise required under Accounting Principles Board Opinion No. 21.

In the quarter ended July 31, 2002, the Company recorded charges of $5.6 million for excess and obsolete inventory and sold inventory components that were previously written-off in prior periods with an approximate original cost of $2.7 million. As a result, cost of revenue associated with the sale of this inventory was zero.

In the quarter ended July 31, 2003, the Company recorded additional charges of $11.5 million for excess and obsolete inventory and sold inventory components that were previously written-off in prior periods with an approximate original cost of $4.0 million. As a result, cost of revenue associated with the sale of this inventory was zero.

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

The provision for income taxes increased from of $61,000 in the quarter ended July 31, 2002 to $213,000 in the quarter July 31, 2003, primarily reflecting state tax requirements.

The Company has established a valuation allowance for a portion of its gross deferred tax assets. In part, the valuation allowance at July 31, 2003 reduced net deferred tax assets by amounts related to stock option deductions that are not currently realizable. A portion of the valuation allowance will be credited to paid-in capital when realized. The remaining portion of the valuation allowance, when realized, will first reduce unamortized goodwill, then other non-current intangible assets of acquired subsidiaries and then income tax expense. There can be no assurance that deferred tax assets subject to the valuation allowance will be realized.

Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. Because the Company’s deferred tax assets equal deferred tax liabilities as of July 31, 2003, the Company does not expect to record any additional tax benefit against future operating losses.

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

In connection with the grant of certain stock options to employees, Finisar recorded deferred stock compensation prior to the Company’s initial public offering, representing the difference between the fair value of the Company’s common stock for accounting purposes and the option exercise price of these options at the date of grant. During fiscal 2001 and 2002, the Company recorded additional deferred compensation related to the assumptions of stock options associated with companies acquired during those years. Deferred stock compensation is presented as a reduction of stockholder’s equity, with accelerated amortization recorded over the vesting period, which is typically three to five years. The amortization expense relates to options awarded to employees in all operating expense categories. The following table summarizes the amount of deferred stock compensation expense which Finisar has recorded and the amortization it has recorded and expects to record in future periods in connection with grants of certain stock options to employees during fiscal 1999 and 2000 and assumptions of stock options associated with companies acquired during fiscal 2001 and 2002. Amounts to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited (in thousands):

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

Effective May 1, 2002, the Company performed the required transitional impairment testing of goodwill and recognized a transitional impairment loss of $460.6 million as a cumulative effect of an accounting change during the quarter ended July 31, 2002. Of this impairment loss, $406.4 million was related to optical subsystems and components and $54.2 million was related to network test and monitoring systems.

On May 3, 2002, the Company recorded additional goodwill in the optical subsystems and components reporting unit of $485,000 as a result of achievement of certain milestones specified in the Transwave acquisition agreement. The Company recorded an impairment loss of $485,000 in the three months ended July 31, 2002 for this additional consideration, since the Company’s transitional impairment charge, recorded in the first quarter of the fiscal 2003, indicated it could not be supported. On May 3, 2003, the Company recorded additional goodwill in the optical subsystems and components reporting unit of $147,000 as a result of achievement of certain milestones specified in the Transwave acquisition agreement.

The following table reflects intangible assets subject to amortization as of April 30, 2003 and July 31, 2003 (in thousands):

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

The Company designs, develops, manufactures and markets optical subsystems, components and test and monitoring systems for high-speed data communications. The Company views its business as having two principal operating segments, consisting of optical subsystems and components and network test and monitoring systems. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for storage area networks (SANs) and local area networks (LANs), and transceivers, multiplexers, demultiplexers and optical add/drop modules for use in metropolitan access networks (MAN) applications. Network test and monitoring systems include products designed to test the reliability and performance of equipment for Fibre Channel, Gigabit Ethernet, 10 Gigabit Ethernet and the iSCSI protocols. These test and monitoring systems are sold to both manufacturers and end-users of the equipment.

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

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

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

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

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

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

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

On November 8, 2002, the Company announced that its board of directors had approved a voluntary stock option exchange program for eligible option holders. Under the program, eligible holders of the Company’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 at least six months and one day after the date of cancellation. Members of the Company’s 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 shares 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 the Company’s common stock on that date. Each new option preserves the vesting schedule and the vesting commencement date of the option it replaced. There were no accounting charges as a result of this stock option exchange program.

The Company offers a one-year limited warranty for all of its products. The specific terms and conditions of these warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs based on revenue

recognized. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

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

During the fiscal year ended April 30, 2003, the Company initiated actions to reduce its cost structure due to sustained negative economic conditions that have impacted its operations and resulted in lower than anticipated revenues. In May and October 2002, the Company reduced its workforce in the United States. The restructuring actions in fiscal 2003 resulted in a reduction in the U.S. workforce of approximately 255 employees, or 36% of the Company’s U.S. workforce measured as of the beginning of fiscal 2003, and affected all areas of U.S. operations. During fiscal 2003, the Company sold its Sensors Unlimited subsidiary, closed its Hayward facility, and began the process of closing the facilities occupied by its Demeter subsidiary. As facilities in the United States were consolidated, related leasehold improvement and equipment were written off. As a result of these restructuring activities, a charge of $9.4 million was incurred in fiscal 2003. The restructuring charge included approximately $5.4 million for the write-off of leasehold improvements and equipment in the vacated buildings, approximately $1.8 million of severance related charges, approximately $1.5 million of excess committed facilities payments and approximately $700,000 of miscellaneous costs required to effect the closures.

During the first quarter of fiscal 2004, the Company completed the closure of its Demeter subsidiary. In addition, the Company began the process of closing its German operations that will result in a reduction in the German workforce of approximately 10 employees in research and development in the optical subsystems and components reporting segment. The intellectual property, technical know-how and certain assets related to the German operations will be consolidated with the Company’s operations in Sunnyvale, California, during the second quarter. As a result of these restructuring activities, a charge of $2.2 million was incurred in the first fiscal quarter. The restructuring charge included $800,000 of severance, approximately $600,000 of fees associated with the early termination of the Company’s facilities lease in Germany, approximately $450,000 for remaining payments for excess leased equipment and approximately $300,000 of miscellaneous costs incurred to effect the closures.

