UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

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

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

Commission file number 000-27999

 

Finisar Corporation

(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of		94-3038428
incorporation or organization)		(I.R.S. Employer Identification No.)
1389 Moffett Park Drive
Sunnyvale, California		94089
(Address of principal executive offices)		(Zip Code)

     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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     At November 30, 2009, there were 64,808,071 shares of the registrant’s common stock, $.001 par value, issued and outstanding.

 

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended November 1, 2009

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of November 1, 2009 and April 30, 2009			4
Condensed Consolidated Statements of Operations for the three and six month periods ended November 1, 2009 and November 2, 2008			5
Condensed Consolidated Statements of Cash Flows for the six month periods ended November 1, 2009 and November 2, 2008			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			46
Item 3. Quantitative and Qualitative Disclosure About Market Risk			57
Item 4. Controls and Procedures			57
PART II OTHER INFORMATION
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 6. Exhibits			77
Signatures			78
EX-4.1
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-31.3
EX-32.1
EX-32.2
EX-32.3

FORWARD LOOKING STATEMENTS

     This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words like “anticipates,” “believes,” “plans,” “expects,” “future,” “intends” and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events; however, our business and operations are subject to a variety of risks and uncertainties, and, consequently, actual results may materially differ from those projected by any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements since they may not occur.

     Certain factors that could cause actual results to differ from those projected are discussed in “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

		November 1, 2009				April 30, 2009 *
		(In thousands, except share and per share data)
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	80,595			$	37,129
Short-term available-for-sale investments			79				92
Accounts receivable, net of allowance for doubtful accounts of $1,859 at November 1, 2009 and $1,069 at April 30, 2009			95,924				81,820
Accounts receivable, other			9,747				10,033
Inventories			113,133				107,764
Prepaid expenses			6,738				6,795
Current assets associated with discontinued operations			—				4,863
Total current assets			306,216				248,496
Property, plant and improvements, net			81,077				81,606
Purchased technology, net			14,074				16,459
Other intangible assets, net			12,559				13,427
Minority investments			12,289				14,289
Other assets			6,183				2,584
Non-current assets associated with discontinued operations			—				3,527
Total assets		$	432,398			$	380,388
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	54,915			$	48,421
Accrued compensation			10,885				11,428
Other accrued liabilities (Note 11)			25,403				30,513
Deferred revenue			2,079				1,703
Current portion of convertible debt (Note 12)			33,334				—
Current portion of long-term debt (Note 13)			6,241				6,107
Non-cancelable purchase obligations			596				2,965
Current liabilities associated with discontinued operations			—				3,160
Total current liabilities			133,453				104,297
Long-term liabilities:
Convertible notes, net of current portion (Note 12)			100,000				134,255
Long-term debt, net of current portion (Note 13)			12,151				15,305
Other non-current liabilities			5,832				2,511
Deferred income taxes			1,136				1,149
Non-current liabilities associated with discontinued operations			—				650
Total liabilities			252,572				258,167
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at November 1, 2009 and April 30, 2009			—				—
Common stock, $0.001 par value, 750,000,000 shares authorized, 64,799,969 shares issued and outstanding at November 1, 2009 and 59,686,507 shares issued and outstanding at April 30, 2009			65				60
Additional paid-in capital			1,887,167				1,831,224
Accumulated other comprehensive income			9,840				2,662
Accumulated deficit			(1,717,246	)			(1,711,725	)
Total stockholders’ equity			179,826				122,221
Total liabilities and stockholders’ equity		$	432,398			$	380,388

See accompanying notes.

FINISAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share data)

		Three Months Ended								Six Months Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Revenues		$	145,730			$	147,746			$	274,455			$	263,520
Cost of revenues			104,745				106,536				202,875				180,671
Amortization of acquired developed technology			1,192				1,253				2,385				2,103
Gross profit			39,793				39,957				69,195				80,746
Operating expenses:
Research and development			21,575				21,774				42,622				39,187
Sales and marketing			7,313				7,903				14,132				14,779
General and administrative			8,177				10,538				17,798				19,049
Acquired in-process research and development			—				10,500				—				10,500
Restructuring charges			4,173				—				4,173				—
Amortization of purchased intangibles			518				614				1,219				743
Impairment of goodwill and intangible assets			—				178,768								178,768
Total operating expenses			41,756				230,097				79,944				263,026
Loss from operations			(1,963	)			(190,140	)			(10,749	)			(182,280	)
Interest income			9				657				19				1,625
Interest expense			(2,167	)			(4,113	)			(4,601	)			(9,356	)
Loss on debt extinguishment			(25,067	)			—				(25,067	)			—
Other income (expense), net			(2,191	)			(3,282	)			(1,938	)			(3,179	)
Loss from continuing operations before income taxes			(31,379	)			(196,878	)			(42,336	)			(193,190	)
Provision (benefit) for income taxes			38				(7,743	)			197				(6,997	)
Loss from continuing operations		$	(31,417	)		$	(189,135	)		$	(42,533	)		$	(186,193	)
Income (loss) from discontinued operations, net of income taxes		$	(67	)		$	1,115			$	37,012			$	990
Net loss		$	(31,484	)		$	(188,020	)		$	(5,521	)		$	(185,203	)
Net income (loss) per share:
Basic
Continuing operations		$	(0.49	)		$	(3.55	)		$	(0.68	)		$	(4.06	)
Discontinued operations		$	(0.00	)		$	0.02			$	0.60			$	0.02
Diluted
Continuing operations		$	(0.49	)		$	(3.55	)		$	(0.68	)		$	(4.06	)
Discontinued operations		$	(0.00	)		$	0.02			$	0.60			$	0.02
Weighted average number of common shares outstanding:
Basic			64,198				53,325				62,157				45,889
Diluted			64,198				53,325				62,157				45,889

See accompanying notes.

FINISAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

		Six Months Ended
		November 1, 2009				November 2, 2008
Operating activities
Net loss		$	(5,521	)			(185,203	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization			14,782				14,303
Stock-based compensation expense			8,807				6,827
Amortization of beneficial conversion feature of convertible notes			—				1,817
Non-cash interest cost on 2.5% convertible senior subordinated notes			2,291				2,470
Amortization of purchased technology and finite lived intangibles			1,296				1,021
Amortization of acquired developed technology			2,555				2,749
Impairment of minority investments			2,000				—
Loss on sale or retirement of assets			275				395
Loss on debt extinguishment			23,581				232
Gain on remeasurement of derivative liability			—				(1,135	)
(Gain) loss on sale of equity investment			(375	)			12
(Gain) loss on sale of a product line			(1,250	)			919
Other than temporary decline in fair market value of equity security			—				1,920
Gain on sale of discontinued operation			(36,053	)			—
Impairment of goodwill			—				178,768
Acquired in-process R&D			—				10,500
Changes in operating assets and liabilities:
Accounts receivable			(14,104	)			(17,450	)
Inventories			(3,675	)			(5,718	)
Other assets			(2,137	)			(1,511	)
Deferred income taxes			(13	)			(7,846	)
Accounts payable			6,494				(104	)
Accrued compensation			(886	)			1,741
Other accrued liabilities			(1,945	)			(3,046	)
Deferred revenue			174				(286	)
Net cash provided by (used in) operating activities			(3,704	)			1,375
Investing activities
Purchases of property, equipment and improvements			(10,711	)			(15,532	)
Sale of short and long-term investments, net			29				30,684
Proceeds from sale of equity investment			375				90
Proceeds from disposed product line			1,250				—
Purchase of intangible assets			(375	)			—
Proceeds from sale of discontinued operations			40,683				—
Purchase of subsidiaries, net of cash assumed			—				30,101
Net cash provided by investing activities			31,251				45,343
Financing activities
Repayment of convertible notes related to acquisition			—				(11,918	)
Proceeds from term loan			—				19,968
Issuance of 5% convertible notes			98,057				—
Repayments of liability related to sale-leaseback of building			—				(101	)
Repayments of borrowings under notes			(3,021	)			(1,241	)
Repayment of convertible notes			(82,575	)			(92,026	)
Proceeds from exercise of stock options and stock purchase plan, net of repurchase of unvested shares			3,458				3,350
Net cash provided by (used in) financing activities			15,919				(81,968	)
Net increase(decrease) in cash and cash equivalents			43,466				(35,250	)
Cash and cash equivalents at beginning of period			37,129				79,442
Cash and cash equivalents at end of period		$	80,595			$	44,192
Supplemental disclosure of cash flow information
Cash paid for interest		$	2,215			$	3,749
Cash paid for taxes		$	211			$	266
Issuance of common stock and assumption of options and warrants in connection with merger		$	—				251,382
Issuance of common stock for repayment of convertible debt		$	16,383				—

See accompanying notes.

FINISAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

Description of Business

     Finisar Corporation is a leading provider of optical subsystems and components that are used to interconnect equipment in local area networks, or LANs, storage area networks, or SANs, metropolitan area networks, or MANs, fiber-to-home networks, or FTTx, cable television networks, or CATV, and wide area networks, or WANs. The Company’s optical subsystems consist primarily of transceivers and transponders which provide the fundamental optical-electrical interface for connecting various types of equipment used in building these networks, including switches, routers and file servers used in wireline networks as well as antennas and base stations for wireless networks. These products rely on the use of digital and analog RF semiconductor lasers in conjunction with integrated circuit design and novel packaging technology to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable using a wide range of network protocols, transmission speeds and physical configurations over distances from 100 meters up to 200 kilometers. The Company also provides products for dynamically switching network traffic from one optical link to another across multiple wavelengths without first converting to an electrical signal known as reconfigurable optical add/drop multiplexers, or ROADMs. The Company’s line of optical components consists primarily of packaged lasers and photodetectors used in transceivers, primarily for LAN and SAN applications and passive optical components used in building MANs. Demand for the Company’s products is largely driven by the continually growing need for additional bandwidth created by the ongoing proliferation of data and video traffic that must be handled by both wireline and wireless networks. The Company’s manufacturing operations are vertically integrated and include integrated circuit design and internal assembly and test capabilities for the Company’s optical subsystem products, as well as key components used in those subsystems. The Company sells its optical subsystem and component products to manufacturers of storage and networking equipment such as Alcatel-Lucent, Brocade, Cisco Systems, EMC, Emulex, Ericsson, Hewlett-Packard Company, Huawei, IBM, Juniper, Qlogic, Siemens and Tellabs.

     The Company formerly provided network performance test systems through its Network Tools Division. On July 15, 2009, the Company consummated the sale of substantially all of the assets of the Network Tools Division to JDS Uniphase Corporation (“JDSU”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements, Discontinued Operations (formerly referenced as Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long Lived Assets), the operating results of this business and the assets and liabilities for all applicable prior periods are reported as discontinued operations in the condensed consolidated financial statements for the period ended November 1, 2009. See Note 4 for further details regarding the sale of division.

     Finisar Corporation was incorporated in California in April 1987 and reincorporated in Delaware in November 1999.

     The accompanying unaudited condensed consolidated financial statements as of November 1, 2009 and for the three and six month periods ended November 1, 2009 and November 2, 2008, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and include the accounts of Finisar Corporation and its wholly-owned subsidiaries (collectively, “Finisar” or the “Company”). Inter-company accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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 November 1, 2009 and its operating results and cash flows for the three and six month periods ended November 1, 2009 and November 2, 2008. 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, 2009. The Company has evaluated subsequent events through December 11, 2009, the date these financial statements were issued.

FASB Accounting Standards Codification

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (GAAP)—a replacement of SFAS No. 162 (“SFAS 168”), which establishes the FASB ASC as the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. This guidance is effective for interim periods and fiscal years ending after September 15, 2009. On July 1, 2009, the Company adopted the provisions of this guidance and as a result, the majority of references to historically issued accounting pronouncements are now superseded by references to the FASB ASC. Certain accounting pronouncements, such as SFAS 168, will remain authoritative until they are integrated into the FASB ASC.

Fiscal Periods

     The Company maintains its financial records on the basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the period (thirteen-week periods).

Reclassifications

     Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These changes had no impact on the Company’s previously reported financial position, results of operations and cash flows.

Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP 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.

Convertible Senior Subordinated Notes

     In May 2008, the FASB issued FASB ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) (formerly referenced as FASB Staff Position (“FSP”) Accounting Principles Board Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”)). This standard addresses instruments commonly referred to as Instrument C which requires the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer’s option. It requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective application to all periods presented. On May 1, 2009, the Company adopted the provisions of ASC 470-20 on a retrospective basis and reflected additional interest expense of $1.1 million and $1.2 million for the three months ended November 1, 2009 and

November 2, 2008, respectively, and $2.3 million and $2.5 million for the six months ended November 1, 2009 and November 2, 2008, respectively, in its condensed consolidated statement of operations. In addition, the retrospective adoption of ASC 470-20 decreased debt issuance costs included in other assets by an aggregate of $313,000, decreased convertible senior notes, net included in long-term liabilities by $7.7 million, and increased total stockholders’ equity by $7.4 million after a charge of $12.1 million to accumulated deficit on its condensed consolidated balance sheet as of April 30, 2009. See Note 12 for the impact of the adoption of ASC 470-20 on prior period balances.

Reverse Stock Split

     On September 25, 2009, the Company effected a 1-for-8 reverse split of its common stock, pursuant to previously obtained stockholder authorization. The number of authorized shares of common stock was not changed. The reverse stock split reduced the Company’s issued and outstanding shares of common stock as of September 25, 2009 from approximately 517,161,351 shares of Common Stock to approximately 64,645,169 shares.

     All share and per-share information in the accompanying financial statements have been restated retroactively to reflect the reverse stock split. The common stock and additional paid-in capital accounts at April 30, 2009 were adjusted retroactively to reflect the reverse stock split.

2. Summary of Significant Accounting Policies

Revenue Recognition

     The Company’s revenue transactions consist predominately of sales of products to customers. The Company follows FASB ASC 605-10, Revenue Recognition, Products (formerly referenced as SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition) and FASB ASC 605-25, Revenue Recognition, Multiple-Element Arrangement (formerly referenced as Emerging Issues Task Force (“EITF”) Issue 00-21, Revenue Arrangements with Multiple Deliverables). Specifically, the Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer, generally upon shipment, the price is fixed or determinable, and collectability is reasonably assured. For those arrangements with multiple elements, or in related arrangements with the same customer, the arrangement is divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. In cases where there is objective and reliable evidence of the fair value of the undelivered item in an arrangement but no such evidence for the delivered item, the residual method is used to allocate the arrangement consideration. For units of accounting which include more than one deliverable, the Company generally recognizes all revenue and cost of revenue for the unit of accounting during the period in which the last undelivered item is delivered.

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

     Sales to certain distributors are made under agreements providing distributor price adjustments and rights of return under certain circumstances. Revenue and costs relating to distributor sales are deferred until products are sold by the distributors to end customers. Revenue recognition depends on notification from the distributor that

product has been sold to the end customer. Also reported by the distributor are product resale price, quantity and end customer shipment information, as well as inventory on hand. Deferred revenue on shipments to distributors reflects the effects of distributor price adjustments and, the amount of gross margin expected to be realized when distributors sell-through products purchased from the Company. Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfers, typically upon shipment from the Company at which point the Company has a legally enforceable right to collection under normal payment terms.

Segment Reporting

     FASB ASC 280, Segment Reporting (formerly referenced as SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information) establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. Prior to the first quarter of fiscal 2010, the Company had determined that it operated in two segments consisting of optical subsystems and components and network test systems. After the sale of the assets of the Network Tools Division to JDSU in the first quarter of fiscal 2010, the Company has one reportable segment comprising optical subsystems and components.

Concentrations of Credit Risk

     Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents, available-for-sale and restricted investments and accounts receivable. The Company places its cash, cash equivalents, available-for-sale and restricted investments with high-credit quality financial institutions. Such investments are generally in excess of FDIC insurance limits.

     Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Generally, the Company does not require collateral or other security to support customer receivables. The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have not been material. The Company’s five largest customers represented 41% and 48% of total accounts receivable at November 1, 2009 and April 30, 2009, respectively. As of November 1, 2009, one customer accounted for 13% of total accounts receivable. As of April 30, 2009, two customers accounted for 19% and 17%, respectively, of total accounts receivable.

