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 (I.R.S. Employer
incorporation or organization)		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):

     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 August 31, 2009, there were 515,017,220 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 August 2, 2009

		Page
PART I FINANCIAL INFORMATION			4
Item 1. Financial Statements:			4
Condensed Consolidated Balance Sheets as of August 2, 2009 and April 30, 2009			4
Condensed Consolidated Statements of Operations for the three month periods ended August 2, 2009 and August 3, 2008			5
Condensed Consolidated Statements of Cash Flows for the three month periods ended August 2, 2009 and August 3, 2008			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3. Quantitative and Qualitative Disclosure About Market Risk			41
Item 4. Controls and Procedures			41
PART II OTHER INFORMATION			41
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 6. Exhibits			53
Signatures			54
EX-10.1
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

FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

		August 2, 2009				April 30, 2009 *
		(In thousands, except share and per share data)
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	60,327			$	37,129
Short-term available-for-sale investments			92				92
Accounts receivable, net of allowance for doubtful accounts of $2,184 at August 2, 2009 and $1,069 at April 30, 2009			99,466				81,820
Accounts receivable, other			8,512				10,033
Inventories			108,686				107,764
Prepaid expenses			5,568				6,795
Current assets associated with discontinued operations			—				4,863
Total current assets			282,651				248,496
Property, plant and improvements, net			79,492				81,606
Purchased technology, net			15,267				16,459
Other intangible assets, net			13,102				13,427
Minority investments			14,289				14,289
Other assets			2,427				2,584
Non-current assets associated with discontinued operations			—				3,527
Total assets		$	407,228			$	380,388
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	52,264			$	48,421
Accrued compensation			9,048				11,428
Other accrued liabilities (Note 10)			25,102				30,513
Deferred revenue			2,073				1,053
Current portion of long-term debt (Note 12)			6,173				6,107
Non-cancelable purchase obligations			657				2,965
Current liabilities associated with discontinued operations			—				3,810
Total current liabilities			95,317				104,297
Long-term liabilities:
Convertible notes (Note 11)			135,490				134,255
Long-term debt, net of current portion (Note 12)			13,737				15,305
Other non-current liabilities			2,352				3,161
Deferred income taxes			973				1,149
Total liabilities			247,869				258,167
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at August 2, 2009 and April 30, 2009			—				—
Common stock, $0.001 par value, 750,000,000 shares authorized, 486,006,907 shares issued and outstanding at August 2, 2009 and 477,492,057 shares issued and outstanding at April 30, 2009			486				477
Additional paid-in capital			1,838,083				1,830,807
Accumulated other comprehensive income			6,552				2,662
Accumulated deficit			(1,685,762	)			(1,711,725	)
Total stockholders’ equity			159,359				122,221
Total liabilities and stockholders’ equity		$	407,228			$	380,388

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

		Three Months Ended
		August 2, 2009				August 3, 2008 *
Revenues		$	128,725			$	115,774
Cost of revenues			98,130				74,135
Amortization of acquired developed technology			1,193				850
Gross profit			29,402				40,789
Operating expenses:
Research and development			21,047				17,413
Sales and marketing			6,819				6,876
General and administrative			9,621				8,511
Amortization of purchased intangibles			701				129
Total operating expenses			38,188				32,929
Income (loss) from operations			(8,786	)			7,860
Interest income			10				968
Interest expense			(2,434	)			(5,243	)
Other income (expense), net			253				103
Income (loss) from continuing operations before income taxes			(10,957	)			3,688
Provision for income taxes			159				746
Net income (loss) from continuing operations		$	(11,116	)		$	2,942
Income (loss) from discontinued operations, net of income taxes		$	37,079			$	(125	)
Net income		$	25,963			$	2,817
Net income (loss) per share:
Basic
Continuing operations		$	(0.02	)		$	0.01
Discontinued operations		$	0.08			$	(0.00	)
Diluted
Continuing operations		$	(0.02	)		$	0.01
Discontinued operations		$	0.07			$	(0.00	)
Weighted average number of common shares outstanding:
Basic			481,444				310,133
Diluted			502,106				311,614

See accompanying notes.

FINISAR CORPORATION

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

		Three Months Ended
		August 2, 2009				August 3, 2008
Operating activities
Net income		$	25,963			$	2,817
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization			7,418				6,647
Stock-based compensation expense			4,872				3,057
Amortization of beneficial conversion feature of convertible notes			—				1,146
Non-cash interest cost on 2.5% convertible senior subordinated notes			1,235				1,235
Amortization of purchased technology and finite lived intangibles			778				268
Amortization of acquired developed technology			1,362				1,246
Loss on sale or retirement of assets			21				413
Gain on remeasurement of derivative liability			—				(1,135	)
(Gain) loss on sale of equity investment			(375	)			—
(Gain) loss on sale of a product line			(1,250	)			919
Gain on sale of discontinued operations			(36,053	)			—
Other than temporary decline in fair market value of equity security			—				735
Changes in operating assets and liabilities:
Accounts receivable			(17,646	)			(9,181	)
Inventories			(834	)			(8,980	)
Other assets			2,638				(1,979	)
Deferred income taxes			(176	)			551
Accounts payable			3,843				6,302
Accrued compensation			(2,720	)			(876	)
Other accrued liabilities			(5,718	)			(436	)
Deferred revenue			168				523
Net cash provided by (used in) operating activities			(16,474	)			3,272
Investing activities
Purchases of property, equipment and improvements			(3,150	)			(5,643	)
Sale of short and long-term investments, net			14				8,852
Proceeds from sale of equity investment			375				—
Purchase of intangible assets			(375	)			—
Proceeds from disposed product line			1,250				—
Proceeds from sale of discontinued operations			40,683				—
Net cash provided by investing activities			38,797				3,209
Financing activities
Repayment of convertible notes related to acquisition			—				(11,918	)
Proceeds from term loan			—				20,000
Repayments of liability related to sale-leaseback of building			—				(101	)
Repayments of borrowings under notes			(1,503	)			(492	)
Proceeds from exercise of stock options and stock purchase plan, net of repurchase of unvested shares			2,378				3,087
Net cash provided by financing activities			875				10,576
Net increase in cash and cash equivalents			23,198				17,057
Cash and cash equivalents at beginning of period			37,129				79,442
Cash and cash equivalents at end of period		$	60,327			$	96,499
Supplemental disclosure of cash flow information
Cash paid for interest		$	341			$	81
Cash paid for taxes		$	180			$	179

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 connect 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 the equipment used in building these 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. 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.

     On August 29, 2008, Finisar completed a business combination with Optium Corporation, a leading designer and manufacturer of high performance optical subsystems for use in telecommunications and CATV systems, through the merger of Optium with a wholly-owned subsidiary of Finisar. The Company believes 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 Finisar’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, the Company has realized and expects 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 components into product designs previously purchased in the open market by Optium. At the closing of the merger, the Company issued 160,808,659 shares of Finisar common stock, valued at approximately $242.8 million, in exchange for all of the outstanding common stock of Optium.

     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 Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, the operating results of this business, the assets and liabilities through the date of its disposition and for all applicable prior periods are reported as discontinued operations in the condensed consolidated financial statements for the period ended August 2, 2009. See Note 3 for further details regarding the sale of division.

     Finisar Corporation was incorporated in California in April 1987 and reincorporated in Delaware in November 1999. Finisar’s principal executive offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089, and its telephone number at that location is (408) 548-1000.

     The accompanying unaudited condensed consolidated financial statements as of August 2, 2009 and for the three month periods ended August 2, 2009 and August 3, 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 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 August 2, 2009 and its operating results and cash flows for the three month periods ended August 2, 2009 and August 3, 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 September 11, 2009, the date these financial statements were issued.

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.

Convertible Senior Subordinated Notes

     In May 2008, the Financial Accounting Standards Board (“FASB”) issued 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). FSP APB 14-1 addresses instruments commonly referred to as Instrument C from Emerging Issues Task Force (“EITF”) Issue No. 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion, 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. FSP APB 14-1 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. FSP APB 14-1 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 FSP APB 14-1 on a retrospective basis and reflected additional interest expense of $1.2 million for each of the three months ended August 2, 2009 and August 3, 2008, respectively, in its Condensed Consolidated Statement of Operations. In addition, the retrospective adoption of FSP APB 14-1 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 11 for the impact of the adoption of FSP APB 14-1 on prior period balances.

Use of Estimates

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

2. Summary of Significant Accounting Policies

Revenue Recognition

     The Company’s revenue transactions consist predominately of sales of products to customers. The Company follows SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and 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

     Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. 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 consisting of 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 and available-for-sale 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 48.0% of total accounts receivable at August 2, 2009 and April 30, 2009, respectively. As of August 2, 2009, two customers accounted for 18% and 10%, respectively, 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 months ended August 2, 2009 and August 3, 2008, sales of optical subsystems and components to one customer represented 16% and 18%, respectively, of total revenues. No other customer accounted for more than 10% of total revenues in either of these fiscal periods

     Included in the Company’s condensed consolidated balance sheet at August 2, 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 $73 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.