The facilities consolidation charge was calculated using estimates and was based upon the remaining future lease commitments for vacated facilities from the date of facility consolidation, net of estimated future sublease income. The estimated costs of vacating these leased facilities were based on market information and trend analyses, including information obtained from third party real estate sources. The Company has engaged brokers to locate tenants to sublease the Hayward facility. As of July 31, 2003, $1.3 million of committed facilities payments, net of anticipated sublease income, remains accrued and is expected to be fully utilized by fiscal 2006. In calculating the charge for facilities consolidation, certain assumptions were made with respect to the estimated time periods of vacancy and sublease rates and opportunities. Actual future circumstances could be materially different from the Company’s estimates and, accordingly, the actual total charges

associated with the vacated facilities could be materially higher or lower than estimated. Adjustments to the facilities consolidation charges will be made in future periods, if necessary, based upon then current actual events and circumstances. At July 31, 2003, $3.8 million related to the fiscal year 2003 restructuring activities remained in accrued liabilities.

At July 31, 2003, $5.3 million related to fiscal 2003 and first quarter fiscal 2004 restructuring activities remained in other accrued liabilities for payment in future periods as follows (in thousands):

Cash payments totaling approximately $1.5 million, primarily consisting of lease payments, will be made though 2006. All other facilities consolidations expenses and the accrued severance balance of $446,000 and are expected to be paid out by October 2003.

other issuer defendants, on the basis that the amended complaints in these cases alleged that the respective issuers had acquired companies in exchange for their stock or conducted follow-on offerings after their initial public offerings. In June 2003, the plaintiffs in all of the cases presented a settlement proposal to all of the issuer defendants. Under the proposed settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all the related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, the Company would be responsible to pay its pro rata portion of the shortfall, up to the amount of the self-insured retention under its insurance policy, which is $2 million. The timing and amount of payments that the Company could be required to make under the proposed settlement will depend on several factors, principally the timing and amount of any payment required by the insurers pursuant to the $1 billion guaranty. In July 2003, the Company determined to accept the proposed settlement. The settlement is subject to acceptance by a substantial majority of the issuer defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. If the settlement is not accepted by the requisite number of defendants or if it is not approved by the Court, the Company intends 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 outcome of the litigation is adverse to the Company and if the Company is required to pay significant monetary damages, the Company’s business would be significantly harmed.

In a privately negotiated transaction concluded during the quarter ended July 31, 2003, the Company exchanged $5.0 million in principal amount of its convertible notes due 2008 for 2,311,937 shares of the Company’s common stock. In connection with the exchange, the Company recorded additional non-cash interest expense of approximately $2.4 million representing the fair value of the incremental shares issued to induce the exchange and non-cash interest expense of approximately $1.2 million representing the remaining unamortized discount for the beneficial conversion feature related to the convertible notes exchanged. Also, $140,000 of unamortized debt issue costs related to the convertible notes exchanged was charged to additional paid-in capital.

In privately negotiated transactions concluded during August 2003, the Company exchanged an additional $11.8 million in principal amount of its convertible notes due 2008 for 5,341,997 shares of the Company’s common stock. In connection with the exchange, the Company will record additional non-cash interest expense of approximately $5.7 million representing the fair value of the incremental common shares issued to induce the exchange and non-cash interest expense of approximately $2.8 million representing the remaining unamortized discount of the beneficial conversion feature related to the convertible notes exchanged during the quarter ended October 31, 2003. Also, $329,000 of unamortized debt issue costs relate to the convertible notes exchanged will be charged to additional paid-in capital. As of August 31, 2003, approximately $108.2 million aggregate principal amount of the Company’s convertible notes due 2008 remains outstanding.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those set forth below under “Risk Factors That Could Affect Our Future Performance.” The following discussion should be read together with our financial statements and related notes thereto included elsewhere in this document.

We are a leading provider of fiber optic subsystems and network performance test and monitoring systems which enable high-speed data communications over local area networks, or LANs, storage area networks, or SANs, and metropolitan access networks, or MANs. We are 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. Our line of optical subsystems supports a wide range of network applications, transmission speeds, distances, physical mediums and configurations. We also provide 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. We sell our products to leading storage and networking equipment manufacturers such as Brocade, Cisco, EMC, Emulex, Extreme Networks and Hewlett-Packard Company.

We were incorporated in 1987 and funded our initial product development efforts largely through revenues derived under research and development contracts. After shipping our first products in 1991, we continued to finance our operations principally through internal cash flow and periodic bank borrowings until November 1998. At that time we raised $5.6 million of net proceeds from the sale of equity securities and bank borrowings to fund the continued growth and development of our business. In November 1999, we received net proceeds of $151.0 million from the initial public offering of shares of our common stock, and in April 2000 we received $190.6 million from an additional public offering of shares of our common stock. In October 2001, we sold $125 million aggregate principal amount of 5 1/4% convertible subordinated notes due October 15, 2008.

Since October 2000, we have acquired six privately-held companies and certain assets from two other companies in order to gain access to new technologies which can be used in conjunction with our existing core competencies to develop new and innovative products. During our fiscal year ended April 30, 2001, we acquired Sensors Unlimited, Inc., Demeter Technologies, Inc., Medusa Technologies, Inc., and Shomiti Systems, Inc. During our fiscal year ended April 30, 2002, we acquired Transwave Fiber, Inc. and certain assets, including equipment and intellectual property, of AIFOtec GmbH in Germany. In May 2002, we acquired certain assets, including equipment, inventory and intellectual property related to the passive optical components business of New Focus, Inc. In April 2003, we acquired Genoa Corporation.

In October 2002, we sold certain assets and transferred certain liabilities of Sensors Unlimited to a new company organized by a management group led by Dr. Greg Olsen, then an officer and director of Finisar and former majority owner of Sensors Unlimited. The intellectual property developed after the acquisition of Sensors Unlimited was transferred to other operations within Finisar. In November 2002, we discontinued a product line at Demeter Technologies that was not making a significant contribution to our operating results and was no longer considered a key part of our product strategy. Certain assets of Demeter Technologies were sold to another party in conjunction with the product line discontinuation. In April 2003 we acquired Genoa Corporation and announced the closure of our Demeter Technologies subsidiary and the consolidation of all active device development and wafer fabrication into the Genoa facility. This consolidation was completed in July 2003. In June 2003, we announced the planned closure of our operations in Munich, Germany and the transfer of certain assets, intellectual property and employees to our headquarters in Sunnyvale, California during the quarter ending October 31, 2003.

