##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the Fiscal Year Ended April 30,
    2004                                                
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number: 0-30869

STRATOS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                                          |  |                                         
|----------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                  |  | 36-4360035                              
|(State or other jurisdiction of
    incorporation or organization)                        |  | (I.R.S. Employer
    Identification No.)
|                                                                                         
|7444 West Wilson Avenue
    Chicago, Illinois(Address of principal executive
    offices) |  | 60706(Zip Code)                         

Registrants telephone number, including
area code:

(708) 867-9600


Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: $.01 par value Common
Stock

(Title of Class)


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 if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to the
Form 10-K.     o

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

The aggregate market value of the $.01 par
value common stock of the registrant held by non-affiliates on
October 31, 2003, based upon the closing sale price on that
date as reported in The Wall Street Journal was approximately
$40,976,174.

The registrant had 14,286,363 shares of
$.01 par value common stock outstanding as of July 22,
2004.



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##### Table of Contents



DOCUMENTS INCORPORATED BY REFERENCE

Filings made by companies with the Securities and
Exchange Commission (SEC) sometimes
incorporate information by reference. This means
that the company is referring you to information that either was
previously filed or will be filed with the SEC, and this
information is considered to be part of the document that you
are reading. Portions of the proxy statement for the Annual
Meeting of Stockholders are incorporated by reference into
Part III of this Form 10-K.



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TABLE OF CONTENTS






|                                    |  |                                                                                                                          |  |                                |    |  |   | 
|----------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | -- |  | - | 
|Section                             |  |                                                                                                                          |  | Page                          
|                                    |  |                                                                                                                          |  |                               
|                                    |  |                                                                                                                          |  | Forward-Looking
    Statements |    |  | 2 | 
|                                    |  |                                                                                                                          |  | PART I                         |    |  |   | 
|Item 1.                             |  | Business                                                                                                                 |  |                                | 3  | 
|Item 2.                             |  | Properties                                                                                                               |  |                                | 15 | 
|Item 3.                             |  | Legal Proceedings                                                                                                        |  |                                | 15 | 
|Item 4.                             |  | Submission of Matters to a
    Vote of Security Holders                                                                  |  |                                | 17 | 
|                                    |  |                                                                                                                          |  | PART II                        |    |  |   | 
|Item 5.                             |  | Market for Registrants
    Common Equity and Related Stockholder Matters and Insurer
    Purchases of Equity Securities |  |                                | 18 | 
|Item 6.                             |  | Selected Financial Data                                                                                                  |  |                                | 19 | 
|Item 7.                             |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                |  |                                | 21 | 
|Item 7A.                            |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                           |  |                                | 30 | 
|Item 8                              |  | Financial Statements and
    Supplementary Data                                                                          |  |                                | 30 | 
|Item 9.                             |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosure                                 |  |                                | 31 | 
|Item 9A.                            |  | Controls and Procedures                                                                                                  |  |                                | 31 | 
|                                    |  |                                                                                                                          |  | PART III                       |    |  |   | 
|Item 10.                            |  | Directors and Executive
    Offices of the Registrant                                                                    |  |                                | 31 | 
|Item 11.                            |  | Executive Compensation                                                                                                   |  |                                | 31 | 
|Item 12.                            |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters                   |  |                                | 31 | 
|Item 13.                            |  | Certain Relationships and
    Related Transactions                                                                       |  |                                | 31 | 
|Item 14.                            |  | Principal Accountant Fees
    and Services                                                                               |  |                                | 31 | 
|                                    |  |                                                                                                                          |  | PART IV                        |    |  |   | 
|Item 15.                            |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                                     |  |                                | 32 | 
|Code of Business Conduct and Ethics
|List of Subsidiaries               
|Consent of Ernst & Young LLP       
|Certification                      
|Certification                      
|Certification                      
|Certification                      
|Cautionary Statements              



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##### Table of Contents






FORWARD LOOKING STATEMENTS

You should read the following discussion
together with our consolidated financial statements and notes to
those financial statements, which are included in this report.
This report contains forward-looking statements made pursuant to
the safe harbor provisions of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. The words
anticipates, intends,
expects, could, should,
plans, believes, estimates,
or words or phrases of similar import generally identify
forward-looking statements. You are cautioned that
forward-looking statements are subject to risks, trends and
uncertainties that could cause actual results, performance or
achievements to differ materially from those expressed in any
forward-looking statements. Important factors that could cause
our actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by those statements include, but are not
limited to the following: (i) the continuation of the
current economic climate and its effect on our business;
(ii) our ability to meet analyst and investor expectations;
(iii) the long-term growth of the communications industry
and its use of our technologies; (iv) our ability to
develop and market new products and technology and to make
enhancements to existing products and technology on a successful
and timely basis; (v) our and our customers ability
to comply with evolving domestic and international government
regulations; (vi) expenditures associated with redesigning
products to comply with evolving industry standards or
alternative technologies that become the industry standard;
(vii) our dependence on sales to the military/aerospace
industry; (viii) our ability to develop and manage
relationships with large customers that comprise, and will
comprise, a significant percentage of our net sales,
respectively; (ix) the length of sales cycles, which vary
by product and customer, and the effect that this length has on
net sales and operating expenses; (x) the lack of long-term
customer contracts and its effect on customers ability to
reduce, cancel and defer orders on short notice without
significant penalty; (xi) the effect on gross margins of an
inability to reduce manufacturing costs or increase sales of
higher margin products; (xii) the impact of competitive
products; (xiii) our reliance on a limited number of
suppliers and the effect of underestimating or overestimating
the need for certain supplies; (xiv) our ability to attract
and retain qualified personnel; (xv) the effect of defects
in our products; (xvi) the effect of compliance with
environmental laws and other legal requirements; (xvii) the
effect of economic, political and regulatory risks associated
with international operations, including acts of terrorism
directed against the United States or U.S. affiliated
targets; (xviii) our ability to complete and integrate
acquisitions, strategic alliances and joint ventures;
(xix) our ability to secure and defend intellectual
property rights and, when appropriate, license required
technology; (xx) adverse outcomes of pending, threatened or
future litigation, including suits related to intellectual
property matters; (xxi) volatile market prices for
securities of technology-related companies; (xxii) the
effect of provisions in our organizational documents and
Delaware law that may delay or prevent the acquisition of
Stratos or may decrease the value of Stratos common stock;
(xxiii) our ability to integrate Stratos and Sterling;
(xxiv) impact on our earnings of application of the
purchase method of accounting in connection with the Sterling
merger; (xxv) our ability to realize benefits from
consolidation of Sterling into the Mesa, Arizona facility; and
(xxvi) the outcome of our process involving the exploration
of various strategic alternatives. Because forward-looking
statements are subject to assumptions and uncertainties, actual
results may differ materially from those expressed or implied by
such forward-looking statements. Shareholders are cautioned not
to place undue reliance on such statements, which speak only as
of the date of this document or the date of any document
incorporated by reference. All subsequent written and oral
forward-looking statements concerning the Sterling merger or
other matters addressed in this document and attributable to
Stratos or any person acting on either companys behalf are
expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. Except to
the extent required by applicable law or regulation, Stratos
undertakes no obligation to release publicly any revisions or
updates to such forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events.

See the cautionary statements included as
Exhibit 99 to this annual report on Form 10-K for a
more detailed discussion of the foregoing and other factors that
could cause actual results to differ materially from those
included in the forward-looking statements and that, among
others, should be considered in evaluating our
outlook.

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PART I





|        |          
|------- | ---------
|Item 1. | Business.

Overview

Stratos designs, develops, manufacturers, and
sells active and passive optical, optoelectronic and radio
frequency (RF) and microwave components, subsystems
and interconnect products used in telecom, enterprise, military
and video markets. Our products are used in a variety of
applications including Ethernet, synchronous optical network
(SONET) and Fibre Channel applications for
telecom/enterprise, tactical field communications for military,
and high definition transport for video.

Industry Background



| |                                           
| | ------------------------------------------
| | Increasing Demand for Higher
    Bandwidth

Over the last decade, the number of communication
networks and the amount of data transmitted over networks has
increased substantially due to the growth of data intensive
applications such as Internet access, e-commerce, e-mail, video
conferencing, multimedia file transfers, the movement of large
blocks of stored data across networks, the increasing need for
large amounts of data access and transfer on the modern military
battlefield, and the proliferation of high definition video in
professional and consumer markets. In addition, the expansion of
data and storage networks for business over a geographically
dispersed user base has increased both the amount of data and
the distance it is transmitted over communication networks. This
growth has exposed the transmission speed and physical space
limitations of existing networks that is being addressed by
higher bandwidth technologies.



| |                                                                 
| | ----------------------------------------------------------------
| | Growth of High Bandwidth Technology in the
    Enterprise Market

10 Gigabit Ethernet and Fast Ethernet in Local
Area Networks (LANs).LANs
interconnect computer users within an organization and allow
users to share computer resources. Early LANs, which had
relatively limited performance requirements, short connection
distances and low transmission speeds, were generally
interconnected using copper cabling. Most present day LANs use
the Ethernet transmission protocol. As performance requirements,
transmission distance and bandwidth requirements of network
users have increased, transmission protocols have evolved to
100 Mbps Fast Ethernet, Gigabit Ethernet technology, and 10
Gigabit Ethernet technology which operates at 10,000 Mbps
or 10 gigabits per second (Gbps). Each Ethernet
switch port relies on a optical or copper subsystem to transmit
and receive data.

The scalability and migration capacity built into
the Ethernet protocol allows original equipment manufacturers
(OEMs) developing these systems to leverage their
experience with this standard to transition to a higher data
rate. This next generation of high data rate networking systems
will require even higher performance subsystems and components.

Fibre Channel in Storage Area
Networks.Data storage technology is
evolving rapidly. Early storage networks used a standard
interface protocol known as the small computer systems interface
or SCSI.

To address the limitations of SCSI-based storage
systems, the Fibre Channel standard was developed in the early
1990s. Fibre Channel allows devices to communicate with each
other at rates up to 2.125 Gbps over distances up to 10
kilometers, while maintaining backward compatibility with the
installed base of SCSI-based storage systems. A new generation
of Fibre Channel products operates at speeds of 4.25 Gbps. Fibre
Channel also is scalable and the next generation of Fibre
Channel, operating at speed of 8.50 Gbps is currently under
development. Fibre Channel-based storage area networks
(SANs) enable enhanced network applications such as
storage backup, and better overall storage management achievable
through centralized storage resources. Each Fibre Channel switch
port relies on a subsystem to transmit and receive data.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Optical and RF Technology in Access,
    Metropolitan Area, Wide Area and Telecommunication
    Networks

Access.The past
several years have seen rapid growth of broadband services for
business and residential customers. In particular, consumer
demand for cable modem and DSL services, next generation cellular

3



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applications, and the proliferation of wireless
access points, is pushing high bandwidth capacity requirements
from the telecommunication central offices and cable television
headends, to the edge of the network. This bandwidth demand has
caused the telecom and cable television (CATV)
service providers to embark on large network upgrades. These
network upgrades require the use of higher bandwidth optical and
coaxial technologies to be deployed closer to the end customer.
Verizons announcement of a fiber to the home
(FTTH) network deployment is an example of this
trend. Another trend is the deployment of high speed coaxial DS3
signal rates from the central office into the remote terminal
and premise wiring portions of the telecom network, extending
bandwidth closer to the edge.


Metropolitan and Wide Area Networks
(MANs and WANs,
respectively).The increased
transmission capabilities of optical and RF technologies have
allowed for the geographic extension of LANs and SANs through
the use of extended networks, such as MANs and WANs. These
networks enable enterprises to interconnect network systems
throughout a corporate campus or wide geographic area rather
than within a single building. Interconnections between network
systems are performed by switches and routers that use optical
and RF components and subsystems. These networks enable business
enterprises to use their networks for enhanced applications,
such as real-time backup data storage at longer distances for
disaster protection. In addition, these networks offer
organizations a cost-effective way to address increased
bandwidth requirements.

Telecommunication
Networks.Optical and RF technology
also is being used in high data rate telecommunication
applications, including the intra-office connection of clusters
of telecommunication switches based on the synchronous optical
network (SONET) and asynchronous transfer mode
(ATM) protocols. SONET switches and ATM access
switches are often used in telecommunication networks to switch
regional traffic and route long distance traffic. Newest
generation networks are also applying Ethernet protocols to
these telecommunication networks. In these core networks,
multiple switches are often grouped together within a service
providers central office network. The interconnections
between these systems are commonly provided by RF and optical
interconnects.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Optical, RF, and Microwave Technology in
    Military and Aerospace Applications

Modern militaries are becoming increasingly
dependent on high data rate communications and smart weapons,
creating a network centric battlefield, where the application of
high bandwidth communication technologies is combined with
design attributes suitable for the harsh environment in which
they are deployed. In avionics applications, the high bandwidth
and light weight of optical systems serves to increase the
performance of aircraft. Tactical field communications use
optical and RF technologies to quickly deploy reliable high
bandwidth networks in the battlefield. Microwave cable and
connector technology is a vital element of phased array radar
systems used for threat warning by the military.

Militaries are often supplied their systems and
technology by large system integrators. These system integrators
typically have strong expertise in system level design and
function, with significantly less expertise in component and
subsystem. They rely on their suppliers for component and
subsystem level expertise, requiring that their suppliers
understand both the technology and their particular application
environment.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Demands on Suppliers of Optical, RF, and
    Microwave Subsystems and Components

The ability to send high data rate signals over
longer distances depends not only on optical and electronic
transceiver technology, but also on the performance of the fiber
optic and electronic connections within the network. The demand
for increasing bandwidth places continued emphasis on the need
for high quality optical connectivity in critical applications
such as in telecommunications, enterprise, military, and video
networks, where the transmission of higher data rates over long
distances has pushed the limits of signal integrity. Optical and
electronic connections within networks may degrade the signal
and can substantially reduce the distance over which signals can
reliably be sent. The market demands for networks with ever
increasing data rates over longer distances have driven the need
for high bandwidth subsystems and components that provide the
critical interconnections between devices within these high data
rate network systems.

Network equipment manufacturers and military
system integrators increasingly rely on highly integrated
subsystem suppliers to rapidly develop major elements of their
systems. These suppliers allow network

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equipment OEMs and system integrators to better
focus on their core competencies in overall product design,
specifically differentiating product benefits, marketing and
distribution. We expect this trend to continue, with network
equipment OEMs and military system integrators outsourcing an
increasing percentage of their non-core functions to contract
manufacturers and integrated subsystem suppliers.


Products

Stratos has built a broad range of standardized
and custom broadband data communication products, through its
optoelectronic, passive fiber, RF and Microwave product families.

Stratos optoelectronics products encompass a
broad range of standardized, multi-source agreement compliant
(MSA) and custom active fiber optic components
including embedded and removable transceivers, multi-channel
optical links and custom integrated modules used in telecom,
storage, data networking, military, video and industrial
applications. These products support a wide variety of protocols
including Gigabit Ethernet, Fibre Channel and SONET and address
a wide range of wavelengths and transmission distances.

The Optoelectronics product offering consists of
(i) MSA transceivers for telecom/enterprise,
(ii) specialty transceivers, (iii) military and harsh
environment components and subsystems, and (iv) video
components and subsystems.



| |                                             
| | --------------------------------------------
| | MSA Transceivers for Telecom/
    Enterprise



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos designs, manufactures and markets a broad
    product line of MSA transceivers for the telecom/enterprise
    market including low-cost small form factor (SFF)
    and small form factor pluggable (SFP) modules, which
    can be produced in high volumes. Stratos MSA transceivers
    offering includes 1x9, gigabit interface converter
    (GBIC), SFF, SFP, and coarse wave division
    multiplexing (CWDM) SFP form factors in multiple
    laser variations for short, medium and long reach applications.



| |                       
| | ----------------------
| | Specialty Transceivers



| |                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos manufactures a line of specialty
    transceivers based upon less commonly manufactured standard and
    non-standard form factors and protocols. These products leverage
    the Companys packaging, miniaturization and optoelectronic
    expertise and offer smaller modules with enhanced performance
    characteristics that are not available from other suppliers.



| |                                                             
| | ------------------------------------------------------------
| | Military and Harsh Environment Components
    and Subsystems



| |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos optoelectronics products for the military
    market meet the shock and vibration requirements of military and
    harsh environment applications. We sell specialized transceivers
    and custom integrated modules designed to meet specific customer
    requirements, including Active Bulkheads, which combine a
    transceiver media converter and expanded beam connection in a
    single integrated package.



| |                                    
| | -----------------------------------
| | Video Components and
    Subsystems



| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos provides optoelectronic solutions
    specifically designed for the transport of standard definition
    and high definition video signals. These products include
    transceivers, media converters and subsystems.

Stratos also sells a family of passive fiber
optics and assemblies and for various end markets such as
telecom, military and oil and gas. The Fiber Optics product line
consists of (i) CWDM components and modules,
(ii) optical flex circuits and multifiber assemblies,
(iii) harsh environment connectors, (iv) specialty
fiber components and assemblies, and (v) connectors and
cable assemblies.



| |                            
| | ---------------------------
| | CWDM Components and Modules



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos manufactures and sells 4, 8 and
    16-channel multiplexer and demultiplexer modules, one to four
    channel optical add/drop modules (OADM), integrated
    modules with pluggable and discrete active

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| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | components and a dense wave division multiplexing
    (DWDM) interleaver product. The products are
    typically customized to the specific needs of the Companys
    telecom and enterprise customers.



| |                                                    
| | ---------------------------------------------------
| | Optical Flex Circuits and Multifiber
    Assemblies



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos has proprietary, automated and software
    driven optical flex circuit manufacturing expertise. Using that
    expertise, the Company develops custom circuit cards and
    backplane solutions for specific customer requirements.



| |                             
| | ----------------------------
| | Harsh Environment Connectors



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos supplies expanded beam and physical
    contact harsh environment connectors to the military and other
    end markets. Stratos expanded beam connector technology
    uses optics to expand the beam of light at the end of the fiber,
    making the connector less susceptible to performance degradation
    due to dust, debris, moisture, shock and vibration. Stratos also
    has developed a series of physical contact connectors to address
    additional applications.



| |                                              
| | ---------------------------------------------
| | Specialty Fiber Components and
    Assemblies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos manufactures its specialty fiber
    components and assemblies in its UK facility. Capabilities at
    this facility include laser machining and shaping of fibers,
    glass-to-metal hermetic sealing, fiber metallization as well as
    active device and polarization maintaining fiber termination.
    Products include custom optical subassemblies for transceiver
    and device manufacturers in single and multifiber applications.
    Stratos has developed these specialized products for the medical
    device, military fiber sensor and oil and gas markets.



| |                                    
| | -----------------------------------
| | Connectors and Cable
    Assemblies



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stratos incorporates industry standard connectors
    in support of its optical flex circuit, CWDM, harsh environment
    connector and specialty businesses, and also sells these
    standard products to customers.

Since the acquisition of Sterling, Stratos sells
two product lines in RF and microwave interconnect products
under the Trompeter and Semflex brand names. Trompeter
Electronics, Inc. (Trompeter) provides RF coaxial
interconnects for the telecom, military, and video markets.
Semflex, Inc., a subsidiary of Stratos (Semflex)
manufactures and sells microwave frequency bulk cable and cable
assembly for the military, aerospace, and test instrumentation
markets.



| |                                          
| | -----------------------------------------
| | RF Connectors for Military/
    Aerospace



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trompeter produces impedance controlled Twinax
    and Triax RF connectors that enable high frequency electrical
    performance in the military environments. Applications for the
    military/aerospace RF connector products include MIL-STD-1553
    databus couplers, forward battlefield command centers, satellite
    equipment and hermetic interconnects.



| |                          
| | -------------------------
| | RF Connectors for Telecom



| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trompeters BNC and mini-BNC connectors are
    used in telecom applications such as DS3 cross connects
    (DSX). The companys product offering in this
    space includes the 75 ohm DS3 Coaxial BNC series, the mini-BNC
    series, Western Electric Company (WECo) and
    mini-WECo patch plugs and various other interconnect jacks.



| |                        
| | -----------------------
| | RF Connectors for Video



| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trompeter is a provider of 75 ohm BNC connectors
    and patch jacks for video applications. In addition to these
    products, the Company also sells a line of, WECo, and mini-WECo
    patch jacks and patch panels. Its products are used in
    applications such as station signal management and mobile
    production vehicles.