     The Company sells products primarily to customers located in Asia and North America. During the three and six months ended November 1, 2009, sales to the Company’s five largest customers represented 43% of total revenues, respectively. During the three and six months ended November 2, 2008, sales to the Company’s five largest customers represented 42% and 40% of total revenues, respectively. One customer, Cisco Systems, represented more than 10% of total revenues during each of these periods.

     Included in the Company’s condensed consolidated balance sheet at November 1, 2009 are the net assets of the Company’s manufacturing operations, substantially all of which are located at its overseas manufacturing facilities and which total approximately $84.2 million.

Foreign Currency Translation

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

Research and Development

     Research and development expenditures are charged to operations as incurred.

Shipping and Handling Costs

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

Cash and Cash Equivalents

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

Investments

     Available-for-Sale Investments

     Available-for-sale investments consist of interest bearing securities with maturities of greater than three months from the date of purchase and equity securities. Pursuant to FASB ASC 320, Investments-Debt and Equity Securities (formerly referenced as SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities), the Company has classified certain of its investments as available-for-sale. Available-for-sale securities are stated at market value, which approximates fair value, and unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income until realized. A decline in the market value of the security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.

     Other Investments

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

Fair Value Accounting

     FASB ASC 820, Fair Value Measurements and Disclosures (formerly referenced as SFAS No. 157, Fair Value Measurements), defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies to accounting pronouncements that require or permit fair value measurements with certain exclusions. The standard provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This standard establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. Valuation techniques used to measure fair value under this standard must maximize the use of observable inputs and minimize the use of unobservable inputs The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

     Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities;

     Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and

     Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

     The Company classifies investments within Level 1 if quoted prices are available in active markets. Level 1 assets include instruments valued based on quoted market prices in active markets which generally include money market funds, corporate publicly traded equity securities on major exchanges and U.S. Treasury notes with quoted prices on active markets. The Company classifies items in Level 2 if the investments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. These investments include: government agencies, corporate bonds and commercial paper. See Note 9 for additional details regarding the fair value of the Company’s investments.

     The Company did not hold financial assets and liabilities which were valued using unobservable inputs as of November 1, 2009 or April 30, 2009.

Inventories

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

     The Company permanently writes down the cost of inventory that the Company specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company defines obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage and is determined using management’s best estimate of future demand, based upon information then available to the Company. The Company also considers: (1) parts and

subassemblies that can be used in alternative finished products, (2) parts and subassemblies that are likely 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.

     In quantifying the amount of excess inventory, the Company assumes that the last twelve months of demand is generally indicative of the demand for the next twelve months. Inventory on hand that is in excess of that demand is written down. Obligations to purchase inventory acquired by subcontractors based on forecasts provided by the Company are recognized at the time such obligations arise.

Property and Equipment

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

Goodwill and Other Intangible Assets

     Goodwill, purchased technology, and other intangible assets result from acquisitions are accounted for under the purchase method. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization of purchased technology and other intangibles has been provided on a straight-line basis over periods ranging from three to ten years. The amortization of goodwill ceased with the adoption of FASB ASC 350, Intangibles- Goodwill and Other (formerly referenced as SFAS No. 142, Goodwill and Other Intangible Assets) beginning in the first quarter of fiscal 2003. Goodwill is assessed for impairment annually or more frequently when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value.

Accounting for the Impairment of Long-Lived Assets

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

Stock-Based Compensation Expense

     The Company accounts for stock-based compensation in accordance with FASB ASC 718 (“ASC 718”), Compensation-Stock Compensation (formerly referenced as SFAS No. 123 (revised 2004), Share-Based Payment), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options and employee stock purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values. ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option pricing model. The Company uses the Black-Scholes option pricing model to determine the fair value of stock based awards under ASC 718. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the consolidated statements of operations.

     Stock-based compensation expense recognized in the condensed consolidated statements of operations for the three and six months ended November 1, 2009 and November 2, 2008 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of, the adoption of ASC 718. Compensation expense for expected-to-vest stock-based awards that were granted on or prior to April 30, 2006 was valued under the multiple-option approach and will continue to be amortized using the accelerated attribution method. Subsequent to April 30, 2006, compensation expense for expected-to-vest stock-based awards is valued under the single-option approach and amortized on a straight-line basis, net of estimated forfeitures.

Computation of Net Income (Loss) Per Share

     Basic and diluted net income (loss) per share is presented in accordance with FASB ASC 260, Earnings Per Share (“ASC 260”), (formerly referenced as SFAS No. 128, Earnings Per Share), for all periods presented. Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from options and warrants (under the treasury stock method) and convertible notes (on an as-if-converted basis) outstanding during the period.

     The following table presents common stock equivalents related to potentially dilutive securities excluded from the calculation of diluted net loss per share from continuing operations because they are anti-dilutive (in thousands):

		Three Months Ended								Six Months Ended
		November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008
Employee stock options			1,423				418				1,252				301
Conversion of convertible subordinated notes			2,401				3,771				2,015				3,771
Warrants			34				35				33				35
			3,858				4,224				3,300				4,107

Comprehensive Income (Loss)

     FASB ASC 220, Comprehensive Income (“ASC 220”) (formerly referenced as SFAS No. 130, Reporting Comprehensive Income), establishes rules for reporting and display of comprehensive income or loss and its components. ASC 220 requires unrealized gains or losses on the Company’s available-for-sale securities and foreign currency translation adjustments to be included in comprehensive income (loss).

     The components of comprehensive income (loss) for the three and six months ended November 1, 2009 and November 2, 2008 were as follows (in thousands):

		Three Months Ended								Six Months Ended
		November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008
Net loss		$	(31,484	)		$	(188,020	)		$	(5,521	)		$	(185,203	)
Foreign currency translation adjustment			3,289				(7,228	)			7,162				(9,180	)
Change in unrealized loss on securities, net of reclassification adjustments for realized loss			(1	)			(216	)			16				(1,067	)
Comprehensive income (loss)		$	(28,196	)		$	(195,464	)		$	1,657			$	(195,450	)

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

		November 1, 2009				April 30, 2009
Net unrealized losses on available-for-sale securities		$	(5	)		$	(21	)
Cumulative translation adjustment			9,845				2,683
Accumulated other comprehensive income		$	9,840			$	2,662

Income Taxes

     We use the liability method to account for income taxes as required by FASB ASC 740, Income Taxes (formerly referenced as SFAS No. 109, Accounting for Income Taxes). As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves determining our income tax expense together with calculating the deferred income tax expense related to temporary differences resulting from the differing treatment of items for tax and accounting purposes, such as deferred revenue or deductibility of certain intangible assets. These temporary differences result in deferred tax assets or liabilities, which are included within the consolidated balance sheets.

     We record a valuation allowance to reduce our deferred tax assets to an amount that we estimate is more likely than not to be realized. We consider estimated future taxable income and prudent tax planning strategies in determining the need for a valuation allowance. When we determine that it is more likely than not that some or all of our tax attributes will be realizable by either refundable income taxes or future taxable income, the valuation allowance will be reduced and the related tax impact will be recorded to the provision in that quarter. Likewise, should we determine that we are not likely to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance would be recorded to the provision in the period such determination was made.

Recent Adoption of New Accounting Standards

     As discussed earlier, the Company has adopted SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles — a Replacement of FASB Statement No. 162 (“SFAS 168”) and provides references to the topics of the codification in this report alongside references to the previous standards.

     In the first quarter of fiscal 2010, the Company adopted FASB ASC 470-20 which specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. See Note 12 for the impact of the adoption of ASC 470-20 on the Company’s financial position and results of operations.

     In May 2009, the FASB issued FASB ASC 855, Subsequent Events (“ASC 855”) (formerly referenced as SFAS No. 165, Subsequent Events). ASC 855 requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. For nonrecognized subsequent events that must be disclosed to keep the financial statements from being misleading, an entity will be required to disclose the nature of the event as well as an estimate of its financial effect, or a statement that such an estimate cannot be made. In addition, ASC 855 requires an entity to disclose the date through which subsequent events have been evaluated. ASC 855 is effective for the Company beginning in the first quarter of fiscal 2010 and is required to be applied prospectively. The implementation of this standard did not have any impact on the financial statements of the Company. Subsequent events through the filing date of this Form 10-Q report have been evaluated for disclosure and recognition.