The principal strategic goal of most of our acquisitions to date related to our optics business has been to gain access to leading-edge technology for the manufacture of optical components in order to improve the

performance and reduce the cost of our optical subsystem products. We have also sold a limited amount of these optical components on a stand-alone basis to other manufacturers; however, to date, the sale of these components into this so-called “merchant market” has not been a strategic priority, and our revenues from the sale of optical subsystems and components has consisted predominantly of subsystems sales. We intend to evaluate opportunities to increase the sale of our components in the merchant market, although we do not expect such sales to represent a significant portion of our revenues for the foreseeable future.

To date, our revenues have been principally derived from sales of our optical subsystems and network performance test and monitoring systems to networking and storage systems manufacturers. A large proportion of our sales are concentrated with a relatively small number of customers. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future.

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

We sell our products through our direct sales force, with the support of our manufacturers’ representatives, directly to domestic customers and indirectly through distribution channels to international customers. The evaluation and qualification cycle prior to the initial sale for our optical subsystems may span a year or more, while the sales cycle for our network test and monitoring systems is usually considerably shorter.

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

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

Our gross profit margins vary among our product families, and are generally higher on our network test and monitoring systems than on our optical subsystems and components. Our 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 and our ability to reduce product costs.

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

Sales and marketing expenses consist primarily of commissions paid to manufacturers’ representatives, salaries and related expenses for personnel engaged in sales, marketing and field support activities and other costs associated with the promotion of our products.

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

In connection with the grant of stock options to employees between August 1, 1998 and October 15, 1999, we recorded deferred stock compensation representing the difference between the fair value of our common stock for accounting purposes and the exercise price of these options at the date of grant. In connection with the assumption of stock options previously granted to employees of companies we acquired, we recorded deferred compensation representing the difference between the fair market value of our common stock on the date of closing of each acquisition and the exercise price of options granted by those companies which we assumed. Deferred stock compensation is presented as a reduction of stockholder’s equity, with accelerated amortization recorded over the vesting period, which is typically three to five years. The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited prior to vesting and could increase if we modify the terms of an option grant resulting in a new measurement date.

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

A portion of the purchase price in a business combination is allocated to goodwill and intangibles. Goodwill and intangible assets with indefinite lives are not amortized but subject to annual impairment testing. Other purchased intangible assets are amortized over their estimated useful lives.

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

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

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

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

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

Revenues. Revenues decreased 8.4% from $47.0 million in the quarter ended July 31, 2002 to $39.4 million in the quarter ended July 31, 2003. This decrease reflects a 13.0% decrease in sales of optical subsystems and components, from $39.3 million in the quarter ended July 31, 2002 to $34.8 million in the quarter ended July 31, 2003, and a 32.5% decrease in sales of network test and monitoring systems, from $7.8 million in the quarter ended July 31, 2002 to $5.2 million in the quarter ended July 31, 2003. Approximately $4.1 million of the decrease in sales of optical subsystems and components was due to a reduction in sales of products for MAN applications which is an emerging market and subject to significant variations in demand. Approximately $1.1 million of the decrease represented lost revenue from our Sensors Unlimited subsidiary, following the sale of its assets in October 2002. We believe that the reduction in sales of network test and monitoring systems was related primarily to a reduction in overall industry demand for such equipment.

Sales of optical subsystems and components as a percent of revenues increased from 83.5% in the quarter ended July 31, 2002, to 86.7% in the quarter ended July 31, 2003. Sales of network test and monitoring systems as a percent of revenues decreased from 16.5% in the quarter ended July 31, 2002, to 13.3% in the quarter ended July 31, 2003.

One optical subsystems and components customer accounted for 10.1% of total revenues in the quarter ended July 31, 2002 while three optical subsystems and components customers accounted for 16.3%, 11.2% and 10.4% of total revenues in the quarter ended July 31, 2003. No other customer accounted for more than 10% of total revenues in either period.

Gross Profit. Gross profit decreased from $2.7 million in the quarter ended July 31, 2002 to a loss of $1.7 million in the quarter ended July 31, 2003. As a percentage of revenues, gross profit decreased from 5.8% in the quarter ended July 31, 2002, to a loss of 4.3% in the quarter ended July 31, 2003. Of the $4.4 million decrease in gross profit, $2.5 million was associated with lower revenues in the quarter ended July 31, 2003, compared to revenues in the quarter ended July 31, 2002. Gross profit was also adversely affected by a

The reserve for slow-moving, obsolete and unusable inventory, primarily related to optical subsystems and components, increased $4.6 million from $2.9 million in the quarter ended July 31, 2002 to $7.5 million in the quarter ended July 31, 2003. This $7.5 million charge in the current quarter consists of $11.5 million for potential slow-moving, obsolete and unusable inventory, partially offset by the use of $4.0 million of inventory previously reserved in prior periods. The $2.9 million charge in the quarter ended July 31, 2002 consists of $5.6 million for potential slow-moving and obsolete inventory, partially offset by the use of $2.7 million of inventory previously reserved in prior periods. These charges for excess inventory were calculated based on inventory levels in excess of estimated 12-month demand for each specific product. It is possible that some portion of the excess inventory subject to these provisions may be used in the future based on customer demand and product mix changes which were not anticipated at the time the estimates were made and the charges were recognized.

Amortization of acquired developed technology is associated with several acquisitions completed during fiscal years 2001 through 2003. The charge for acquired developed technology decreased from $7.4 million in the quarter ended July 31, 2002, to $4.7 million in the quarter ended July 31, 2003 due to earlier writeoffs of acquired developed technology associated with the sale of our Sensors Unlimited subsidiary and with the sale of part of our Demeter Technologies subsidiary’s product line.

Research and Development Expenses. Research and development expenses increased $5.4 million, or 34.8%, from $15.5 million in the quarter ended July 31, 2002 to $20.9 million in the quarter ended July 31, 2003. Of this increase, $6.0 million was due to accelerated depreciation on equipment that was abandoned as a result of the closure in this quarter of the facilities occupied by our Demeter Technologies subsidiary. Research and development expenses increased as a percentage of revenue to 53.0% in the quarter ended July 31, 2003 compared to 33.0% in the quarter ended July 31, 2002.