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| |                    
| | -------------------
| | RF Cable Assemblies



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trompeter manufacturers coaxial cable assemblies,
    servicing primarily telecom service providers and their central
    office installers as well as military communications shelter
    manufacturers.



| |                                     
| | ------------------------------------
| | Patch Products and Outside
    Plant



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Within the telecommunications network, the point
    where the network responsibility transfers from one network
    operator to another is known as the demarcation point.
    Trompeters BNC panels and interconnect modules give a
    network operator a network access point immediately adjacent to
    this demarcation, enabling them to assure a quality handoff, and
    to avoid service calls for network problems beyond their
    control. In addition, these products allow customers to access
    network points without disconnection, avoiding service
    disruption.
|
| | For the military, Trompeter supplies triax patch
    panels for shelters and battlefield communication centers for
    several US military branches.                                                                                                                                                                                                                                                                                                                                                                                                                                      



| |                                         
| | ----------------------------------------
| | Microwave Cable and Cable
    Assemblies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Microwave Cable and Cable Assemblies
    business, operated under the Semflex brand, designs and
    manufactures flexible microwave frequency coaxial cable and
    custom cable assemblies for the military/aerospace, commercial
    OEM and test instrumentation markets. In addition, Semflex
    manufactures some custom connectors, adapters, phase trimmers
    and other components to meet special application requirements,
    usually associated with the cable assemblies being built.



| |                
| | ---------------
| | Microwave Cable



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Semflex primarily manufactures high performance,
    flexible microwave cable. Semflex makes cable with a process
    that delivers low attenuation characteristics over length and at
    microwave frequencies. This capability allows low-loss tuned
    cable assemblies where the performance of the cable is matched
    to the connector design.



| |                           
| | --------------------------
| | Microwave Cable Assemblies



| |                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Semflex cable assemblies are typically phase
    matched microwave frequency custom designs of both the cable and
    connector for a variety of military, precision test, and
    wireless applications. Typical customers for microwave cable
    assemblies are military and aerospace firms.

Customers

During fiscal 2004, sales to General Dynamics UK
Ltd. and Tellabs and their respective contract manufacturers
amounted to 6% and 3%, respectively, of consolidated net sales.
For fiscal 2003, our two largest customers and their respective
contract manufacturers accounted for 13% of our net sales, with
Redfern Broadband and Qlogic accounting for 8% and 5% of our
consolidated net sales.

Backlog

Backlog consists of written purchase orders for
products for which we have assigned shipment dates within the
following 12 months. As of April 30, 2004 and
April 30, 2003, our backlog was approximately
$13.0 million and $5.0 million, respectively. Orders
in backlog are firm, but are subject to cancellation or
rescheduling by the customer.

Sales, Marketing and Technical
Support

We market and sell our products domestically and
internationally through our direct sales force, local resellers
and manufacturers representatives. Specifically, we have
established relationships with resellers and manufacturers
representatives in North America, Europe, South America, Asia
and various other countries.

7



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Sales and Technical Support

The Company sells through a team of
representative distributors and direct sales professionals
across North America, Europe and Asia. The Companys sales
teams are organized into three groups including Stratos
Lightwave (active and passive components and subsystems),
Trompeter (RF interconnect) and Semflex (microwave cable and
cable assemblies). The Company maintains three sales
organizations to capture the strong brand identity each has
developed in its respective marketplace.

We believe our ability to deliver value-added
customer service and technical support is essential to our
business. Our sales force and design engineers work closely with
our customers through the design and manufacturing process. We
also provide extensive technical support to our customers after
the design and qualification process is complete. We intend to
strengthen our current customer relationships by continuing to
deliver a high level of value-added service and technical
support and leveraging our reputation for high quality products
and service to establish relationships with new customers.

Marketing

The marketing group is responsible for developing
marketing strategies and programs that support the sale of
Stratos products and enhance its reputation in the
industry. These strategies and programs include (i) ongoing
interaction with customers for the development of new products
and technical support, (ii) advertising and other
promotional activities in industry trade journals and
publications targeting design engineers,
(iii) participation in major trade show events and
conferences in the communications network industry to promote
the Companys broad lines of active and passive optical,
and RF and microwave components and subsystems, (iv) public
relations covering new products, applications and design wins,
(v) market research to support R&D investment and
investor relations activity, (vi) corporate branding to
create a consistent message across the Stratos Lightwave,
Trompeter and Semflex brands, and (vii) interaction with its
customers in industry associations and standards committees to
promote and further enhance active and passive interconnection
technologies, and increase Stratos visibility as industry
experts.

Competition

The market for optical, RF and microwave
subsystems and components is highly competitive and subject to
rapidly changing technology. We believe the primary competitive
factors impacting our business are:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | data rate, port density, reliability and other
    performance features;
|
| |  | ability to rapidly scale production for high
    volumes;               
|
| |  | timeliness of new product introductions;                                
|
| |  | length of product design cycle;                                         
|
| |  | compatibility with emerging industry standards;                         
|
| |  | scope and responsiveness of service and technical
    support;          
|
| |  | price and performance characteristics; and                              
|
| |  | established reputation with key customers.                              

For optoelectronics, we compete primarily with
Agilent Technologies, Inc., Finisar Corporation, JDS Uniphase
Corporation and Optical Communications Products, Inc. For fiber
optics, we compete primarily with Amphenol Corporation, Molex,
Inc. and Tyco International, Ltd. and numerous other smaller
companies. For RF products we compete with ADC
Telecommunications, Inc, Amphenol, ITT Cannon (a subsidiary of
ITT Industries), Kings Electronics Co., Inc, Radiall, S.A. and
numerous other companies globally. In the microwave products
business, we compete with Huber+Suhner, WL Gore Associates, Inc.
and a large number of smaller companies. Many of our current and
potential competitors have significantly

8



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greater financial, technical, marketing,
purchasing, distribution and other resources than we do, and as
a result, may be able to:




| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | respond more quickly to new or emerging
    technologies or standards and to changes in customer
    requirements;
|
| |  | devote greater resources to the development,
    promotion and sale of their products; and                        
|
| |  | deliver competitive products at a lower price.                                                                    

In addition, some of our existing and potential
customers are also current and potential competitors. These
companies may attempt to integrate their operations by producing
their own subsystems or components or by acquiring one of our
competitors, thereby eliminating the need to purchase our
products. Furthermore, larger companies in other related
industries may develop or acquire technologies and apply their
significant resources, including their distribution channels and
brand name recognition, to capture significant market share.

Some of our critical components used in
production of certain of our products are purchased from a key
supplier which has been acquired by a competitor of the Company.
If this supplier increases prices, reduces quantities available
to us or ceases to supply us, our business and results of
operations may be significantly harmed.

We cannot assure you that we will be able to
compete successfully against either current or future
competitors. Increased competition could result in significant
price erosion, reduced revenue, lower margins or loss of market
share, any of which would significantly harm our business.

Manufacturing

Stratos provides integrated engineering and
manufacturing capabilities at each of its three manufacturing
locations, including product design, fabrication, assembly,
packaging and testing, and delivers quality assurance through
its ISO 9001:2000 certified processes and procedures. The
Company also has proprietary processes such as autocalibration
and automated multifiber polishing to ensure it meets stringent
customer requirements. The Companys integrated
engineering/manufacturing business model allows it to reduce
development times and respond to customer needs.

9



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| |                       
| | ----------------------
| | Production by Location

|                          |  |                                                                                                                                                                               |  |                                                                                                                        |  |                                                                                                                                                                       
|------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Location                  |  | Optoelectronics                                                                                                                                                               |  | Fiber Optics                                                                                                           |  | RF and Microwave                                                                                                                                                      
|                          |  |                                                                                                                                                                               |  |                                                                                                                        |  |                                                                                                                                                                       
|Chicago, Illinois         |  |  Telecom/enterprise MSA and specialty
    transceivers
     Military and video components and subsystems
     Has intercompany optical sales to the Fiber Optics
    group |  |  CWDM components and modules
     Optical flex circuits and multifiber assemblies
     Harsh environment assemblies |  |                                                                                                                                                                       
|                         
|Mesa, Arizona             |  |                                                                                                                                                                               |  |                                                                                                                        |  |  RF connectors, cable assemblies and
    patch components and panels
     Microwave cable
     Microwave connectors and components
     Microwave cable assemblies
|                         
|Haverhill, United Kingdom |  |                                                                                                                                                                               |  |  Harsh environment connectors and
    assemblies
     Specialty fiber components and assemblies                      |  |                                                                                                                                                                       

Chicago,
IL In May 2003, Stratos
began to consolidate all of its North American optical
manufacturing into its Chicago, IL facility. That process is
complete and the Company currently manufactures all of its
optoelectronic products, CWDM components and modules, optical
flex circuits and multifiber assemblies, and harsh environment
assemblies for the domestic market in this 89,360 square
foot facility. The facility includes two high-capacity pick and
place lines, surface mount (SMT) capability, wave
and convection-reflow soldering systems, automated and
semi-automated chip-to-wire bonding equipment, and custom laser
welding systems.

The Companys optical flex circuit products
are assembled by a proprietary, software-driven automated fiber
routing and embedding system, along with semi-automated
multi-fiber connector polishing machines and processes.

The CWDM operation features micro-optic alignment
equipment and processes. The Company has also developed
proprietary test methods to increase throughput of these
multi-wavelength modules.

The facility also includes extensive test
laboratories with Telcordia, Highly Accelerated Life Test
(HALT) and Highly Accelerated Stress Screen
(HASS) capabilities, a stereolithography system for
rapid prototyping, 3,000 square feet of clean-room capacity
and an in-house toolroom.

The Chicago, IL operations are ISO 9001:2000
certified and operate under a JD Edwards ERP system.

Mesa, AZ
In July 2003, Sterling began to consolidate all of the
manufacturing for Trompeter and Semflex products into the Mesa,
AZ facility. This consolidation is now largely complete and all
Trompeter and Semflex products are manufactured in the Mesa
facility. The 50,000 square foot, two building complex
includes a full function vertically-integrated manufacturing
facility for Semflexs low loss, tape wrapped, flexible
microwave cable line, close coupled with a medium capacity
machining facility with significant computer-controlled turning,
milling and drilling capability for turn-key production. This
operation also produces medium and low volume Swiss screw
machine type contacts for the Trompeter RF connector line.

10



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In addition, the Mesa facility houses a recently
installed automated nickel plating line, primarily for the
Trompeter connector business as well as a recently upgraded gold
plating line used for all RF and microwave contacts in support
of all product lines. Many of the other RF connector product
line components are sourced from various low cost suppliers. The
facility also houses a multi-shift assembly and test capability
for all product lines. Additionally, Stratos owns approximately
4.5 acres of land adjacent to the Mesa facility that it can
use for future expansion needs.

The Mesa, AZ facility is ISO 9001 registered and
meets the requirements of MIL-Q-9858A and other military
standard requirements.

Haverhill,
UK Stratos
Haverhill, UK facility currently manufactures the Companys
harsh environment connectors and cable assemblies and specialty
fiber products in 30,000 square feet of leased space. The
harsh environment connector components are produced with a seven
axis machining center and two micro-turn lathes, featuring 0.1
micron repeatability. Metrology equipment supports production,
quality and development and includes ultra high precision air
gauging (up to 0.1mm accuracy), a three micron accuracy
measuring center, environmental test chambers and a tensile load
tester.

The specialty fiber components and assembly
business is supported by a Class 10,000 clean room, Electro
Static Discharge (ESD) flooring, high vacuum plasma
vapor deposition (PVD) equipment, an RF induction
heating system, a high power CO2 laser machining and
cleaving center, and a scanning electron microscope.

Research and Development

As of April 30, 2004, we had 74 employees
engaged in research and development, including 3 engineers with
Ph.Ds. Our research and development expenses were
$9.3 million, $40.2 million and $28.1 million in
fiscal 2004, 2003 and 2002, respectively.

We believe continued investment in technology is
critical to our future success. We concentrate our research and
development activities on enhancing our existing products and
developing new products to meet the evolving needs of our
customers. Our interaction with customers throughout the product
design process enables us to anticipate emerging technological
trends in the networking industry and focus our research and
development efforts on addressing these needs.

Technology and Intellectual Property

Stratos has a rich history of product innovation
and has been a pioneer in developing several optical devices.
This innovation has allowed the Company to amass a strong IP
portfolio, certain segments of which it has crossed-licensed
with leading technology companies including Agilent, IBM and
Tyco. The Company collects licensing fees through upfront
payments and/or ongoing royalties. As of April 30, 2004,
Stratos had approximately 105 U.S. patents issued and 32
pending patent applications for innovations in the areas of
optoelectronics, optical interconnects and RF and microwave
applications. The Company protects its other proprietary
information such as know-how through trade secrets.



| |                                                       
| | ------------------------------------------------------
| | Active Components and Subsystems
    (Optoelectronics)

Stratos has a number of issued patents and
pending patent applications in the areas of electromagnetic
interference (EMI) and radio frequency interference
(RFI), specifically relating to the electromagnetic
energy emissions from the space between the optoelectronic
device and the chassis of the host device. Additionally, Stratos
conceived and developed the idea of a hot pluggable
optoelectronic device and maintains patents for its electrical
grounding solutions, which essentially every optoelectronic
transceiver including the GBICs, SFPs, SFFs and 1x9s must use to
meet EMI standards.

Separate from providing solutions for EMI and RFI
problems, Stratos also has patents covering certain aspects of
the electrical circuit architecture or electrical circuit
operation of optoelectronic devices. These patents cover
functions such as a laser feedback system, a laser diode
stabilizer, a transceiver module having

11



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variable voltage capability, and an
optoelectronic transceiver having an adaptable logic level
signal detect output.


In connection with its Paracer acquisition in
2002, Stratos acquired many pending patent applications related
to the emerging field of parallel transmission optoelectronic
devices, such as transmitters, receivers and transceivers. The
Company has two issued patents and eleven pending patent
applications in this area.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Active Integrated Modules and Passive
    Components and Subsystems (Fiber Optics)

Stratos has developed a number of fiber
management solutions that organize optical fibers through
flex circuitry or bonding fibers to flexible
substrates and use a radio frequency identification
(RFID) tag that is specifically applied to fiber
optic systems. These solutions enable operators to organize and
manage their numerous optical fibers interconnecting their host
devices. The RFID system enables operators to associate a
specific optical fiber with a specific port of a host device.
Stratos has eleven issued patents related to the design or
manufacturing of flex circuitry, including optical and
electrical flex circuitry, and has a pending patent application
related to the application of RFID techniques to optical systems.

In addition, Stratos has many issued patents that
relate to various aspects of optical connectors. Stratos also
has patents that cover certain aspects of single fiber ferrules,
multifiber ferrules and metallization of an optical fiber.



| |                                                           
| | ----------------------------------------------------------
| | RF and Microwave Interconnect Products (RF/
    Microwave)

Stratos, through Trompeter and Semflex, has an
intellectual property portfolio consisting of patents and trade
secrets for RF and microwave connectors and cross connects. One
innovation includes a visual indicator to ensure a plug-side
connector is fully engaged with a jack-side connector so as to
form an electrical connection. The visual indication allows the
operator to notice from a distance that the electrical hardware
is properly engaged, which is more cost effective than an
operator having to manually verify each connection. This
function is especially valuable when the electrical hardware is
in buildings which are subject to shock and vibration.

Regulatory Matters

Our properties and business operations are
subject to a wide variety of federal, state, local, and foreign
environmental, health and safety laws and other legal
requirements, including those relating to the storage, use,
discharge and disposal of toxic, volatile or otherwise hazardous
substances used in our manufacturing processes. If we fail to
obtain required permits or otherwise fail to operate within
these or future legal requirements, we may be required to pay
substantial penalties, suspend our operations or make costly
changes to our manufacturing processes or facilities. Although
we believe that we are in compliance and have complied with all
applicable legal requirements, we may be required to incur
additional costs to comply with current or future legal
requirements.

12



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Employees

As of May 1, 2004, the Company had
approximately 598 employees, including 21 senior level corporate
executives and administrative employees. The table below
categorizes employees by function and location.

Stratos Employees at May 1,
2004

|                            |  |           |     |           |  |            |     |       |  |  |    |  |  |  |     | 
|--------------------------- |  | --------- | --- | --------- |  | ---------- | --- | ----- |  |  | -- |  |  |  | --- | 
|                            |  | Chicago,  |     | Mesa,     |  | Haverhill, |     |      
|Category                    |  | Illinois* |     | Arizona** |  | UK         |     | Total
|                            |  |           |     |           |  |            |     |      
|Manufacturing               |  |           | 119 |           |  |            | 223 |       |  |  | 59 |  |  |  | 401 | 
|Design & Development        |  |           | 51  |           |  |            | 8   |       |  |  | 16 |  |  |  | 75  | 
|Process Engineering         |  |           | 15  |           |  |            | 3   |       |  |  | 2  |  |  |  | 20  | 
|Sales/ Marketing            |  |           | 22  |           |  |            | 22  |       |  |  | 6  |  |  |  | 50  | 
|Finance                     |  |           | 7   |           |  |            | 8   |       |  |  | 3  |  |  |  | 18  | 
|Human Resources             |  |           | 2   |           |  |            | 3   |       |  |  | 1  |  |  |  | 6   | 
|Executive/ Admin/ IT/ Legal |  |           | 16  |           |  |            | 11  |       |  |  | 1  |  |  |  | 28  | 
|                            |  |           |     |           |  |            |     |       |  |  |    |  |  |  |     | 
|Total Employees             |  |           | 232 |           |  |            | 278 |       |  |  | 88 |  |  |  | 598 | 
|                            |  |           |     |           |  |            |     |       |  |  |    |  |  |  |     | 



---



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Includes 2 manufacturing, 12 research &
    development, and 2 administrative personnel located in
    Melbourne, Florida; 1 research & development and 2
    sales/marketing personnel located in Mountain View, CA; and 2
    sales/marketing personal in Hauppauge, NY.



|   |                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------
|** | Includes 1 manufacturing, 7 research &
    development, 15 sales and marketing, and 12 administrative
    personnel located in Westlake, CA.

13



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Executive Officers of the Registrant

The following table sets forth information
concerning our executive officers as of July 22, 2004:

|                     |  |     |    |           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------- |  | --- | -- | --------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                 |  | Age |    | Positions
|                     |  |     |    |          
|James W. McGinley    |  |     | 49 |           |  | President, Chief Executive Officer and Director
    since April 2000. Mr. McGinley was President of Methode
    Electronics, Inc. from August 1998 through June 2000.
    Mr. McGinley served as President of Methode
    Electronics Optical Interconnect Products Division from
    January 1995 through July 1998. Mr. McGinley was a director
    of Methode until 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|David A. Slack       |  |     | 51 |           |  | Executive Vice President of Finance and Chief
    Financial Officer since September 2002 and Vice President,
    Finance and Chief Financial Officer since April 2000.
    Mr. Slack served as the Chief Financial Officer of the
    Optoelectronics Group of Methode Electronics from March 27,
    2000 through April 2000. From 1993 through March 27, 2000,
    Mr. Slack served as Director of Finance, Chief Financial
    Officer and Director of Information Technology of Bretford
    Manufacturing, Inc., a manufacturer of furniture, carts, mounts,
    screens and other equipment.                                                                                                                                                                                                                
|Richard C.E. Durrant |  |     | 43 |           |  | Executive Vice President of the Passive
    Subsystems Group since September 2002 and the Managing Director
    of our Stratos Limited subsidiary since its acquisition in
    December 1998. Mr. Durrant previously served as the
    Managing Director of Methode Fibre Optic Europe Ltd. from 1997
    through April 2000. From 1993 through 1997 Mr. Durrant
    served as Sales Director of Mikon Ltd., a Methode subsidiary.                                                                                                                                                                                                                                                                                                                                                                                
|Joe D. Norwood       |  |     | 62 |           |  | Executive Vice President of Stratos and President
    and CEO of Sterling Holding Company. Mr. Norwood has served
    as President and Chief Executive Officer of Sterling since 2001.
    Also, in 2002 and 2003, Mr. Norwood served as a director of
    Corona Optical systems, Inc. During 2001, he served as Executive
    Vice President and Chief Operating Officer of Sterling; from
    1997 to 2001, he was President of Sterlings Trompeter
    Electronics subsidiary. He served as Vice President of Amphenol
    Corporation in charge of their RF/ Microwave and Fiber Optic
    Products divisions from 1986 until 1992 and again from 1995 to
    1996 as a Vice President of their Time Fiber Communications
    subsidiary. From 1992 to 1994 he served as a Vice President of
    ITT Cannon.

Geographic Areas

Information concerning our operations in
different geographic regions is set forth in Note 15 to our
financial statements included in Item 15 of this annual
report on Form 10-K.