     In April 2009, the FASB issued FASB ASC 825-10, Financial Instruments (“ASC 825-10”) (formerly referenced as SFAS No. 107-1) and FASB ASC 270-10-05-01, Interim Reporting (“ASC 270-10-05-01”) (formerly referenced as Accounting Principle Board Opinion No. 28-1, “Interim Disclosures About Fair Value of Financial Instrument”). ASC 825-10 and ASC 270-10-05-01 require fair value disclosures in both interim and annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. ASC 825-10 and ASC 270-10-05-01 are effective for interim and annual periods ending after June 15, 2009. The Company adopted these standards as of May 1, 2009. As ASC 825-10 and ASC 270-10-05-01 relate specifically to disclosures, these standards had no impact on the Company’s financial condition, results of operations or cash flows. See Note 18 for further discussion.

     In December 2007, the FASB issued FASB ASC 810, Consolidation, Non-Controlling Interests (“ASC 810”) (formerly referenced as SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51). ASC 810 addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. ASC 810 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC 810 is effective for fiscal years beginning after December 15, 2008. The adoption of this standard had no impact on the Company’s financial condition, results of operations or cash flows.

     In December 2007, the FASB issued FASB ASC 805, Business Combinations (“ASC 805”) (formerly referenced as SFAS No. 141 (revised 2007), Business Combinations) which established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. ASC 805 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the Company engages in subsequent to May 1, 2009 will be accounted for in accordance with ASC 805. The Company expects ASC 805 will have an impact on its consolidated financial statements but the nature and magnitude of the specific effects will depend upon the nature, terms and size of any acquisitions it may consummate after the effective date. There were no business combinations consummated in the first half of fiscal 2010 by the Company.

     Pending Adoption of New Accounting Standards

     In September 2009, the FASB amended the ASC as summarized in ASU 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry specific revenue accounting guidance for software and software related transactions, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. The Company has not completed its assessment of the impact ASU 2009-14 and ASU 2009-13 will have on its financial condition, results of operations or cash flows.

     In June 2009, the FASB issued FASB ASC 860, Transfers and Servicing (“ASC 860”) (formerly referenced as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). The FASB’s objective in issuing ASC 860 was to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASC 860 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. ASC 860 must be applied to transfers occurring on or after the effective date. The Company is currently evaluating the potential impact, if any, of the adoption of ASC 860 on its consolidated results of operations and financial condition.

3. Business Combination

     On August 29, 2008, the Company consummated a combination with Optium Corporation, a leading designer and manufacturer of high performance optical subsystems for use in telecommunications and cable TV network systems, through the merger of Optium with a wholly-owned subsidiary of the Company. The Company’s management and board of directors believe that the combination of the two companies created the world’s largest supplier of optical components, modules and subsystems for the communications industry and will leverage the Company’s leadership position in the storage and data networking sectors of the industry and Optium’s leadership position in the telecommunications and CATV sectors to create a more competitive industry participant. In addition, as a result of the combination, management believes that the Company should be able to realize cost synergies related to operating expenses and manufacturing costs resulting from (1) the transfer of production to lower cost locations, (2) improved purchasing power associated with being a larger company and (3) cost synergies associated with the integration of internally manufactured components into product designs in place of components previously purchased by Optium in the open market. The Company has accounted for the combination using the purchase method of accounting and as a result has included the operating results of Optium in its consolidated financial results since the August 29, 2008 consummation date. The following table summarizes the components of the total purchase price (in thousands):

Fair value of Finisar common stock issued		$	242,821
Fair value of vested Optium stock options and warrants assumed			8,561
Direct transaction costs			2,431
Total purchase price		$	253,813

     At the closing of the merger, the Company issued 20,101,082 shares of its common stock valued at approximately $242.8 million for all of the outstanding common stock of Optium. The value of the shares issued was calculated using the five day average of the closing price of the Company’s common stock from the second trading day before the merger announcement date on May 16, 2008 through the second trading day following the announcement, or $12.08 per share. There were approximately 2,150,325 shares of the Company’s common stock issuable upon the exercise of the outstanding options, warrants and restricted stock awards it assumed in accordance with the terms of the merger agreement. The number of shares was calculated based on the fixed conversion ratio of 0.7827 shares of Finisar common stock for each share of Optium common stock. The purchase price includes $8.6 million representing the fair market value of the vested options and warrants assumed.

     The Company also expects to recognize approximately $5.1 million of non-cash stock-based compensation expense related to the unvested options assumed on the acquisition date. This expense will be recognized beginning from the acquisition date over the remaining service period of the awards. The Company has recognized $1.8 million of expense relating to these options as of November 1, 2009. The stock options and warrants were valued using the Black-Scholes option pricing model using the following weighted average assumptions:

Interest rate			2.17 - 4.5	%
Volatility			47 - 136	%
Expected life		1 - 6 years
Expected dividend yield			0	%

     Direct transaction costs include estimated legal and accounting fees and other external costs directly related to the merger.

Purchase Price Allocation

     The Company accounted for the purchase of Optium using the purchase method of accounting. The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date of August 29, 2008. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill. The Company believes the fair value assigned to the assets acquired and liabilities assumed was based on reasonable assumptions. The total purchase price has been allocated to the fair value of assets acquired and liabilities assumed as follows (in thousands):

Tangible assets acquired and liabilities assumed:
Cash and short-term investments		$	31,825
Other current assets			64,233
Fixed assets			19,129
Other non-current assets			889
Accounts payable and accrued liabilities			(47,005	)
Other liabilities			(973	)
Net tangible assets			68,098
Identifiable intangible assets			25,100
In-process research and development			10,500
Goodwill			150,115
Total purchase price allocation		$	253,813

Identifiable Intangible Assets

     Intangible assets consist primarily of developed technology, customer relationships and trademarks. Developed technology is comprised of products that have reached technological feasibility and are a part of Optium’s product lines. This proprietary know-how can be leveraged to develop new technology and products and improve our existing products. Customer relationships represent Optium’s underlying relationships with its customers. Trademarks represent the fair value of brand name recognition associated with the marketing of Optium’s products. The fair values of identified intangible assets were calculated using an income approach and estimates and assumptions provided by both Finisar and Optium management. The rates utilized to discount net cash flows to their present values were based on the Company’s weighted average cost of capital and ranged from 15% to 30%. This discount rate was determined after consideration for the Company’s rate of return on debt capital and equity and the weighted average return on invested capital. The amounts assigned to developed technology, customer relationships, and trademarks were $12.1 million, $11.9 million and $1.1 million, respectively. The Company expects to amortize developed technology, customer relationships, and trademarks on a straight-line basis over their weighted average expected useful life of 10, 5, and 1 years, respectively. Developed technology is amortized into cost of sales while customer relationships and trademarks are amortized into operating expenses.

In-Process Research and Development

     The Company expensed in-process research and development (“IPR&D”) upon acquisition as it represented incomplete Optium research and development projects that had not reached technological feasibility and had no alternative future use as of the date of the merger. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications including functions, features, and technical performance requirements. The value assigned to IPR&D of $10.5 million was determined by considering the importance of

each project to the Company’s overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present values based on the percentage of completion of the IPR&D projects as of the date of the merger.

Pro Forma Financial Information

     The unaudited financial information in the table below summarizes the combined results of operations of the Company and Optium on a pro forma basis after giving effect to the merger at the beginning of each period presented. The pro forma information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the merger had happened at the beginning of either of the periods presented.

     The unaudited pro forma financial information for the three months ended November 2, 2008 combines the historical results of the Company for the three months ended November 2, 2008 with the historical results of Optium for one month ended August 29, 2008. The unaudited pro forma financial information for the six months ended November 2, 2008 combines the historical results of the Company for the six months ended November 2, 2008 with the historical results of Optium for one month ended August 29, 2008 and the three months ended August 2, 2008.