Sales and Marketing Expenses. Sales and marketing expenses decreased $1.9 million, or 30.1%, from $6.2 million in the quarter ended July 31, 2002 to $4.3 million in the quarter ended July 31, 2003. The decrease was primarily due to a reduction of $1.0 million of employee related expense associated with lower manpower levels, and $600,000 related to commissions and other associated selling expenses associated with a lower overall revenue level. As a result of these lower expense levels, sales and marketing expenses as a percent of revenues decreased from 13.1% in the quarter ended January 31, 2002, to 10.9% in the quarter ended January 31, 2003.

General and Administrative Expenses. General and administrative expenses increased $100,000, or 2.6%, from $3.9 million in the quarter ended July 31, 2002 to $4.0 million in the quarter ended July 31, 2003. This increase was primarily related to an increase legal and insurance expenses offset in part by lower depreciation, bad debt and labor expenditures. General and administrative expenses increased as a percent of revenues from 8.2% in the quarter ended July 31, 2002 to 10.0% in the quarter ended July 31, 2003.

Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation decreased from a charge of $1.4 million in the quarter ended July 31, 2002 to a benefit of $304,000 in the quarter ended July 31, 2003. This decrease was related to the termination of employees with deferred compensation associated with their stock options and the effects of the graded vested method of amortization which accelerates the amortization of deferred compensation.

Amortization of Purchased Intangibles. Intangible assets related to trade name are associated with several acquisitions completed during fiscal years 2001 through 2003. We amortized acquired purchased intangibles associated with trade name in the amount of $143,000 in the quarter ended July 31, 2003 compared to $329,000 in the quarter ended July 31, 2002 which included $186,000 related to the Sensors Unlimited tradename. This tradename was sold in the second quarter of fiscal 2003.

Impairment of Goodwill and Intangible Assets. On May 3, 2002, we recorded additional goodwill in the optical subsystems and components reporting unit of $485,000 as a result of the achievement of certain milestones specified in the Transwave acquisition agreement. In the quarter ended July 31, 2002, we recorded

Restructuring Costs. During the quarter ended July 31, 2003, we completed the process of consolidating our facilities and operations located at our Demeter subsidiary in El Monte, California into our facilities in Fremont, California, and began the process of closing our facility in Munich Germany, in order to reduce future operating costs. As a result of these restructuring activities, a charge of $2.2 million was incurred in the first fiscal quarter. This restructuring charge included $800,000 of severance, approximately $600,000 of fees associated with the early termination of our facilities lease in Germany, approximately $450,000 for remaining payments for excess leased equipment and approximately $300,000 of miscellaneous costs incurred to effect the closures.

Other Acquisition Costs. Other acquisition costs decreased from $197,000 in the quarter ended July 31, 2002 to $45,000 in the quarter ended July 31, 2003. The charges in the prior year period were related to potential acquisitions that were not completed, whereas the charge in the current quarter was related to retention bonuses paid to certain employees of Transwave.

Interest Income. Interest income decreased from $1.4 million in the quarter ended July 31, 2002 to $869,000 in the quarter ended July 31, 2003. The decrease in interest income reflects lower cash, cash equivalents and short-term investments as well as lower interest rates.

Interest Expense. Interest expense in the quarter ended July 31, 2003 totaled $6.4 million, including a non-cash charge of $2.4 million associated with the amortization of discount on our convertible notes and an additional $2.4 million associated with the exchange of $5.0 million in principal amount of our convertible notes for common stock in privately negotiated transactions concluded during the quarter. This compared to interest expense of $2.7 million in the quarter ended July 31, 2002 which included a non-cash charge of $1.1 million associated with the amortization of discount on our convertible notes. An additional $11.8 million of these notes were exchanged for common stock during August 2003, and we expect to record additional non-cash interest charges of $8.5 million related to this transaction during the quarter ending October 31, 2003.

Other Expense, net. Other expense, net of other income, decreased from $10.3 million in the quarter ended July 31, 2002 to $2.6 million in the quarter ended July 31, 2003. In the first quarter of fiscal 2003, we recorded an impairment charge of $10.0 million for our minority equity investment in a development stage company due to that company’s inability to raise sufficient additional funding which necessitated its restructuring. Additionally, using the equity method, we incurred a charge of $185,000 for our pro rata share of the loss of another company in which we hold a minority equity investment. In the first quarter of fiscal 2004, we recorded an impairment charge of $1.6 million for our minority equity investments in two development stage companies due primarily to recent funding efforts which suggested that the value of our investment has been impaired. Additionally, using the equity method, we incurred a charge of $204,000 for our pro rata share of the loss of another company in which we hold a minority equity investment. Additionally we recorded a write down due to an other-than-temporary decline in our investment in an available-for-sale marketable equity security of $528,000.

Provision for Income Taxes. The provision for income taxes increased from $61,000 in the quarter ended July 31, 2002, to $213,000 in the quarter ended July 31, 2003, primarily related to minimum state taxes.

We have established a valuation allowance for a portion of the gross deferred tax assets. In part, the valuation allowance at July 31, 2003 reduced net deferred tax assets by amounts related to stock option deductions that are not currently realizable. A portion of the valuation allowance will be credited to paid-in capital when realized. The remaining valuation allowance, when realized, will first reduce unamortized goodwill, then other non-current intangible assets of acquired subsidiaries and then income tax expense. There can be no assurance that deferred tax assets subject to the valuation allowance will be realized.

Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. Because our deferred tax assets equal deferred tax liabilities as of July 31, 2003, we do not expect to record any additional tax benefit against future operating losses.

Cumulative Effect of an Accounting Changes. We adopted SFAS 142 effective May 1, 2002. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests. In adopting this new standard, we recorded a charge of $460.6 million in the quarter ended July 31, 2002.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity 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 from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provision of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We are currently evaluating the potential effect of FIN 46 in our operating results and financial position.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 sets out criteria for when revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. EITF 00-21 will be effective for fiscal periods beginning after June 15, 2003. We believe that the adoption of this standard will have no material impact on our financial statements.