Available Information

We make available free of charge through our
website, www.stratoslightwave.com, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is
electronically filed with the Securities and Exchange
Commission. These reports may also be obtained without charge by
contacting Investor Relations, Stratos International, Inc, 7444
West Wilson Avenue, Chicago, Illinois 60706, phone 708-867-9600.
Our

14



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##### Table of Contents



Internet website and the information contained
therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K. You may
read and copy any materials we file with the SEC at the
SECs Public Reference Room at 450 Fifth Street, N.W.,
Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site at
www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC.







|        |            
|------- | -----------
|Item 2. | Properties.

|                     |  |                                                                                                                                                                        |  |         |  |                                   
|-------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- |  | ----------------------------------
|                     |  |                                                                                                                                                                        |  |         |  | Own vs. Lease                     
|Location             |  | Function                                                                                                                                                               |  | Sq. Ft. |  | (Lease Expiration)                
|                     |  |                                                                                                                                                                        |  |         |  |                                   
|Active Operations    |  |                                                                                                                                                                        |  |         |  |                                   
|Chicago, IL          |  | Corporate headquarters, administrative offices,
    sales and marketing, research and development facilities and
    primary optical subsystems manufacturing facility |  | 89,360  |  | Owned                             
|Mesa, AZ             |  | RF/ Microwave administrative offices, sales and
    marketing, research & development
    facilities and manufacturing facility                                        |  | 50,000  |  | Owned                             
|Haverhill, UK        |  | Administrative offices, sales and marketing,
    research and development facilities and manufacturing facility
    for fiber optic passive products                   |  | 30,000  |  | Leased (2010)                     
|Westlake Village, CA |  | RF/ Microwave administrative, sales &
    marketing office                                                                                                             |  | 11,668  |  | Leased (Nov/2004)                 
|Melbourne, FL        |  | Military Subsystems administrative offices and
    research & development facilities                                                                                   |  | 7,752   |  | Leased (June/2007)                
|                    
|Inactive Facilities  |  |                                                                                                                                                                        |  |         |  |                                   
|Chicago, IL          |  | Limited use                                                                                                                                                            |  | 61,590  |  | Owned currently being sold        
|Mountlake, WA        |  | Limited use                                                                                                                                                            |  | 2,178   |  | Leased (Aug/2006) $7,100 a month  
|Mountain View, CA    |  | Limited use                                                                                                                                                            |  | 38,000  |  | Leased (Aug/2007) $62,000 a month 
|Hauppauge, NY        |  | Limited use                                                                                                                                                            |  | 20,000  |  | Leased (Sept/2004) $20,000 a month






|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.

Legal Proceedings

From time to time, the Company becomes involved
in various lawsuits and legal proceedings that arise in the
normal course of business. The Company believes that the
resolution of these lawsuits and legal proceedings will not have
a significant effect on the Companys business, financial
condition or results of operations.

The Company and certain of its directors and
executive officers have been named as defendants in purported
class action lawsuits filed in the United States District Court,
Southern District of New York, The first of these lawsuits,
filed on July 25, 2001, is captioned Kucera v. Stratos
Lightwave, Inc. et.al. No. 01 CV 6821. Three other similar
lawsuits have also been filed against the Company and certain of
its directors and executive officers. The complaints also name
as defendants the underwriters for the Companys initial
public

15



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##### Table of Contents



offering. The complaints are substantially
identical to numerous other complaints filed against other
companies that went public over the last several years. The
complaints generally allege, among other things, that the
registration statement and prospectus from the Companys
June 26, 2000 initial public offering failed to disclose
certain alleged actions by the underwriters for the offering.
The complaints charge the Company and two or three of its
directors and executive officers with violations of
Sections 11 and 15 of the Securities Act of 1933, as
amended, and/or Section 10(b) and Section 20(a) to the
Security Exchange Act of 1934, as amended. The complaints also
allege claims solely against the underwriting defendants under
Section 12(a)(2) of the Securities Act of 1933, as amended.


In 2003, the Company agreed to a Memorandum of
Understanding, which reflects a settlement of these class
actions as between the purported class action plaintiffs, the
Company and the defendant officers and directors, and the
Companys liability insurer. Under the terms of the
Memorandum of Understanding, the Companys liability
insurers will pay certain sums to the plaintiffs, with the
amount dependent upon the plaintiffs recovery from the
underwriters in the IPO class actions as a whole. The plaintiffs
will dismiss with prejudice their claims against the Company and
its officers and directors, and the Company will assign to the
plaintiffs certain claims that it may have against the
underwriters. The plaintiffs have filed with the court a motion
for preliminary approval of the settlement, which, if granted,
will lead to the mailing of class-wide notices of the settlement
and a hearing date for approval of the settlement.

In February 2002, Stratos acquired Tsunami
Optics, Inc. The acquisition agreement contemplated a potential
earn-out payment of up to $18 million in common stock if
certain financial targets were achieved following the
acquisition. In June 2002, Catherine Lego, as representative of
the former Tsunami shareholders, filed a lawsuit against the
Company alleging, among other things, that the Company breached
the acquisition agreement by refusing to allow Tsunami to
operate as a separate subsidiary, firing the Tsunami executives
that it believed were necessary to operate the business and
thereby making it impossible for Tsunami to achieve the targets
required to receive any earnout payments. The complaint also
alleged fraud and violations of federal securities laws in
connection with the acquisition of Tsunami. Plaintiffs sought
$38 million in damages or the rescission of the acquisition
agreement. The Company filed a counterclaim against
Ms. Lego and several other shareholders and officers of
Tsunami which alleges fraud, breach of contract and violations
of federal securities laws. The counterclaim seeks compensatory
and punitive damages.

In April 2004, the Court entered an order in
favor of the Company to dismiss with prejudice 11 of 13 counts
of the plaintiffs complaint. The alleged damages sought
for the plaintiffs two remaining claims (breach of
contract and rescission) remain unchanged at $38 million.
The Company believes that the plaintiffs remaining claims
are without merit and intends to vigorously defend against these
claims. The court denied the plaintiffs motion to dismiss
the Companys counterclaims of fraud and violations of
federal securities law and granted the plaintiffs motion
to dismiss the allegation of breach of contract. This action is
currently set for trial on October 19, 2004.

In August 2002, James Campbell, the former CEO of
Tsunami, filed a lawsuit against the Company alleging wrongful
termination in breach of his employment contract, fraud and age
discrimination. Campbell seeks unspecified damages, punitive
damages and attorneys fees. The Company believes that this
lawsuit is without merit and intends to vigorously defend
against these claims. This action is currently set for trial on
August 23, 2004.

In March 2003, Alcatel USA, seeking unspecified
damages and alleging breach of contract, breach of warranty,
negligent misrepresentation, fraud and conspiracy in connection
with Alcatels purchase of certain goods from the
defendants over a period spanning 2000 and 2001. The Company
asserted certain counterclaims against Alcatel relating to the
same type of goods at issue in Alcatels complaint. In
April 2004, Alcatel and the Company executed a written
settlement agreement resolving all disputes and the Company
expects that by the end of August 2004, Alcatel and the Company
will execute and deliver mutual releases and the matter will be
dismissed with prejudice.

We are plaintiffs in several lawsuits relating to
our intellectual property rights. The defendants in these
lawsuits include E2O, Inc. (District of Delaware), and
Picolight, Inc. (District of Delaware). In these actions, the
Company alleges that optoelectronic products sold by the
defendants infringe numerous of the Companys

16



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##### Table of Contents



patents. We are seeking monetary damages and
injunctive relief. The defendants in these lawsuits have
asserted various affirmative defenses and filed counterclaims
and contend that the patents are invalid, unenforceable and/or
not infringed by the products sold by the defendants. For
example, Picolight has asserted an antitrust counterclaim based
on the alleged unenforceability of our patents. If successful,
defendants are seeking attorneys fees and costs in
connection with the lawsuits. We intend to pursue these lawsuits
and defend against these counterclaims vigorously. On
November 24, 2003, a jury returned a verdict finding that
Picolight infringed six Stratos patents. The trial is now
proceeding to the patent validity and damages phases.


The Companys management believes that the
resolution of these lawsuits will not have a significant effect
on the Companys business or financial condition.

During fiscal 2003 and 2002, the Company settled
several patent infringement cases. As a result of these
settlements, the Company received lump-sum payments of
approximately $5.8 million in fiscal 2003, and
$1.0 million in fiscal 2002, which were recorded as license
fees and royalties in the consolidated statement of operations.
In addition, the Company received $2.5 million in fiscal
2004 and will receive $5.5 million in fiscal 2006,
respectively, from the settlement of one case in fiscal 2003.
The present value of these amounts were recorded as license fees
and royalties in the fiscal 2003 consolidated statement of
operations. Legal fees in connection with some of these matters
of approximately $1.0 million in fiscal 2002 were
classified in general and administrative expenses. In addition,
the Company is entitled to fixed future payments and/or ongoing
royalty payments based on a percentage of sales of licensed
products. The timing and/or the amount of these payments is not
within the Companys control. Also, in certain
circumstances, the Company is entitled to other future economic
benefits. Subsequent to April  30, 2004, the Company also
received a net payment of $2.0 million related to the
settlement of a patent infringement case.

In addition, certain litigation and other claims
arising in the normal course of business are pending against the
Company. Management believes that the resolution of this
Companys litigation will not have a significant effect on
the consolidated financial statements.






|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.

There were no matters submitted to a vote of
security holders during the three-month period ended
April 30, 2004.

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##### Table of Contents






PART II






|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities.

Our common stock is currently traded on the
Nasdaq National Market under the symbol STLW. The
following table sets forth the range of high and low closing
sales prices of our common stock for the periods indicated:

|                                      |  |      |      |     |  |   |      | 
|------------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                      |  | High |      | Low
|                                      |  |      |      |    
|Fiscal Year Ended April 30,
    2004: |  |      |      |     |  |   |      | 
|First Quarter                         |  | $    | 6.76 |     |  | $ | 4.19 | 
|Second Quarter                        |  | $    | 6.41 |     |  | $ | 4.97 | 
|Third Quarter                         |  | $    | 8.29 |     |  | $ | 6.08 | 
|Fourth Quarter                        |  | $    | 7.42 |     |  | $ | 4.95 | 
|                                     
|Fiscal Year Ended April 30,
    2003: |  |      |      |     |  |   |      | 
|First Quarter                         |  | $    | 2.94 |     |  | $ | 0.76 | 
|Second Quarter                        |  | $    | 3.69 |     |  | $ | 0.25 | 
|Third Quarter                         |  | $    | 8.83 |     |  | $ | 3.17 | 
|Fourth Quarter                        |  | $    | 4.48 |     |  | $ | 2.63 | 

The high and low closing sales prices above have
been restated, when applicable, to reflect a 1 for 10 reverse
split effected on October 21, 2002.

The closing price of our common stock on
July 22, 2004 was $4.25. The approximate number of
stockholders of record on July 22, 2004 was 467, excluding
shares held in street name.

We have never declared or paid dividends on our
common stock and currently do not intend to pay dividends in the
foreseeable future so that we may reinvest our earnings in the
development of our business. Any payment of dividends in the
future will be at the discretion of the Board of Directors of
the Company.

Stratos registration statement on
Form S-1 filed under the Securities Act of 1933, Commission
File No. 333-34864, was declared effective by the
Commission on June 26, 2000. As adjusted for the 1-for-10
reverse stock split in October, 2002, a total of
1,006,250 shares of our common stock were registered
pursuant to this registration statement. The managing
underwriters for the offering were Lehman Brothers, CIBC World
Markets, U.S. Bancorp Piper Jaffray, Robert W.
Baird & Co., Tucker Anthony Cleary Gull, and Fidelity
Capital Markets, a division of National Financial Services
Corporation.

These shares were sold by Stratos at an initial
public offering price of $210.00 per share. The aggregate
underwriting discount paid in connection with the offering was
$14,791,875.

The net proceeds from the offering, after
deducting the underwriting discount and the estimated offering
expenses to be paid by Stratos, were approximately
$195 million. Uses of proceeds to date include
$134.4 million for general corporate purposes and the
purchase of equipment and facilities, payments of
$17.1 million in connection with various acquisitions,
repayment of $2.7 million of advances from a Methode
Electronics Inc. (Methode) subsidiary, and $333,000
for repayment of a note assumed in connection with the
acquisition of our Stratos Ltd. subsidiary. The remainder of the
proceeds will be used for general corporate purposes, including
working capital, capital expenditures, research and development
and the payment of any dividends that may be declared by the
Board of Directors of the Company. Pending these uses, the
remaining net proceeds have been invested in short-term interest
bearing, investment grade marketable securities.

Other than the repayment of advances from a
Methode subsidiary described above and the payment of the
additional purchase price in connection with our Stratos
Lightwave-Florida acquisition which was paid to two former
officers (and the payment of salaries and expense reimbursements
to employees in the ordinary course of business), none of the
net proceeds of the offering have been paid, directly or
indirectly, to any

18



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##### Table of Contents



Stratos director or officer or any of their
associates, to any persons owning 10 percent or more of our
common stock, or to any Stratos affiliate.


Equity Compensation Plan Information

The following table provides information about
shares of our common stock that may be issued upon exercise of
stock options under all of our existing equity compensation
plans as of April 30, 2004.

|                                                               |       |                      |         |                      |  |                         |      |      |  |  |         |         | 
|-------------------------------------------------------------- | ----- | -------------------- | ------- | -------------------- |  | ----------------------- | ---- | ---- |  |  | ------- | ------- | 
|                                                               |       |                      |         |                      |  | Number of securities   
|                                                               |       |                      |         |                      |  | remaining available for
|                                                               |       | Number of securities |         |                      |  | future issuance under  
|                                                               |       | to be issued         |         | Weighted-average     |  | equity compensation    
|                                                               |       | upon exercise of     |         | exercise price of    |  | plans (excluding       
|                                                               |       | outstanding options, |         | outstanding options, |  | securities reflected   
|                                                               |       | warrants and rights  |         | warrants and rights  |  | in column(a))          
|Plan category                                                  |       | (a)                  |         | (b)                  |  | (c)                    
|                                                               |       |                      |         |                      |  |                        
|Equity compensation plans approved by security
    holders     |       |                      | 606,144 |                      |  | $                       | 9.70 |      |  |  | 214,651 |        
|Equity compensation plans not approved by
    security holders |       |                      | 39,024  |                      |  | $                       | 6.58 |      |  |  | 75,976  |        
|                                                               |       |                      |         |                      |  |                         |      |      |  |  |         |        
|                                                               | Total |                      |         | 645,168              |  |                         | $    | 9.51 |  |  |         | 290,627 | 
|                                                               |       |                      |         |                      |  |                         |      |      |  |  |         |        

The Companys only equity compensation plan
not approved by security holders is the Stratos Lightwave, Inc.
2002 Stock Plan for Acquired Companies (the 2002
Plan). Following shareholder approval of the Stratos
Lightwave, Inc. 2003 Stock Plan (the 2003 Plan) on
November 6, 2003, no additional awards may be granted under
the 2002 Plan. The approval of the 2003 Plan, however, has not
affected and will not affect any awards granted under the 2002
Plan prior to November 6, 2003. See Note 8 to our
financial statements included in Item 15 of this Annual
Report on Form 10-K.






|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

You should read the following selected
consolidated financial data in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the related notes included elsewhere in
this annual report on Form 10-K.

The consolidated statement of operations data set
forth below for the fiscal years ended April 30, 2004, 2003
and 2002 and the consolidated balance sheet data as of
April 30, 2004 and 2003 are derived from, and are qualified
by reference to, our audited consolidated financial statements
included elsewhere in this annual report on Form 10-K. The
consolidated statement of operations data set forth below for
the fiscal year ended April 30, 2001 and 2000 and the
consolidated balance sheet data as of April 30, 2002, 2001
and 2000 are derived from consolidated audited financial
statements not included in this report.

19



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##### Table of Contents



|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |        |        | 
|------------------------------------------------------------------------------ | ----------------------------- | ----------------------------------------------- | ------- | ------ | ------ | ---- | -------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                                                               |                               |                                                
|                                                                               |                               | Fiscal Year Ended April 30,                    
|                                                                               |                               |                                                
|                                                                               |                               | 2004                                            |         | 2003   |        | 2002 |          | 2001   |         | 2000
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |     
|                                                                               |                               |                                                
|                                                                               |                               | (In thousands, except share and per share data)
|Statement of Operations Data:                                                  |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Revenue:                                                                       |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|                                                                               | Net sales                     |                                                 | $       | 49,379 |        |      | $        | 37,236 |         |      | $       | 56,387 |         |   | $       | 126,902 |         |   | $      | 71,785 |       
|                                                                               | License fees and royalties    |                                                 |         | 1,444  |        |      |          | 14,398 |         |      |         | 3,622  |         |   |         | 4,873   |         |   |        | 1,459  |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|                                                                               |                               |                                                 | 50,823  |        |        |      | 51,634   |        |         |      | 60,009  |        |         |   | 131,775 |         |         |   | 73,244 |       
|Cost and expenses:                                                             |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|                                                                               | Cost of sales(1)              |                                                 |         | 42,317 |        |      |          | 63,114 |         |      |         | 64,713 |         |   |         | 89,617  |         |   |        | 48,064 |       
|                                                                               | Research and development(2)   |                                                 |         | 9,274  |        |      |          | 40,208 |         |      |         | 28,087 |         |   |         | 14,729  |         |   |        | 7,045  |       
|                                                                               | Sales and marketing           |                                                 |         | 8,225  |        |      |          | 7,063  |         |      |         | 7,999  |         |   |         | 9,146   |         |   |        | 6,724  |       
|                                                                               | General and administrative(3) |                                                 |         | 20,666 |        |      |          | 45,675 |         |      |         | 37,349 |         |   |         | 13,367  |         |   |        | 5,361  |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|                                                                               |                               | Total costs and expenses                        |         |        | 80,482 |      |          |        | 156,060 |      |         |        | 138,148 |   |         |         | 126,859 |   |        |        | 67,194 | 
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Income (loss) from operations                                                  |                               |                                                 | (29,659 | )      |        |      | (104,426 | )      |         |      | (78,139 | )      |         |   | 4,916   |         |         |   | 6,050  |       
|Investment income, net                                                         |                               |                                                 | 777     |        |        |      | 1,117    |        |         |      | 3,368   |        |         |   | 7,770   |         |         |   |       |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Income (loss) before income taxes                                              |                               |                                                 | (28,882 | )      |        |      | (103,309 | )      |         |      | (74,771 | )      |         |   | 12,686  |         |         |   | 6,050  |       
|Provision for income taxes (credit)                                            |                               |                                                 | (1,797  | )      |        |      |         |        |         |      | (2,581  | )      |         |   | 3,510   |         |         |   | 2,260  |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Income (loss) before cumulative effect of a
    change in accounting principle |                               |                                                 | (27,085 | )      |        |      | (103,309 | )      |         |      | (72,190 | )      |         |   | 9,176   |         |         |   | 3,790  |       
|Cumulative effect of a change in accounting
    principle                      |                               |                                                 |        |        |        |      | (16,982  | )      |         |      |        |        |         |   |        |         |         |   |       |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Net income (loss)                                                              |                               |                                                 | (27,085 | )      |        |      | (120,291 | )      |         |      | (72,190 | )      |         |   | 9,176   |         |         |   | 3,790  |       
|Preferred stock dividend requirements                                          |                               |                                                 | (142    | )      |        |      |         |        |         |      |        |        |         |   |        |         |         |   |       |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Net income (loss) attributable to common
    shareholders                      |                               | $                                               | (27,227 | )      |        | $    | (120,291 | )      |         | $    | (72,190 | )      |         | $ | 9,176   |         |         | $ | 3,790  |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Net income (loss) per share, basic and diluted:(4)                             |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Before cumulative effect of a change in
    accounting principle               |                               | $                                               | (2.60   | )      |        | $    | (14.12   | )      |         | $    | (11.06  | )      |         | $ | 1.47    |         |         | $ | 0.70   |       
|Cumulative effect of a change in accounting
    principle                      |                               |                                                 |        |        |        |      | (2.32    | )      |         |      |        |        |         |   |        |         |         |   |       |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Net income (loss)                                                              |                               |                                                 | (2.60   | )      |        |      | (16.44   | )      |         |      | (11.06  | )      |         |   | 1.47    |         |         |   | 0.70   |       
|Preferred stock dividend requirements                                          |                               |                                                 | (0.01   | )      |        |      |         |        |         |      |        |        |         |   |        |         |         |   |       |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Net income (loss) per share attributable to
    common shareholders            |                               | $                                               | (2.61   | )      |        | $    | (16.44   | )      |         | $    | (11.06  | )      |         | $ | 1.47    |         |         | $ | 0.70   |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|Weighted average number of common shares
    outstanding                       |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|                                                                               | Basic                         |                                                 |         | 10,444 |        |      |          | 7,317  |         |      |         | 6,525  |         |   |         | 6,246   |         |   |        | 5,403  |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       
|                                                                               | Diluted                       |                                                 |         | 10,444 |        |      |          | 7,317  |         |      |         | 6,525  |         |   |         | 6,281   |         |   |        | 5,403  |       
|                                                                               |                               |                                                 |         |        |        |      |          |        |         |      |         |        |         |   |         |         |         |   |        |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Cost of sales for fiscal 2004, 2003 and 2002
    includes $1,925, $6,805 and $13,835, respectively, for charges
    for obsolete and slow moving inventory and $363, $900 and
    $8,300, respectively, of expenses related to the restructuring
    of operations. In addition, cost of sales for fiscal 2003
    includes $16,400 of charges for impairment of long-lived assets.
    See Note 4 to Consolidated Financial Statements.

