Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 "Part II. Other Information, 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.

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 are used in data communication and telecommunication applications. Our optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables, which provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in building these networks, including the switches, routers and servers used in wireline networks as well as antennas and base stations for wireless networks. These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to more than 100 Gbps, over distances of less than 10 meters to more than 2,000 kilometers using a wide range of network protocols and physical configurations. 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-Gbps bandwidth over several wavelengths on the same fiber.

We also provide products known as wavelength selective switches, or WSS. In long-haul and metro networks, each fiber may carry 50 to 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal. The wavelength selective feature means that WSS enable any wavelength or combination of wavelengths to be switched from the input fiber to the output fibers. WSS products are sometimes combined with other components and sold as linecards that plug into a system chassis referred to as reconfigurable optical add/drop multiplexers, or ROADMs.

Our line of optical components consists primarily of packaged lasers and photodetectors for data communication and telecommunication applications.

Demand for our products is largely driven by the continually growing need for additional bandwidth created by the ongoing proliferation of data and video traffic driven by video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization that must be handled by both wire line and wireless networks. Mobile traffic is increasing as the result of proliferation of smart phones, tablet computers, and other mobile devices.

Our manufacturing operations are vertically integrated and we produce many of the key components used in making our products including lasers, photo-detectors and integrated circuits, or ICs, designed by our 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 such as Alcatel-Lucent, Brocade, Ciena, Cisco Systems, EMC, Emulex, Ericsson, Fujitsu, Hewlett-Packard Company, Huawei, IBM, Juniper, Qlogic, Nokia-Siemens and Tellabs, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunications service providers and CATV operators, collectively referred to as carriers.

Recent Developments

Acquisition of Red-C

On July 16, 2012, we acquired all outstanding equity interests in Red-C Optical Networks, Inc., ("Red-C"), a Delaware Corporation, with subsidiary operations in Tel Aviv, Israel, engaged in research, development and marketing of optical amplifiers and sub-systems for the wavelength division multiplexing, or WDM, optical communication sector. The acquisition will broaden the Company's product lines primarily for telecom applications by adding key amplification technologies, including erbium doped fiber amplification, or EDFA, Raman amplification and dynamic hybrid amplification. These technologies are considered critical for reconfigurable optical add-drop multiplexer, or ROADM, line cards and are increasingly important in cost-effectively extending the reach of transceivers and transponders especially for 100 Gbps and 40 Gbps coherent transmission, ultra-long repeaterless links, and low latency networks. For additional information regarding this acquisition, see "Part I, Item 1, Financial Statements - Note 3. Acquisitions."

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 from those described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012.

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
                                                           July 29,          July 31,
                                                             2012              2011
Revenues                                                     100.0  %           100.0  %
Cost of revenues                                              73.1               70.2
Amortization of acquired developed technology                  0.6                0.7
Gross profit                                                  26.3               29.1
Operating expenses:
Research and development                                      17.3               15.5
Sales and marketing                                            4.8                4.2
General and administrative                                     6.2                6.1
Restructuring recoveries                                         -               (0.1 )
Amortization of purchased intangibles                          0.4                0.3
Total operating expenses                                      28.7               26.0
Income (loss) from operations                                 (2.4 )              3.1
Interest income                                                0.1                0.1
Interest expense                                              (0.3 )             (0.4 )
Loss on debt extinguishment                                      -               (0.2 )
Other income, net                                                -                2.0
Income (loss) before income taxes and
non-controlling interest                                      (2.6 )              4.6
Provision for income taxes                                     0.3                0.2
Consolidated net income (loss)                                (2.9 )              4.4
Adjust for net loss attributable to non-controlling
interest                                                         -                  -
Net income (loss) attributable to Finisar
Corporation                                                   (2.9 )%             4.4  %

Revenues. Revenues decreased $7.7 million, or 3.4%, to $220.5 million in the quarter ended July 29, 2012 compared to $228.2 million in the quarter ended July 31, 2011.

The following table sets forth the changes in revenues by market application (in thousands):

                               Three Months Ended
                 July 29,     July 31,
                   2012         2011        Change     % Change
Datacom revenue $ 139,464    $ 129,072    $ 10,392        8.1  %
Telecom revenue    81,062       99,154     (18,092 )    (18.2 )%
Total revenues  $ 220,526    $ 228,226    $ (7,700 )     (3.4 )%

Datacom revenue for the three months ended July 29, 2012 increased compared to the three months ended July 31, 2011 primarily due to an increase in market demand for our datacom products as enterprises upgraded their technology infrastructure driving demand for the products of our OEM system customers and thus higher demand for our datacom module products. Telecom revenue decreased for the quarter ended July 29, 2012, primarily due to a decline in market demand for our telecom products due to sluggish spending by telecom service providers worldwide.