From inception through November 1998, we financed our operations primarily through internal cash flow and periodic bank borrowings. In November 1998, we raised $5.6 million of net proceeds from the sale of preferred stock and bank borrowings to fund the continued growth and development of our business. In November 1999, we received net proceeds of $151.0 million from the initial public offering of our common stock, and in April 2000 we received $190.6 million from an additional public offering. In October 2001, we sold $125 million aggregate principal amount of 5 1/4% convertible subordinated notes due October 15, 2008. Interest on the notes is 5 1/4% per year on the principal amount, payable semiannually on April 15 and October 15, beginning on April 15, 2002. The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of our common stock at a conversion price of $5.52 per share, which is equal to a conversion rate of approximately 181.159 shares per $1,000 principal amount of notes. The conversion price is subject to adjustment. Because the market value of the stock rose above the conversion price between the day the notes were priced and the day the proceeds were collected, we recorded a discount of $38,270,000 related to the intrinsic value of the beneficial conversion feature. This amount will be amortized to interest expense over the life of the convertible notes, or sooner upon conversion. We purchased and pledged to a collateral agent, as security for the exclusive benefit of the holders of the notes, approximately $18.9 million of U.S. government securities, which will be sufficient upon receipt of scheduled principal and interest payments thereon, to provide for the payment in full of the first six scheduled interest payments due on the notes. The notes are subordinated to all of our existing and future senior indebtedness and effectively subordinated to all existing and future indebtedness and other liabilities of our subsidiaries. In a privately negotiated transaction concluded during the quarter ending July 31, 2003 we exchanged $5.0 million in principal amount of our convertible notes for 2,311,937 shares of our common stock. We exchanged an additional $11.8 million of these notes for common stock during August 2003.

As of July 31, 2003, our principal sources of liquidity were $108.5 million in cash, cash equivalents and short-term investments, net of $10.0 million of short-term securities reserved for the next three interest payments due under our convertible subordinated notes.

Net cash used in operating activities totaled $11.4 million in the quarter ended July 31, 2003, reflecting the operating loss of $41.2 million, partially offset by $24.0 million of non-cash charges and a reduction in other assets and liabilities of $5.8 million. Included in non-cash charges was $11.8 million in depreciation and

amortization of which $6.0 million was related to accelerated depreciation for equipment to be abandoned in connection with the closure of our Demeter Technologies subsidiary, $4.7 million of amortization of acquired developed technology, $1.6 million of impairment charge for our minority equity investments in two development stage companies and $2.4 million for amortization of the beneficial conversion feature of our outstanding convertible notes, of which $1.2 million was related to the exchange of $5 million principal amount of convertible notes for common shares of stock during the quarter. Net cash used in operating activities totaled $27.6 million in the quarter ended July 31, 2002, and was primarily the result of net losses totaling $497.5 million and changes in operating assets and liabilities of $15.8 million offset in part by non-cash charges totaling $485.6 million. Included in non-cash charges was $460.6 million for the cumulative effect of adopting SFAS 142 in May 2002.

Net cash used in investing activities totaled $1.6 million in the quarter ended July 31, 2003, and consisted primarily of purchases of property and equipment. Net cash used in investing activities totaled $9.9 million in the quarter ended July 31, 2002, and consisted primarily of the purchase of property and equipment totaling $5.3 million and purchases of short-term investments of $4.2 million.

Net cash provided by financing activities totaled $1.0 million in the quarter ended July 31, 2003, and consisted primarily of proceeds from the exercise of employee stock options, net of repurchase of unvested shares, and proceeds from the purchase of stock through the employee stock purchase plan. Net cash provided by financing activities totaled $1.5 million in the quarter ended July 31, 2002, and consisted primarily of proceeds from the exercise of employee stock options, net of repurchase of unvested shares, and proceeds from purchase of stock through the employee stock purchase plan.

We believe that our existing balances of cash, cash equivalents and short-term investments and cash flow expected to be generated from our future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future. The significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operation will be adversely affected.

Future minimum payments under long-term debt and operating leases are as follows as of July 31, 2003 (in thousands):

Long-term debt consists of $120 million in convertible notes due October 15, 2008, redeemable by us, in whole or in part, at any time after October 15, 2004.

Operating leases consist of base rents for facilities we occupy at various locations and photocopying equipment. Included in operating leases is $2.1 million of accrued lease cost obligations that are recorded on our balance sheet.

The following table summarizes our commercial commitments as of July 31, 2003 (in thousands):

Non-cancelable purchase obligation consists of an obligation to purchase equipment from one manufacturer. Standby repurchase obligations consist of materials purchased and held by subcontractors on our behalf to fulfill the subcontractor’s purchase order obligations at their facilities. Total commercial commitments of $9.7 million has been expensed and recorded on the balance sheet as non-cancelable purchase obligations.

At July 31, 2003 and April 30, 2003, we 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.

OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.

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 and the Gigabit Ethernet and Fibre Channel standards, 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 time frames without significant penalty. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business. It is likely that in some future quarters our operating results will again decrease from the previous quarter or fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock would significantly decline.

As a result of the sale of our 5 1/4% convertible subordinated notes in October 2001, we incurred $125 million of indebtedness, substantially increasing our ratio of debt to total capitalization. As a result of the exchange of notes for common stock, approximately $108 million in principal amount of the notes was outstanding as of August 31, 2003. We may incur additional indebtedness in the future. The level of our indebtedness, among other things, could:


	•	make it difficult for us to make payments on the notes;

	•	make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

	•	limit our flexibility in planning for, or reacting to changes in, our business; and

	•	make us more vulnerable in the event of a downturn in our business.

We will be required to generate cash sufficient to pay our indebtedness and other liabilities, including interest payable on the notes, 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. We must also generate sufficient cash to repay the principal of the notes which is payable in October 2008. 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. If we fail to make payments on the notes when due, the holders of the notes could declare a default and demand immediate payment of the entire principal amount of the notes, which could result in our inability to continue our business operations.

We believe that our existing balances of cash, cash equivalents and short-term investments, together with the cash expected to be generated from our future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may however require additional financing to fund our operations in the future or to repay the principal of our 5 1/4% convertible subordinated notes, due in October 2008. 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.

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 exceed our actual requirements. In the past, we have experienced significant growth followed by a significant decrease in customer demand such as occurred between the quarters ended July 31, 2000 and July 31, 2001, when quarterly revenues fluctuated from $27.2 million to $64.8 million followed by a decrease to $34.2 million. 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 2001 and 2002. We recorded additional charges for obsolete and excess inventories during fiscal 2003 and the first quarter of fiscal 2004, due to unanticipated changes in demand and the mix for our products. Should revenue in future quarters again fall substantially below our

We experienced a significant decline in revenues and operating results during fiscal 2002. While revenues recovered to some extent in fiscal 2003 and the first quarter of fiscal 2004, they have not yet reached levels required to operate on a profitable basis due primarily to higher fixed costs 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 costs in order to conserve our cash and accelerate our return to profitability, and we may be required to take further action to reduce costs. These cost 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 continue to reduce our operating expenses and product costs, while at the same time completing our key product development programs and penetrating new customers.