Advertising Costs

     Advertising costs are expensed as incurred. Advertising is used infrequently in marketing the Company’s products. Advertising costs were $12,000 and $6,000 in the three months ended August 2, 2009 and August 3, 2008, respectively.

Shipping and Handling Costs

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

Cash and Cash Equivalents

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

Investments

     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 SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company has classified 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 the investment.

Fair Value Accounting

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS 159”). FAS 159 expands the use of fair value accounting to eligible financial assets and liabilities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year commencing after November 15, 2007. The Company evaluated its existing financial instruments and elected not to adopt the fair value option to account for its financial instruments. As a result, SFAS 159 did not have any impact on the Company’s financial condition or results of operations for the periods presented in this report. However, because the SFAS 159 election is based on an instrument-by-instrument election at the time the Company first recognizes an eligible item or enters into an eligible firm commitment, the Company may decide to elect the fair value option on new items should business reasons support doing so in the future.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement 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 statement 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. SFAS 157 defines fair value based upon an exit price model.

     SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. Valuation techniques used to measure fair value under SFAS 157 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. 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 adopted the effective portions of SFAS 157 on May 1, 2008. In February 2008, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2 (“FSP 157-1 and “FSP 157-2”). FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted the provisions of FSP 157-2 in first quarter of fiscal 2010 on a prospective basis for its non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of FSP 157-2 did not have a material impact on the financial condition, results of operations or cash flows of the Company.

     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. Please see note 8 for additional details regarding fair value of our investments.

     The Company did not hold financial assets and liabilities which were valued using unobservable inputs as of August 2, 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 accounted for under the purchase method. Amortization of purchased technology and other intangibles has been provided on a straight-line basis over periods ranging from three to seven years. The amortization of goodwill ceased with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), 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. Intangible assets with finite lives are amortized over their estimated useful lives.

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 SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), 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. SFAS 123R 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 SFAS 123R. 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 Company’s consolidated statements of operations.

     Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the three months ended August 2, 2009 and August 3, 2008 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of, the adoption of SFAS 123R, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and compensation expense for the stock-based payment awards granted subsequent to April 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. 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 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 the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

		Three Months Ended
		August 2,				August 3,
		2009				2008
Numerator:
Net income (loss) from continuing operations		$	(11,116	)		$	2,942
Net income (loss) from discontinued operations		$	37,079			$	(125	)
Denominator for basic net income (loss) per share from continuing operations and basic net income (loss) per share from discontinued operations
Weighted-average shares outstanding — basic			481,444				310,133
Effect of dilutive securities:
Weighted-average shares outstanding — employee stock options			6,911				1,481
Weighted-average warrants outstandig			256
Conversion of convertible subordinated notes			13,495
Weighted-average shares outstanding — diluted			502,106				311,614
Denominator for diluted net income (loss) per share:
From continuing operations			481,444				311,614
From discontinued operations			502,106				310,133
Basic net income (loss) per share
From continuing operations			(0.02	)			0.01
From discontinued operations		$	0.08			$	(0.00	)
Diluted net income (loss) per share
From continuing operations		$	(0.02	)		$	0.01
From discontinued operations		$	0.07			$	(0.00	)

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

		Three Months Ended
		August 2,				August 3,
		2009				2008
Employee stock opitons			6,911				—
Conversion of convertible subordinated notes			13,495				30,167
Warrants assumed in acquisition			256				21
			20,662				30,188

Comprehensive Income (Loss)

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

     The components of comprehensive income for the three months ended August 2, 2009 and August 3, 2008 were as follows (in thousands):

		Three Months Ended
		August 2,				August 3,
		2009				2008
Net income		$	25,963			$	2,817
Foreign currency translation adjustment, net of income taxes			3,876				(1,953	)
Change in unrealized gain (loss) on securities, net of reclassification adjustments for realized loss, net of income taxes			14				(850	)
Comprehensive income		$	29,853			$	14

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

		August 2, 2009				April 30, 2009
Net unrealized losses on available-for-sale securities		$	(7	)		$	(21	)
Cumulative translation adjustment			6,559				2,683
Accumulated other comprehensive income		$	6,552			$	2,662

Income Taxes

     The Company uses the liability method to account for income taxes as required by SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). As part of the process of preparing its consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. 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.

     The Company records a valuation allowance to reduce its deferred tax assets to an amount that it estimates is more likely than not to be realized. The Company considers estimated future taxable income and prudent tax planning strategies in determining the need for a valuation allowance. When the Company determines that it is more likely than not that some or all of its 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 the Company determine that it is not likely to realize all or part of its deferred tax assets in the future, an increase to the valuation allowance would be recorded to the income tax provision in the period such determination was made.

Recent Adoption of New Accounting Standards

     In May 2008, the FASB issued FSP APB 14-1 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. The Company adopted this pronouncement in the first quarter of fiscal 2010. See Note 11 for the impact of the adoption of FSP APB 14-1 on the Company’s financial position and results of operations.

     In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 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, SFAS 165 requires an entity to disclose the date through which subsequent events have been evaluated. SFAS No. 165 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 SFAS No. 107-1 and Accounting Principle Board (“APB”) Opinion No. 28-1 (“APB No. 28-1”), “Interim Disclosures About Fair Value of Financial Instruments” (“SFAS No. 107-1” and “APB No. 28-1”). SFAS No. 107-1 and APB No. 28-1 require fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. SFAS No. 107-1 and APB No. 28-1 are effective for interim and annual periods ending after June 15, 2009. The Company adopted these standards as of May 1, 2009. As SFAS No. 107-1 and APB No. 28-1 relate specifically to disclosures, these standards had no impact on the Company’s financial condition, results of operations or cash flows. See note 25 for further discussion.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 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. FAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 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 SFAS No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R establishes 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. SFAS 141R 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 SFAS 141R. The Company expects FAS No. 141R 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 quarter of fiscal 2010 by the Company.

     Pending Adoption of New Accounting Standards

     In June 2009, the FASB issued 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”). SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for the Company in the second quarter of fiscal 2010, and accordingly, its Quarterly Report on Form 10-Q for the quarter ending November 1, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The codification will not have an impact on the Company’s financial condition, results of operations or cash flows.

     In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company has not completed its assessment of the impact SFAS 167 will have on its financial condition, results of operations or cash flows.

          In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets (“SFAS 166”), an amendment of SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The FASB’s objective in issuing this Statement is 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. This Statement 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. This Statement 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 SFAS 166 on its consolidated results of operations and financial condition.

3. 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 SFAS 144, Accounting for the Impairment or Disposal of Long Lived Assets, the operating results of this business, through the date of its disposition and for all applicable prior periods are reported as discontinued operations in the condensed consolidated financial statements for the period ending August 2, 2009. 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 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 consolidated statements of cash flow.

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

		Three Months Ended
		August 2,				August 3,
		2009				2008
Net revenue		$	6,753			$	12,938
Gross profit			4,892				8,633
Income (loss) from discontinued operations			1,026				(125	)
Gain on sale of discontinued operations			36,053				—
Income (loss) from discontinued operations		$	37,079			$	(125	)

     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			3,610
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

     The Company has entered into a transition services agreement with the buyer of the Network Tools business. The Company evaluated the agreement for continuing cash flows and concluded that the cash flows from continuation of activities are not expected to extend beyond one year. 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 three to six months.

4. Inventories

     Inventories consist of the following (in thousands):

		August 2, 2009				April 30, 2009
Raw materials		$	34,707			$	36,153
Work-in-process			40,442				36,042
Finished goods			33,537				35,569
Total inventories		$	108,686			$	107,764

     During the three months ended August 2, 2009 and August 3, 2008, the Company recorded charges of $9.2 million and $2.6 million, respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $2.7 million and $1.8 million, respectively. As a result, cost of revenue associated with the sale of this inventory was zero.

5. Property and Equipment

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

		August 2, 2009				April 30, 2009
Buildings		$	7,549			$	7,416
Computer equipment			33,741				33,232
Office equipment, furniture and fixtures			3,791				3,739
Machinery and equipment			158,361				154,505
Leasehold improvements			17,800				17,246
Contruction-in-process			404				445
Total			221,646				216,583
Accumulated depreciation and amortization			(142,154	)			(134,977	)
Property, equipment and improvements (net)		$	79,492			$	81,606

6. Sale-leaseback and Impairment of Tangible Assets

     During the quarter ended January 31, 2005, the Company recorded an impairment charge of $18.8 million to write down the carrying value of one of its corporate office facilities located in Sunnyvale, California upon entering into a sale-leaseback agreement. The property was written down to its appraised value, which was based on the work of an independent appraiser in conjunction with the sale-leaseback agreement. Due to retention by the Company of an option to acquire the leased properties at fair value at the end of the fifth year of the lease, the sale-leaseback transaction was recorded in the Company’s quarter ended April 30, 2005 as a financing transaction under which the sale would not be recorded until the option expired or was otherwise terminated.

     During the first quarter of fiscal 2009, the Company amended the sale-leaseback agreement with the landlord to immediately terminate the Company’s option to acquire the leased properties. Accordingly, the Company finalized the sale of the property by disposing of the remaining net book value of its corporate office facility in Sunnyvale, California and the corresponding value of the land resulting in a loss on disposal of approximately $12.2 million. This loss was offset by the reduction in the carrying value of the financing liability and other related accounts by approximately $11.9 million, resulting in the recognition of a net loss on the sale of this property of approximately $343,000 during the three months ended August 3, 2008. As of August 3, 2008, the carrying value of the property and the financing liability had been reduced to zero.