20



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Research and development expenses for fiscal 2003
    includes $16,900 of charges for impairment of long-lived assets
    and a $2,070 charge to in-process research and development.
    Fiscal 2004 and 2003 includes $475 and $1,100, respectively, of
    expenses related to the restructuring of operations. Research
    and development expenses for fiscal 2002 include $6,300 of
    expenses as the result of the Companys change of its
    policy on research and development expenses. Such expenses would
    have been classified as cost of sales under the previous policy.
    It is not practicable to determine the effect this change would
    have had on prior years. See Note 4 to Consolidated
    Financial Statements.
|   
|(3) | General and administrative expenses for fiscal
    2004 includes $910 of charges for impairment of long-lived
    assets, $740 of lease obligations for limited use facilities,
    and $2,100 for the settlement of litigation, offset in part by a
    $1,200 gain on the sale of Bandwidth Semiconductor LLC. Fiscal
    2003 includes $28,400 of charges for impairment of goodwill and
    $3,800 of charges for impairment of long-lived assets. General
    and administrative expenses for fiscal 2004, 2003 and 2002
    include $545, $910 and $22,400, respectively, of expenses
    related to the restructuring of operations. See Notes 3 and
    4 to Consolidated Financial Statements.                                             
|   
|(4) | Net income (loss) per share for fiscal 2002, 2001
    and 2000 has been restated to reflect a 1 for 10 reverse split
    effected on October 21, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                            |  |                                   |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|------------------------------------------- |  | --------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                            |  |                                  
|                                            |  | As of April 30,                  
|                                            |  |                                  
|                                            |  | 2004                              |         | 2003 |  | 2002 |         | 2001 |  | 2000
|                                            |  |                                   |         |      |  |      |         |      |  |     
|                                            |  |                                  
|                                            |  | (In thousands, except share data)
|Balance Sheet Data:                         |  |                                   |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|Cash and cash equivalents                   |  | $                                 | 15,501  |      |  | $    | 43,649  |      |  | $    | 61,020  |  |  | $ | 125,438 |  |  | $ | 537    | 
|Working capital                             |  |                                   | 52,974  |      |  |      | 65,100  |      |  |      | 98,040  |  |  |   | 178,514 |  |  |   | 17,748 | 
|Total assets                                |  |                                   | 129,050 |      |  |      | 118,175 |      |  |      | 251,776 |  |  |   | 280,448 |  |  |   | 61,137 | 
|Long-term obligations, less current portion |  |                                   | 801     |      |  |      | 298     |      |  |      | 6,569   |  |  |   |        |  |  |   |       | 
|Shareholders equity                        |  |                                   | 104,779 |      |  |      | 101,045 |      |  |      | 220,480 |  |  |   | 254,899 |  |  |   | 52,962 | 






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

The following discussion of our financial
condition and results of operations should be read in
conjunction with the consolidated financial statements and
related notes included elsewhere in this annual report on
Form 10-K. 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
several factors, including the cautionary statements included in
Exhibit 99 to this annual report on
Form 10-K.

Overview

In November 2003, the Company acquired Sterling
Holding Company (Sterling), a privately-held company
based in Mesa, Arizona that designs and manufactures Radio
Frequency (RF) and Microwave interconnect products
via its two operating units, Trompeter Electronics, Inc. and
Semflex, Inc. The Company completed this merger on
November 6, 2003, following approval by both Company and
Sterling shareholders. At closing, Sterling became a
wholly-owned subsidiary of the Company, with Sterling
shareholders receiving 6,082,000 shares of the
Companys common stock, which represented approximately 82%
of the Companys total shares outstanding immediately prior
to the consummation of the merger. Of such amount,
608,189 shares were placed in escrow to provide
indemnification to the Company with respect to certain matters
provided for in the merger agreement. Company common shares
issued in this transaction were valued at $5.09 a share, the
closing price on July 2, 2003, the day the merger was
announced. The Company also issued 50,000 shares of
Series B redeemable preferred stock with a face value of
$5.0 million and a contingent value of up to an additional
$6.25 million based on certain events, including the future
performance of the Companys share price. The total
purchase consideration was $38.8 million, consisting of
common and preferred shares of Company stock valued at
$36.0 million and $2.8 million of acquisition related
costs. Our

21



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##### Table of Contents



financial statements, including our results of
operations, commencing on November 6, 2004, reflect the
acquisition of Sterling.


In connection with the transaction, the Company
expanded its Board of Directors to nine members. The new board
is comprised of four members of the Companys Board at the
time of the closing of the merger, four members from
Sterlings Board, and an additional director chosen by
Sterling.

On May 19, 2004, we announced that our board
of directors had decided to explore various strategic
alternatives to maximize shareholder value, including a possible
sale of the Company. In that connection, our board of directors
has formed a committee and has retained CIBC World Markets Corp.
as its exclusive financial advisor. There can be no assurance
that a transaction will result involving the Company.

We develop, manufacture and sell optical, RF, and
microwave components and subsystems for various applications and
multiple end markets. These subsystems are designed for use in
storage, data networking, metro and wide area telecom networks,
military, aerospace, video, government security, oil and gas,
and other industrial markets and applications. We plan to
continue to diversify our end markets and expand our product
offerings through internal and, possibly, external growth. Our
products are compatible with the various standards used in these
applications, including Gigabit Ethernet, Fast Ethernet, Fibre
Channel, and synchronous optical network (SONET),
and other standards dictated by the application of our products.

Our net sales are derived from the sale of
optical components and subsystems to original equipment
manufacturers (OEMs) and local resellers, and from
the sale of RF and microwave components to telecom service
providers, OEMs, military and government users, and distributors
and resellers. Our net sales have fluctuated from period to
period due to customer demand for our products, the size and
timing of customer orders, our ability to deliver in the
relevant period and any canceled, delayed or rescheduled orders
in the relevant period. We determine inventory reserves in light
of the rapid technological change experienced in our industry on
a product-by-product basis. While it is likely that obsolescence
due to rapid technological change will continue, the timing and
amount of this obsolescence cannot be predicted with certainty.

The average unit prices of many of our products
generally decrease as the products mature in response to factors
such as increased competition, the introduction of new products
and increased unit volumes. We anticipate that average selling
prices of many of our products will continue to decline in
future periods, although the timing and degree of the declines
cannot be predicted with any certainty. We must continue to
develop and introduce new products that incorporate features
that can be sold at higher average selling prices, on a timely
basis. There can be no assurance that we will be able to
introduce new products to offset the anticipated decrease in the
average selling prices of our products.

License fees and royalties represent payments
received from licensees of our patented technology, which is
also used by us in our optical subsystems. These license
agreements generally provide for up-front payments and/or future
fixed payments or ongoing royalty payments based on a percentage
of sales of the licensed products. The timing and amounts of
these payments is beyond our control. Accordingly, the amount
received in any given period is expected to vary significantly.
The duration of these license agreements extend generally until
the expiration of the licensed patents which range from 2004 to
2024. We will consider entering into similar agreements in the
future, however, we are not able to predict whether we will
enter into any additional licenses in the future and, if so, the
amount of any license fees or royalties.

Our cost of sales consists of materials, salaries
and related expenses for manufacturing personnel and
manufacturing overhead. We purchase several key components used
in the manufacture of our products from a limited number of
suppliers. We have periodically experienced shortages and
delivery delays for these materials. In some circumstances, we
maintain an inventory of limited source components to decrease
the risk of shortage. If we overestimate our requirements, we
may have excess inventory of these components. The majority of
our products are designed and manufactured in our own
facilities. In the future we may expand the volume of products
manufactured by third parties. In order to remain competitive,
we must continually reduce our manufacturing costs through
design and engineering innovations and increases in
manufacturing efficiencies. There can be no assurance that we
will be able to reduce our manufacturing costs.

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Some of our critical components used in
production of certain of our products are purchased from a key
supplier which has been acquired by a competitor of the Company.
If this supplier increases prices, reduces quantities available
to us or ceases to supply us, our business and results of
operations may be significantly harmed.

Research and development expenses consist
primarily of salaries and related expenses for design engineers,
scientists and other technical personnel, depreciation of test
and prototyping equipment, and tooling. Research and development
expenses also consist of materials and operating expenses
related to major product development projects. We charge all
research and development expenses to operations as incurred. We
believe that continued investment in research and development is
critical to our long-term business success. We intend to
continue to invest in research and development programs in
future periods in order to enhance performance or reduce the
cost of current optical, RF and microwave products, and develop
new optical, RF, and microwave products. There can be no
assurance that these goals will be achieved or that our levels
of spending and project selection will be sufficient and
effective.

We market and sell our products domestically and
internationally through our direct sales force, local resellers
and manufacturers representatives. Sales and marketing
expenses consist primarily of personnel costs, including sales
commissions, travel costs, outside consulting services, and
product marketing and promotion costs. We expect to continue to
make significant expenditures for sales and marketing services.

General and administrative expenses consist
primarily of personnel costs for our administrative and
financial groups, as well as legal, accounting, information
technology and other professional fees. We expect to continue to
make significant expenditures for general and administrative
services.

Critical Accounting Policies



| |                    
| | -------------------
| | Accounts Receivable

We sell products primarily to various OEMs and
distributors. Sales to these customers have varying degrees of
collection risk associated with them. Management assesses
collection risk and the related allowance for doubtful accounts
based on the aging of accounts, historical experience and the
customers financial condition.



| |                   
| | ------------------
| | Inventory Reserves

It is our policy to reserve 100% of the value of
inventory we specifically identify and consider obsolete or
excessive to fulfilling future sales estimates. We define
obsolete inventory as inventory that will no longer be used in
the manufacturing process or items that have potential quality
problems. Excess inventory is defined as inventory in excess of
one to two years projected usage depending upon the
product. Excess inventory is determined using our best estimate
of future demand at the time, based upon information then
available to us. In general, our policy is to scrap inventory
determined to be obsolete shortly after the determination is
made and to keep excess inventory for a reasonable amount of
time before it is discarded. Occasionally, changed circumstances
in the marketplace present us with an opportunity to sell
inventory that was previously determined to be excessive and
reserved for. If this occurs, we vigorously pursue such
opportunities.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

We review the carrying value of our long-lived
assets if the facts and circumstances, such as significant
declines in sales, earnings or cash flows or material adverse
changes in the business climate suggest that they may be
impaired. If this review indicates that long-lived assets will
not be recoverable, as determined based on the estimated
undiscounted cash flows of the long-lived asset, impairment is
measured by comparing the carrying value of the long-lived asset
to fair value. Fair value is determined based on quoted market
values, discounted cash flows or appraisals. If an asset is
considered held for sale, we adjust the carrying value of the
underlying assets to fair value, as determined based on the
estimated net realizable proceeds of the assets.

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| |                    
| | -------------------
| | Revenue Recognition

Revenue from product sales, net of trade
discounts, is recognized when title passes, which generally
occurs upon shipment. We handle returns by replacing, repairing
or issuing credit for defective products when returned. We
establish a reserve for returns based on any known and
anticipated returns and accordingly adjust revenue, accounts
receivable and inventories.



| |                 
| | ----------------
| | Customer Returns

It is our policy to establish a reserve for
customer returns based on any known returns and anticipated
returns based on past experience and accordingly adjust revenue,
accounts receivable and inventories.

Customer demand is a changing dynamic.
Occasionally, we have and will receive requests from customers
to accept the return of merchandise for which they had
previously accepted delivery. Although we have no obligation to
do so, each such request is evaluated in light of contemplated
future business from that customer. We will continue to consider
these requests in the future, however, we are not able to
predict the amount of any such returns.

Because we do support several fully franchised
distribution agreements which include provisions for inventory
rotation, certain products covered under these agreements are
returned to us from time to time.



| |                         
| | ------------------------
| | Research and Development

All expenses relative to the development of a new
product, prior to its introduction into production, are
considered research and development expenses. In addition, the
costs of the engineering effort to do significant redesign to
enhance product performance that results essentially in a new
product are also considered to be research and development
expenses. Because the true manufacturability of our products is
not obvious until a period of volume production has occurred,
initial production is considered a part of the development
process. During this phase, a portion of the scrap expense and
yield loss is considered development expense. A product
continues to be considered under development until it matures to
the point where its production yields (volumes) are
consistent with other mature products and any related
engineering effort is predominately dedicated to customer
applications and/or quality support.

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Results of Operations

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

|                                                                      |                            |                             |       |       |       |      |        |       |       |  |        |       |       | 
|--------------------------------------------------------------------- | -------------------------- | --------------------------- | ----- | ----- | ----- | ---- | ------ | ----- | ----- |  | ------ | ----- | ----- | 
|                                                                      |                            |                            
|                                                                      |                            | Fiscal Year Ended April 30,
|                                                                      |                            |                            
|                                                                      |                            | 2004                        |       | 2003  |       | 2002
|                                                                      |                            |                             |       |       |       |     
|Revenue:                                                              |                            |                             |       |       |       |      |        |       |       |  |        |      
|                                                                      | Net sales                  |                             |       | 100.0 | %     |      |        | 100.0 | %     |  |        | 100.0 | %    
|                                                                      | License fees and royalties |                             |       | 2.9   |       |      |        | 38.7  |       |  |        | 6.2   |      
|                                                                      |                            |                             |       |       |       |      |        |       |       |  |        |      
|                                                                      |                            | Total                       |       |       | 102.9 |      |        |       | 138.7 |  |        |       | 106.2 | 
|Cost and expenses:                                                    |                            |                             |       |       |       |      |        |       |       |  |        |      
|                                                                      | Cost of sales              |                             |       | 85.7  |       |      |        | 169.5 |       |  |        | 114.4 |      
|                                                                      | Research and development   |                             |       | 18.8  |       |      |        | 108.0 |       |  |        | 49.8  |      
|                                                                      | Sales and marketing        |                             |       | 16.7  |       |      |        | 19.0  |       |  |        | 14.2  |      
|                                                                      | General and administrative |                             |       | 41.8  |       |      |        | 122.5 |       |  |        | 66.4  |      
|                                                                      |                            |                             |       |       |       |      |        |       |       |  |        |      
|                                                                      |                            | Total costs and expenses    |       |       | 163.0 |      |        |       | 419.0 |  |        |       | 244.8 | 
|Loss from operations                                                  |                            |                             | (60.1 | )     |       |      | (280.3 | )     |       |  | (138.6 | )    
|Investment income, net                                                |                            |                             | 1.6   |       |       |      | 3.0    |       |       |  | 6.0    |      
|                                                                      |                            |                             |       |       |       |      |        |       |       |  |        |      
|Loss before income taxes                                              |                            |                             | (58.5 | )     |       |      | (277.3 | )     |       |  | (132.6 | )    
|Provision for income taxes (credit)                                   |                            |                             | (3.6  | )     |       |      |       |       |       |  | (4.6   | )    
|                                                                      |                            |                             |       |       |       |      |        |       |       |  |        |      
|Loss before cumulative effect of a change in
    accounting principle |                            |                             | (54.9 | )     |       |      | (277.3 | )     |       |  | (128.0 | )    
|Cumulative effect of a change in accounting
    principle             |                            |                             |      |       |       |      | (45.6  | )     |       |  |       |      
|                                                                      |                            |                             |       |       |       |      |        |       |       |  |        |      
|Net Loss                                                              |                            |                             | (54.9 | )     |       |      | (322.9 | )     |       |  | (128.0 | )    
|Preferred Stock dividend requirements                                 |                            |                             | (0.2  | )     |       |      |       |       |       |  |       |      
|Net Loss attributable to common shareholders                          |                            |                             | (55.1 | )%    |       |      | (322.9 | )%    |       |  | (128.0 | )%   
|                                                                      |                            |                             |       |       |       |      |        |       |       |  |        |      

Fiscal Years Ended April 30, 2004 and
2003

Net Sales:Net sales
increased to $49.4 million in fiscal 2004 from
$37.2 million in fiscal 2003. This $12.2 million
increase represents a $9.1 million increase in the net
sales into the military/governmental end market,
$3.3 million increase into the data networking end market,
$1.5 is from an increase into the telecom/metro end market and
$4.4 million from an increase in sales into other end
markets. These increases were offset in part by a
$6.1 million decrease of net sales into the storage end
market. Included in the amounts above is $19.6 million in
sales from product lines acquired in the merger with Sterling.

Excluding the sales attributable to the product
lines acquired from Sterling, sales decreased $7.4 million
in the year ended April 30, 2004 over fiscal 2003. The
decrease in sales was primarily due to lower customer demand due
to the current economic climate and reduced capital spending for
optical networking equipment. Sales were also negatively
impacted by declines in average unit prices for our products
resulting from pricing pressure and changes in product mix. Our
total sales order backlog increased to $13.0 million as of
April 30, 2004 from $5.0 million as of April 30,
2003. This increase reflects a significant increase in the
backlog in our military/governmental end market and
$4.1 million from the merger with Sterling. These increases
were offset partially by decreases reflecting lower customer
demand for our products, customer push-outs and cancellation of
orders, due in part to delays in the launch of new product
programs by our customers in other end markets we service.

License Fees and
Royalties.License fees and royalties
decreased to $1.4 million in fiscal 2004 from
$14.4 million in fiscal 2003. The decrease primarily
relates to lump sum payments of approximately $5.8 million
from the receipt of license and royalty payments in association
with the settlement of several

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patent infringement cases in fiscal 2003. In
addition, the Company recorded in fiscal 2003 the present value
of $2.5 million and $5.5 million of license and
royalty payments received in fiscal 2004 and to be received in
fiscal 2006, respectively, from the settlement of a patent
infringement case. License fees consist of both fixed schedule
payments and contingent payments based on sales volumes of
licensed products.


Cost of Sales and Gross
Margins.Cost of sales decreased to
$42.3 million in fiscal 2004 from $63.1 million in
fiscal 2003. Gross profit as a percentage of net sales, or gross
margin, increased to 14.3% in fiscal 2004 from negative 69.5% in
fiscal 2003. Approximately 68.8 percentage points of the
83.8 percentage point increase in gross margin was the
result of the increase in sales and the reduction in prime costs
and manufacturing costs, mainly charges related to impairment of
long-lived assets in fiscal 2003. Approximately
14.4 percentage points of the increase was due to the
reduction in charges for obsolete and slow moving inventory and
1.4 percentage points was attributable to the sale of
approximately $710,000 of inventory that was previously
considered excess and fully reserved. These factors were offset
by 0.8 percentage points due to expenses related to
restructuring charges.

Cost of sales was charged approximately
$1.9 million, $6.8 million and $13.8 million in
fiscal 2004, 2003 and 2002, respectively, to increase the
reserve for obsolete and excess inventory.

Research and
Development.Research and development
expenses decreased to $9.3 million in fiscal 2004 from
$40.2 million in fiscal 2003. The $30.9 million
decrease was primarily due to a reduction of $16.9 million
in charges related to impairment of long-lived assets and a
$2.0 million reduction in a charge for the write off of
costs of the acquisitions of Tsunami Optics, Inc. and Paracer,
Inc. that was allocated to intangible in-process research and
development. The balance of the $30.9 million decrease was
the result of a $6.7 million decrease in costs of research
and development facilities, $4.5 million decrease in
personnel costs dedicated to research and development and
$1.0 million decrease in material and overhead cost related
to major product development. These decreases were offset by
$200,000 in research and development expenses attributable to
the product lines acquired from Sterling.

Sales and Marketing.Sales and marketing expenses increased to $8.2 million in
fiscal 2004 from $7.1 million in fiscal 2003. This increase
was due to an increase of $1.0 million in sales and
marketing salaries, fringe benefits, bonuses and commissions,
and $200,000 in field sales operating costs supporting our sales
volume. The above amounts include $2.7 million of sales and
marketing expenses attributable to the product lines acquired
from Sterling.

General and
Administrative.General and
administrative expenses decreased to $20.7 million in
fiscal 2004 from $45.7 million in fiscal 2003. This
$25.0 million decrease was due primarily to a reduction of
a $28.4 million charge for goodwill impairment in fiscal
2003, a reduction of $2.9 million in charges related to
impairment of long lived assets other than goodwill, a
$1.0 million decrease in corporate management costs and a
$1.2 million gain on the sale of Bandwidth Semiconductor
LLC. These decreases were offset in part by $2.1 million
for the settlement of litigation, $740,000 of lease obligations
for limited use facilities, a $3.6 million increase in
general expenses and $2.1 million of general and
administrative expenses attributable to the product lines
acquired from Sterling.

We operate in markets that experienced a severe
economic downturn that began late in the third quarter of fiscal
2001 and continued throughout fiscal 2004 and, as a result, many
of our customers began to stretch their payment terms. Days
sales in accounts receivable decreased to 57 days at
April 30, 2004 compared to 64 days at April 30,
2003.

Investment Income,
Net.Investment income, net of
investment expense, decreased to $800,000 in fiscal 2004 from
$1.1 million in fiscal 2003. Investment income consists of
earnings on the short-term investment of excess cash balances
and the decrease of this income in fiscal 2004 reflects the
reduction of excess cash balances as well as lower interest
rates throughout the marketplace during this period.