We have based our product offerings principally on Fibre Channel and Gigabit Ethernet standards and, to a lesser extent, the SONET standard and our future success is substantially dependent on the continued market acceptance of these standards. If an alternative technology is adopted as an industry standard within our target markets, we would have to dedicate significant time and resources to redesign our products to meet this new industry standard. Our products comprise only a part of an entire networking system, and we depend on the companies that provide other components to support industry standards as they evolve. The failure of these companies, many of which are significantly larger than we are, to support these industry standards could negatively impact market acceptance of our products. Because we may develop some products prior to the adoption of industry standards, we may develop products that do not comply with the eventual industry standard. Our failure to develop products that comply with industry standards would limit our ability to sell our products. Moreover, if we introduce a product before an industry standard has become widely accepted, we may incur significant expenses and losses due to lack of customer demand, unusable purchased components for these products and the diversion of our engineers from future product development efforts. Finally, if new standards evolve, we may not be able to successfully design and manufacture new products in a timely fashion, if at all, that meet these new standards.

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

We currently derive substantially all of our revenue from sales of our optical subsystems 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 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 the competition through product offerings and brand name recognition. We cannot assure you that we will be successful in making this differentiation or achieving widespread acceptance of our products. Failure of our existing or future products to maintain and achieve widespread levels of market acceptance will significantly impair our revenue growth.

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

The markets in which we sell our products are dominated by a relatively small number of systems manufacturers, thereby 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.

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, we will lose sales and customers.

The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. We expect that new technologies will emerge as competition and the need for higher and more cost effective bandwidth increases. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. 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 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:


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

	•	changing product specifications and customer requirements;

	•	difficulties in hiring and retaining necessary technical personnel;

	•	difficulties in reallocating engineering resources and overcoming resource limitations;

	•	changing market or competitive product requirements; and

	•	unanticipated engineering complexities.

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

The markets for optical subsystems and components 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. We expect that more companies, including some of our customers, will 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., E2O, Inc., Infineon Technologies AG, JDS Uniphase Corporation, Luminent, Inc., Molex, Premise Networks, Optical Communications Products, Inc., Picolight, Inc. 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 subsystems and components 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.

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

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

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.

Since October 2000, we have completed the acquisition of six privately-owned companies and certain assets from two other companies. We expect to 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. In six of our eight acquisitions, we issued stock as all or a portion of the consideration, and 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. 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.

During fiscal 2003, we sold certain assets acquired in two of our 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 acquisitions, and our inability to do so could significantly harm our business. In addition, to the extent that the economic benefits associated with such 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.

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

In addition to our principal manufacturing facility in Malaysia, we operate a smaller facility in China and also rely on two contract manufacturers located outside of the United States. Each of these facilities and manufacturers subjects us to the following additional risks associated with international manufacturing:


	•	unexpected changes in regulatory requirements;

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

	•	inadequate protection of intellectual property in some countries;

	•	greater incidence of shipping delays;

	•	greater difficulty in overseeing manufacturing operations;

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

	•	potential political and economic instability;

	•	currency fluctuations; and

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

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

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 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 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.

Through fiscal 2002, we recorded minority equity investments in early-stage technology companies, totaling $41.7 million, including a loan of $7.0 million to one company in which we also hold a minority equity position. 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 the first quarter of fiscal 2004 we wrote off $1.6 million in two investments which became impaired, and we may be required to write off all or a portion of the $26.2 million in such investments remaining on our balance sheet as of July 31, 2003 in future periods.

offerings to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, all of which have been consolidated for pretrial purposes. In June 2003, the plaintiffs in all of the cases presented a settlement proposal to all of the issuer defendants. Under the proposed settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all the related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, Finisar would be responsible to pay its pro rata portion of the shortfall, up to the amount of the self-insured retention under its insurance policy, which is $2 million. The timing and amount of payments that Finisar could be required to make under the proposed settlement will depend on several factors, principally the timing and amount of any payment required by the insurers pursuant to the $1 billion guaranty. In July 2003, Finisar determined to accept the proposed settlement. The settlement is subject to acceptance by a substantial majority of the issuer defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. If the settlement is not accepted by the requisite number of defendants or if it is not approved by the Court, Finisar intends 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 outcome of the litigation is adverse to us and if we are required to pay significant monetary damages, our business would be significantly harmed.

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

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 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 and we have filed applications for additional patents, we cannot assure you that any patents will issue as a result of pending patent applications or that our issued patents will be upheld. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult. 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.

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.

As of August 18, 2003, our executive officers, directors and entities affiliated with them beneficially owned approximately 54.8 million shares or approximately 25.5% of the outstanding shares of our common stock. These stockholders, acting together, may be able to effectively control matters requiring approval by stockholders, including the election or removal of directors and the approval of mergers or other business combination transactions. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have an adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market price for their shares of common stock.

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


	•	authorizing the board to issue additional preferred stock;

	•	prohibiting cumulative voting in the election of directors;

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

	•	prohibiting stockholder actions by written consent;

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

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

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 acquires more than 20% of our common stock without prior Board approval. Should such an event occur, Finisar stockholders, other than the acquiror, will be entitled to purchase shares of our common stock at a 50% discount from its then-current per share market price or, in the case of certain business combinations, purchase the common stock of the acquiror at a 50% discount.

Although we believe that these charter and bylaw provisions, and the 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 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 U.S. and overseas. Currently, our corporate headquarters and a portion of our manufacturing operations are located in California. California in particularly has been vulnerable to natural disasters and other risks, such as earthquakes, fires and floods, which at times have disrupted the local economy and posed physical risks to our property. Because of our overseas manufacturing locations, we are also dependent on communications links with these 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 certain that the insurance we maintain against these events would be adequate, in which case our business would suffer.