     The following pro forma financial information for the periods presented includes purchase accounting adjustments for amortization charges from acquired identifiable intangible assets and depreciation on acquired property and equipment (in thousands, except per share information):

		Three months ended				Six months ended
		November 2, 2008				November 2, 2008
Net revenue		$	152,520			$	315,512
Net loss			(195,286	)			(195,992	)
Net loss per share — basic and diluted		$	(3.66	)		$	(4.27	)

4. Discontinued Operations

     During the three months ended August 2, 2009, the Company completed the sale of substantially all of the assets of its Network Tools Division to JDSU. The Company received $40.6 million in cash and recorded a net gain on sale of the business of $36.1 million before income taxes, which is included in income from discontinued operations, net of tax, in the Company’s condensed consolidated statements of operations. In accordance with FASB ASC 360, Property, Plant and Equipment- Impairment or Disposal of Long Lived Assets (“ASC 360”) (formerly referenced as SFAS 144, Accounting for the Impairment or Disposal of Long Lived Assets), the operating results of this business, through November 1, 2009 and for all applicable prior periods are reported as discontinued operations in the condensed consolidated financial statements. The assets and liabilities related to this business have been classified as discontinued operations in the consolidated financial statements for all periods presented. As a result, the prior period comparative financial statements have been restated to exclude assets, liabilities and results of operations related to the discontinued operations. In accordance with FASB ASC 230, Statement of Cash Flows (formerly referenced as SFAS No. 95, Statement of Cash Flows), the Company has elected not to separately disclose the cash flows associated with the discontinued operations in the condensed consolidated statements of cash flows.

     The following table summarizes results from discontinued operations (in thousands):

		Three Months Ended								Six Months Ended
		November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008
Net revenue		$	—			$	11,760			$	6,753			$	24,699
Gross profit			—				8,187				4,892				16,820
Income (loss) from discontinued operations			(67	)			1,115				959				990
Gain on sale of discontinued operations			—				—				36,053				—

     The following table summarizes assets and liabilities classified as discontinued operations (in thousands):

		April 30, 2009
ASSETS
Current assets:
Prepaid expenses		$	327
Inventories			4,536
Total current assets			4,863
Purchased technoloy, net		$	204
Other intangible assets, net			889
Property, plant and improvements, net			2,434
Total assets of discontinued operations		$	8,390
LIABILITIES
Current liabilities:
Warranty accrual			200
Deferred revenue			2,960
			3,160
Non-current liabilities associated with discontinued operations
Deferred Revenue			650
Total liabilities of discontinued operations		$	3,810

     The following table summarizes the gain on sale of discontinued operations (in thousands):

Gross proceeds from sale		$	40,683
Assets sold
Inventory			(4,814	)
Property and equipment			(2,295	)
Intangibles			(845	)
Liabilities transferred
Deferred revenue			3,102
Other accruals			312
Other charges			(90	)
		$	36,053

     In connection with the sale of the assets of the Network Tools Division, the Company entered into a transition services agreement with the buyer. Under this agreement, the Company will provide manufacturing services to the buyer for a period which is not expected to be more than one year. The buyer will reimburse the Company for material costs plus 10% for the first six months, plus 12% for the first three months of any extension and plus 15% for the second three months of any extension. The buyer will also pay the Company a fixed fee of $50,000 per month to cover manufacturing overhead and direct labor costs. Under the agreement, the buyer will also pay a fixed fee for leasing the Company’s facilities and a service fee for the use of the

Company’s information technology, communication services and employee services. The duration for which these services will be provided is not expected to be more than twelve months. During the second quarter of fiscal 2010, the Company incurred net operating expense of $67,000 for providing manufacturing services to the buyer.

5. Inventories

     Inventories consist of the following (in thousands):

		November 1, 2009				April 30, 2009
Raw materials		$	39,885			$	36,153
Work-in-process			44,341				36,042
Finished goods			28,907				35,569
Total inventories		$	113,133			$	107,764

     During the three and six months ended November 1, 2009, the Company recorded charges of $5.6 million and $14.8 million, respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $4.4 million and $7.1 million, respectively. As a result, cost of revenue associated with the sale of this inventory was zero.

     During the three and six months ended November 2, 2008, the Company recorded charges of $3.6 million and $6.0 million, respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $1.2 million and $2.9 million, respectively. As a result, cost of revenue associated with the sale of this inventory was zero.

6. Property and Equipment

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

		November 1, 2009				April 30, 2009
Buildings		$	7,805			$	7,416
Computer equipment			33,552				33,232
Office equipment, furniture and fixtures			3,535				3,739
Machinery and equipment			161,749				154,505
Leasehold improvements			18,037				17,246
Construction-in-process			1,392				445
Total			226,070				216,583
Accumulated depreciation and amortization			(144,993	)			(134,977	)
Property, equipment and improvements (net)		$	81,077			$	81,606

7. Income Taxes

     The Company recorded a provision for income taxes of $38,000 and a benefit for income taxes of $7,743,000 for the three months ended November 1, 2009 and November 2, 2008, respectively. The income tax benefit for the three months ended November 2, 2008 includes a non-cash benefit of $8,398,000 from the

reversal of the previously recorded deferred tax liabilities related to tax amortization of goodwill for which no financial statement amortization has occurred. The provision for income tax expense of $38,000 for the three months ended November 1, 2009 includes minimum state taxes, federal refundable credits and foreign income taxes arising in certain foreign jurisdictions in which the Company conducts business.

     The Company records a valuation allowance against its deferred tax assets for each period in which management concludes that it is more likely than not that the deferred tax assets will not be realized. Realization of the Company’s net deferred tax assets is dependent upon future taxable income the amount and timing of which are uncertain. Accordingly, the Company’s net deferred tax assets as of November 1, 2009 have been fully offset by a valuation allowance.

     A portion of the valuation allowance for deferred tax assets at November 1, 2009 relates to the stock option deductions, the tax benefit of which will be credited to paid-in capital if and when realized, and, thereafter, to income tax expense.

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

     The Company’s total gross unrecognized tax benefits as of May 1, 2009 and November 1, 2009 were $12.5 million. There was no change in the uncertain tax position. Excluding the effects of recorded valuation allowances for deferred tax assets, $10.5 million of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized.

     Due to the Company’s taxable loss position since inception, all tax years are subject to examination in the U.S. and state jurisdictions. The Company is also subject to examination in various foreign jurisdictions, none of which are individually material. It is the Company’s belief that no significant changes in the unrecognized tax benefit positions will occur within 12 months of April 30, 2009.

     The Company records interest and penalties related to unrecognized tax benefits in income tax expense. At November 1, 2009, there were no accrued interest or penalties related to uncertain tax positions. The Company recorded no interest or penalties for the quarter ended November 1, 2009.

8. Intangible Assets Including Goodwill

Intangible Assets

     The following table reflects intangible assets subject to amortization as of November 1, 2009 and April 30, 2009 (in thousands):

		November 1, 2009
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Purchased technology		$	75,937			$	(61,863	)		$	14,074
Purchased trade name			1,172				(1,172	)			—
Purchased customer relationships			15,970				(3,761	)			12,209
Purchased patents			375				(25	)			350
Totals		$	93,454			$	(66,821	)		$	26,633

		April 30, 2009
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Purchased technology		$	75,936			$	(59,478	)		$	16,458
Purchased trade name			1,172				(805	)			367
Purchased customer relationships			15,970				(2,909	)			13,061
Totals		$	93,078			$	(63,192	)		$	29,886

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

Year		Amount
2010		$	3,229
2011			6,222
2012			5,405
2013			3,993
2014 and beyond			7,784
total		$	26,633

Goodwill impairment

     During the second quarter of fiscal 2009, the Company performed a goodwill impairment analysis as it concluded that there were sufficient indicators to require an interim goodwill impairment analysis. Among these indicators were a significant deterioration in the macroeconomic environment largely caused by the widespread unavailability of business and consumer credit, a significant decrease in the Company’s market capitalization as a result of a decrease in the trading price of its common stock to $4.88 at the end of the quarter and a decrease in internal expectations for near term revenues, especially those expected to result from the Optium merger. For the purposes of this analysis, the Company’s estimates of fair value were based on a combination of the income approach, which estimates the fair value of its reporting units based on future discounted cash flows, and the market approach, which estimates the fair value of its reporting units based on comparable market prices. As of the filing of its Quarterly Report on Form 10-Q for the second quarter of fiscal 2009, the Company had not completed its analysis due to the complexities involved in determining the implied fair value of the goodwill for the optical subsystems and components reporting unit, which is based on the determination of the fair value of all assets and liabilities of this reporting unit. However, based on the work performed through the date of the filing, the Company concluded that an impairment loss was probable and could be reasonably estimated. Accordingly, it recorded a $178.8 million non-cash goodwill impairment charge, representing its best estimate of the impairment loss during the second quarter of fiscal 2009.