7. Intangible Assets

     The following table reflects intangible assets subject to amortization as of August 2, 2009 and April 30, 2009 (in thousands):

		August 2, 2009
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Purchased technology		$	75,937			$	(60,670	)		$	15,267
Purchased trade name			1,172				(1,080	)			92
Purchased customer relationships			15,970				(3,335	)			12,635
Purchased patent			375				—				375
Totals		$	93,454			$	(65,085	)		$	28,369

		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		$	4,931
2011			6,190
2012			5,373
2013			3,961
2014 and beyond			7,914
total		$	28,369

8. Investments

Available-for-Sale Investments

     The following table presents the summary of the Company’s available-for-sale investments measured at fair value on a recurring basis as of August 2, 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		$	40			$	—			$	—			$	40
Mortgage-backed debt			—				92				—				92
Total cash equivalents, and available-for-sale investments		$	40			$	92			$	—			$	132
Cash															60,287
Total cash, cash equivalents and available-for-sale investments														$	60,419
Reported as:
Cash and cash equivalents														$	60,327
Short-term available-for-sale investments															92
Long-term available-for-sale investments															—
Total cash, cash equivalents, and available-for-sale investments														$	60,419

     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):

						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-sales investments:
Money market funds		$	25			$	—			$	—			$	25
Mortgage-backed debt			—				92				—				92
Total cash equivalents and available-for-sales investments		$	25			$	92			$	—				117
Cash															37,104
Total cash, cash equivalents, and available-for-sales 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-sales investments														$	37,221

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

		August 2, 2009								April 30, 2009
		Amortized				Market				Amortized				Market
		Cost				Value				Cost				Value
Mature in less than one year		$	99			$	92			$	113			$	92

     The gross realized gains and losses for the three months ended August 2, 2009 and August 3, 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 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 and also recorded a $735,000 loss as the Company determined that the carrying value of these shares was other than temporarily impaired.

9. Minority Investments

     The carrying value of minority investments at August 2, 2009 and April 30, 2009 is $14.3 million, respectively and comprises of the Company’s minority investment in four privately held companies accounted for under the cost method.

     During the first quarter 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 sale of product line was related to its Network Tools Division which was sold to JDS Uniphase in the first quarter of fiscal 2010 and accounted as discontinued operations. For accounting purposes, no value had been 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.

10. Other Accrued Liabilities

     Accrued liabilities consist of the following (in thousands):

		August 2, 2009				April 30, 2009
Warranty accrual (Note 16)		$	6,410			$	6,413
Other liabilities			18,692				24,100
Total		$	25,102			$	30,513

11. Convertible Debt

     The Company’s convertible subordinated and convertible senior subordinated note balances as of August 2, 2009 and April 30, 2009 were as follows (in thousands):

		Carrying				Interest				Due in
Description		Amount				Rate				Fiscal year
As of August 2, 2009
Convertible subordinated notes		$	50,000				2.50	%			2011
Convertible senior subordinated notes			92,000				2.50	%			2011
Unamortized debt discount			(6,510	)
Convertible senior subordinated notes, net			85,490
Total		$	135,490
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 2, the Company adopted the provisions of FSP APB 14-1 in the first quarter of fiscal 2010. FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The separation of the conversion option creates an original issue discount in the bond component which is to be accreted as interest expense over the term of the instrument using the interest method, resulting in an increase in interest expense and a decrease in net income and earnings per share. The provisions of this FSP apply to the Company’s $92 million aggregate principal amount of 2.5% 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%. FSP APB 14-1 requires retrospective application to all periods presented. Accordingly, prior period balances have been restated to effectively record a debt discount equal to the fair value of the equity component and an increase to paid-in capital for the fair value of the equity component as of the date of issuance of the underlying notes. Prior period balances have also been adjusted to provide for the amortization of the debt discount through interest expense (non-cash interest cost).

     FSP APB 14-1 also requires the debt issuance costs to be allocated to the equity component based on the percentage split between the liability and equity component of the debt. Accordingly, the Company has allocated $700,000 of the total debt issuance costs of $1.9 million to the equity component. The remaining $1.2 million of debt issuance cost will continue to be amortized over the expected life of the debt on a straight line basis. Prior period amounts of amortization of debt issuance costs have been adjusted accordingly.

     The following table reflects the Company’s previously reported amounts, along with the adjusted amounts reflecting the adoption of FSP APB 14-1.

Condensed Consolidated Statement of Operations (Unaudited)		As reported				As Adjusted				Effect of Change
		(in thousands, except per share data)
Three Months Ended August 3, 2008
Interest expense		$	4,008			$	5,243			$	1,235
Income (loss) from continuing operations			4,131				2,942				(1,189	)
Net Income (loss)			4,006				2,817				(1,189	)
Income (loss) per share from continuing operations:
Basic			0.01				0.01				0.00
Diluted			0.01				0.01				0.00
Condensed Consolidated Balance Sheet (Unaudited)
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 2.5% 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 Company’s common stock reaching $4.92 for a period of time at a conversion price of $3.28 per share, which is equal to a rate of approximately 304.9055 shares of Finisar 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 of the Company, 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 Finisar common stock. At August 2, 2009, the if-converted value of the Convertible Senior Subordinated Notes did not exceed the principal balance.

     At August 2, 2009, the $6.5 million unamortized debt discount had a remaining amortization period of approximately 14 months. On August 11, 2009 the Company repurchased $14.4 million principal amount of 2.5% Convertible Senior Subordinated Notes under exchange offers which commenced on July 16, 2009. See Note 26 for additional details regarding these exchange offers.

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

		August 2,				April 30,
		2009				2009
Carrying amount of the equity component		$	19,509			$	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 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
		August 2,				August 3,
		2009				2008
Non-cash interest cost		$	1,235			$	1,235
Cash interest cost			601				660
		$	1,836			$	1,895

     The Company’s Convertible Subordinated and Convertible Senior Subordinated Notes are due in fiscal 2011.

12. 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. At August 2, 2009, the remaining principal balance outstanding under this note was $3.2 million. At April 30, 2009, the remaining principal balance outstanding under this note was $3.7 million. As of August 2, 2009, the Company recorded $2.2 million of this debt, as “Current portion of long-term debt” and recorded the remaining $1.0 million as “Long-term debt, net of current portion” on the consolidated balance sheet. As of April 30, 2009, the Company recorded $2.1 million of this debt, as “Current portion of long-term debt” and recorded the remaining $1.6 million as “Long-term debt, net of current portion”.

     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 August 2, 2009 and April 30, 2009. At August 2, 2009, the principal balance outstanding under these loans was $16.7 million. As of August 2, 2009, the Company recorded $4.0 million of this debt, as “Current portion of long-term debt” and recorded the remaining $12.7 million as “Long-term debt, net of current portion” on the consolidated balance sheet. At April 30, 2009, the principal balance outstanding under these loans was $17.7 million. As of April 30, 2009, the Company recorded $4.0 million of this debt, as “Current portion of long-term debt” and recorded the remaining $13.7 million as “Long-term debt, net of current portion” on the consolidated balance sheet.

13. Revolving Line of Credit Agreement

     On March 14, 2008, the Company entered into a revolving line of credit agreement with Silicon Valley Bank which, as previously amended, was further amended on July 15, 2009. The amended credit facility allows for advances in the aggregate amount of $25 million subject to certain restrictions and limitations. Borrowings under this line are 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%. The maturity date is July 15, 2010. The facility is subject to financial covenants including an adjusted quick ratio covenant and an EBITDA covenant which are tested as of the last day of each month. The Company was in compliance with all covenants associated with this facility as of August 2, 2009 and April 30, 2009. There were no outstanding borrowings under this revolving line of credit at August 2, 2009 or April 30, 2009.

14. 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 will 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 is unsecured but includes a negative pledge that requires that the Company will not create 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 August 2, 2009 and April 30, 2009 totaled $3.4 million and $3.4 million, respectively.

15. Non-recourse Accounts Receivable Purchase Agreement

     On October 28, 2004, the Company entered into an 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 may 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 are purchased by Silicon Valley Bank. In these non-recourse sales, the Company removes sold receivables from its books and records no liability related to the sale, as the Company has assessed that the sales should be accounted for as “true sales” in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. 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 months ended August 2, 2009, the Company did not sell any receivables under the facility. During the three months ended August 3, 2008, the Company sold receivables totaling $5.2 million, respectively, under this facility.