Income Taxes.The
Company has recorded a valuation allowance against deferred
income tax assets primarily associated with tax loss carry
forwards based on the significant operating losses experienced.
As a result, valuation allowances of $55.3 million were
recorded at April 30, 2003, which eliminated the tax
benefit attributable to the losses incurred in fiscal years 2002
and 2003. We have continued to experience operating

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losses during fiscal year 2004, and an additional
valuation allowance of $9.9 million was recorded, which
eliminated the tax benefit attributable to the net loss incurred
in fiscal 2004.


We have net operating loss carry forwards of
approximately $157.0 million that are available to offset
taxable income in the future. The net operating loss carry
forwards will expire in 2022 through 2024.

Cumulative Effect of a Change in Accounting
Principle.Effective May 1, 2002,
the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, and performed a
transitional goodwill impairment test as of that date. As a
result, it was determined that the goodwill of our active
optical subsystems reporting unit had been impaired and recorded
a one-time noncash charge of approximately $17.0 million.
This charge was recorded as of May 1, 2002 and is reflected
as a cumulative effect of a change in accounting principle in
the Statement of Operations. See Note 3 to the Consolidated
Financial Statements located elsewhere in this filing for
further discussion of this item.

Fiscal Years Ended April 30, 2003 and
2002

Net Sales.Net sales
decreased to $37.2 million in fiscal 2003 from
$56.4 million in fiscal 2002. This $19.2 million
decrease represents a $10.3 million decrease in the net
sales into the storage end market, a $9.5 million decrease
in the net sales into the data networking end market, a
$1.8 million decrease in the net sales into the
telecom/metro end market and a $500,000 decrease in net sales
into other end markets. These decreases were offset in part by a
$2.9 million increase in the net sales into the
military/governmental end market.

The decrease in net sales was primarily due to
lower customer demand due to the current economic climate and
reduced capital spending for optical networking equipment. Sales
were also negatively impacted by declines in average unit prices
for our products resulting from pricing pressure and changes in
product mix. Our total sales order backlog decreased to
$5.0 million as of April 30, 2003 from
$8.4 million as of April 30, 2002. These decreases
reflect lower customer demand for our products, customer
push-outs and cancellation of orders, due in part to delays in
the launch of new product programs by our customers.

License Fees and
Royalties.License fees and royalties
increased to $14.4 million in fiscal 2003 from
$3.6 million in fiscal 2002. The increase relates to lump
sum payments of approximately $5.8 million from the receipt
of license and royalty payments in association with the
settlement of several patent infringement cases in fiscal 2003.
In addition, the Company has recorded in fiscal 2003 the present
value of $2.5 million and $5.5 million of license and
royalty payments to be received in fiscal 2004 and fiscal 2006,
respectively, from the settlement of a patent infringement case.
The increase was partially offset by lower royalties as a result
of generally lower sales of optical subsystems among licensees
consistent with general economic conditions in the optical
networking market. License fees consist of both fixed schedule
payments and contingent payments based on sales volumes of
licensed products.

Cost of Sales and Gross
Margins.Cost of sales decreased to
$63.1 million in fiscal 2003 from $64.7 million in
fiscal 2002. Gross profit as a percentage of net sales, or gross
margin, decreased to negative (69.5)% in fiscal 2003 from
negative (14.8)% in fiscal 2002. Approximately
30.6 percentage points of the 54.7 percentage point
decrease in gross margin was due to charges related to
impairment of long-lived assets, 16.3 percentage points was
a result of the decline in sales and the decline in the average
unit selling price for our products due primarily to pricing
pressures and product mix, 4.5 percentage points was due to
the write down to fair market value of assets held for sale,
3.9 percentage points was due to charges for obsolete and
slow moving inventory and 2.4 percentage points was due to
the expenses related to restructuring charges. These factors
were offset by the sale of approximately $1.9 million of
inventory that was previously considered excess and fully
reserved. The sale of this inventory favorably impacted gross
margin by 3.0 percentage points.

Cost of sales was charged approximately
$6.8 million and $13.8 million in fiscal 2003 and
2002, respectively, to increase the reserve for obsolete and
excess inventory.

Research and
Development.Research and development
expenses increased to $40.2 million in fiscal 2003 from
$28.1 million in fiscal 2002. The $12.1 million
increase was primarily due to $16.9 million in charges
related to impairment of long-lived assets, a $2.0 million
charge to in-process research and

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development, an increase of $2.9 million in
costs of research and development facilities, $1.1 million
for employee severance pay related to restructuring of
operations and a $700,000 write down to fair market value of
assets held for sale. These increases were offset by a
$8.7 million reduction in material and operating costs and
a reduction of $2.8 million of personnel costs dedicated to
research and development.


Sales and Marketing.Sales and marketing expenses decreased to $7.1 million in
fiscal 2003 from $8.0 million in fiscal 2002. This decrease
was due to a decrease of $200,000 in sales and marketing
salaries, fringe benefits, bonuses and commissions, and $700,000
in field sales operating costs supporting our sales volume.

General and
Administrative.General and
administrative expenses increased to $45.7 million in
fiscal 2003 from $37.3 million in fiscal 2002. This
$8.4 million increase was due primarily to a
$28.4 million charge for goodwill impairment,
$3.8 million in charges related to impairment of long-lived
assets, other than goodwill, and a $2.9 million increase in
corporate management costs. These increases were offset by a
$21.2 million reduction in expenses related to
restructuring charges, a $2.1 million reduction in charges
to the allowance for doubtful accounts and a $3.4 million
reduction in general operating expenses.

We operate in markets that are currently
experiencing a severe economic downturn that began late in the
third quarter of fiscal 2001 and escalated during the first
quarter of fiscal 2002. As a result, many of our customers began
to stretch their payment terms. Days sales in accounts
receivable increased to 64 days at April 30, 2003
compared to 52 days at April 30, 2002. During the
first quarter of fiscal 2002, we identified customers that we
considered to be high risk relative to the collection of
accounts receivable. Based upon this review, we recorded an
additional $2.1 million provision for doubtful accounts in
the first quarter of fiscal 2002.

Investment Income,
Net.Investment income, net of
investment expense, decreased to $1.1 million in fiscal
2003 from $3.4 million in fiscal 2002. Investment income
consists of earnings on the short-term investment of excess cash
balances and the decrease of this income in fiscal 2003 reflects
the reduction of excess cash balances as well as lower interest
rates throughout the market place during this period.

Income Taxes.During
fiscal 2002, we determined the need for a valuation allowance
against the carrying value of deferred tax assets primarily
associated with tax loss carry forwards based on the significant
reduction in business levels experienced. As a result, a
valuation reserve of $24.7 million was recorded at
April 30, 2002, which eliminated the tax benefit
attributable to the losses incurred in fiscal 2002. We have
continued to experience similar reductions in business levels
during fiscal 2003, and an additional valuation reserve of
$30.5 million was recorded, which eliminated the tax
benefit attributable to the net loss incurred in fiscal 2003.

We have net operating loss carry forwards of
approximately $98.5 million that are available to offset
taxable income in the future. The net operating loss carry
forwards will expire in 2022 and 2023.

Cumulative Effect of a Change in Accounting
Principle.Effective May 1, 2002,
the Company has adopted the provisions of
SFAS No. 142, and performed a transitional goodwill
impairment test as of that date. As a result, it was determined
that the goodwill of our active optical subsystems reporting
unit had been impaired and recorded a one-time noncash charge of
approximately $17.0 million. This charge was recorded as of
May 1, 2002 and is reflected as a cumulative effect of a
change in accounting principle in the Statement of Operations.
See Note 3 to the Consolidated Financial Statements located
elsewhere in this filing for further discussion of this item.

Liquidity and Capital Resources

Net cash used in operating activities totaled
$18.1 million, $22.8 million and $20.2 million
for fiscal 2004, fiscal 2003 and fiscal 2002, respectively. The
use of cash in operating activities for fiscal 2004 resulted
primarily from the net loss and increase in inventories offset
in part by the decrease in accounts receivable, other assets and
the increase in accounts payable and accrued expenses. The use
of cash in operating activities in fiscal 2003 and 2002 resulted
primarily from the net loss and a decrease in accounts payable
and accrued expenses offset in part by decreases in accounts
receivable and inventories.

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Net cash provided by investing activities was
$5.6 million and $11.9 million in fiscal 2004 and
fiscal 2003, respectively. These amounts reflect the net
proceeds from the sale of short-term investments, the proceeds
from the sale of assets held for sale, and in fiscal 2004,
$8.1 million cash acquired in the merger with Sterling (net
of acquisition expenses), offset in part by the purchases of
equipment and facilities in both fiscal years and the net
purchase of short term investments in fiscal 2004. Net cash used
in investing activities in fiscal 2002 was $43.5 million
related primarily to acquisitions, purchases of equipment and
facilities and the purchase of short-term investments. We
expended $8.1 million for the acquisition of substantially
all of the net assets of the Optical Flexcircuits division of
Advanced Interconnection Technology, Inc. in May 2001 and
$4.6 million (net of cash received) for the acquisition of
Tsunami Optics, Inc. in February 2002. In addition, the Company
acquired $2.8 million in cash from the acquisition of all
the outstanding common stock of Paracer, Inc. in March 2002.

Net cash used in financing activities for fiscal
2004 represents repayments on long-term borrowings, a
$12.0 million distribution to the former owners of Sterling
to satisfy a liability assumed in the acquisition, $217,000 in
treasury stock transactions and $142,000 of dividends on
preferred stock, offset in part by $261,000 of proceeds from the
exercise of stock options. Net cash used in financing activities
for fiscal 2003 and fiscal 2002 represents repayments on
long-term borrowings.

As of April 30, 2004, our principal source
of liquidity was approximately $37.0 million in cash, cash
equivalents and short-term investments.

Our future capital requirements will depend on a
number of factors, including our ability to generate increased
sales and our ability to manage operating expenses. The
continued diversification of our end markets and expansion of
our product offerings through internal and, possibly, external
growth could materially change our level of cash and cash
equivalents. This diversification may require the Company to
seek equity or debt financing. Our only cash commitments are
(i) the repayment of long-term debt of approximately
$3.0 million and (ii) the payment of cumulative cash
dividends on the Series B Preferred Stock on terms
specified in the Certificate of Designation for such stock. We
also are obligated to redeem all shares of Series B
Preferred Stock in accordance with the terms of the Certificate
of Designation for such stock no later than 60 days
following the occurrence of certain events relating to the
Companys achievement of $250 million in annual
revenue or $500 million in market capitalization. In
addition, if a change of control of the Company occurs, the
Series B Preferred Stock becomes redeemable for an
aggregate of $5 million, subject to upward adjustment under
certain circumstances relating to market price of the
Companys Common Stock. We believe that our current cash
balances will be sufficient to meet our cash needs for working
capital, capital expenditures, the Series B Preferred Stock
dividend and repayments of long-term debt for the next
12 months. The settlement of, or an adverse result in,
current and future litigation may, however, significantly affect
our cash position and capital requirements. To the extent that
the Company needs to or deems it advisable to seek equity or
debt financing in connection with any of the foregoing, no
assurance can be given that such financing will be available, or
that it will be available on favorable terms.

We operate in markets that have experienced a
severe economic downturn that began late in the third quarter of
fiscal 2001. These conditions continued in fiscal 2004, during
which we experienced significant decreases in net sales and
incurred net losses, offset to a certain extent by the
acquisition of Sterling. We expect the difficult industry
conditions to continue for at least the next 6 to 12 months
and they may continue for a longer period. Any continued or
further decline in demand for our customers products or in
general economic conditions would likely result in further
reduction in demand for our products and our business, operating
results and financial condition would suffer.

Further, in order to propel overall industry
growth and to encourage interoperability of supplier components,
subsystems, systems and networks, various industry standards
have evolved and are evolving which provide customers the
opportunity to choose between vendors who have form, fit and
function compatible products that are essentially
interchangeable as second or third sources. As customers manage
their supply chains more efficiently, pricing pressure increases
on vendors, such as Stratos, reducing gross margins for similar
products.

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In response to these conditions, we have
implemented personnel reductions, shut down certain facilities,
disposed of certain assets and put in place other cost reduction
programs; however, since many of our costs are fixed in the near
term, we expect to continue to incur significant manufacturing,
research and development, sales and marketing and administrative
expenses. Consequently, we will need to generate higher revenues
while containing costs and operating expenses if we are to
return to profitability. If our efforts to increase our revenues
and contain our costs are not successful, we will continue to
incur net losses.

We are also examining and pursuing opportunities
for improving gross margins and cash flow. The merger with
Sterling combined two companies with brands that are
well-respected by segments of the telecommunications, military,
video and broadcast customer base that seek solutions to
difficult problems at the electrical side of the
high-performance, high-bandwidth interface which are solved by
products offered by Stratos. We believe that these products,
when combined with superior customer service, provide the
potential for improving gross margins and cash flows.

Accordingly, we are examining the requirements of
our customers and the broader potential customer base where our
core competencies could provide value to customers in an
enduring and profitable way. We are also focused on improving
customer service through better execution of delivery, support
and cycle time, particularly for specialty products to those
customers who value and will pay for this service. We seek to
create a customer-responsive organization which executes on
demand and stands behind its customers strategy. There is
no assurance that these efforts will be successful.

The Companys contractual obligations as of
April 30, 2004 are as follows:

|                            |  |                                      |        |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |     | 
|--------------------------- |  | ------------------------------------ | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | --- |  |  | - | --- | 
|                            |  |                                     
|                            |  | Payment due by period (in thousands)
|                            |  |                                     
|                            |  |                                      |        | Less than |  |           |       | More than
|Contractual Obligations     |  | Total                                |        | 1 year    |  | 1-3 years |       | 3-5 years |  | 5 years
|                            |  |                                      |        |           |  |           |       |           |  |        
|Long-Term Debt Obligations  |  | $                                    | 3,031  |           |  | $         | 2,230 |           |  | $       | 801   |  |  | $ |    |  |  | $ |    | 
|Operating Lease Obligations |  |                                      | 4,414  |           |  |           | 1,181 |           |  |         | 2,219 |  |  |   | 762 |  |  |   | 252 | 
|Purchase Obligations        |  |                                      | 6,547  |           |  |           | 6,547 |           |  |         |      |  |  |   |    |  |  |   |    | 
|                            |  |                                      |        |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |     | 
|Total                       |  | $                                    | 13,992 |           |  | $         | 9,958 |           |  | $       | 3,020 |  |  | $ | 762 |  |  | $ | 252 | 
|                            |  |                                      |        |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |     | 






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk.

The Company is subject to certain market risks,
including foreign currency and interest rates. Although certain
of our subsidiaries enter into transactions in currencies other
than their functional currency, foreign currency exposures
arising from these transactions are not material to us. The
primary foreign currency exposure arises from the translation of
our net equity investment in our foreign subsidiaries to
U.S. dollars. We generally view as long-term our
investments in foreign subsidiaries with functional currencies
other than the U.S. dollar. The primary currency to which
we are exposed is the pound sterling.

The Company does not have exposure to interest
rate risk related to its debt obligations because the interest
rates are fixed. The Companys market risk is the potential
loss of income from the reduction in interest rates from the
renewal of short-term investments. The Company experienced such
reductions in these rates during fiscal 2003 and fiscal 2004.






|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

See Stratos International, Inc. Index to
Financial Statements on page F-1. Such Financial
Statements and the notes related thereto are incorporated herein
by reference.

30



---



##### Table of Contents








|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial
    Disclosure.

None.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and procedures.

As of the end of the period covered by this
report, our management, including our Chief Executive Officer
and Chief Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange
Act)). Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed
in our filings with the SEC. There has been no change in our
internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the period covered by this annual report on
Form 10-K that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




PART III






|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant.

Information included under the captions
Election of Directors, Board of Director
Meetings and Committees of Board of Directors and
Section 16(a) Beneficial Ownership Reporting
Compliance in our Proxy Statement for the Annual Meeting
of Stockholders (our Proxy Statement) is
incorporated herein by reference. See also the section captioned
Executive Officers of the Registrant in Part I,
Item 1 of this annual report on Form 10-K.

We have adopted a code of ethics that applies to
our principal executive officer, principal financial officer and
principal accounting officer or controller or persons performing
similar functions. A copy of our code of ethics is filed as
Exhibit 14 to this annual report on Form 10-K. The
code of ethics is also published at our website at
www.stratoslightwave.com.






|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

Information regarding executive compensation is
included under the captions Executive Compensation
and Comparison of Stockholder Return in our Proxy
Statement and is incorporated herein by reference.






|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters.

Information regarding the security ownership of
certain beneficial owners and management is included under the
caption Stock Ownership in our Proxy Statement and
is incorporated herein by reference. Information regarding
equity compensation plans is included in Part II,
Item 5 of this annual report on Form 10-K.






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

Information regarding certain relationships and
related transactions is included under the caption Related
Transactions in our Proxy Statement and is incorporated
herein by reference.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services.

Information regarding principal accountant fees
and services is included under the caption Independent
Accountants in our Proxy Statement and is incorporated
herein by reference.

31



---



##### Table of Contents






PART IV






|         |                                                                      
|-------- | ---------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K.

(a) 1. Financial Statements. The
financial statements and the notes related thereto listed under
Stratos International, Inc. Index to Financial
Statements on page F-1 are filed as part of this annual
report on Form 10-K.

2. Financial Statement Schedule.
Schedule II  Valuation and Qualifying Accounts
and reserves is filed as part of this annual report on
Form 10-K.

3. Exhibits Required by Item 601 of
Regulation S-K and Paragraph (c) below.

See response to Item 15(c) below.

(b) Reports on Form 8-K. The
following table indicates the filing date and the items reported
in the current reports on Form 8-K that we filed in the
fourth quarter of fiscal 2004.

|              |  |                                                                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date Filed    |  | Items Reported                                                                                                                                                                                                                                     
|              |  |                                                                                                                                                                                                                                                    
|March 9, 2004 |  | Furnishing(i) a press release announcing
    financial results for the third quarter ended January 31,
    2004 and (ii) the transcript of a conference call held to
    discuss financial results for the third quarter ended
    January 31, 2004

(c) Exhibits

|        |    |                         |  |                                                                                                                                                                                                                                                                         
|------- | -- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 2  | .1                      |  | Agreement and Plan of Merger, dated as of
    July 2, 2003, as amended as of August 19, 2003 and
    October 31, 2003, among Stratos Lightwave, Inc., Sleeping
    Bear Merger Corp. and Sterling Holding Company(11)                                                   
|        | 3  | .1                      |  | Restated Certificate of Incorporation of
    Registrant (12)                                                                                                                                                                                                            
|        | 3  | .2                      |  | Bylaws of Registrant(1)                                                                                                                                                                                                                                                 
|        | 3  | .3                      |  | Certificate of Designation of Series A
    Junior Participating Preferred Stock, included as Exhibit A
    to Exhibit 4.3                                                                                                                                               
|        | 3  | .4                      |  | Certificate of Designation for Series B
    Preferred Stock (10)                                                                                                                                                                                                        
|        | 4  | .1                      |  | Specimen certificate representing the common
    stock(1)                                                                                                                                                                                                               
|        | 4  | .2                      |  | Specimen Certificate representing the
    Series B Preferred Stock (12)                                                                                                                                                                                                 
|        | 4  | .3                      |  | Rights Agreement, dated as of March 23,
    2001, between Stratos International, Inc. and Mellon Investor
    Services LLC(2)                                                                                                                                           
|        | 4  | .4                      |  | First Amendment, dated as of July 2, 2003,
    to Rights Agreement, dated as of March 23, 2001, between
    Stratos Lightwave, Inc. and Mellon Investor Services LLC, as
    Rights Agent(9)                                                                            
|        | 4  | .5                      |  | Registration Rights Agreement, dated as of
    July 2, 2003, among Stratos Lightwave, Inc., Citicorp
    Venture Capital Ltd., the William N. and Carol A. Stout Trust
    dated 11/24/98 and the William N. and Carol A. Stout Charitable
    Remainder Unit Trust (10)
|        | 4  | .6                      |  | Standstill Agreement, dated as of July 2,
    2003, between Stratos Lightwave, Inc. and Citicorp Venture
    Capital Ltd. (10)                                                                                                                                          
|        | 10 | .1                      |  | Form of Indemnity Agreement between Registrant
    and Registrants directors and officers**(1)                                                                                                                                                                         
|        | 10 | .2                      |  | Stratos Lightwave, Inc. 2000 Stock Plan, as
    amended and restated(3)                                                                                                                                                                                                 
|        | 10 | .3                      |  | Agreement and Plan of Reorganization, dated
    January 22, 2002, by and among the Registrant, Tundra
    Acquisition Corp. and Tsunami Optics, Inc.(4)                                                                                                                 
|        | 10 | .4                      |  | Stratos Lightwave, Inc. 2002 Stock Plan for
    Acquired Companies(5)                                                                                                                                                                                                   
|        | 10 | .5                      |  | Agreement and Plan of Reorganization, dated
    March 18, 2002, by and among the Registrant, Polar
    Acquisition Corp. and Paracer, Inc.(6)                                                                                                                           
|        | 10 | .6                      |  | Management Retention Agreement between the
    Registrant and James McGinley**(7)                                                                                                                                                                                       