Amortization of Acquired Developed Technology. Amortization of acquired developed technology, a component of cost of

revenues, decreased $250,000, or 16.4%, to $1.3 million in the quarter ended July 29, 2012 compared to $1.5 million for the quarter ended July 31, 2011 due to roll-off of amortization of certain intangible assets related to one of our prior acquisitions.

Gross Profit. Gross profit decreased $8.7 million, or 13.1%, to $57.8 million in the quarter ended July 29, 2012 compared to $66.5 million in the quarter ended July 31, 2011. Gross profit as a percentage of revenues decreased by 2.9%, from 29.1% in the quarter ended July 31, 2011 to 26.2% in the quarter ended July 29, 2012. We recorded charges of $9.5 million for obsolete and excess inventory in the quarter ended July 29, 2012 compared to $5.7 million in the quarter ended July 31, 2011. We sold inventory that was written-off in previous periods resulting in a benefit of $4.6 million in the quarter ended July 29, 2012 and $4.0 million in the quarter ended July 31, 2011. As a result, we recognized a net charge of $4.9 million in the quarter ended July 29, 2012 compared to a net charge of $1.7 million in the quarter ended July 31, 2011. Cost of revenues included stock-based compensation charges of $1.3 million in the quarter ended July 29, 2012 and $1.7 million in the quarter ended July 31, 2011. 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 $65.3 million, or 29.6% of revenues, in the quarter ended July 29, 2012 compared to $71.4 million, or 31.3% of revenues, in the quarter ended July 31, 2011. The decrease in gross margin primarily reflects a decline in average selling prices, partially offset by reduced material costs, as well as under-utilization of certain manufacturing facilities and higher net charges for excess and obsolete inventory.

Research and Development Expenses. Research and development expenses increased $2.8 million, or 7.8%, to $38.2 million in the quarter ended July 29, 2012 compared to $35.4 million in the quarter ended July 31, 2011. The increase was due primarily to increases in employee related expenses. Included in research and development expenses were stock-based compensation charges of $2.8 million in the quarter ended July 29, 2012 and $2.1 million in the quarter ended July 31, 2011. Research and development expenses as a percent of revenues increased to 17.3% in the quarter ended July 29, 2012 compared to 15.5% in the quarter ended July 31, 2011.

Sales and Marketing Expenses. Sales and marketing expenses increased $1.1 million, or 11.3%, to $10.7 million in the quarter ended July 29, 2012 compared to $9.6 million in the quarter ended July 31, 2011. The increase was primarily due to increases in employee related expenses. Included in sales and marketing expenses were stock-based compensation charges of $1.0 million in the quarter ended July 29, 2012 and $0.8 million in the quarter ended July 31, 2011. Sales and marketing expenses as a percent of revenues increased to 4.8% in the quarter ended July 29, 2012 compared to 4.2% in the quarter ended July 31, 2011.

General and Administrative Expenses. General and administrative expenses decreased $610,000, or 4.4%, to $13.3 million in the quarter ended July 29, 2012 compared to $14.0 million in the quarter ended July 31, 2011. The decrease was due to a $775,000 reduction in transaction-related expenses, as we incurred $325,000 in transaction costs in connection with the acquisition of Red-C in the quarter ended July 29, 2012 compared to $1.1 million incurred in connection with the acquisition of Ignis in the quarter ended July 31, 2011. This reduction, as well as a reduction in legal costs was partially offset by higher stock-based compensation expense. Included in general and administrative expenses were stock-based compensation charges of $2.7 million in the quarter ended July 29, 2012 and $1.9 million in the quarter ended July 31, 2011. General and administrative expenses as a percent of revenues increased to 6.2% in the quarter ended July 29, 2012 compared to 6.1% in the quarter ended July 31, 2011.

Restructuring Recoveries. During the first quarter of fiscal 2012, we entered into a sublease agreement with a third party for a portion of our abandoned and unused facility in Allen, Texas. As a result of this sublease agreement, we recorded a recovery of $322,000 to reflect an adjustment to our future net liability related to the abandoned and subleased portion of this facility.

Amortization of Purchased Intangibles. Amortization of purchased intangibles increased $30,000, or 3.9%, to $809,000 in the quarter ended July 29, 2012 compared to $779,000 in the quarter ended July 31, 2011.

Interest Income. Interest income increased $36,000 to $196,000 in the quarter ended July 29, 2012 compared to $160,000 in the quarter ended July 31, 2011. Interest income increased due to higher cash balances in the first two months of the quarter ended July 29, 2012 compared to the quarter ended July 31, 2011.

Interest Expense. Interest expense decreased $264,000, or 29.0%, to $647,000 in the quarter ended July 29, 2012 compared to $911,000 in the quarter ended July 31, 2011. The decrease was primarily due to repayments of Ignis loans during fiscal 2012 and the first quarter of fiscal 2013.