16. 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):

		Three Months Ended
		August 2, 2009
Beginning balance at April 30, 2009		$	6,413
Additions during the period based on product sold			899
Settlements			(481	)
Changes in liability for pre-existing warranties, including expirations			(421	)
Ending balance at August 2, 2009		$	6,410

17. Stockholders’ Equity

Employee Stock Purchase Plan

     The Company has an Employee Stock Purchase Plan, which includes its sub-plan, the International Employee Stock Purchase Plan (together the “Purchase Plan”), under which 16,750,000 shares of the Company’s common stock have been reserved for issuance. The Purchase Plan permits eligible employees to purchase Finisar common stock through payroll deductions, which may not exceed 20% of the employee’s total compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of Finisar common stock on either the first or the last day of the offering period, whichever is lower. During the three months ended August 2, 2009, the Company issued 6,412,146 shares under the Purchase Plan. During the three months ended August 2, 2008, the Company issued 1,947,944 shares under the Purchase Plan. At August 2, 2009, 1,627,625 shares were available for issuance under the Purchase Plan.

Employee Stock Option Plans

     In September 1999, Finisar’s 1999 Stock Option Plan was adopted by the board of directors and approved by the stockholders. An amendment and restatement of the 1999 Stock Option Plan, including renaming it the 2005 Stock Incentive Plan (the “2005 Plan”), was approved by the board of directors in September 2005 and by the stockholders in October 2005. A total of 21,000,000 shares of common stock were initially reserved for issuance under the 2005 Plan. The share reserve automatically increases on May 1 of each calendar year by a number of shares equal to 5% of the number of shares of Finisar’s common stock issued and outstanding as of the immediately preceding April 30, subject to certain restrictions on the aggregate maximum number of shares that may be issued pursuant to incentive stock options. The types of stock-based awards available under the 2005 Plan include stock options, stock appreciation rights, restricted stock units (“RSUs”) and other stock-based awards which vest upon the attainment of designated performance goals or the satisfaction of specified service requirements or, in the case of certain RSUs or other stock-based awards, become payable upon the expiration of a designated time period following such vesting events. Options generally vest over five years and have a maximum term of 10 years. As of August 2, 2009, there were no shares subject to repurchase.

     A summary of activity under the Company’s employee stock option plans is as follows:

		Stock-based awards				Options Outstanding
		available								Weighted-				Weighted-Average
		for Grant								Average				Remaining				Aggregate
		Number of				Number of				Exercise				Contractual				Intrinsic
Options for Common Stock		Shares				Shares				Price				Term				Value(1)
														(In years)				($000’s)
Balance at April 30, 2009			28,292,066				77,450,473			$	1.83
Increase in authorized shares			23,874,603
Options granted			(244,000	)			244,000			$	0.64
RSUs granted			(57,726	)
Options exercised							(271,752	)		$	0.38
RSUs canceled			947,917
Options canceled			4,806,792				(4,806,792	)		$	1.66
Balance at August 2, 2009			57,619,652				72,615,929			$	1.85				6.49			$	6,249

     The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.64 as of August 2, 2009, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted-average remaining contractual life of options exercisable is 5.46 years.

Restricted Stock Units

     A summary of the changes in RSUs outstanding under the Company’s employee stock plans during first quarter of fiscal 2010 is as follows:

						Weighted- Average Grant
		Shares				Date Fair Value
Nonvested at April 30, 2009			11,053,092			$	0.67
Granted			57,726			$	0.64
Vested			(2,846,600	)		$	0.62
Forfeited			(947,917	)		$	0.56
Nonvested at August 2, 2009			7,316,301			$	0.70

     During the first quarter of fiscal 2010 and first quarter of fiscal 2009, the Company issued 57,726 and 60,214 RSUs, respectively, under the 2005 Plan. Typically, vesting of RSUs occurs over one to four years and is subject to the employee’s continuing service to the Company. The compensation expense related to these awards of $36,945 and $96,878 for first quarter fiscal 2009 and first quarter of fiscal 2010, respectively, was determined using the fair market value of the Company’s common stock on the date of the grant and is recognized using a straight line method over the awards’ vesting period.

     The aggregate intrinsic value of RSUs outstanding at August 2, 2009 was $4.7 million.

     As of August 2, 2009, the Company had $3.0 million of unrecognized compensation expense, net of estimated forfeitures, related to RSUs grants. These expenses are expected to be recognized over a weighted-average period of 15 months.

Valuation and Expense Information Under SFAS 123R

     The following table summarizes stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123R for the three months ended August 2, 2009 and August 3, 2008 which was reflected in the Company’s operating results (in thousands):

		Three Months Ended
		August 2,				August 3,
		2009				2008
		(unaudited, in thousands)
Cost of revenues		$	1,032			$	821
Research and development			1,521				860
Sales and marketing			578				327
General and administrative			1,040				515
Total		$	4,171			$	2,523

     The total stock-based compensation capitalized as part of inventory as of August 2, 2009 was $672,000.

     As of August 2, 2009, total compensation cost related to unvested stock options not yet recognized was approximately $13.7 million which is expected to be recognized over the next 29 months.

     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
		August 2,				August 3,				August 2,				August 3,
		2009				2008				2009				2008
Weighted average fair value per share		$	0.43			$	0.99			$	0.21			$	0.51
Expected term (in years)			5.16				5.14				0.75				0.74
Volatility			84	%			72	%			102	%			58	%
Risk-free interest rate			2.57	%			3.23	%			4.50	%			3.29	%
Dividend yield			0.00	%			0.00	%			0.00	%			0.00	%

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.

Acceleration of Vesting of Certain Options and RSUs

     During the first quarter of fiscal 2010, the Company partially accelerated certain outstanding options and restricted stock units held by the employees of the Network Tools Division the assets of which were sold to JDSU during the quarter. This acceleration of vesting was treated as a modification of the award in accordance with SFAS 123R. Incremental stock compensation expense of $99,000 was recorded in loss from discontinued operations.

Extension of Stock Option Exercise Periods for Former Employees

     As more fully described in Note 22, Pending Litigation- Stock option Derivative, the Company could not issue shares of its common stock under its registration statements on Form S-8 during the period in which it was not current in its obligations to file periodic reports under the Securities Exchange Act of 1934 (“34 Act”) due to the pending investigation into its historical stock option grant practices,. As a result, during parts of 2006 and 2007, vested options held by certain former employees of the Company could not be exercised until the completion of the Company’s stock option investigation and the Company’s report filings under the ‘34 Act had been made current. As a result, the Company extended the expiration date of these stock options to June 30, 2008. This extension was treated as a modification of the award in accordance with SFAS 123R. As a result of the extension, the fair value related to these stock options had been reclassified to current liabilities subsequent to the modification and was subject to mark-to-market accounting each reporting period until the earlier of the final settlement or June 30, 2008. The remaining accrued balance for these stock options as of April 30, 2008 was approximately $341,000.

     During the first quarter of fiscal 2009, the Company recognized a benefit of approximately $332,000 as a result of a decrease in the fair value of these options on June 30, 2008. The remaining accrued balance of $9,000 related to these stock options was reclassified to equity as of August 3, 2008. These transactions represented the final settlement of these options.

18. Income Taxes

     The Company recorded a provision for income taxes of $159,000 and $746,000, respectively, for the three months ended August 2, 2009 and August 3, 2008. The provision for income tax expense for the three months ended August 3, 2008 includes non-cash charges of $551,000 for deferred tax liabilities that were recorded for tax amortization of goodwill for which no financial statement amortization has occurred under generally accepted accounting principles. The $159,000 provision for income tax expense for the three months ended August 2, 2009 includes minimum state taxes 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 August 3, 2008 have been fully offset by a valuation allowance.

     A portion of the valuation allowance for deferred tax assets at August 2, 2009 relates to the tax benefits of stock option deductions the tax benefit of which will be credited to paid-in capital if and when realized, and thereafter, 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 April 30, 2009 and August 2, 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 were 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, 2010.

     The Company records interest and penalties related to unrecognized tax benefits in income tax expense. At August 2, 2009, there were no accrued interest or penalties related to uncertain tax positions. The Company recorded no interest or penalties for the quarter ended August 2, 2009.

     On May 1, 2009, the Company adopted the provisions of FSP APB-14-1 on a retrospective basis which requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. As a result of the adoption of FSP APB 14-1, the Company has separately accounted for the liability and equity components of its 2.5% Convertible Senior Subordinated Notes due 2010. The Company calculated the value of the conversion component of the debt and recorded this value as a component of equity and a corresponding debt discount. The debt discount, which is a reduction to the carrying value of the debt, will be amortized as additional non-cash interest expense over the term of the original note. The retrospective application of this pronouncement affects all periods presented. There are no income tax benefits related to the non-cash interest expense over the term of the original note due to the valuation allowances for deferred tax assets

19. Segments

     Prior to first quarter of fiscal 2010, the Company’s Chief Executive Officer and Chairman of the Board viewed the 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.

20. Geographic Information

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

		Three Months Ended
		August 2,				August 3,
		2009				2008
Revenues from sales to unaffiliated customers:
United States		$	49,001			$	25,764
Malaysia			22,361				27,341
China			17,022				15,427
Rest of the world			40,341				47,242
		$	128,725			$	115,774

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

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

		August 2,				April 30,
		2009				2009
Long-lived assets
United States		$	77,773			$	83,119
Malaysia			28,504				28,067
Rest of the world			18,300				17,180
		$	124,577			$	128,366

21. Restructuring Charges

     During the second quarter of fiscal 2006, the Company consolidated its Sunnyvale facilities into one building and permanently exited a portion of its Scotts Valley facility. As a result of these activities, the Company recorded restructuring charges of approximately $3.1 million. These restructuring charges included $290,000 of miscellaneous costs required to effect the closures and approximately $2.8 million of non-cancelable facility lease payments. Of the $3.1 million in restructuring charges, $1.9 million related to the Company’s optical subsystems and components segment and $1.2 million related to discontinued operations. During the first quarter of fiscal 2009, the Company recorded additional restructuring charges of $600,000 for lease payments for the remaining portion of the Scotts Valley facility that had been used for a product line of our discontinued operations which was sold in first quarter of fiscal 2009. See Note 9 for additional details regarding the sale of this product line.