32



---



##### Table of Contents



|        |    |                         |  |                                                                                                                                                                                                                       
|------- | -- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 10 | .7                      |  | Management Retention Agreement between the
    Registrant and David Slack**(7)                                                                                                                                        
|        | 10 | .8                      |  | Management Retention Agreement between the
    Registrant and Richard Durrant**(7)                                                                                                                                    
|        | 10 | .9                      |  | Stratos Lightwave, Inc. Severance Plan**(7)                                                                                                                                                                           
|        | 10 | .10                     |  | Agreement and Plan of Merger, dated as of
    July 2, 2003, as amended as of August 19, 2003 and
    October 31, 2003, among Stratos Lightwave, Inc., Sleeping
    Bear Merger Corp. and Sterling Holding Company (11)
|        | 10 | .11                     |  | Amendment to Management Retention Agreement
    between the Registrant and James McGinley**(8)                                                                                                                        
|        | 10 | .12                     |  | Amendment to Management Retention Agreement
    between the Registrant and David Slack**(8)                                                                                                                           
|        | 10 | .13                     |  | Amendment to Management Retention Agreement
    between the Registrant and Richard Durrant**(8)                                                                                                                       
|        | 10 | .14                     |  | Amendment to Stratos Lightwave, Inc. Severance
    Plan**(8)                                                                                                                                                          
|        | 10 | .15                     |  | Stratos Lightwave, Inc. 2003 Stock Plan**
    (10)                                                                                                                                                                    
|        | 10 | .16                     |  | Stratos Lightwave, Inc. 2003 Employee Stock
    Purchase Plan** (10)                                                                                                                                                  
|        | 14 |                         |  | Stratos International, Inc. Code of Business
    Conduct and Ethics*                                                                                                                                                  
|        | 21 |                         |  | List of Subsidiaries*                                                                                                                                                                                                 
|        | 23 |                         |  | Consent of Ernst & Young LLP*                                                                                                                                                                                         
|        | 24 |                         |  | Power of Attorney (contained in the signature
    page to this annual report on Form 10-K)*                                                                                                                           
|        | 31 | .1                      |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Executive Officer*                                                                                                                                            
|        | 31 | .2                      |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Financial Officer*                                                                                                                                            
|        | 32 | .1                      |  | Section 1350 Certification of Chief
    Executive Officer*                                                                                                                                                            
|        | 32 | .2                      |  | Section 1350 Certification of Chief
    Financial Officer*                                                                                                                                                            
|        | 99 |                         |  | Cautionary Statements*                                                                                                                                                                                                



---



| |     |                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the
    Registrants Registration Statement on Form S-1
    effective June 26, 2000.          
|
| | (2) | Incorporated by reference to the
    Registrants Form 8-K dated March 22, 2001.                                           
|
| | (3) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended April 30, 2001.        
|
| | (4) | Incorporated by reference to the
    Registrants Form 8-K dated February 4, 2002.                                         
|
| | (5) | Incorporated by reference to the
    Registrants Registration Statement on Form S-8 dated
    January 31, 2002.           
|
| | (6) | Incorporated by reference to the
    Registrants Form 8-K dated March 28, 2002.                                           
|
| | (7) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended October 31, 2002.
|
| | (8) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2003. 
|
| | (9) | Incorporated by reference to the
    Registrants Form 8-A/ A filed August 7, 2003.                                        



|     |                                                                                                           
|---- | ----------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the
    Registrants Form S-4/ A effective September 29,
    2003.           
|    
|(11) | Incorporated by reference to the
    Registrants Form 8-K dated November 6, 2003.                        
|    
|(12) | Incorporated by reference to the Quarterly Report
    on Form 10-Q for the quarter ended October 31, 2003.



| |   |               
| | - | --------------
| | * | Filed herewith



|   |                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------
|** | Management contract or compensatory plan or
    arrangement required to be filed as an exhibit to this annual
    report on Form 10-K.

33



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##### Table of Contents



(d) Financial Statement Schedules

Schedule II  Valuation and
Qualifying Accounts and Reserves is filed as part of this annual
report on Form 10-K.

34



---



##### Table of Contents



SIGNATURES

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



| |                            
| | ---------------------------
| | STRATOS INTERNATIONAL, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ JAMES W. MCGINLEY

| |                                          
| | -----------------------------------------
| |                                          
| | James W. McGinley                        
| | President and Chief Executive
    Officer

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints James W.
McGinley and David A. Slack, and each of them, such
persons true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, in any and all
capacities, to sign one or more Annual Reports for the
Companys fiscal year ended April 30, 2004 on
Form 10-K under the Securities Exchange Act of 1934, as
amended (the Exchange Act), or such other form as
any such attorney-in-fact may deem necessary or desirable, any
amendments thereto, and all additional amendments thereto, each
in such form as they or either of them may approve, and to file
the same with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done so
that such Annual Report shall comply with the Exchange Act and
the applicable rules and regulations adopted or issued pursuant
thereto, as fully and to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them or
their substitute, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and the dates indicated.

|                                               |  |                                                                                                                  |  |               |  | 
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                               |  |                                                                                                                  |  |              
|Signature                                      |  | Title                                                                                                            |  | Date         
|                                               |  |                                                                                                                  |  |              
|                                              
|/s/ JAMES W. MCGINLEYJames W. McGinley         |  | Director, President and Chief Executive
    Officer (Principal Executive Officer)                                |  | July 29, 2004
|                                              
|/s/ DAVID A. SLACKDavid A. Slack               |  | Senior Vice President  Finance and
    Chief Financial Officer (Principal Financial and Accounting
    Officer) |  | July 29, 2004
|                                              
|/s/ BRIAN J. JACKMANBrian J. Jackman           |  | Director                                                                                                         |  | July 29, 2004
|                                              
|/s/ CHARLES DANIEL NELSENCharles Daniel Nelsen |  | Director                                                                                                         |  | July 29, 2004
|                                              
|/s/ EDWARD J. OCONNELLEdward J. OConnell     |  | Director                                                                                                         |  | July 29, 2004

35



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##### Table of Contents



|                                           |  |          |  |               |  | 
|------------------------------------------ |  | -------- |  | ------------- |  | 
|                                           |  |          |  |              
|Signature                                  |  | Title    |  | Date         
|                                           |  |          |  |              
|                                          
|/s/ REGINALD W. BARRETTReginald W. Barrett |  | Director |  | July 29, 2004
|                                          
|/s/ PHILIP A. HARRISPhilip A. Harris       |  | Director |  | July 29, 2004
|                                          
|/s/ DAVID Y. HOWEDavid Y. Howe             |  | Director |  | July 29, 2004
|                                          
|/s/ NEWELL V. STARKSNewell V. Starks       |  | Director |  | July 29, 2004
|                                          
|William T. Comfort III                     |  | Director |  | July 29, 2004

36



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##### Table of Contents



STRATOS INTERNATIONAL, INC.

INDEX TO FINANCIAL STATEMENTS

Index to Financial Statements and Financial
Statement Schedule

|   |  |                                                                                                                  |  |      |      | 
|-- |  | ---------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|   |  |                                                                                                                  |  | Page
|   |  |                                                                                                                  |  |     
|1. |  | Financial Statements:                                                                                            |  |      |      | 
|   |  | Report of Independent Registered Public
    Accounting Firm                                                      |  |      | F-2  | 
|   |  | Consolidated Balance Sheets at April 30,
    2004 and 2003                                                       |  |      | F-3  | 
|   |  | Consolidated Statements of
    Operations  Years Ended April 30, 2004, 2003
    and 2002                         |  |      | F-4  | 
|   |  | Consolidated Statements of Shareholders
    Equity  Years Ended April 30, 2004, 2003 and
    2002               |  |      | F-5  | 
|   |  | Consolidated Statements of Cash
    Flows  Years Ended April 30, 2004, 2003 and
    2002                         |  |      | F-6  | 
|   |  | Notes to Consolidated Financial Statements                                                                       |  |      | F-7  | 
|2. |  | Financial Statement Schedule:                                                                                    |  |      |      | 
|   |  | Schedule II  Valuation and
    Qualifying Accounts and Reserves  Years Ended
    April 30, 2004, 2003 and 2002 |  |      | II-1 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors and Shareholders

Stratos International, Inc.


We have audited the accompanying consolidated
balance sheets of Stratos International, Inc. and subsidiaries
as of April 30, 2004 and 2003, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
April 30, 2004. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Stratos International, Inc.
and subsidiaries as of April 30, 2004 and 2003, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended April 30,
2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed in Note 3 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill and other intangible assets to conform
to the requirements of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets, effective May 1, 2002.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Chicago, Illinois

June 18, 2004


F-2



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |          |       |         |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | -------------------------- | ------------------------------------------ | ------ | ------- | ------- | -------- | ----- | ------- | ------- | 
|                                         |                                                                                                                                                                          |                          
|                                         |                                                                                                                                                                          | April 30,                
|                                         |                                                                                                                                                                          |                          
|                                         |                                                                                                                                                                          | 2004                      |                            | 2003                                      
|                                         |                                                                                                                                                                          |                           |                            |                                           
|                                         |                                                                                                                                                                          |                          
|                                         |                                                                                                                                                                          | (in thousands, except par
|                                         |                                                                                                                                                                          | value and share amounts) 
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         | Cash and cash equivalents                                                                                                                                                |                           | $                          | 15,501                                     |        |         | $       | 43,649   |      
|                                         | Short-term investments                                                                                                                                                   |                           |                            | 21,488                                     |        |         |         | 17,879   |      
|                                         | Accounts receivable, less allowance
    (2004  $358; 2003  $414)                                                                                                       |                           |                            | 12,544                                     |        |         |         | 7,701    |      
|                                         | Inventories:                                                                                                                                                             |                           |                            |                                            |        |         |         |          |      
|                                         |                                                                                                                                                                          | Finished products         |                            |                                            | 2,831  |         |         |          | 864   |        
|                                         |                                                                                                                                                                          | Work in process           |                            |                                            | 1,042  |         |         |          | 797   |        
|                                         |                                                                                                                                                                          | Materials                 |                            |                                            | 12,091 |         |         |          | 6,133 |        
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | 15,964                     |                                            |        |         | 7,794   |         
|                                         | Recoverable income taxes                                                                                                                                                 |                           |                            | 4,176                                      |        |         |         | 2,391    |      
|                                         | Prepaid expenses                                                                                                                                                         |                           |                            | 1,326                                      |        |         |         | 2,083    |      
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | Total current assets       |                                            |        | 70,999  |         |          |       | 81,497  |        
|Other assets:                            |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         | Goodwill and other indefinite lived assets                                                                                                                               |                           |                            | 6,110                                      |        |         |         |         |      
|                                         | Intangible assets, net of amortization                                                                                                                                   |                           |                            | 14,665                                     |        |         |         | 621      |      
|                                         | Assets held for sale                                                                                                                                                     |                           |                            | 4,441                                      |        |         |         | 3,484    |      
|                                         | Other                                                                                                                                                                    |                           |                            | 5,879                                      |        |         |         | 6,321    |      
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | 31,095                     |                                            |        |         | 10,246  |         
|Property, plant and equipment:           |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         | Land                                                                                                                                                                     |                           |                            | 1,721                                      |        |         |         | 1,071    |      
|                                         | Buildings and building improvements                                                                                                                                      |                           |                            | 11,374                                     |        |         |         | 20,230   |      
|                                         | Furniture and fixtures                                                                                                                                                   |                           |                            | 18,586                                     |        |         |         | 18,029   |      
|                                         | Machinery and equipment                                                                                                                                                  |                           |                            | 59,849                                     |        |         |         | 54,337   |      
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | 91,530                     |                                            |        |         | 93,667  |         
|                                         | Less allowances for depreciation                                                                                                                                         |                           |                            | 64,574                                     |        |         |         | 67,415   |      
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | 26,956                     |                                            |        |         | 26,252  |         
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | Total assets               |                                            | $      | 129,050 |         |          | $     | 118,175 |        
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         | Accounts payable                                                                                                                                                         |                           | $                          | 8,422                                      |        |         | $       | 5,063    |      
|                                         | Salaries, wages and payroll taxes                                                                                                                                        |                           |                            | 2,563                                      |        |         |         | 2,039    |      
|                                         | Other accrued expenses                                                                                                                                                   |                           |                            | 4,810                                      |        |         |         | 2,967    |      
|                                         | Current portion of long-term debt                                                                                                                                        |                           |                            | 2,230                                      |        |         |         | 6,331    |      
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | Total current liabilities  |                                            |        | 18,025  |         |          |       | 16,400  |        
|Long-term debt, less current portion     |                                                                                                                                                                          |                           | 801                        |                                            |        |         | 298     |         
|Deferred income taxes                    |                                                                                                                                                                          |                           | 445                        |                                            |        |         | 82      |         
|Minority interest                        |                                                                                                                                                                          |                           |                           |                                            |        |         | 350     |         
|Redeemable preferred stock               |                                                                                                                                                                          |                           | 5,000                      |                                            |        |         |        |         
|Shareholders equity:                    |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         | Preferred stock, $.01 par value. Authorized
    5,000,000 shares; 50,000 shares issued and outstanding
    at April 30, 2004 (None at April 30, 2003)                    |                           |                            |                                           |        |         |         |         |      
|                                         | Common stock, $.01 par value. Authorized
    100,000,000 shares; issued and outstanding 14,265,510 and
    7,342,081 shares at April 30, 2004 and 2003,
    respectively |                           |                            | 143                                        |        |         |         | 74       |      
|                                         | Additional paid-in capital                                                                                                                                               |                           |                            | 319,212                                    |        |         |         | 284,254  |      
|                                         | Accumulated deficit                                                                                                                                                      |                           |                            | (210,633                                   | )      |         |         | (183,406 | )    
|                                         | Unearned compensation                                                                                                                                                    |                           |                            | (3,809                                     | )      |         |         |         |      
|                                         | Foreign currency translation adjustments                                                                                                                                 |                           |                            | 114                                        |        |         |         | 154      |      
|                                         | Cost of shares in treasury                                                                                                                                               |                           |                            | (248                                       | )      |         |         | (31      | )    
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           | Total shareholders equity |                                            |        | 104,779 |         |          |       | 101,045 |        
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         
|                                         |                                                                                                                                                                          |                           |                            | Total liabilities and shareholders equity |        | $       | 129,050 |          |       | $       | 118,175 | 
|                                         |                                                                                                                                                                          |                           |                            |                                            |        |         |         |         

See notes to consolidated financial statements.

F-3



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |        |         | 
|------------------------------------------------------------------------------ | -------------------------- | ---------------------------------------- | ------- | ------ | ------ | ---- | -------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                               |                            |                                         
|                                                                               |                            | Fiscal Year Ended April 30,             
|                                                                               |                            |                                         
|                                                                               |                            | 2004                                     |         | 2003   |        | 2002
|                                                                               |                            |                                          |         |        |        |     
|                                                                               |                            |                                         
|                                                                               |                            | (In thousands, except per share amounts)
|Revenue:                                                                       |                            |                                          |         |        |        |      |          |        |         |   |         |       
|                                                                               | Net sales                  |                                          | $       | 49,379 |        |      | $        | 37,236 |         |   | $       | 56,387 |        
|                                                                               | License fees and royalties |                                          |         | 1,444  |        |      |          | 14,398 |         |   |         | 3,622  |        
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|                                                                               |                            | Total                                    |         |        | 50,823 |      |          |        | 51,634  |   |         |        | 60,009  | 
|Cost and expenses:                                                             |                            |                                          |         |        |        |      |          |        |         |   |         |       
|                                                                               | Costs of sales             |                                          |         | 42,317 |        |      |          | 63,114 |         |   |         | 64,713 |        
|                                                                               | Research and development   |                                          |         | 9,274  |        |      |          | 40,208 |         |   |         | 28,087 |        
|                                                                               | Sales and marketing        |                                          |         | 8,225  |        |      |          | 7,063  |         |   |         | 7,999  |        
|                                                                               | General and administrative |                                          |         | 20,666 |        |      |          | 45,675 |         |   |         | 37,349 |        
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|                                                                               |                            | Total costs and expenses                 |         |        | 80,482 |      |          |        | 156,060 |   |         |        | 138,148 | 
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Loss from operations                                                           |                            |                                          | (29,659 | )      |        |      | (104,426 | )      |         |   | (78,139 | )     
|Investment income, net                                                         |                            |                                          | 777     |        |        |      | 1,117    |        |         |   | 3,368   |       
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Loss before income taxes                                                       |                            |                                          | (28,882 | )      |        |      | (103,309 | )      |         |   | (74,771 | )     
|Income tax credit                                                              |                            |                                          | (1,797  | )      |        |      |         |        |         |   | (2,581  | )     
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Loss before cumulative effect of a change in
    accounting principle          |                            |                                          | (27,085 | )      |        |      | (103,309 | )      |         |   | (72,190 | )     
|Cumulative effect of a change in accounting
    principle                      |                            |                                          |        |        |        |      | (16,982  | )      |         |   |        |       
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Net loss                                                                       |                            |                                          | (27,085 | )      |        |      | (120,291 | )      |         |   | (72,190 | )     
|Preferred stock dividend requirements                                          |                            |                                          | (142    | )      |        |      |         |        |         |   |        |       
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Net loss attributable to common shareholders                                   |                            | $                                        | (27,227 | )      |        | $    | (120,291 | )      |         | $ | (72,190 | )     
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Net loss per share attributable to common
    shareholders, basic and diluted: |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Loss before cumulative effect of a change in
    accounting principle          |                            | $                                        | (2.60   | )      |        | $    | (14.12   | )      |         | $ | (11.06  | )     
|Cumulative effect of a change in accounting
    principle                      |                            |                                          |        |        |        |      | (2.32    | )      |         |   |        |       
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Net loss                                                                       |                            |                                          | (2.60   | )      |        |      | (16.44   | )      |         |   | (11.06  | )     
|Preferred stock dividend requirements                                          |                            |                                          | (0.01   | )      |        |      |         |        |         |   |        |       
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Net loss per share attributable to common
    shareholders                     |                            | $                                        | (2.61   | )      |        | $    | (16.44   | )      |         | $ | (11.06  | )     
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|Weighted average number of common shares
    outstanding:                      |                            |                                          |         |        |        |      |          |        |         |   |         |       
|                                                                               | Basic                      |                                          |         | 10,444 |        |      |          | 7,317  |         |   |         | 6,525  |        
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       
|                                                                               | Diluted                    |                                          |         | 10,444 |        |      |          | 7,317  |         |   |         | 6,525  |        
|                                                                               |                            |                                          |         |        |        |      |          |        |         |   |         |       

See notes to consolidated financial statements.