Loss on Debt Extinguishment. During the first quarter of fiscal 2012, we repaid certain bank loans that we assumed as part of the Ignis acquisition. The repayment of these loans resulted in a loss of $419,000 which we recognized in our condensed consolidated statement of operations for the quarter ended July 31, 2011.

Other Income, Net. Other income, net was $81,000 in the quarter ended July 29, 2012 compared to $4.7 million in the quarter ended July 31, 2011. Other income, net in the quarter ended July 29, 2012 primarily consisted of foreign exchange gains. Other income, net in the quarter ended July 31, 2011 primarily consisted of a gain of $5.4 million related to the fair-value measurement of our equity interest in Ignis upon obtaining a controlling interest in May 2011, offset by $619,000 representing our portion of the net losses of Ignis during the period prior to our acquisition of a controlling interest, during which period we accounted for our investment in Ignis using the equity method of accounting.

Non-controlling interest. Non-controlling interest for the quarter ended July 29, 2012 and July 31, 2011 represents minority shareholders' proportionate share of the net loss of Fi-ra (Korean subsidiary of Ignis).

Provision for Income Taxes. We recorded income tax provisions of $642,000 and $548,000, respectively, for the quarters ended July 29, 2012 and July 31, 2011. The income tax provisions for both quarters primarily represent current state and foreign income 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 U.S. deferred tax assets which represent future income tax benefits associated with our operating losses because we do not currently believe it is more likely than not these assets will be realized.

Liquidity and Capital Resources

Cash Flows from Operating Activities

Net cash provided by operating activities was $11.2 million in the quarter ended July 29, 2012, compared to $14.9 million in the quarter ended July 31, 2011. Cash provided by operating activities in the quarter ended July 29, 2012 consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $23.4 million, less cash used for working capital requirements primarily related to increase in accounts receivable and decrease in accounts payable and accrued compensation offset by decrease in inventory. Accounts receivable increased by $8.4 million primarily due to slower collections near the end of the quarter. Accrued compensation decreased by $6.6 million due to payment of bonuses during the quarter and accounts payable decreased by $3.8 million due to payments made to suppliers towards the end of the quarter. Inventory decreased by $11.2 million due to usage in the manufacturing process. Cash used in operating activities in the quarter ended July 31, 2011 consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling to $15.8 million and cash used for working capital, primarily related to increases in accounts receivable, inventory and accounts payable. Accounts receivable decreased by $13.1 million primarily due to strong collections at the end of the quarter, offset by an increase in the allowance for doubtful accounts. Inventory increased by $7.1 million and accounts payable increased $3.7 million due to increased purchases to support projected levels of sales.

Cash Flows from Investing Activities

Net cash used in investing activities totaled $25.1 million in the quarter ended July 29, 2012 compared to $87.4 million in the quarter ended July 31, 2011. Net cash used in investing activities in the quarter ended July 29, 2012 consisted of $20.6 million related to the acquisition of Red-C and $15.0 million of expenditures for capital equipment. Net cash used in investing activities in the quarter ended July 31, 2011 consisted of $71.1 million related to the acquisition of Ignis and $16.3 million of expenditures for capital equipment.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $219,000 in the quarter ended July 29, 2012 compared to $4.2 million in the quarter ended July 31, 2011. Cash used in financing activities for the quarter ended July 29, 2012 primarily reflected repayments of borrowings related to the Ignis acquisition totaling $3.2 million and proceeds from the issuance of shares under employee stock option and stock purchase plans totaling $2.9 million. Net cash used in financing activities for the quarter ended July 31, 2011 primarily reflected proceeds from the exercise of stock options and purchases under our stock purchase plan totaling $2.6 million and repayments of borrowings related to the Ignis acquisition totaling $8.7 million, partially offset by additional borrowings of $1.8 million by Fi-ra.

Sources of Liquidity and Capital Resource Requirements

At July 29, 2012, our principal sources of liquidity consisted of $220.4 million of cash and cash equivalents and an aggregate of $66.6 million available for borrowing under our credit facility with Wells Fargo Foothill, LLC, subject to certain restrictions and limitations. Cash and cash equivalents totaling $37.9 million was held by our foreign subsidiaries as of July 29, 2012.

We believe that our existing balances of cash and cash equivalents, together with the cash expected to be generated from future operations and borrowings under our bank credit facility, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire our outstanding 5% Convertible Senior Notes due 2029, in the aggregate principal amount of $40.0 million, which are subject to redemption by the holders at their option in October 2014, 2016, 2019 and 2024. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.

Off-Balance-Sheet Arrangements

At July 29, 2012 and April 30, 2012, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.