     As of August 2, 2009 and April 30, 2009, $700,000 and $900,000, respectively, of committed facilities payments related to restructuring activities remained accrued all of which is expected to be fully utilized by the end of fiscal 2011.

22. Pending Litigation

Stock Option Derivative Litigation

     On November 30, 2006, the Company announced that it had undertaken a voluntary review of its historical stock option grant practices subsequent to its initial public offering in November 1999. The review was initiated by senior management, and preliminary results of the review were discussed with the Audit Committee of the Company’s board of directors. Based on the preliminary results of the review, senior management concluded, and the Audit Committee agreed, that it was likely that the measurement dates for certain stock option grants differed from the recorded grant dates for such awards and that the Company would likely need to restate its historical financial statements to record non-cash charges for compensation expense relating to some past stock option grants. The Audit Committee thereafter conducted a further investigation and engaged independent legal counsel and financial advisors to assist in that investigation. The Audit Committee concluded that measurement dates for certain option grants differed from the recorded grant dates for such awards. The Company’s management, in conjunction with the Audit Committee, conducted a further review to finalize

revised measurement dates and determine the appropriate accounting adjustments to its historical financial statements. The announcement of the investigation resulted in delays in filing the Company’s quarterly reports on Form 10-Q for the quarters ended October 29, 2006, January 28, 2007, and January 27, 2008, and the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2007. On December 4, 2007, the Company filed all four of these reports which included revised financial statements.

     Following the Company’s announcement on November 30, 2006 that the Audit Committee of the board of directors had voluntarily commenced an investigation of the Company’s historical stock option grant practices, the Company was named as a nominal defendant in several shareholder derivative cases. These cases have been consolidated into two proceedings pending in federal and state courts in California. The federal court cases have been consolidated in the United States District Court for the Northern District of California. The state court cases have been consolidated in the Superior Court of California for the County of Santa Clara. The plaintiffs in all cases have alleged that certain of the Company’s current or former officers and directors caused the Company to grant stock options at less than fair market value, contrary to the Company’s public statements (including its financial statements), and that, as a result, those officers and directors are liable to the Company. No specific amount of damages has been alleged, and by the nature of the lawsuits, no damages will be alleged against the Company. On May 22, 2007, the state court granted the Company’s motion to stay the state court action pending resolution of the consolidated federal court action. On June 12, 2007, the plaintiffs in the federal court case filed an amended complaint to reflect the results of the stock option investigation announced by the Audit Committee in June 2007. On August 28, 2007, the Company and the individual defendants filed motions to dismiss the complaint. On January 11, 2008, the Court granted the motions to dismiss, with leave to amend. On May 12, 2008, the plaintiffs filed an amended complaint. The Company and the individual defendants filed motions to dismiss the amended complaint on July 1, 2008. The Court’s ruling on the motions remains pending.

‘505 Patent Litigation

     DirecTV Litigation

     On April 4, 2005, the Company filed an action for patent infringement in the United States District Court for the Eastern District of Texas against the DirecTV Group, Inc., DirecTV Holdings, LLC, DirecTV Enterprises, LLC, DirecTV Operations, LLC, DirecTV, Inc., and Hughes Network Systems, Inc. (collectively, “DirecTV”). The lawsuit involves the Company’s U.S. Patent No. 5,404,505, or the ‘505 patent, which relates to technology used in information transmission systems to provide access to a large database of information. On June 23, 2006, following a jury trial, the jury returned a verdict that the Company’s patent had been willfully infringed and awarded the Company damages of $78,920,250. In a post-trial hearing held on July 6, 2006, the Court determined that, due to DirecTV’s willful infringement, those damages would be enhanced by an additional $25 million. Further, the Court awarded the Company pre-judgment interest on the jury’s verdict and court costs in the aggregate amount of approximately $13.5 million. The Court denied the Company’s motion for injunctive relief, but ordered DirecTV to pay a compulsory ongoing license fee to the Company at the rate of $1.60 per set-top box activated by or on behalf of DirecTV for the period beginning June 16, 2006 through the duration of the patent, which expires in April 2012.

     DirecTV appealed to the United States Court of Appeals for the Federal Circuit. In its appeal, DirecTV raised issues related to claim construction, infringement, invalidity, willful infringement and enhanced damages. The Company cross-appealed raising issues related to the denial of the Company’s motion for a permanent injunction, the trial court’s refusal to enhance future damages for willfulness and the trial court’s determination that some of the asserted patent claims are invalid. The appeals were consolidated.

     On April 18, 2008, the appeals court issued its decision affirming in part, reversing in part, and remanding the case for further proceedings before the trial court in Texas. Specifically, the appeals court ruled that the lower court’s interpretation of some of the patent claim terms was too broad and issued its own, narrower interpretation of those terms. The appeals court also determined that one of the seven patent claims (Claim 16) found infringed by the jury was invalid, that DirecTV’s infringement of the ‘505 patent was not willful, and that the trial court did not err in its determination that various claims of the ‘505 patent were invalid for indefiniteness. As a result, the judgment, including the compulsory license, was vacated and the case was remanded to the trial court to reconsider infringement and validity of the six remaining patent claims and releasing to DirecTV the escrow funds it had deposited.

     On July 11, 2008, the United States District Court for the Northern District of California issued an order in the Comcast lawsuit described below in which it held that one of the claims of the ‘505 patent, Claim 25, is invalid. The order in the Comcast lawsuit also, in effect, ruled invalid a related claim, Claim 24, which is one of the six remaining claims of the ‘505 patent that were returned to the trial court for retrial in the DirectTV lawsuit.

     On December 1, 2008, both parties filed motions for summary judgment on the issue of validity in the trial court. On May 19, 2009, the Court granted DirecTV’s motions for summary judgment and entered final judgment in the case in favor of DirecTV. The Company is appealing this ruling.

     EchoStar Litigation

     On July 10, 2006, EchoStar Satellite LLC, EchoStar Technologies Corporation and NagraStar LLC (collectively, “EchoStar”), filed an action against the Company in the United States District Court for the District of Delaware seeking a declaration that EchoStar does not infringe, and has not infringed, any valid claim of the Company’s ‘505 patent. The ‘505 patent is the same patent that is in dispute in the DirecTV lawsuit. On December 4, 2007, the Court approved the parties’ stipulation to stay the case pending issuance of the Federal Circuit’s mandate in the DirecTV case. This stay expired when the mandate of the Federal Circuit issued in the DirecTV case on April 18, 2008. The Court has yet to set a case schedule.

     Requests for Re-Examination of the ‘505 Patent

     Four requests for re-examination of the Company’s ‘505 patent have been filed with the PTO. The ‘505 patent is the patent that is in dispute in the DirecTV and EchoStar lawsuits. The PTO has granted each of these requests, and these proceedings have been combined into a single re-examination. During the re-examination, some or all of the claims in the ‘505 patent could be invalidated or revised to narrow their scope, either of which could have a material adverse impact on the Company’s position in the related ‘505 lawsuits.

Securities Class Action

     A securities class action lawsuit was filed on November 30, 2001 in the United States District Court for the Southern District of New York, purportedly on behalf of all persons who purchased the Company’s common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants the Company, Jerry S. Rawls, its President and Chief Executive Officer, Frank H. Levinson, its former Chairman of the Board and Chief Technical Officer, Stephen K. Workman, its Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an underwriter for the Company’s initial public offering in November 1999 and a secondary offering in April 2000. The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the registration statements for the offerings failed to disclose, among other things, that (i) the underwriter had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriter allocated to those investors material portions of the shares of the Company’s stock sold in the offerings and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of the Company’s stock sold in the offerings to those customers in exchange for which the customers agreed to purchase additional shares of the Company’s stock in the aftermarket at pre-determined prices. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October 2002, all claims against the individual defendants were dismissed without prejudice. On February 19, 2003, the Court denied defendants’ motion to dismiss the complaint.

     In July 2004, the Company and the individual defendants accepted a settlement proposal made to all of the issuer defendants. Under the terms of the settlement, the plaintiffs would dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers would have been required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. If the plaintiffs failed to recover $1 billion and payment was required under the guaranty, the Company would have been responsible to pay its pro rata portion of the shortfall, up to the amount of the self-insured retention under its insurance policy, which could have been up to $2 million. The Court gave preliminary approval to the settlement in February 2005. Before the Court issued a final decision on the settlement, on December 5, 2006, the United States Court of Appeals for the Second Circuit vacated the class certification of plaintiffs’ claims against the underwriters in six cases designated as focus or test cases. Thereafter, the parties withdrew the settlement.