F-4



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------------------------------- |  | ----------------------------- | ---- | ---------- |  | ------------ | ------- | ------------ |  | ----------- | -------- | -------- |  | ------------- | ------ | ------------- |  | - | ---- | - |  | - | ---- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                |  |                               |      |            |  | Retained     |         |              |  | Foreign     |          |          |  |               |        |              
|                                                                                                |  |                               |      | Additional |  | Earnings     |         |              |  | Currency    |          |          |  | Total         |        | Comprehensive
|                                                                                                |  | Common                        |      | Paid-In    |  | (Accumulated |         | Unearned     |  | Translation |          | Treasury |  | Shareholders |        | Income       
|                                                                                                |  | Stock                         |      | Capital    |  | Deficit)     |         | Compensation |  | Adjustments |          | Shares   |  | Equity        |        | (Loss)       
|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |              
|                                                                                                |  |                              
|                                                                                                |  | (in thousands, except shares)
|Balance at April 30, 2001                                                                       |  | $                             | 641  |            |  | $            | 245,538 |              |  | $           | 9,075    |          |  | $             |       |               |  | $ | (355 | ) |  | $ |     |   |  | $ | 254,899  |   |  |   |          |  
|Common stock issued in acquisitions of
    subsidiaries                                         |  |                               | 87   |            |  |              | 37,624  |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   | 37,711   |   |  |   |          |  
|Net loss                                                                                        |  |                               |      |            |  |              |         |              |  |             | (72,190  | )        |  |               |        |               |  |   |      |   |  |   |      |   |  |   | (72,190  | ) |  | $ | (72,190  | )
|Foreign currency translation adjustments                                                        |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   | 60   |   |  |   |      |   |  |   | 60       |   |  |   | 60       |  
|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Balance at April 30, 2002                                                                       |  |                               | 728  |            |  |              | 283,162 |              |  |             | (63,115  | )        |  |               |       |               |  |   | (295 | ) |  |   |     |   |  |   | 220,480  |   |  | $ | (72,130  | )
|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Issuance of 507,700 shares of restricted
    common stock                                       |  |                               | 5    |            |  |              | 427     |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   | 432      |   |  |   |          |  
|Exercise of options for 2,455 shares of
    common stock                                        |  |                               |      |            |  |              | 6       |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   | 6        |   |  |   |          |  
|Purchase of 251,959 shares of common stock
    for treasury                                     |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   | (31  | ) |  |   | (31      | ) |  |   |          |  
|Effect of 1 for 10 reverse split                                                                |  |                               | (659 | )          |  |              | 659     |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |         |   |  |   |          |  
|Net loss                                                                                        |  |                               |      |            |  |              |         |              |  |             | (120,291 | )        |  |               |        |               |  |   |      |   |  |   |      |   |  |   | (120,291 | ) |  | $ | (120,291 | )
|Foreign currency translation adjustments                                                        |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   | 449  |   |  |   |      |   |  |   | 449      |   |  |   | 449      |  
|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Balance at April 30, 2003                                                                       |  |                               | 74   |            |  |              | 284,254 |              |  |             | (183,406 | )        |  |               |       |               |  |   | 154  |   |  |   | (31  | ) |  |   | 101,045  |   |  | $ | (119,842 | )
|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Issuance of 745,351 shares of restricted
    common stock                                       |  |                               | 7    |            |  |              | 3,802   |              |  |             |          |          |  |               | (3,809 | )             |  |   |      |   |  |   |      |   |  |   |         |   |  |   |          |  
|Exercise of options for 98,675 shares of
    common stock                                       |  |                               | 1    |            |  |              | 260     |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   | 261      |   |  |   |          |  
|Purchase of common stock for treasury                                                           |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   | (217 | ) |  |   | (217     | ) |  |   |          |  
|Dividend on redeemable preferred stock                                                          |  |                               |      |            |  |              |         |              |  |             | (142     | )        |  |               |        |               |  |   |      |   |  |   |      |   |  |   | (142     | ) |  |   |          |  
|Issuance of 6,082,000 shares of common stock
    in the acquisition of Sterling Holding Company |  |                               | 61   |            |  |              | 30,896  |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   | 30,957   |   |  |   |          |  
|Net loss                                                                                        |  |                               |      |            |  |              |         |              |  |             | (27,085  | )        |  |               |        |               |  |   |      |   |  |   |      |   |  |   | (27,085  | ) |  | $ | (27,085  | )
|Foreign currency translation adjustments                                                        |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   | (40  | ) |  |   |      |   |  |   | (40      | ) |  |   | (40      | )
|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Balance at April 30, 2004                                                                       |  | $                             | 143  |            |  | $            | 319,212 |              |  | $           | (210,633 | )        |  | $             | (3,809 | )             |  | $ | 114  |   |  | $ | (248 | ) |  | $ | 104,779  |   |  | $ | (27,125  | )
|                                                                                                |  |                               |      |            |  |              |         |              |  |             |          |          |  |               |        |               |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  

See notes to consolidated financial statements.

F-5



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |         |         |         |  
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ------- | -------- | ------ | ------- | ------- | ------- | ------- | ------- | -
|                                                                        |                                                                                                                                                      |                                                          
|                                                                        |                                                                                                                                                      | Fiscal Year Ended April 30,                              
|                                                                        |                                                                                                                                                      |                                                          
|                                                                        |                                                                                                                                                      | 2004                                                      |                                                         | 2003    |        | 2002   
|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |        
|                                                                        |                                                                                                                                                      |                                                          
|                                                                        |                                                                                                                                                      | (in thousands)                                           
|Operating activities:                                                   |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|                                                                        | Net loss                                                                                                                                             |                                                           | $                                                       | (27,085 | )      |         | $       | (120,291 | )      |         | $       | (72,190 | )      
|                                                                        | Adjustments to reconcile net loss to net cash
    used in operating activities:                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |         |        
|                                                                        |                                                                                                                                                      | Cumulative effect of a change in accounting
    principle |                                                         |         |       |         |         |          | 16,982 |         |         |         |        |        
|                                                                        |                                                                                                                                                      | Provision for depreciation                                |                                                         |         | 6,280  |         |         |          | 13,600 |         |         |         | 11,768  |        
|                                                                        |                                                                                                                                                      | Provision for amortization                                |                                                         |         | 894    |         |         |          | 552    |         |         |         | 847     |        
|                                                                        |                                                                                                                                                      | Provision for goodwill impairment                         |                                                         |         |       |         |         |          | 28,429 |         |         |         | 8,493   |        
|                                                                        |                                                                                                                                                      | Provision for asset impairment                            |                                                         |         | 910    |         |         |          | 39,175 |         |         |         | 13,715  |        
|                                                                        |                                                                                                                                                      | Provision for losses on accounts receivable               |                                                         |         | 461    |         |         |          | 331    |         |         |         | 326     |        
|                                                                        |                                                                                                                                                      | Provision for obsolete and overstock inventory            |                                                         |         | 1,925  |         |         |          | 6,805  |         |         |         | 13,835  |        
|                                                                        |                                                                                                                                                      | Provision for deferred income taxes                       |                                                         |         |       |         |         |          |       |         |         |         | 421     |        
|                                                                        |                                                                                                                                                      | Minority interest                                         |                                                         |         | (350   | )       |         |          | (148   | )       |         |         | 21      |        
|                                                                        |                                                                                                                                                      | Gain on sale of assets held for sale                      |                                                         |         | (1,305 | )       |         |          |       |         |         |         |        |        
|                                                                        |                                                                                                                                                      | Changes in operating assets and liabilities:              |                                                         |         |        |         |         |          |        |         |         |         |         |        
|                                                                        |                                                                                                                                                      | Accounts receivable                                       |                                                         |         | 27     |         |         |          | 213    |         |         |         | 16,302  |        
|                                                                        |                                                                                                                                                      | Inventories                                               |                                                         |         | (2,309 | )       |         |          | 1,222  |         |         |         | (976    | )      
|                                                                        |                                                                                                                                                      | Prepaid expenses and other assets                         |                                                         |         | 1,746  |         |         |          | (4,578 | )       |         |         | (428    | )      
|                                                                        |                                                                                                                                                      | Accounts payable and accrued expenses                     |                                                         |         | 730    |         |         |          | (5,082 | )       |         |         | (12,348 | )      
|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|                                                                        |                                                                                                                                                      |                                                           | Net cash used in operating activities                   |         |        | (18,076 | )       |          |        | (22,790 | )       |         |         | (20,214 | )
|Investing activities:                                                   |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|                                                                        | Purchases of property, plant and equipment                                                                                                           |                                                           |                                                         | (3,268  | )      |         |         | (2,126   | )      |         |         | (22,778 | )      
|                                                                        | Purchases of short-term investments                                                                                                                  |                                                           |                                                         | (38,603 | )      |         |         | (30,479  | )      |         |         | (54,700 | )      
|                                                                        | Sales of short-term investments                                                                                                                      |                                                           |                                                         | 34,994  |        |         |         | 43,500   |        |         |         | 44,200  |        
|                                                                        | Acquisitions, net of cash acquired                                                                                                                   |                                                           |                                                         | 8,120   |        |         |         | (189     | )      |         |         | (9,961  | )      
|                                                                        | Sale of assets held for sale                                                                                                                         |                                                           |                                                         | 4,381   |        |         |         | 1,209    |        |         |         |        |        
|                                                                        | Other                                                                                                                                                |                                                           |                                                         |        |        |         |         |         |        |         |         | (275    | )      
|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|                                                                        |                                                                                                                                                      |                                                           | Net cash provided by (used in) investing
    activities |         |        | 5,624   |         |          |        | 11,915  |         |         |         | (43,514 | )
|Financing activities:                                                   |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|                                                                        | Repayments on long-term borrowings                                                                                                                   |                                                           |                                                         | (3,598  | )      |         |         | (6,496   | )      |         |         | (690    | )      
|                                                                        | Dividends on preferred stock                                                                                                                         |                                                           |                                                         | (142    | )      |         |         |         |        |         |         |        |        
|                                                                        | Net proceeds from exercise of stock options                                                                                                          |                                                           |                                                         | 261     |        |         |         |         |        |         |         |        |        
|                                                                        | Purchase of shares for treasury                                                                                                                      |                                                           |                                                         | (217    | )      |         |         |         |        |         |         |        |        
|                                                                        | Distribution to former owners of acquired company
    to satisfy assumed liability                                                                   |                                                           |                                                         | (12,000 | )      |         |         |         |        |         |         |        |        
|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|                                                                        |                                                                                                                                                      |                                                           | Net cash used in financing activities                   |         |        | (15,696 | )       |          |        | (6,496  | )       |         |         | (690    | )
|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|Net decrease in cash and cash equivalents                               |                                                                                                                                                      |                                                           | (28,148                                                 | )       |        |         | (17,371 | )        |        |         | (64,418 | )      
|Cash and cash equivalents at beginning of period                        |                                                                                                                                                      |                                                           | 43,649                                                  |         |        |         | 61,020  |          |        |         | 125,438 |        
|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|Cash and cash equivalents at end of period                              |                                                                                                                                                      | $                                                         | 15,501                                                  |         |        | $       | 43,649  |          |        | $       | 61,020  |        
|                                                                        |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|Supplement schedule of non cash investing and
    financing activities: |                                                                                                                                                      |                                                           |                                                         |         |        |         |         |          |        |         |         |        
|                                                                        | Long-term debt (including current portion)
    incurred in exchange for the purchase of software and equipment
    for information technology system |                                                           | $                                                       |        |        |         | $       |         |        |         | $       | 9,084   |        
|                                                                        | Common stock issued in acquisition of subsidiaries                                                                                                   |                                                           |                                                         | 30,957  |        |         |         |         |        |         |         | 37,711  |        
|                                                                        | Issuance of shares of restricted common stock                                                                                                        |                                                           |                                                         | 3,809   |        |         |         | 432      |        |         |         |        |        

See notes to consolidated financial statements.

F-6



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(all amounts in thousands, except share and
per share data)




|        |                                               
|------- | ----------------------------------------------
|Note 1. | Summary of Significant Accounting
    Policies

Principles of
consolidation.The consolidated
financial statements include the accounts and transactions of
all subsidiaries in which the Company has a controlling
interest. Intercompany accounts and transactions have been
eliminated in consolidation.

Cash and cash
equivalents.All highly liquid
investments with a maturity of three or fewer months when
purchased are carried at their approximate fair value and
classified in the balance sheet as cash equivalents.

Short-term
investments.Short-term investments
represent short-term corporate debt that is available for sale
to meet working capital needs. Cost represents estimated fair
value at the balance sheet date and there are no gross
unrealized gains or losses. Interest earned is included in
investment income.

Accounts receivable.Accounts receivable represent amounts due from customers for
products shipped or services provided. An allowance for doubtful
accounts is maintained based on an assessment of the
customers financial condition and historical bad debt
experience. Collateral or other security is generally not
required for trade accounts receivable.

Inventories.Inventories are stated at the lower of cost (first-in, first-out
method) or market. In fiscal 2004, 2003 and 2002, the Company
incurred charges of $1,925, $6,805 and $13,835, respectively, to
write-off inventory considered obsolete or excessive to fulfill
future sales estimates.

Property, plant and
equipment.Properties are stated on
the basis of cost. For financial reporting purposes the Company
amortizes such costs by annual charges to income, computed on
the straight-line method using estimated useful lives of 5 to
35 years for buildings and improvements, 3 to 15 years
for machinery and equipment and 5 to 10 years for furniture
and fixtures. Accelerated methods are generally used for income
tax purposes.

Research and development
costs.Costs associated with the
development of new products are charged to expense when incurred.

Advertising.The
Company expenses all advertising costs as incurred. Advertising
expenses in fiscal 2004, 2003 and 2002 were $474, $295 and $548,
respectively.

Revenue recognition.Revenue from product sales, net of trade discounts, is
recognized when title passes, which generally occurs upon
shipment. The Company handles returns by replacing, repairing or
issuing credit for defective products when returned. Returns
were $133, $929 and $5,816, respectively, in fiscal 2004, 2003
and 2002. The Company establishes an allowance for returns based
on any known and anticipated returns. At the end of each of the
years, the amount recorded as a reserve for returns was not
significant to the consolidated financial statements.

The Company operates in markets that were
affected by a severe economic downturn that began late in the
third quarter of fiscal 2001 and escalated during the first
quarter of fiscal 2002. As a result, many customers began to
experience excess inventory levels and requested permission to
return merchandise for which they had previously accepted
delivery or declined to accept delivery of the merchandise after
shipment from our facility. The majority of this activity took
place during the first six months of fiscal 2002. In
consideration of the contemplation of future business, the
Company did accept return of merchandise previously shipped to
certain customers during fiscal 2002. The amount of returns for
these shipments were approximately $3,700 in fiscal 2002. In
addition, returns for shipments declined by the customers
amounted to approximately $640. Similar return levels were not
experienced in fiscal 2004 and 2003.

Shipping and handling fees and
costs.The Company includes shipping
and handling costs in costs of sales.

F-7



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


License fees and
royalties.License fees and royalties
represent revenue from license agreements for patented
technology which also is used by the Company in its optical
subsystems. The license agreements generally provide for fixed
up-front payments and/or future fixed payments or continuing
royalty payments based on a percentage of sales of the licensed
products. The timing and amounts of these payments is beyond the
Companys control. Accordingly, the amount recorded in any
given period is expected to vary significantly. The duration of
these license agreements extend generally until the expiration
of the licensed patents which range from 2004 to 2024. Legal
settlements received related to present infringement cases are
also considered to be royalties because such amounts are in
settlement of previous use of the Companys technology and
products by third parties.

Income taxes.The
Company files consolidated U.S. and state income tax returns as
required. Deferred tax assets and liabilities are recognized for
the expected tax consequences of temporary differences between
the tax bases of assets and their reported amounts, and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company
assesses on an ongoing basis the need for valuation reserves
against net deferred tax assets.

Long-lived assets.The Company periodically reviews long-lived assets to determine
if there are indicators of impairment. When indicators of
impairment are present, the Company evaluates the carrying value
of property, plant, and equipment and intangibles, including
goodwill, in relation to the operating performance and future
undiscounted cash flows of the underlying businesses. The
Company adjusts the net carrying value of the underlying assets
if the sum of the expected future undiscounted cash flows is
less than carrying value.

During fiscal 2003 the Company reviewed the
carrying value of its long-lived assets (excluding goodwill) in
light of significant declines in sales, earnings and cash flows
and determined that substantially all of the Companys
long-lived assets would not be recoverable. In accordance with
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
recorded in fiscal 2003 non-cash charges of $37,105 to reduce
the carrying value of these long-lived assets to their fair
value. See Note 4 to Consolidated Financial Statements.

Due to restructuring during fiscal 2002 of the
Companys product offerings, along with current and
expected market conditions in the bandwidth marketplace, it
became apparent that the goodwill and fixed assets acquired with
the Bandwidth acquisition were impaired. In accordance with its
policies, the Company completed evaluations of the fair value of
the Bandwidth long-lived assets, including goodwill, during the
quarter ended April 30, 2002. The Company recorded non-cash
impairment charges of $11,800 and $8,500 for fixed assets and
goodwill, respectively, to reduce the carrying value of recorded
fixed assets and goodwill to their estimated fair value.

In addition, the Company recorded non-cash
charges of $1,000 and $900 in fiscal 2002 for impairment of the
corporate aircraft and fixed assets related to the exit from the
single ferrule connector business, respectively, to reduce the
carrying value of such assets to their estimated fair value.

Assets held for
sale.Assets held for sale represent
real property that is no longer in use and is being actively
marketed for sale. Management expects to complete these sales
transactions within a one-year period. The Company recorded a
charge of $910 in fiscal 2004 to adjust the carrying value of
assets held for sale to their estimated net realization value.

Foreign currency
translation.The functional currencies
of the Companys foreign subsidiaries are local currencies.
Accordingly, the results of operations of the Companys
foreign operations are translated into U.S. dollars using
average exchange rates during the year, while the assets and
liabilities are translated using period end exchange rates.
Adjustments as a result of the translation process are included
in accumulated other comprehensive income.

F-8



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


Intangibles.Prior
to fiscal 2003, the excess of purchase price over the estimated
fair value of net assets of acquired companies has been
amortized on a straight-line basis over 25 years. In
accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, the excess purchase
price for the acquisitions of Tsunami Optics, Inc. and Paracer,
Inc. was not amortized because the acquisitions occurred after
July 1, 2001.

In accordance with the provisions of
SFAS No. 142, the Company performed the transitional
goodwill impairment evaluation during the second quarter of
fiscal 2003. This transitional impairment test resulted in an
impairment of goodwill of approximately $16,982 as of
May 1, 2002. This one-time non-cash charge is reflected as
a cumulative effect of a change in accounting principle in the
Consolidated Statement of Operations for fiscal 2003.

In addition, in accordance with the provisions of
SFAS No. 142, the Company performed its annual
goodwill impairment review during the fourth quarter of fiscal
2003 and 2004. The fiscal 2003 review indicated additional
impairment existed and a non-cash charge of approximately
$28,429 classified as general and administrative in the
Consolidated Statement of Operations for fiscal 2003, was
recorded. No additional impairment charges were recorded in
fiscal 2004.

In accordance with SFAS No. 2,
Accounting for Research and Development Costs, as
interpreted by Financial Accounting Standards Board
(FASB) Interpretation No. 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted
for by the Purchase Method,amounts assigned to purchased
in-process research and development in a purchase business
combination must be charged to expense at the date of
consummation of the purchase business combination. In connection
with the Tsunami and Paracer acquisitions, the Company recorded
a $2,070 charge to in-process research and development during
the second quarter of fiscal 2003. The charge has been
classified as research and development in the Consolidated
Statement of Operations for fiscal 2003.

Financial
instruments.The Companys
financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable,
accrued expenses and long-term debt. The fair values of these
investments approximates their net carrying values.

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

Stock Based
Compensation.The Company has elected
to follow Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to
Employees,and related interpretations in accounting
for its employee stock options and awards. Under APB
No. 25, employee stock options are valued using the
intrinsic method, and no compensation expense is recognized
since the exercise price of the options equals or is greater
than the fair market value of the underlying stock as of the
date of the grant.

F-9



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


The following table shows the effect on net loss
and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123,
Accounting for Stock Based Compensation.

|                                                                                                                                                       |  |                             |         |      |  |      |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                                                                                                                       |  |                            
|                                                                                                                                                       |  | Fiscal Year Ended April 30,
|                                                                                                                                                       |  |                            
|                                                                                                                                                       |  | 2004                        |         | 2003 |  | 2002
|                                                                                                                                                       |  |                             |         |      |  |     
|Net loss attributable to common shareholders, as
    reported                                                                                          |  | $                           | (27,227 | )    |  | $    | (120,291 | ) |  | $ | (72,190 | )
|Deduct: Total stock based employee compensation
    expense determined under fair value based method for all awards,
    net of the related tax effect |  |                             | (2,040  | )    |  |      | (6,766   | ) |  |   | (22,049 | )
|                                                                                                                                                       |  |                             |         |      |  |      |          |   |  |   |         |  
|Pro forma net loss attributable to common
    shareholders                                                                                             |  |                             | (29,267 | )    |  | $    | (127,057 | ) |  | $ | (94,239 | )
|                                                                                                                                                       |  |                             |         |      |  |      |          |   |  |   |         |  
|Basic and diluted loss per share, as reported                                                                                                          |  | $                           | (2.61   | )    |  | $    | (16.44   | ) |  | $ | (11.06  | )
|Basic and diluted loss per share, pro forma                                                                                                            |  |                             | (2.80   | )    |  |      | (17.36   | ) |  |   | (14.40  | )

Recent Accounting Pronouncements

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, effective for exit or disposal
activities initiated after December 31, 2002. The
Companys current restructuring plan, initiated in fiscal
2003, was not accounted for under SFAS No. 146. The
Company recorded a pre-tax charge of approximately $3,100 when
Company management approved the current restructuring plan. If
the Company had accounted for this restructuring plan under
SFAS No. 146, $400 of the $3,100 charge would have
been recognized as incurred and not accrued in fiscal 2003.

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This
statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts.
SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003. The adoption of this
statement did not have a material effect on the Companys
consolidated financial statements.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. The adoption of this statement did not have any
effect on the Companys consolidated financial statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin No. 51
(FIN 46), which requires variable interest
entities (commonly referred to as SPEs) to be
consolidated by the primary beneficiary of the entity if certain
criteria are met. FIN 46 is effective immediately for all
new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 became effective for the Company during its third
quarter 2004. The adoption of FIN 46 had no effect on the
Company.