The trading price of our common stock has been and may continue to be subject to large fluctuations, which may result in losses to investors. 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 operating results;

	•	the operating and stock price performance of other companies that investors 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.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of the Company’s investment activities is to preserve principal while maximizing yields without significantly increasing risk. We place our investments with high credit issuers in short-term securities with maturities ranging from overnight up to 36 months or have characteristics of such short-term investments. The average maturity of the portfolio will not exceed 18 months. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign exchange risk.

The Company invests in equity instruments of privately held companies for business and strategic purposes. These investments are included in other long-term assets and are accounted for under the cost method when ownership is less than 20%. For these non-quoted investments, our policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. We identify and record impairment losses when events and circumstances indicate that such assets might be impaired. To date, approximately $12.6 million of impaired assets have been recognized. If certain of these investments in privately-held companies became marketable equity securities upon the company’s completion of an initial public offering in the future or acquisition by another company, then they would be subject to significant fluctuations in fair market value due to the volatility of the stock market. We also invest in equity securities of a publicly traded company. Such investments in publicly traded equity securities are subject to market price volatility. Equity security price fluctuations of plus or minus 10% would have had a $221,000 impact on the value of these securities as of July 31, 2003. There has been no material change in our interest rate exposure since April 30, 2002.

Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President, Finance and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our President and Chief Executive Officer and Senior Vice President, Finance and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above.

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 subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the registration statements for the offerings failed to disclose, among other things, that (i) the underwriter had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriter allocated to those investors material portions of the shares of our stock sold in the offerings and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of our stock sold in the offerings to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, all of which have been consolidated for pretrial purposes. In October 2002, all claims against the individual defendants were dismissed without prejudice. On February 19, 2003, the Court ruled on motions to dismiss the complaints filed by the remaining defendants. The motions were denied as to claims under the Securities Act of 1933 in the case against us and in all but 10 of the other cases. The motions were also denied as to claims under Section 10(a) of the Securities Exchange Act of 1934 against us and 184 of the other issuer defendants, on the basis that the amended complaints in these cases alleged that the respective issuers had acquired companies or conducted follow-on offerings after their initial public offerings. In June 2003, the plaintiffs in all of the cases presented a settlement proposal to all of the issuer defendants. Under the proposed settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all the related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, we would be responsible to pay our pro rata portion of the shortfall, up to the amount of the self-insured retention under our insurance policy, which is $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 required by the insurers pursuant to the $1 billion guaranty. In July 2003, we determined to accept the proposed settlement. The settlement is subject to acceptance by a substantial majority of the issuer defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. If the settlement is not accepted by the requisite number of defendants or if it 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 outcome of the litigation is adverse to us and if we are required to pay significant monetary damages, our business would be significantly harmed.

In July and August 2003, we issued an aggregate of 7,653,934 shares of our common stock in exchange for $16.8 million aggregate principal amount of our convertible subordinated promissory notes due 2008 in a number of privately negotiated transactions. The issuance of the shares of our common stock in these transactions was not registered under the Securities Act of 1933, as amended (the “Act”), in reliance on Section 3(a)(9) of the Act which exempts from the provisions of the Act an exchange of securities by an

We filed or furnished the following reports on Form 8-K during the quarter ended July 31, 2003:


	(1)	Press Release dated June 3, 2003 regarding financial information for Finisar for the quarter and fiscal year ended April 30, 2003.

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


	By:	/s/ STEPHEN K. WORKMAN



	Stephen K. Workman
	Senior Vice President, Finance and
	Chief Financial Officer


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

		For the Quarterly Period Ended July 31, 2003

or

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

		For the transition period from to


Delaware		94-3038428
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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


PART I -- FINANCIAL INFORMATION
	Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.
	Item 4. Controls And Procedures.
PART II -- OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


		Page

PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of July 31, 2003 and April 30, 2003		2
	Condensed Consolidated Statements of Operations for the three month periods ended July 31, 2003 and 2002		3
	Condensed Consolidated Statements of Cash Flows for the three month periods ended July 31, 2003 and 2002		4
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		41
Item 4.	Controls and Procedures		41
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		42
Item 2.	Changes in Securities and Use of Proceeds		42
Item 6.	Exhibits and Reports on Form 8-K		43
Signatures			44


		July 31, 2003			April 30, 2003


		(In thousands, except share
		and per share data)
ASSETS
Current assets:
	Cash and cash equivalents	$	28,967		$	40,918
	Short-term investments		79,509			78,520
	Restricted investments		6,732			6,737
	Accounts receivable, trade (net)		25,660			23,390
	Accounts receivable, other		4,536			5,362
	Inventories		29,697			36,470
	Prepaid expenses		2,651			2,341
	Deferred income taxes		3,069			3,324

Total current assets			180,821			197,062
Property, plant, equipment and improvements, net			100,989			112,125
Restricted investments, long-term			3,308			3,307
Purchased intangibles, net			48,111			52,910
Goodwill, net			19,985			19,838
Minority investments			26,167			28,844
Other assets			9,307			9,520

Total assets		$	388,688		$	423,606

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	21,396		$	22,872
	Accrued compensation		3,933			4,449
	Other accrued liabilities		10,391			8,474
	Non-cancelable purchase obligations		9,711			9,380
	Income tax payable		806			536
	Current portion of other long-term liabilities		1,384			1,384

Total current liabilities			47,621			47,095
Long-term liabilities:
	Deferred income taxes		3,069			3,324
	Convertible notes, net of unamortized portion of beneficial conversion feature of $28,604 and $30,977 at July 31, 2003 and April 30, 2003, respectively		91,396			94,023
	Other long-term liabilities		4,192			4,184

Total long-term liabilities			98,657			101,531
Stockholders’ equity
	Common stock, $0.001 par value, 210,285,954 shares issued and outstanding at July, 31, 2003 and 207,295,693 shares issued and outstanding at April 30, 2003.		210			207
	Additional paid-in capital		1,226,996			1,219,424
	Notes receivable from stockholders		(934	)		(1,077	)
	Deferred stock compensation		(674	)		(1,045	)
	Accumulated other comprehensive income		1,407			841
	Accumulated deficit		(984,595	)		(943,370	)

Total stockholders’ equity			242,410			274,980

Total liabilities and stockholders’ equity		$	388,688		$	423,606



		Three Months Ended
		July 31,

		2003			2002


		(Unaudited, in thousands,
		except per share data)
Revenues		$	39,431		$	47,047
Cost of revenues			36,462			36,923
Amortization of acquired developed technology			4,656			7,395