     In February 2009, the parties reached an understanding regarding the principal elements of a settlement, subject to formal documentation and Court approval. On June 10, 2009, the Court granted preliminary approval of the settlement and on September 10, 2009 took the settlement under advisement pending final approval of the settlement terms. Under the new proposed settlement, the underwriter defendants will pay a total of $486 million, and the issuer defendants and their insurers will pay a total of $100 million to settle all of the cases. On August 25, 2009, the Company funded approximately $327,000 with respect to its pro rata share of the issuers’ contribution to the settlement and certain costs. This amount was accrued in the financial statements for the quarter ended August 2, 2009 and recorded as operating expense.

Section 16(b) Lawsuit

     A lawsuit was filed on October 3, 2007 in the United States District Court for the Western District of Washington by Vanessa Simmonds, a purported holder of the Company’s common stock against two investment banking firms that served as underwriters for the initial public offering of the Company’s common stock in November 1999. None of the Company’s officers, directors or employees were named as defendants in the complaint. On February 28, 2008, the plaintiff filed an amended complaint. The complaint, as amended, alleges that: (i) the defendants, other underwriters of the offering, and unspecified officers, directors and the

Company’s principal shareholders constituted a “group” that owned in excess of 10% of the Company’s outstanding common stock between November 11, 1999 and November 20, 2000; (ii) the defendants were therefore subject to the “short swing” prohibitions of Section 16(b) of the Securities Exchange Act of 1934; and (iii) the defendants engaged in purchases and sales, or sales and purchases, of the Company’s common stock within periods of less than six months in violation of the provisions of Section 16(b). The complaint seeks disgorgement of all profits allegedly received by the defendants, with interest and attorneys fees, for transactions in violation of Section 16(b). The Company, as the statutory beneficiary of any potential Section 16(b) recovery, is named as a nominal defendant in the complaint.

     This case is one of 54 lawsuits containing similar allegations relating to initial public offerings of technology company issuers, which were coordinated (but not consolidated) by the Court. On July 25, 2008, the real defendants in all 54 cases filed a consolidated motion to dismiss, and a majority of the nominal defendants (including the Company) filed a consolidated motion to dismiss, the amended complaints. On March 19, 2009, the Court dismissed the amended complaints naming the nominal defendants that had moved to dismiss, without prejudice, because the plaintiff had not properly demanded action by their respective boards of directors before filing suit; and dismissed the amended complaints naming nominal defendants that had not moved to dismiss, with prejudice, finding the claims time-barred by the applicable statute of limitation. Also on March 19, 2009, the Court entered judgment against the plaintiff in all 54 cases. The plaintiff has appealed the order and judgments. The real defendants have cross-appealed the dismissal of certain amended complaints without prejudice, contending that dismissal should have been with prejudice because those amended complaints are barred by the applicable statute of limitation.

JDSU/Emcore Patent Litigation

     Litigation is pending with JDS Uniphase Corporation and Emcore Corporation with respect to certain cable television transmission products acquired in connection with the Company’s acquisition of Optium Corporation. On September 11, 2006, JDSU and Emcore filed a complaint in the United States District Court for the Western District of Pennsylvania alleging that the Company’s 1550 nm HFC externally modulated transmitter used in cable television applications, in addition to possibly “products as yet unidentified,” infringes on two U.S. patents. On March 14, 2007, JDSU and Emcore filed a second complaint in the United States District Court for the Western District of Pennsylvania alleging that the Company’s 1550 nm HFC quadrature amplitude modulated transmitter used in cable television applications, in addition to possibly “products as yet unidentified,” infringes on another U.S. patent. The plaintiffs are seeking for the court to declare that Optium has willfully infringed on such patents and to be awarded up to three times the amount of any compensatory damages found, if any, plus any other damages and costs incurred. The Company has answered both of these complaints denying that it has infringed any of the asserted patents and asserting that those patents are invalid. On December 10, 2007, the Company filed a complaint in the United States District Court for the Western District of Pennsylvania seeking a declaration that the patents asserted against the Company’s HFC externally modulated transmitter are unenforceable due to inequitable conduct committed by the patent applicants and/or the attorneys or agents during prosecution.

     On February 18, 2009, the Court granted JDSU’s and Emcore’s motion for summary judgment dismissing the Company’s declaratory judgment action on inequitable conduct. The Company has appealed this ruling. The court has consolidated the remaining two actions and has scheduled a single trial to begin October 19, 2009. The Company is unable to determine the ultimate outcome of this litigation.

Export Compliance

     During mid-2007, Optium became aware that certain of its analog RF over fiber products may, depending on end use and customization, be subject to the International Traffic in Arms Regulations, or ITAR. Accordingly, Optium filed a detailed voluntary disclosure with the United States Department of State describing the details of possible inadvertent ITAR violations with respect to the export of a limited number of certain prototype products, as well as related technical data and defense services. Optium may have also made unauthorized transfers of ITAR-restricted technical data and defense services to foreign persons in the workplace. Additional information has been provided upon request to the Department of State with respect to this matter. In late 2008, a grand jury subpoena from the office of the U.S. Attorney for the Eastern District of Pennsylvania was received requesting documents from 2005 through the present referring to, relating to or involving the subject matter of the above referenced voluntary disclosure and export activities.

     While the Department of State encourages voluntary disclosures and generally affords parties mitigating credit under such circumstances, the Company nevertheless could be subject to continued investigation and potential regulatory consequences ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties, and in extreme cases, debarment from government contracting, denial of export privileges and criminal sanctions, any of which would adversely affect the Company’s results of operations and cash flow. The Department of State and U.S. Attorney inquiries may require the Company to expend significant management time and incur significant legal and other expenses. The Company cannot predict how long it will take or how much more time and resources it will have to expend to resolve these government inquiries, nor can it predict the outcome of these inquiries.

     Other Litigation

     In the ordinary course of business, the Company is a party to litigation, claims and assessments in addition to those described above. Based on information currently available, management does not believe the impact of these other matters will have a material adverse effect on its business, financial condition, results of operations or cash flows of the Company.

23. Guarantees and Indemnifications

     In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The Company may terminate the indemnification agreements with its officers and directors upon 90 days written notice, but termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid.

     The Company enters into indemnification obligations under its agreements with other companies in its ordinary course of business, including agreements with customers, business partners, and insurers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or the use of the Company’s products. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.

     The Company believes the fair value of these indemnification agreements are not material. Accordingly, the Company has not recorded any liabilities for these agreements as of August 2, 2009. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements and payments under the loans are expected to be paid when due.

     During the first quarter of fiscal 2009, the Company’s Malaysian subsidiary entered into loan agreements with a Malaysian bank (see Note 12. Long-Term Debt) for which the Company has provided corporate guarantees. The Company guaranteed loan payments of up to $23.1 million in the event of non-payment by its Malaysian subsidiary. These guarantees are effective during the term of these loans. The principal balance of this loan outstanding as of August 2, 2009, was $16.7 million.

24. Related Party Transactions

     Frank H. Levinson, the Company’s former Chairman of the Board and Chief Technical Officer and a member of the Company’s board of directors until August 29, 2008, is a member of the board of directors of Fabrinet, Inc., a privately held contract manufacturer. In June 2000, the Company entered into a volume supply agreement, at rates which the Company believes to be market, with Fabrinet under which Fabrinet serves as a contract manufacturer for the Company. In addition, Fabrinet purchases certain products from the Company. The Company recorded purchases of $21.6 million from Fabrinet during the three months ended August 3, 2008 and Fabrinet purchased products from the Company totaling to $13.0 million during the same period.

     During the three months ended August 2, 2009, the Company paid a sales and marketing consultant, who is the brother of the Chief Executive Officer of the Company, $36,700 in cash compensation.

     Amounts paid to related parties represented values considered by management to be fair and reasonable, reflective of an arm’s length transaction.

25. 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 August 2, 2009 are as follows (dollars in thousands):

		August 2, 2009
		Carrying
		Amount				Fair value
Financial assets:
Cash and cash equivalents		$	60,327			$	60,327
Short-term available-for -sale investments			92				92
Financial liabilities:
Convertible notes			135,490				123,540
Long-term debt			19,910				19,910
Totals		$	215,819			$	203,869

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 its carrying value.

Convertible notes — The fair value of convertible notes is estimated using the price from the repurchase transaction that the Company completed during August 2009.

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 August 2, 2009, the carrying value of its minority investments is $14.3 million which represents the original cost of the investment, which management believes is not impaired as of August 2, 2009.

26. Subsequent Events

Settlement of Exchange Offer

     On July 9, 2009, the Company announced that it had commenced separate concurrent “Modified Dutch Auction” tender offers (each an “Exchange Offer” and together, the “Exchange Offers”) to exchange shares of its common stock and cash for an aggregate of up to $95 million principal amount of the following series of its outstanding convertible notes (the “Notes”):

	•		2.50% Convertible Subordinated Notes due 2010 (the “Subordinated Notes”); and
	•		2.50% Convertible Senior Subordinated Notes due 2010 (the “Senior Subordinated Notes”)

     The Company offered to exchange up to an aggregate of $37.5 million principal amount, or 75%, of the outstanding Subordinated Notes and an aggregate of $57.5 million principal amount, or 62.5%, of the outstanding Senior Subordinated Notes.