9. Investments

Available-for-Sale Investments

     The following table presents a summary of the Company’s available-for-sale investments measured at fair value on a recurring basis as of November 1, 2009 (in thousands):

						Significant
		Quoted Prices in				Other
		Active Markets				Observable				Significant
		For Identical				Remaining				Unobservable
Assets Measured at Fair Value on a Recurring Basis		Assets				Inputs				Inputs				Total
		(Level 1)				(Level 2)				(Level 3)
Cash equivalents and available-for-sale investments:
Money market funds		$	3,729			$	—			$	—			$	3,729
Mortgage-backed debt			79								—				79
Total cash equivalents and available-for-sale investments		$	3,808			$	—			$	—			$	3,808
Cash															76,866
Total cash, cash equivalents and available-for-sale investments														$	80,674
Reported as:
Cash and cash equivalents														$	80,595
Short-term available-for-sale investments															79
Long-term available-for-sale investments															—
Total cash, cash equivalents and available-for-sale investments														$	80,674

     The following table presents the summary of the Company’s available-for-sale investments measured at fair value on a recurring basis as of April 30, 2009 (in thousands):

		Quoted
		Prices in				Significant
		Active				Other
		Markets For				Observable				Significant
		Identical				Remaining				Unobservable
Assets Measured at Fair Value on a Recurring Basis		Assets				Inputs				Inputs				Total
		(Level 1)				(Level 2)				(Level 3)
Cash equivalents, and available-for-sales investments:
Money market funds		$	25			$	—			$	—			$	25
Mortgage-backed debt			92				—				—				92
Total cash equivalents and available-for-sale investments		$	117			$	—			$	—				117
Cash															37,104
Total cash, cash equivalents and available-for-sale investments														$	37,221
Reported as:
Cash and cash equivalents														$	37,129
Short-term available-for-sale investments															92
Long-term available-for-sale investments															—
Total cash, cash equivalents and available-for-sale investments														$	37,221

     The following is a summary of the Company’s available-for-sale investments by contractual maturity (in thousands):

		Amortized				Unrealized				Market				Amortized				Unrealized				Market
		Cost				Loss				Value				Cost				Loss				Value
Mature in less than one year		$	84				5			$	79			$	113				21			$	92

     Gross realized gains and losses for the three and six months ended November 1, 2009 and November 2, 2008 were immaterial. Realized gains and losses were calculated based on the specific identification method.

Sale of an Available-for-Sale Equity Security

     During fiscal 2008, the Company granted an option to a third party to acquire 3.8 million shares of stock of a publicly-held company held by the Company. The Company determined that this option should be accounted for under the provisions of FASB ASC 815, Derivatives and Hedging (formerly referenced as SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities), which requires the Company to calculate the fair value of the option at the end of each reporting period, upon the exercise of the option or at the time the option expires and recognize the change in fair value through other income (expense), net. As of April 30, 2008, the Company had recorded a current liability of $1.1 million related to the fair value of this option. During the first quarter of fiscal 2009, the third party did not exercise its option to purchase any of the shares and the option expired. Accordingly, the Company reduced the carrying value of the option liability to zero and recorded $1.1 million of other income during the three months ended August 3, 2008.

     During the quarter ended November 2, 2008, the Company sold 300,000 shares of this investment for $90,000 resulting in a realized loss of $12,000. As of November 2, 2008, the Company classified the remaining 3.5 million shares as available-for-sale securities in accordance with FASB ASC 320, Investments- Debt and Equity Securities (formerly referenced as SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). The Company determined that the full carrying value of these shares was other-than-temporarily impaired and it recorded a loss of $1.2 million during the second quarter of fiscal 2009.

10. Minority Investments

     The carrying value of the Company’s minority investments at April 30, 2009 was $14.3 million and was comprised of minority investment in four privately held companies accounted for under the cost method. The Company concluded that there were sufficient indicators during the second quarter of fiscal 2010 to require an investment impairment analysis of its investment in one of these companies. Among these indicators was the completion of a new round of equity financing by the investee and the resultant conversion of the Company’s preferred stock holdings to common stock. The Company determined that the value of its minority equity investment was impaired and recorded a $2.0 million impairment loss as other expense on the condensed consolidated statement of operations. At November 1, 2009, the carrying value of minority investments was $12.3 million and was comprised of the Company’s minority investment in three privately held companies.

     During the first half of fiscal 2009, the Company completed the sale of a product line to a third party in exchange for an 11% equity interest in the acquiring company in the form of preferred stock and a note convertible into preferred stock. This product line was related to the Company’s Network Tools Division, the remaining assets of which were sold to JDSU in the first quarter of fiscal 2010 and accounted for as discontinued operations. For accounting purposes, no value was originally placed on the equity interest due to the uncertainty in the recoverability of this investment and note. The sale included the transfer of certain assets and liabilities and the retention of certain obligations related to the sale of the product line resulting in a net loss of approximately $919,000 which was included in operating expenses. In the first quarter of fiscal 2010, the Company sold the note and all of the preferred stock back to the buyer of the product line for $1.2 million in cash and recorded the $1.2 million as income from discontinued operations.

11. Other Accrued Liabilities

     Accrued liabilities consist of the following (in thousands):

		November 1, 2009				April 30, 2009
Warranty accrual (Note 17)		$	6,523			$	6,413
Other liabilities			18,880				24,100
Total		$	25,403			$	30,513

12. Convertible Debt

5.0% Convertible Senior Notes due 2029

     On October 15, 2009, the Company sold $100 million aggregate principal amount of 5.0% Convertible Senior Notes due 2029. The notes will mature on October 15, 2029, unless earlier repurchased, redeemed or converted. Interest on the notes will be payable semi-annually in arrears at a rate of 5.0% per annum on each April 15 and October 15, beginning on April 15, 2010. The notes are senior unsecured and unsubordinated obligations of the Company, and rank equally in right of payment with the Company’s other unsecured and unsubordinated indebtedness, but are effectively subordinated to the Company’s secured indebtedness and liabilities to the extent of the value of the collateral securing those obligations, and structurally subordinated to the indebtedness and other liabilities of the Company’s subsidiaries. Holders may convert the notes into shares of the Company’s common stock, at their option at any time prior to the close of business on the trading day before the stated maturity date. The initial conversion rate is 93.6768 shares of Common Stock per $1,000 principal amount of the notes (equivalent to an initial conversion price of approximately $10.68 per share of common stock), subject to adjustment upon the occurrence of certain events. Upon conversion of the notes, holders will receive shares of common stock unless the Company obtains consent from a majority of the holders to deliver cash or a combination of cash and shares of common stock in satisfaction of its conversion obligation. If a holder elects to convert the notes in connection with a “fundamental change” (as defined in the indenture) that occurs prior to October 15, 2014, the conversion rate applicable to the notes will be increased as provided in the indenture.

     Holders may require the Company to redeem, for cash, all or part of their notes upon a “fundamental change” at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date. Holders may also require the Company to redeem, for cash, any of their notes on October 15, 2014, October 15, 2016, October 15, 2019 and October 15, 2024 at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date.

     The Company has the right to redeem the Notes in whole or in part at a redemption price equal to 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, at any time on or after October 22, 2014 if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date on which the Company provides the notice of redemption.