Gross profit (loss)			(1,687	)		2,729
Operating expenses:
	Research and development		20,915			15,516
	Sales and marketing		4,300			6,156
	General and administrative		3,953			3,850
	Amortization of deferred stock compensation		(304	)		1,381
	Amortization of purchased intangibles		143			329
	Impairment of goodwill and intangible assets		—			485
	Restructuring costs		2,185			—
	Other acquisition costs		45			197

Total operating expenses			31,237			27,914

Loss from operations			(32,924	)		(25,185	)
Interest income			869			1,404
Interest expense			(6,377	)		(2,745	)
Other expense, net			(2,580	)		(10,338	)

Loss before income taxes and cumulative effect of an accounting change			(41,012	)		(36,864	)
Provision for income taxes			213			61

Loss before cumulative effect of an accounting change			(41,225	)		(36,925	)
Cumulative effect of an accounting change to adopt SFAS 142.			—			(460,580	)

Net loss		$	(41,225	)	$	(497,505	)

Loss per share before cumulative effect of an accounting change		$	(0.20	)	$	(0.19	)
Cumulative per share effect of an accounting change to adopt SFAS 142			—			(2.44	)

Loss per share — basic and diluted		$	(0.20	)	$	(2.63	)

Shares used in loss per share calculation — basic and diluted			206,744			189,424


	*Interim Financial Information and Basis of Presentation*


	*Accounting for the Impairment of Goodwill and Indefinite-Lived Intangible Assets*


	July 31, 2003		April 30, 2003

Raw materials	$	22,267	$	23,366
Work-in-process		5,073		7,808
Finished goods		2,357		5,296

	$	29,697	$	36,470


	July 31, 2003			April 30, 2003

Land	$	18,780		$	18,781
Buildings		21,219			21,218
Computer equipment		24,973			23,673
Office equipment, furniture and fixtures		3,165			2,930
Machinery and equipment		76,655			79,174
Leasehold improvements		8,949			8,013

		153,741			153,789
Accumulated depreciation and amortization		(52,752	)		(41,664	)

Property, plant, equipment and improvements, net	$	100,989		$	112,125


		Deferred Stock
		Compensation			Amortization
		Generated			Expense

Fiscal year ended April 30, 1999.		$	2,403		$	428
Fiscal year ended April 30, 2000.			12,959			5,530
Fiscal year ended April 30, 2001.			21,217			13,543
Fiscal year ended April 30, 2002.			1,065			11,963
Fiscal year ended April 30, 2003.			(6,855	)		(1,719	)
Fiscal quarter ended July 31, 2003 (unaudited)			(674	)		(304	)
Fiscal quarter ending October 31, 2003 (unaudited)			—			177
Fiscal quarter ending January 31, 2004 (unaudited)			—			164
Fiscal quarter ending April 30, 2004 (unaudited)			—			150
Fiscal year ending April 30, 2005 (unaudited)			—			183

	Total	$	30,115		$	30,115


	Optical			Network Test
	Subsystems			and
	and			Monitoring			Consolidated
	Components			Systems			Total

Balance at April 30, 2002.	$	406,357		$	70,223		$	476,580
Addition related to achievement of Milestones		485			—			485
Addition related to acquisition of Subsidiary		3,838			—			3,838
Transitional impairment loss		(406,357	)		(54,223	)		(460,580	)
Impairment loss		(485	)		—			(485	)

Adjusted balance at April 30, 2003		3,838			16,000			19,838
Addition related to achievement of Milestones		147			—			147

Balance at July 31, 2003.	$	3,985		$	16,000		$	19,985



	April 30, 2003

	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount

Purchased technology	$	89,525	$	(38,242	)	$	51,283
Trade name		2,867		(1,240	)		1,627

Totals	$	92,392	$	(39,482	)	$	52,910


Year	Amount

2004	$	19,191
2005		19,190
2006		12,971
2007		1,280
2008		278


	July 31,		April 30,
	2003		2003

Optical subsystems and components	$	223,069	$	240,297
Network test and monitoring systems		48,614		54,912
Other		117,005		128,397

	$	388,688	$	423,606


Item 1.	*Financial Statements*


	*Description of Business*


	*Fiscal Periods*


	*Use of Estimates*


	Three Months
	Ended
	July 31, 2003

Beginning balance	$	867
Additions during the period based on product sold		266
Settlements		(40	)
Changes in liability for pre-existing warranties including expirations		(207	)

Ending balance	$	886


	Facilities			Severance			Total

Fiscal year 2003 actions:
Total charges	$	7,548		$	1,830		$	9,378
Cash payments		(227	)		(1,660	)		(1,887	)
Non-cash charges		(3,722	)		—			(3,722	)

Balance from fiscal year 2003 actions at July 31, 2003		3,599			170			3,769

Fiscal year 2004 actions:
Total charges		1,396			789			2,185
Cash payments		(145	)		(513	)		(658	)

Balance from fiscal year 2004 actions at July 31, 2003		1,251			276			1,527
Total accrual balance at July 31, 2003	$	4,850		$	446		$	5,296



			Payments Due by Period

			Less Than		1 - 3		4 - 5		After 5
Contractual Obligations	Total		1 Year		Years		Years		Years

Long-term debt	$	120,000	$	—	$	—	$	—	$	120,000
Operating leases		10,751		3,489		6,549		713		—

Total contractual cash obligations	$	130,751	$	3,489	$	6,549	$	713	$	120,000



	Amount of Commitment Expiration per Period

	Total		Less
	Amount		Than		1 - 3		4 - 5		After 5
Commercial Commitments	Committed		1 Year		Years		Years		Years

Non-cancelable purchase obligation	$	1,765	$	1,765	$	—	$	—	$	—
Standby repurchase obligations		7,946		7,946		—		—		—

Total commercial commitments	$	9,711	$	9,711	$	—	$	—	$	—


	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 have substantial indebtedness and may have insufficient cash flow to meet our debt service obligations.*


	*We may not be able to obtain additional capital in the future.*


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


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


	We will face challenges to our business if our target markets adopt alternate standards to Fibre Channel and Gigabit Ethernet technology or if our products fail to comply with evolving industry standards and government regulations.


	*We 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 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.*


	*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.*


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


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


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


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


	*Prior and future acquisitions could be difficult to integrate, disrupt our business, dilute stockholder value and harm 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.*


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