     Under the Exchange offers, as amended, for each $1,000 principal amount of Notes, tendering holders were entitled to receive consideration with a value not greater than $870 nor less than $820 (the “Exchange Consideration”), with such value determined by a “Modified Dutch Auction” procedure, plus accrued and unpaid interest to, but excluding, the settlement date, payable in cash. A separate “Modified Dutch Auction” procedure was conducted for each of the Exchange Offers. A “Modified Dutch Auction” tender offer allows holders of the Notes to indicate the principal amount of Notes that such holders desire to tender and the consideration within the specified range at which they wish to tender such Notes. The mix of Exchange Consideration consisted of (i) $525 in cash, and (ii) a number of shares of common stock with a value equal to the Exchange Consideration minus $525 (the “Equity Consideration”). The number of shares of common stock representing the Equity Consideration to be received by holders as part of Exchange Consideration was determined on the basis of the trading price of the common stock during a 5-trading day VWAP period (the “5-day VWAP”) starting on July 13 and ending on July 17, 2009.

     The Exchange Offers expired on Thursday, August 6, 2009. On August 11, 2009, the Company announced the final results of the Exchange. The Company exchanged $47,504,000 aggregate principal amount of the Notes. The Company issued approximately 28.3 million shares of common stock and paid out approximately $24.9 million in cash..

     The Company accepted for exchange the following approximate principal amount of each series of Notes:

	(i)		$33,100,000, or 66.2%, of the $50,000,000 aggregate outstanding principal amount of Subordinated Notes; and
	(ii)		$14,404,000, or approximately 15.7%, of the $92,000,000 aggregate outstanding principal amount of Senior Subordinated Notes.

Repurchase of Senior Subordinated Notes

     On September 8, 2009, the Company repurchased $15.2 million principal amount of its Senior Subordinated Notes in a privately negotiated transaction. For each $1,000 principal amount of the Notes, the Company paid $952 in cash, for a total purchase price of $14.5 million plus accrued interest of $154,000.

     After the repurchase and the settlement of the Exchange Offers discussed above, approximately $79.3 million aggregate principal amount of Notes remained outstanding.

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

Forward-Looking Statements

     The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those referred to in “Part II, Item 1A. Risk Factors” below. The following discussion should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this report.

Business Overview

     We are a leading provider of optical subsystems and components that connect short-distance local area networks, or LANs, and storage area networks, or SANs, and longer distance metropolitan area networks, or MANs and wide area networks, or WANs. Our optical subsystems consist primarily of transmitters, receivers, transceivers and transponders which provide the fundamental optical-electrical interface for connecting the equipment used in building these networks. These products rely on the use of semiconductor lasers and photodetectors 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 at speeds ranging from less than 1Gbps to 40Gbps, using a wide range of network protocols and physical configurations over distances of 70 meters to 200 kilometers. We supply optical transceivers and transponders that allow point-to-point communications on a fiber using a single specified wavelength or, bundled with multiplexing technologies, can be used to supply multi-gigabit bandwidth over several wavelengths on the same fiber. We also provide products for dynamically switching network traffic from one optical wavelength to another across multiple wavelengths known as reconfigurable optical add/drop multiplexers, or ROADMs. Our line of optical components consists primarily of packaged lasers and photodetectors used in transceivers for LAN and SAN applications and passive optical components used in building MANs. Our manufacturing operations are vertically integrated and we utilize internal sources for many of the key components used in making our products including lasers, photodetectors and integrated circuits, or ICs, designed by our own internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.

     We sell our optical products to manufacturers of storage systems, networking equipment and telecommunication equipment or their contract manufacturers, such as Alcatel-Lucent, Brocade, Cisco Systems, EMC, Emulex, Ericsson, Hewlett-Packard Company, Huawei, IBM, Juniper, Qlogic, Siemens and Tellabs. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunications service providers and cable TV operators, collectively referred to as carriers.

Recent Developments

Combination with Optium Corporation

          On August 29, 2008, we completed a business 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 Finisar. We 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 Finisar’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, we expect 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 components into product designs previously purchased in the open market by Optium. At the closing of the merger, we issued 160,808,659 shares of Finisar common stock, valued at approximately $242.8 million, in exchange for all of the outstanding common stock of Optium.

          We have accounted for the combination using the purchase method of accounting and as a result have included the operating results of Optium in our consolidated financial results since the August 29, 2008 consummation date. The Optium results are included in our optical subsystems and components segment.

Sale of Network Tools Division

     In the first quarter of fiscal 2010, we sold substantially all of the assets of our Network Tools Division to JDSU for $40.6 million in cash. We 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 income tax, in our condensed consolidated statements of operations. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, the assets and liabilities, results of operations and cash flows related to the business, have been classified as discontinued operations in the condensed consolidated financial statements for all periods presented.

Critical Accounting Policies

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended April 30, 2009 other than the adoption of FSP APB14-1 (see Note 1 to condensed consolidated financial statements).

Results of Operations

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

		Three Months Ended
		August 2,				August 3,
		2009				2008
		(Unaudited)
Revenues			100.0	%			100.0	%
Cost of revenues			76.2				64.0
Amortization of acquired developed technology			1.0				0.8
Gross profit			22.8				35.2
Operating expenses:
Research and development			16.4				15.0
Sales and marketing			5.3				5.9
General and administrative			7.5				7.4
Amortization of purchased intangibles			0.5				0.1
Total operating expenses			29.7				28.4
Income (loss) from operations			(6.9	)			6.8
Interest income			0.0				0.8
Interest expense			(1.9	)			(4.5	)
Other income (expense), net			0.2				0.1
Income (loss) before income taxes			(8.6	)			3.2
Provision for income taxes			0.1				0.7
Income (loss) from continuing operations			(8.7	)			2.5
Income (loss) from discontinued operations, net of taxes			28.8				(0.1	)
Net income			20.1				2.4

     Revenues. Revenues from continuing operations increased $13.0 million, or 11.2%, to $128.7 million in the quarter ended August 2, 2009 compared to $115.8 million in the quarter ended August 3, 2008. The increase was due to the inclusion of $28.8 million revenues from Optium’s operations, consisting of $14.1 million in sales of Metro/Telecom products with speeds of 10 Gbs and higher, $11.0 million in sales of ROADM products and $3.7 million in sales of CATV products. Revenue from pre-merger Finisar products decreased $15.9 million, or 13.7%, to $99.9 million compared to $115.8 million in the quarter ended August 3, 2008. While this decrease was primarily due to the global recession, sales of products with speeds of 10 Gbs and higher increased while sales of products with speeds of less than 10 Gbs declined. Sales of LAN and SAN products with speeds of less than 10 Gbs decreased $12.0 million, or 26.1%, to $34.0 million while sales of LAN and SAN products with speeds of 10 Gbs and higher increased $3.1 million, or 30.8%, to $13.1 million. Sales of Metro/Telecom products with speeds of less than 10 Gbs decreased $7.0 million, or 23.1%, to 23.4 million while sales of Metro/Telecom products with speeds of 10 Gbs and higher increased $2.1 million, or 9.4%, to $24.3 million. Sales of components decreased $2.3 million, or 32.9%, to $4.8 million. Combined sales of Metro/Telecom products with speeds of 10 Gbs and higher increased $16.2 million, or 73.1%, to $38.4 million.

     Amortization of Acquired Developed Technology. Amortization of acquired developed technology related to continuing operations, a component of cost of revenues, increased $343,000, or 40.4%, in the quarter ended August 2, 2009 to $1.2 million compared to $850,000 in the quarter ended August 3, 2008. The increase was primarily due to the addition of $605,000 related to the Optium merger offset by full amortization during fiscal 2009 of the assets associated with the Kodeos acquisition.

     Gross Profit. Gross profit from continuing operations decreased $11.4 million, or 27.9%, to $29.4 million in the quarter ended August 2, 2009 compared to $40.8 million in the quarter ended August 3, 2008. Gross profit as a percentage of revenue was 22.8% in the quarter ended August 2, 2009 compared to 35.2% in the quarter ended August 3, 2008. We recorded charges of $9.2 million for obsolete and excess inventory in the quarter ended August 2, 2009 compared to $2.6 million in the quarter ended August 3, 2008. We sold inventory that was written-off in previous periods resulting in a benefit of $2.7 million in the quarter ended August 2, 2009 and $1.8 million in the quarter ended August 3, 2008. As a result, we recognized a net charge of $6.5 million in the quarter ended August 2, 2009 compared to $800,000 in the quarter ended August 3, 2008. Manufacturing overhead includes stock-based compensation charges of $1.0 million in the quarter ended August 2, 2009 and $821,000 in the quarter ended August 3, 2008. Excluding

amortization of acquired developed technology, the net impact of excess and obsolete inventory charges and stock-based compensation charges, gross profit would have been $38.1 million, or 29.6% of revenue, in the quarter ended August 2, 2009 compared to $43.3 million, or 37.4% of revenue in the quarter ended August 3, 2008. The decrease in adjusted gross profit margin resulted from many factors including lower manufacturing volume, reduced pricing on our slower speed products, lower yield rates on our higher speed components and sales of certain lower margin products acquired in the Optium merger. Manufacturing overhead costs, including those related to Optium’s operations, increased by 3.2% compared to the combined increase in revenue of 11.2% suggesting that we have achieved some manufacturing cost synergies as a result of the Optium merger .