     The Company’s convertible senior notes, convertible subordinated notes and convertible senior subordinated notes as of November 1, 2009 and April 30, 2009 were as follows (in thousands):

		Carrying				Interest				Due in
Description		Amount				Rate				Fiscal year
As of November 1, 2009
Convertible senior notes		$	100,000				5.00	%			2029
Convertible subordinated notes			4,400				2.50	%			2011
Convertible senior subordinated notes			30,681				2.50	%			2011
Unamortized debt discount			(1,747	)
Convertible senior subordinated notes, net			28,934
Total		$	133,334
As of April 30, 2009
Convertible subordinated notes		$	50,000				2.50	%			2011
Convertible senior subordinated notes			92,000				2.50	%			2011
Unamortized debt discount			(7,745	)
Convertible senior subordinated notes, net			84,255
Total		$	134,255

     As discussed in Note 1, the Company adopted the provisions of FASB ASC 470-20 in the first quarter of fiscal 2010. The provisions of this ASC apply to the Company’s 2 1/2% Convertible Senior Subordinated Notes due 2010, and the Company has accounted for the debt and equity components of the notes to reflect the estimated nonconvertible debt borrowing rate at the date of issuance of 8.59%.

     The following table reflects the Company’s previously reported amounts, along with the adjusted amounts reflecting the adoption of ASC 470-20.

Condensed Consolidated Statement of Operations (Unaudited)

		As reported				As Adjusted				Effect of Change
		(in thousands, except per share data)
Three Months Ended November 2, 2008
Interest expense		$	2,878			$	1,235			$	(1,643	)
Loss from continuing operations			(187,946	)			(189,135	)			(1,189	)
Net loss			(186,831	)			(188,020	)			(1,189	)
Loss per share from continuing operations:
Basic			(3.52	)			(3.55	)			(0.03	)
Diluted			(3.52	)			(3.53	)			(0.01	)

		As reported				As Adjusted				Effect of Change
		(in thousands, except per share data)
Six Months Ended Novemeber 2, 2008
Interest expense		$	6,886			$	2,470			$	(4,416	)
Loss from continuing operations			(183,815	)			(186,193	)		$	(2,378	)
Net loss			(182,825	)			(185,203	)		$	(2,378	)
Loss per share from continuing operations:
Basic			(4.01	)			(4.06	)		$	(0.05	)
Diluted			(4.01	)			(4.06	)		$	(0.05	)

Condensed Consolidated Balance Sheet (Unaudited)

		As reported				As Adjusted				Effect of Change
						(in thousands)
As of April 30, 2009
Other assets		$	2,897			$	2,584			$	(313	)
Convertible notes			142,000				134,255				(7,745	)
Additional paid in capital			1,811,298				1,830,807				19,509
Accumulated deficit			(1,699,648	)			(1,711,725	)			(12,077	)

     Interest (cash interest cost) on the 2 1/2% Convertible Senior Subordinated Notes is payable semiannually on April 15 and October 15. The notes become convertible, at the option of the holder, upon the trading price of the Company’s common stock reaching $39.36 for a period of time at a conversion price of $26.24 per share, which is equal to a rate of approximately 38.1097 shares of common stock per $1,000 principal amount of the notes. The conversion price is subject to adjustment. The notes contain a net share settlement feature which requires that, upon conversion of the notes into common stock, Finisar will pay holders in cash for up to the principal amount of the converted notes and that any amounts in excess of the cash amount will be settled in shares of common stock. At November 1, 2009, the if-converted value of the 2 1/2% Convertible Senior Subordinated Notes did not exceed the principal balance.

     At November 1, 2009, the $1.7 million unamortized debt discount had a remaining amortization period of approximately 12 months.

     The following table provides additional information about the Company’s 2 1/2% Convertible Senior Subordinated Notes that may be settled for cash (in thousands):

		November 1,				April 30,
		2009				2009
Carrying amount of the equity component		$	19,466			$	19,509
Effective interest rate on liability component			8.59	%			8.59	%

     The following table presents the associated interest expense related to the Company’s 2 1/2% Convertible Senior Subordinated Notes that may be settled in cash, which consists of both the contractual interest coupon (cash interest cost) and amortization of the discount on the liability (non-cash interest cost) (in thousands):

		Three Months Ended								Six Months Ended
		November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008
Non-cash interest cost		$	1,056			$	1,235			$	2,291			$	2,470
Cash interest cost			484				625				1,085				1,250
		$	1,540			$	1,860			$	3,376			$	3,720

     The Company’s 2 1/2% Convertible Subordinated and 2 1/2% Convertible Senior Subordinated Notes are due in fiscal 2011.

Settlement of Exchange Offers

     On August 11, 2009, the Company exchanged $47,504,000 aggregate principal amount of its 2 1/2% Convertible Senior Subordinated Notes due 2010 and its 2 1/2% Convertible Subordinated Notes due 2010 pursuant to exchange offers which commenced on July 9, 2009 at a price of $870 for each $1,000 principal amount of notes. The consideration for the exchange consisted of (i) $525 in cash and (ii) 596 shares of the Company’s common stock per $1,000 principal amount of notes. The Company issued approximately 3.5 million shares of common stock and paid out approximately $24.9 million in cash to the former holders of

notes validly tendered and not withdrawn in the exchange offers. The Company settled $33,100,000, or 66.2%, of the $50,000,000 aggregate outstanding principal amount of 2 1/2% Convertible Subordinated Notes due 2010; and $14,404,000, or approximately 15.7%, of the $92,000,000 aggregate outstanding principal amount of 2 1/2% Convertible Senior Subordinated Notes due 2010. In accordance with the provisions of ASC 470-20, this exchange was considered to be an induced conversion and a loss on induced conversion of $23.7 million was recorded during the second quarter of fiscal 2010 as loss on debt extinguishment. The Company incurred $1.5 million of expenses in connection with the exchange offers which was recorded as loss on debt extinguishment in the condensed consolidated statement of operations.

Repurchases of Convertible Senior Subordinated Notes

     During the second quarter of fiscal 2010, the Company repurchased an aggregate of $46.9 million principal amount of its 2 1/2% Senior Subordinated Notes due 2010 in privately negotiated transactions for a total purchase price of $45.4 million plus accrued interest of $172,000.

Repurchase of Convertible Subordinated Notes

     On October 27, 2009, the Company repurchased $12.5 million principal amount of the 2 1/2% Subordinated Notes due 2010 in a privately negotiated transaction for a total purchase price of $12.2 million plus accrued interest of $10,000 and recorded a gain on debt extinguishment of $92,000.

13. Long-term Debt

     In December 2005, the Company entered into a note and security agreement with a financial institution. Under this agreement, the Company borrowed $9.9 million at an interest rate of 5.9% per annum. The note is payable in 60 equal monthly installments beginning in January 2006 and is secured by certain property and equipment of the Company. In January 2009, the agreement was amended to increase the rate of interest from 5.9% to 12.9% per annum. The following table provides information regarding the current and long term portion of the remaining principal outstanding under this note as of the respective dates (in thousands):

		November 1,				April 30,
		2009				2009
Current portion of long-term debt		$	2,241			$	2,107
Long-term debt, net of current portion			401				1,555
Total		$	2,642			$	3,662

The outstanding balance of this loan as of November 1, 2009 was subsequently repaid.

     In July 2008, the Company’s Malaysian subsidiary entered into two separate loan agreements with a Malaysian bank. Under these agreements, the Company’s Malaysian subsidiary borrowed a total of $20 million at an initial interest rate of 5.05% per annum. The first loan is payable in 20 equal quarterly installments of $750,000 beginning in January 2009, and the second loan is payable in 20 equal quarterly installments of $250,000 beginning in October 2008. Both loans are secured by certain property of the Company’s Malaysian subsidiary, guaranteed by the Company and subject to certain covenants. The Company was in compliance with all covenants associated with these loans as of November 1, 2009 and April 30, 2009. The following table provides information regarding the current and long term portion of the remaining principal outstanding under these notes as of the respective dates (in thousands):

		November 1,				April 30,
		2009				2009
Current portion of long-term debt		$	4,000			$	4,000
Long-term debt, net of current portion			11,750				13,750
Total		$	15,750			$	17,750

14. Revolving Line of Credit Agreement

Former Credit Facility

     On October 23, 2009, the Company terminated its revolving line of credit agreement with Silicon Valley Bank. This line of credit agreement allowed for advances in the aggregate amount of $25 million subject to certain restrictions and limitations. Borrowings under this line were collateralized by substantially all of the Company’s assets except its intellectual property rights and bear interest, at the Company’s option, at either the bank’s prime rate plus 0.5% or LIBOR plus 3%. There were no outstanding borrowings under this revolving line as of April 30, 2009 or on the date of termination of the agreement.