     Research and Development Expenses. Research and development expenses of continuing operations increased $3.6 million, or 20.9%, to $21.0 million in the quarter ended August 2, 2009 compared to $17.4 million in the quarter ended August 3, 2008. The increase was due to Optium merger. Included in research and development expenses were stock-based compensation charges of $1.5 million in the quarter ended August 2, 2009 and $860,000 in the quarter ended August 3, 2008. Research and development expenses as a percent of revenues increased to 16.4% in the quarter ended August 2, 2009 compared to 15.0% in the quarter ended August 3, 2008.

     Sales and Marketing Expenses. Sales and marketing expenses of continuing operations decreased $57,000, or 0.8% , to $6.8 million in the quarter ended August 2, 2009 compared to $6.9 million in the quarter ended August 3, 2008. The decrease in sales and marketing expenses inspite of an increase in sales of 11.2% was primarily due to cost savings derived from modifications to our sales commission plan structure which reduced commissions expense. Included in sales and marketing expenses were stock-based compensation charges of $578,000 in the quarter ended August 2, 2009 and $327,000 in the quarter ended August 3, 2008. Sales and marketing expenses as a percent of revenues decreased to 5.3% in the quarter ended August 2, 2009 compared to 5.9% in the quarter ended August 3, 2008.

     General and Administrative Expenses. General and administrative expenses of continuing operations increased $1.2 million, or 13.6%, to $9.7 million in the quarter ended August 2, 2009 compared to $8.5 million in the quarter ended August 3, 2008. The increase was primarily due to personnel related costs due to the Optium merger. Included in general and administrative expenses were stock-based compensation charges of $1.0 million in the quarter ended August 2, 2009 and $515,000 in the quarter ended August 3, 2008. General and administrative expenses as a percent of revenues increased slightly to 7.5% of revenues in the quarter August 2, 2009 compared to 7.4% in the quarter ended August 3, 2008.

     Amortization of Purchased Intangibles. Amortization of purchased intangibles increased $572,000, or 443.4% , to $701,000 in the quarter ended August 2, 2009 compared to $129,000 in the quarter ended August 3, 2008. The increase was primarily due to the Optium merger.

     Interest Income. Interest income decreased $958,000, or 99.0%, to $10,000 in the quarter ended August 2, 2009 compared to $968,000 in the quarter ended August 3, 2008. The decrease was primarily due to a decrease in our cash balances related to the purchase and repayment of $100.3 million of our convertible subordinated notes in the second half of fiscal 2009.

     Interest Expense. Interest expense decreased $2.8 million, or 53.6%, to $2.4 million in the quarter ended August 2, 2009 compared to $5.2 million in the quarter ended August 3, 2008. The decrease was primarily related to the purchase and repayment of $100.3 million of our convertible subordinated notes in the second half of fiscal 2009. Interest expense for the quarter ended August 2, 2009 included $927,000 related to our convertible subordinated notes due in 2010, $262,000 related to other various debt instruments and a non-cash charge of $1.2 million due to the adoption of FSP APB 14-1 which requires us to separately account for the liability (debt) and equity (conversion option) components of our 2.5% senior subordinated convertible notes that may be settled in cash (or other assets) on conversion in a manner that reflects our non-convertible debt borrowing rate. The separation of conversion option creates an original issue discount in the bond component which is to be accreted as interest expense over the term of the instrument using the interest method, resulting in an increase in interest expense. Interest expense for the quarter ended August 3, 2008 included $2.2 million related to our convertible subordinated notes due in 2008 and 2010, $626,000 related to other various debt instruments, a non-cash charge of $1.2 million related to the adoption of FSP APB 14-1 and a non-cash charge of $1.1 million to amortize the beneficial conversion feature of the notes due in 2008.

     Other Income (Expense), Net. Other income was $253,000 in the quarter ended August 2, 2009 compared to $103,000 in the quarter ended August 3, 2008. Other expense in both periods primarily consisted of subordinated loan costs offset by gains on the sale of certain equity investments.

     Provision for Income Taxes. We recorded income tax provisions of $159,000 and $746,000, respectively, for the quarters ended August 2, 2009 and August 3, 2008. The income tax provision for the quarter ended August 2, 2009 primarily represents current minimum foreign income taxes arising in certain jurisdictions in which we conduct business. The income tax provision for the quarter ended August 3, 2008 included a non-cash charge of $551,000 for deferred tax liabilities that were recorded for tax amortization of goodwill for which no financial statement amortization has occurred under U.S. GAAP and current tax expense of $195,000 for minimum federal and state and foreign taxes arising in certain jurisdictions in which we conduct business. Due to the uncertainty regarding the timing and extent of our future profitability, we have recorded a valuation allowance to offset our deferred tax assets which represent future income tax benefits associated with our operating losses. There can be no assurance that our deferred tax assets subject to the valuation allowance will ever be realized.

     Income from Discontinued Operation, Net of Taxes. As discussed above, on July 15, 2009, we completed the sale of certain assets related to our Network Tools Division to JDSU for $40.6 million in cash. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of our Network Tools Division business unit through July 15, 2009, have been classified and reported as discontinued operations. Income from discontinued operations for the quarter ended August 2, 2009 was $37.1 million, including a gain on the sale of the business unit of $36.1 million compared to a loss of $125,000 in the quarter ended August 3, 2008. The loss in the quarter ended August 3, 2008 was primarily attributable to a charge of $919,000 related to the sale of a product line.

Liquidity and Capital Resources

Cash Flows From Operating Activities

     Net cash used by operating activities was $16.5 million in the quarter ended August 2, 2009, compared to net cash provided by operating activities of $3.3 million in the quarter ended August 3, 2008. Cash used by operating activities in the quarter ended August 2, 2009 was due to our net loss as adjusted to exclude depreciation, amortization and other non-cash related items in the income statement totaling to $15.7 million and changes in working capital requirements which were primarily related to a increase in accounts receivable and a decrease in other accrued liabilities. Accounts receivable increased by $17.6 million primarily due to no sales of accounts receivable under our non-recourse accounts receivable purchase agreement with Silicon Valley Bank during the first quarter of fiscal 2010 compared to $5.2 million sold in the first quarter of fiscal 2009. Other accrued liabilities decreased by $5.7 million mainly due to repayment of $5.7 million to Silicon Valley Bank which was borrowed against the line of credit available under the non-recourse accounts receivable purchase agreement . Net cash provided by operating activities in the quarter ended August 3, 2008 was due to our net income as adjusted to exclude depreciation, amortization and other non-cash related items in the income statement totaling $14.5 million and changes in working capital requirements which were primarily related to increases in accounts receivable, inventories and accounts payable.

Cash Flows From Investing Activities

     Net cash provided by investing activities totaled $38.8 million in the quarter ended August 2, 2009 compared to $3.2 million in the quarter ended August 3, 2008. Net cash provided by investing activities in the quarter ended August 2, 2009 was primarily due to the $40.7 cash received from sale the assets of our Network Tools Division to JDSU on July 15, 2009. We also received $1.2 million cash from the sale of a product line made in the first quarter of fiscal 2009 which was recorded as a gain from sales of a product line in the first quarter of fiscal 2010. This gain was partially offset by $3.2 million of expenditures for capital equipment. Net cash provided by investing activities in the quarter ended August 3, 2008 was primarily related to the net maturities of available-for-sale investments offset by purchases of equipment to support production expansion.

Cash Flows From Financing Activities

     Net cash provided by financing activities totaled to $875,000 in the quarter ended August 2,2009 compared to $10.6 million in the quarter ended August 3, 2008. Cash provided by financing activities for the quarter ended August 2, 2009 primarily reflected proceeds from the exercise of stock options and purchases under our stock purchase plan totaling $2.4 million, partially offset by repayments of borrowings totaling $1.5 million. Cash provided by financing activities for the quarter ended August 3, 2008 primarily reflected proceeds of $20 million from bank borrowings and proceeds from the exercise of stock options and purchases under our stock purchase plan totaling $3.1 million, partially offset by repayments of borrowings of $12.5 million.

Cash Requirements

Our anticipated cash requirements for the next 12 months are primarily to fund:

	•		Operations
	•		Research and development
	•		Debt repayments
	•		Restructuring payments
	•		Capital expenditures

     At August 2, 2009, we had contractual obligations of $218 million as shown in the following table (in thousands):

						Payments Due by Period
						Less than												After
Contractual Obligations		Total				1 Year				1-3 Years				3-5 Years				5 Years
Short-term debt		$	6,173			$	6,173			$	—			$	—			$	—
Long-term debt			13,737				—				8,987				4,750				—
Convertible debt			142,000								142,000				—				—
Interest on debt			6,617				4,623				1,772				222				—
Operating leases			48,370				7,851				11,073				8,066				21,380
Purchase obligations			657				657				—				—				—
Total contractual obligations		$	217,554			$	19,304			$	163,832			$	13,038			$	21,380