New Credit Facility

     On October 2, 2009, the Company entered into an agreement with Wells Fargo Foothill, LLC to establish a new four-year $70 million senior secured revolving credit facility. Borrowings under the credit facility will bear interest at rates based on the prime rate and LIBOR plus variable margins, under which applicable interest rates currently range from 5.75% to 6.25% per annum. Borrowings will be guaranteed by Finisar’s U.S. subsidiaries and secured by substantially all of the assets of Finisar and its U.S. subsidiaries. The credit facility matures four years following the date of the agreement, subject to certain conditions. The Company was in compliance with all covenants associated with this facility as of November 1, 2009. There were no outstanding borrowings under this revolving line of credit at November 1, 2009.

15. Letter of Credit Reimbursement Agreement

     In April 2005, the Company entered into a letter of credit reimbursement agreement with Silicon Valley Bank. Several amendments were made to the agreement subsequently. The last amendment was on April 30, 2009. Under the terms of the amended agreement, Silicon Valley Bank agreed to provide to the Company, through October 24, 2009, a $4.0 million letter of credit facility covering existing letters of credit issued by Silicon Valley Bank and any other letters of credit that may be required by the Company. The cost related to the credit facility consisted of the bank’s out of pocket expenses associated with the credit facility. The credit facility was unsecured but included a negative pledge that prohibited the Company from creating a security interest in any of its assets in favor of a subsequent creditor without the approval of Silicon Valley Bank. Outstanding letters of credit secured under this agreement at April 30, 2009 totaled $3.4 million. On October 23, 2009, the Company terminated this letter of credit agreement. As of November 1, 2009, the $3.4 million of letters of credit issued by Silicon Valley Bank remained outstanding, as the Company was in the process of obtaining new replacement letters of credit through Wells Fargo Bank. Following the termination of the agreement, the Company secured the outstanding letters of credit with restricted certificates of deposit of $3.4 million.

16. Non-recourse Accounts Receivable Purchase Agreement

     On October 28, 2004, the Company entered into a non-recourse accounts receivable purchase agreement with Silicon Valley Bank. Several amendments were subsequently made to the agreement. The last amendment was on October 28, 2008. Under the terms of the amended agreement, the Company could sell to Silicon Valley Bank, through October 24, 2009 up to $16 million of qualifying receivables whereby all right, title and interest in the Company’s invoices were purchased by Silicon Valley Bank. In these non-recourse sales, the Company removed sold receivables from its books and records no liability related to the sale, as the Company has assessed that the sales should be accounted for as “true sales” in accordance with FASB ASC 860, Transfers and Servicing. The discount interest for the facility is based on the number of days in the discount period multiplied by Silicon Valley Bank’s prime rate plus 0.25% and a non-refundable administrative fee of 0.25% of the face amount of each invoice. During the three and six months ended November 2, 2008, the Company sold approximately $10.0 million and $15.2 million, respectively of its trade receivables. During the first half of fiscal 2010, the Company did not sell any receivables under the facility. On October 23, 2009, the Company terminated this non-recourse accounts receivable purchase agreement with Silicon Valley Bank.

17. Warranty

     The Company generally offers a one-year limited warranty for 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 historical and anticipated rates of warranty claims. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

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

		Six Months Ended
		November 1, 2009
Beginning balance at April 30, 2009		$	6,413
Additions during the period based on product sold			1,703
Settlements			(368	)
Changes in liability for pre-existing warranties, including expirations			(1,225	)
Ending balance at November 1, 2009		$	6,523

18. Fair Value of Financial Instruments

     The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. The estimated fair values of the Company’s financial instruments as of November 1, 2009 are as follows (dollars in thousands):

		November 1, 2009
		Carrying
		Amount				Fair value
Financial assets:
Cash and cash equivalents		$	80,595			$	80,595
Short-term available-for -sale investments			79			$	79
Financial liabilities:
Convertible notes			133,334				135,829
Long-term debt			18,392			$	18,392
Totals		$	232,400			$	234,895

Cash and cash equivalents — The fair value of cash and cash equivalents approximates its carrying value.

Short-term available-for-sale investments — The fair value of short-term available-for-sale investments approximates their carrying value.

Convertible notes -The fair value of subordinated and senior subordinated convertible notes is estimated using the price from the repurchase transaction that the Company completed during October 2009. The fair value of the 5.0% Senior Convertible Notes due 2029 is based on model derived valuation using observable market inputs, such as LIBOR-based yield curves, stock volatility and credit ratings.

Long-term debt — The fair value of long-term debt approximates its carrying value.

     The Company has not estimated the fair value of its minority investments as it is not practicable to estimate the fair value of these investments because of the lack of a quoted market price and the inability to estimate fair value without incurring excessive costs. As of November 1, 2009, the carrying value of its minority investments is $12.3 million which management believes is not impaired as of November 1, 2009.

19. Stockholders’ Equity

Valuation and Expense

     The following table summarizes stock-based compensation expense related to employee stock options, restricted stock awards and employee stock purchases under FASB ASC 718 for the three and six months ended November 1, 2009 and November 2, 2008 which was reflected in the Company’s operating results (in thousands):

		Three Months Ended								Six Months Ended
		November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008
		(unaudited, in thousands)								(unaudited, in thousands)
Cost of revenues		$	1,288			$	840			$	2,320			$	1,661
Research and development			1,490				1,509				3,011				2,369
Sales and marketing			431				440				1,009				767
General and administrative			723				686				1,763				1,201
Total		$	3,932			$	3,475			$	8,103			$	5,998

     The total stock-based compensation capitalized as part of inventory as of November 1, 2009 was $504,318.

     The fair value of each option grant was estimated on the date of grant using the Black-Scholes single option pricing model with the following weighted-average assumptions:

		Employee Stock Option Plans								Employee Stock Purchase Plan								Employee Stock Option Plans								Employee Stock Purchase Plan
		Three months ended																Six months ended
		November 1,				November 2,				November 1,				November 2,				November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008				2009				2008				2009				2008
Weighted average fair value per share		$	4.65			$	6.24			$	3.44			$	4.08			$	4.29			$	6.24 - $7.92%			$	3.44			$	4.08
Expected term (in years)			4.77				5.05				0.75				0.74				4.67				5.05 - 5.14				0.75				0.74
Volatility			84	%			74	%			102	%			58	%			84	%			72 - 74%				102	%			58	%
Risk-free interest rate			2.4	%			2.8	%			3.2	%			3.3	%			2.5	%			2.8% - 3.2%				3.2	%			3.3	%
Dividend yield			0.00	%			0.00	%			0.00	%			0.00	%			0.00	%			0.00%				0.00	%			0.00	%

     During the three and six months ended November 1, 2009, 0 and 801,518 shares of common stock were issued under the Company’s Employee Stock Purchase Plan, respectively, and 297,479 and 331,426 stock options were exercised, respectively. As of November 1, 2009, total compensation cost related to unvested stock options and restricted stock units not yet recognized was approximately $16.6 million which is expected to be recognized over the next 26 months on a weighted-average basis.

Accuracy of Fair Value Estimates

     The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and the stock price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of

management judgment. As a result, if other assumptions had been used, the Company’s recorded stock-based compensation expense could have been materially different from that depicted above. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from the estimate, stock-based compensation expense could be materially different.

20. Segments

     Prior to first quarter of fiscal 2010, the Company’s Chief Executive Officer and Chairman of the Board viewed the Company’s business as having two principal operating segments, consisting of optical subsystems and components, and network performance test systems. After the sale of the assets of the Network Tools Division to JDSU in the first quarter of fiscal 2010, the Company has one reportable segment consisting of optical subsystems and components.

     Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for SANs and LANs and MAN applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in MAN applications. Optical components consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers, primarily for LAN and SAN applications.

21. Geographic Information

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

		Three Months Ended								Six Months Ended
		November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008
Revenues from sales to unaffiliated customers:
United States		$	54,929			$	45,097			$	103,931			$	70,861
Malaysia			25,658				26,920				48,019				54,261
China			18,182				19,362				35,204				34,789
Rest of the world			46,961				56,367				87,301				103,609
		$	145,730			$	147,746			$	274,455			$	263,520