Reclassifications

Certain amounts previously reported in fiscal
2003 and 2002 have been reclassified to conform with the
presentation used in fiscal 2004.



|        |                      
|------- | ---------------------
|Note 2. | Business Combinations



| |            
| | -----------
| | Fiscal 2004

In November 2003, the Company acquired Sterling
Holding Company (Sterling), a privately-held company
based in Mesa, Arizona that designs and manufactures Radio
Frequency (RF) and Microwave

F-10



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


interconnect products via its two operating
units, Trompeter Electronics, Inc. and Semflex, Inc. The Company
completed this merger on November 6, 2003, following
approval by both Company and Sterling shareholders. At closing,
Sterling became a wholly-owned subsidiary of the Company, with
Sterling shareholders receiving 6,082,000 shares of the
Companys common stock, which represented approximately 82%
of the Companys total shares outstanding immediately prior
to the consummation of the merger. Of such amount,
608,189 shares were placed in escrow to provide
indemnification to the Company with respect to certain matters
provided for in the merger agreement. Company common shares
issued in this transaction were valued at $5.09 a share, the
closing price on July 2, 2003, the day the merger was
announced. The Company also issued 50,000 shares of
Series B redeemable preferred stock with a face value of
$5,000 and a contingent value of up to an additional $6,250
based on certain events, including the future performance of the
Companys share price. The total purchase consideration was
$38,755, consisting of common and preferred shares of Company
stock valued at $35,957 and $2,798 of acquisition related costs.

In connection with the transaction, the Company
expanded its Board of Directors to nine members. The new board
is comprised of four members of the Companys Board at the
time of the closing of the merger, four members from
Sterlings Board, and an additional director chosen by
Sterling.



| |            
| | -----------
| | Fiscal 2002

On March 28, 2002, the Company acquired all
of the outstanding common stock of Paracer, Inc. for
approximately 5.5 million shares of the Companys
common stock valued at $21,832, and $482 in cash. In addition,
the Company assumed approximately $1,000 of debt, net of cash
acquired. At the time of the acquisition, Paracer designed and
manufactured parallel optics transceivers and subsystems.

On February 4, 2002, the Company acquired
all of the outstanding common stock of Tsunami Optics, Inc. in
exchange for approximately 3,200,000 shares of the
Companys common stock valued at $15,879, and $4,774 in
cash. In addition, the Company assumed approximately $5,900 of
debt, plus certain expenses in connection with the transaction,
including a loan of approximately $3,800 made by the Company to
Tsunami prior to the acquisition. The $3,800 loan was converted
to additional capital subsequent to the acquisition. At the time
of the acquisition, Tsunami developed and manufactured
innovative fiber optic components and modules.

On May 31, 2001, the Company purchased
substantially all of the net assets of the Optical Flexcircuits
division of Advanced Interconnection Technology, Inc., a
manufacturer of fiber optic circuits located in Hauppauge, New
York, for $8,117 in cash including costs of acquisition.

F-11



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


The allocation of the purchase price to the net
assets acquired was as follows:

|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |        |        | 
|-------------------------------------- | ----------------------------------- | ----------------- | ------ | --------------- | ------ | ------------ | ----- | ------------- | --- | - | ------ | ------ | ----- | - | ------ | ------ | ------ | 
|                                       |                                     | Sterling          |        | Advanced        |        |              |       |              
|                                       |                                     | Holding           |        | Interconnection |        | Tsunami      |       |              
|Amount Allocated To:                   |                                     | Company           |        | Technology      |        | Optics, Inc. |       | Paracer, Inc.
|                                       |                                     |                   |        |                 |        |              |       |              
|Assets acquired:                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|                                       | Cash                                |                   | $      | 10,918          |        |              | $     |              |     |   | $      | 79     |       |   | $      | 3,144  |       
|                                       | Accounts receivable                 |                   |        | 5,312           |        |              |       |              |     |   |        | 162    |       |   |        | 30     |       
|                                       | Inventories                         |                   |        | 7,785           |        |              |       | 559           |     |   |        | 827    |       |   |        |       |       
|                                       | In process research and development |                   |        |                |        |              |       |              |     |   |        | 130    |       |   |        | 1,940  |       
|                                       | Developed technology                |                   |        | 3,185           |        |              |       |              |     |   |        | 490    |       |   |        | 6,020  |       
|                                       | Computer software                   |                   |        | 700             |        |              |       |              |     |   |        | 87     |       |   |        | 66     |       
|                                       | Company trade names                 |                   |        | 2,700           |        |              |       |              |     |   |        | 660    |       |   |        | 540    |       
|                                       | Customer relationships              |                   |        | 10,800          |        |              |       |              |     |   |        |       |       |   |        |       |       
|                                       | Deferred income taxes               |                   |        | 7,572           |        |              |       |              |     |   |        |       |       |   |        |       |       
|                                       | Property, plant and equipment       |                   |        | 8,489           |        |              |       | 318           |     |   |        | 1,286  |       |   |        | 1,237  |       
|                                       | Other                               |                   |        | 3,099           |        |              |       | 50            |     |   |        | 417    |       |   |        | 299    |       
|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|                                       |                                     | Total assets      |        |                 | 60,560 |              |       |               | 927 |   |        |        | 4,318 |   |        |        | 13,276 | 
|Liabilities assumed:                   |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|                                       | Notes payable                       |                   |        |                |        |              |       |              |     |   |        | 2,118  |       |   |        | 3,722  |       
|                                       | Accounts payable                    |                   |        | 1,430           |        |              |       |              |     |   |        | 1,254  |       |   |        | 156    |       
|                                       | Accrued expenses                    |                   |        | 3,673           |        |              |       | 180           |     |   |        | 350    |       |   |        | 719    |       
|                                       | Dividend payable                    |                   |        | 12,000          |        |              |       |              |     |   |        |       |       |   |        |       |       
|                                       | Deferred income taxes               |                   |        | 8,112           |        |              |       |              |     |   |        |       |       |   |        |       |       
|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|                                       |                                     | Total liabilities |        |                 | 25,215 |              |       |               | 180 |   |        |        | 3,722 |   |        |        | 4,597  | 
|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|                                       | Net assets acquired                 |                   |        | 35,345          |        |              |       | 747           |     |   |        | 416    |       |   |        | 8,679  |       
|                                       | Goodwill                            |                   |        | 3,410           |        |              |       | 7,370         |     |   |        | 20,237 |       |   |        | 13,635 |       
|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|                                       | Purchase price                      |                   | $      | 38,755          |        |              | $     | 8,117         |     |   | $      | 20,653 |       |   | $      | 22,314 |       
|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|Cash paid, including transaction costs |                                     | $                 | 2,798  |                 |        | $            | 8,117 |               |     | $ | 4,774  |        |       | $ | 482    |       
|Stock consideration                    |                                     |                   | 35,957 |                 |        |              |      |               |     |   | 15,879 |        |       |   | 21,832 |       
|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       
|Total purchase price                   |                                     | $                 | 38,755 |                 |        | $            | 8,117 |               |     | $ | 20,653 |        |       | $ | 22,314 |       
|                                       |                                     |                   |        |                 |        |              |       |               |     |   |        |        |       |   |        |       

Independent valuation specialists identified
$17,385 of intangible assets in the acquisition of Sterling.
These intangible assets and their associated useful lives are as
follows (in thousands):

|                               |  |        |        |             |  |  |             | 
|------------------------------ |  | ------ | ------ | ----------- |  |  | ----------- | 
|                               |  | Amount |        | Useful Life
|                               |  |        |        |            
|Patents and related technology |  | $      | 3,185  |             |  |  | 14.25 years | 
|Developed software             |  |        | 700    |             |  |  | 5.00 years  | 
|Tradenames                     |  |        | 2,700  |             |  |  | Indefinite  | 
|Customer relationships         |  |        | 10,800 |             |  |  | 12.50 years | 
|                               |  |        |        |             |  |  |             | 
|                               |  | $      | 17,385 |             |  |  |             | 
|                               |  |        |        |             |  |  |             | 

F-12



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


On April 30, 2004, the Company assigned its
60% interest in MP Optical Communications L.L.C. to the minority
shareholder of that entity. As a result of the assignment, the
Company realized a net gain of approximately $114.

The above-described acquisitions were accounted
for using the purchase method of accounting and the results of
operations of the acquired companies have been included in the
Companys consolidated financial statements from their
respective dates of acquisition. Had the acquisitions been made
as of the beginning of fiscal 2002, unaudited pro forma sales
and operating results would have been as follows:

|                                      |                           |         |   |           |   |             |   |              |   |  |   |        |   |  |   |          |  
|------------------------------------- | ------------------------- | ------- | - | --------- | - | ----------- | - | ------------ | - |  | - | ------ | - |  | - | -------- | -
|                                      |                           |         |   | Acquired  |   | Pro Forma   |   |             
|                                      |                           | Stratos |   | Companies |   | Adjustments |   | Consolidated
|                                      |                           |         |   |           |   |             |   |             
|Net Sales:                            |                           |         |   |           |   |             |   |              |   |  |   |        |   |  |   |         
|                                      | Year Ended April 30, 2004 |         | $ | 49,379    |   |             | $ | 17,601       |   |  | $ |       |   |  | $ | 66,980   |  
|                                      | Year Ended April 30, 2003 |         |   | 37,236    |   |             |   | 38,704       |   |  |   |       |   |  |   | 75,940   |  
|                                      | Year Ended April 30, 2002 |         |   | 56,387    |   |             |   | 46,430       |   |  |   |       |   |  |   | 102,817  |  
|                                     
|Net Loss:                             |                           |         |   |           |   |             |   |              |   |  |   |        |   |  |   |         
|                                      | Year Ended April 30, 2004 |         |   | (27,085   | ) |             |   | (5,825       | ) |  |   | (997   | ) |  |   | (33,907  | )
|                                      | Year Ended April 30, 2003 |         |   | (120,291  | ) |             |   | 2,297        |   |  |   | (1,994 | ) |  |   | (119,988 | )
|                                      | Year Ended April 30, 2002 |         |   | (72,190   | ) |             |   | (12,896      | ) |  |   | (1,994 | ) |  |   | (87,080  | )
|                                     
|Net Loss per Share, basic and diluted |                           |         |   |           |   |             |   |              |   |  |   |        |   |  |   |         
|                                      | Year Ended April 30, 2004 |         |   | (2.61     | ) |             |   | (.56         | ) |  |   | (.09   | ) |  |   | (3.26    | )
|                                      | Year Ended April 30, 2003 |         |   | (16.44    | ) |             |   | .31          |   |  |   | (.27   | ) |  |   | (16.40   | )
|                                      | Year Ended April 30, 2002 |         |   | (11.06    | ) |             |   | (1.98        | ) |  |   | (.31   | ) |  |   | (13.35   | )

The pro forma adjustments represent additional
depreciation of the step-up in value of fixed assets and
amortization of intangibles of Sterling.

The pro forma results reported above are not
necessarily indicative of future results.

Because of current tax regulations, the goodwill
related to the acquisition of Sterling cannot be deducted for
federal and state income tax purposes.



|        |                                     
|------- | ------------------------------------
|Note 3. | Goodwill and Other Intangible Assets

In June 2001, the FASB issued
SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after
December 15, 2001. Under these rules, goodwill and
intangible assets deemed to have indefinite lives will no longer
be amortized but are subject to annual impairment tests in
accordance with the Statements. Intangible assets with finite
lives continue to be amortized over those useful lives. Goodwill
amortization expense in fiscal 2002 was $848 ($0.13 per
share). The non-amortization of goodwill provisions of
SFAS No. 142 were adopted at the beginning of fiscal
2003.

Purchased in-process research and development
represents the value assigned in a purchase business combination
to research and development projects of the acquired business
that were commenced but not yet completed at the date of
acquisition, for which technological feasibility has not been
established and which have no alternative future use in research
and development activities or otherwise. In accordance with
SFAS No. 2, Accounting for Research and Development
Costs, as interpreted by FASB Interpretation No. 4,
amounts assigned to purchased in-process research and
development meeting the above criteria must be charged to
expense at the date of consummation of the purchase business
combination. In connection with the Tsunami and Paracer
acquisitions, the Company recorded a $2,070 charge to in-process
research and

F-13



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


development during the second quarter of fiscal
2003. The charge has been classified as research and development
in the Consolidated Statement of Operations for fiscal 2003.

For the transitional goodwill impairment
evaluation, SFAS No. 142 required the Company to
perform an assessment of whether there was an indication that
goodwill was impaired as of the date of adoption, or step one of
the impairment test. To implement SFAS No. 142, the
Company identified reporting units consistent with the way the
Company is managed. The Company then determined the carrying
value of each reporting unit by allocating the assets and
liabilities, including the goodwill and intangible assets, to
the units as of the date of adoption. The Company had up to six
months from the date of adoption to determine the fair value of
each reporting unit and compare it to the reporting units
carrying value. If a reporting units carrying amount
exceeds its fair value, an indication exists that the reporting
units goodwill is impaired, and the Company would be
required to perform the second step of the transitional
impairment test.

During the second quarter of fiscal 2003, the
Company performed its transitional goodwill impairment test in
accordance with SFAS No. 142 which included step one
as described above for each of the reporting units. Results of
step one indicated that the goodwill associated with the active
optical subsystems reporting unit was impaired since the
estimated fair value of the assets of this unit, based on
expected future discounted cash flows to be generated by the
unit, was less than their carrying value. Pursuant to the second
step of the test, the Company compared the implied fair value of
the units goodwill (determined by allocating the
units fair value based on expected future discounted cash
flows, to all of its assets, recognized and unrecognized, and
liabilities in a manner similar to a purchase price allocation
for an acquired business) to its carrying value. The Company did
not obtain independent valuations of unrecognized intangible
assets or fixed assets since the units fair value
indicated full impairment of its goodwill.

Significant negative industry and economic trends
affecting the Companys current and future operations, and
therefore future cash flows, contributed to the transitional
impairment test resulting in an impairment of goodwill related
to the active optical subsystems reporting unit of $16,982. This
non-cash charge is classified as a cumulative effect of a change
in accounting principle in the Consolidated Statement of
Operations for fiscal 2003.

Effective February 1, 2003, the Company
performed its annual impairment review of goodwill utilizing
similar procedures that it used to perform its transitional
goodwill impairment test described above. Results of this review
indicated that an impairment existed within the passive optical
subsystems reporting unit since the estimated fair value of the
assets of this unit, based on expected future discounted cash
flows to be generated by the unit, was less than their carrying
value. Pursuant to this test, the Company compared the implied
fair value of the units goodwill (determined by allocating
the units fair value based on expected future discounted
cash flows, to all of its assets, recognized and unrecognized,
and liabilities in a manner similar to a purchase price
allocation for an acquired business) to its carrying value. The
Company performed these tests after applying the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to identifiable intangible
assets and fixed assets. The units fair value determined
by these tests indicated full impairment of its goodwill.

Continued significant negative industry and
economic trends affecting the Companys current and future
operations, and therefore future cash flows, contributed to the
annual impairment test resulting in an impairment of goodwill
related to the passive optical subsystems reporting unit of
approximately $28,429. This non-cash charge is reflected in
general and administrative expenses in the Consolidated
Statement of Operations for fiscal 2003. No additional
impairment charges were recorded in fiscal 2004.

Annual expense for intangible assets subject to
amortization is expected to approximate $1,500 in each of the
next five years.

F-14



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)




|        |                                
|------- | -------------------------------
|Note 4. | Impairment of Long-Lived Assets

SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, requires that
long-lived assets to be held and used be evaluated for
impairment. The general process requires consideration of
whether indicators of impairment are present. If present, a
determination whether the sum of the estimated undiscounted
future cash flows attributable to the long-lived assets is less
than their carrying value. If less, to recognize an impairment
loss based on the excess of the carrying amount of the
long-lived assets over their respective fair value.

During the third and fourth quarters of fiscal
2003 the Company gathered information to determine if the
indicators of impairment were present. Early in the fourth
quarter it became apparent that the sustained downturn in
business under the Companys current business model was not
able to generate sufficient cash flows and the pursuit of a new
direction for the Company was necessary. It was the decision of
management to formulate a plan for presentation to the Board of
Directors during the fourth quarter that would deploy its core
competency into a new strategic plan. The plan calls for the
closing of some of the Companys business units and the
consolidation of others. Management acknowledged the fact that
it needed time to decide the future of the Company and
therefore, the formulation of the strategic plan took a good
portion of the fourth quarter. At the conclusion of the
formulation process, cash flows were prepared utilizing the
assumptions and reorganization contemplated by the new plan. It
was evident from the new cash flows (based upon the
reorganization) that an indication of impairment was present and
that a triggering event had taken place in the fourth quarter.
Accordingly, a SFAS No. 144 review of the
Companys long-lived assets was necessary. These current
cash flow projections demonstrated that the estimated
undiscounted cash flows were not sufficient to recover the
carrying value of long-lived assets, requiring the Company to
determine the fair value of long-lived assets. The Company made
the decision to evaluate the fair value of the long-lived assets
at the level of the active and passive optical subsystems
reporting units and engaged an independent appraisal firm to
compute the fair value of these asset groups. The independent
appraiser computed the fair value of the long-lived assets based
upon the expected future discounted cash flows to be generated
by each unit. The Company in turn reviewed the fair value
computed by the independent appraiser to ensure that the value
determined was not less than the known or perceived fair market
value of the assets. Results of these computations indicated
that an impairment existed within each reporting unit since the
estimated fair value of the assets of each reporting unit was
less than their carrying value. A non-cash charge for impairment
of long-lived assets of approximately $37,105 was recorded in
the fourth quarter of fiscal 2003.

This charge has been classified in the fiscal
2003 Consolidated Statement of Operations as follows:

|                           |  |   |        | 
|-------------------------- |  | - | ------ | 
|Cost of sales              |  | $ | 16,405 | 
|Research and development   |  |   | 16,900 | 
|General and administrative |  |   | 3,800  | 
|                           |  |   |        | 
|Total                      |  | $ | 37,105 | 
|                           |  |   |        | 



|        |                      
|------- | ---------------------
|Note 5. | Restructuring Charges

The Company recorded restructuring charges of
approximately $3,066, $3,100 and $31,200 in fiscal 2004, 2003
and fiscal 2002 respectively, related to the consolidation and
elimination of various operating units. These charges included
excess and obsolete inventory, goodwill and fixed asset
impairment, personnel, bad debt, and legal costs related to the
restructuring of operations.

F-15



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


Accruals related to the restructuring charges and
the subsequent activity are summarized as follows:

|                            |  |           |     |         |  |                  |       |           |  |   |       |     |  |   |     | 
|--------------------------- |  | --------- | --- | ------- |  | ---------------- | ----- | --------- |  | - | ----- | --- |  | - | --- | 
|                            |  | Balance   |     |         |  |                  |       | Balance  
|                            |  | April 30, |     | 2004    |  | Utilized through |       | April 30,
|                            |  | 2003      |     | Charges |  | April 30, 2004   |       | 2004     
|                            |  |           |     |         |  |                  |       |          
|Employee costs              |  | $         | 400 |         |  | $                | 1,026 |           |  | $ | 1,186 |     |  | $ | 240 | 
|Other costs                 |  |           |    |         |  |                  | 392   |           |  |   | 392   |     |  |   |    | 
|                            |  |           |     |         |  |                  |       |           |  |   |       |     |  |   |     | 
|Cash charge                 |  |           | 400 |         |  |                  | 1,418 |           |  |   | 1,578 |     |  |   | 240 | 
|Asset impairment            |  |           |    |         |  |                  | 910   |           |  |   | 910   | (1) |  |   |    | 
|Limited use facility rental |  |           |    |         |  |                  | 738   |           |  |   |      |     |  |   | 738 | 
|                            |  |           |     |         |  |                  |       |           |  |   |       |     |  |   |     | 
|Non-cash charge             |  |           |    |         |  |                  | 1,648 |           |  |   | 910   |     |  |   | 738 | 
|                            |  |           |     |         |  |                  |       |           |  |   |       |     |  |   |     | 
|Total charge                |  | $         | 400 |         |  | $                | 3,066 |           |  | $ | 2,488 |     |  | $ | 978 | 
|                            |  |           |     |         |  |                  |       |           |  |   |       |     |  |   |     | 

|                      |  |           |       |         |  |                  |       |           |  |   |       |     |  |   |     | 
|--------------------- |  | --------- | ----- | ------- |  | ---------------- | ----- | --------- |  | - | ----- | --- |  | - | --- | 
|                      |  | Balance   |       |         |  |                  |       | Balance  
|                      |  | April 30, |       | 2003    |  | Utilized through |       | April 30,
|                      |  | 2002      |       | Charges |  | April 30, 2003   |       | 2003     
|                      |  |           |       |         |  |                  |       |          
|Employee costs        |  | $         | 850   |         |  | $                | 2,800 |           |  | $ | 3,250 |     |  | $ | 400 | 
|Legal and other costs |  |           | 1,210 |         |  |                  | 100   |           |  |   | 1,310 |     |  |   |    | 
|                      |  |           |       |         |  |                  |       |           |  |   |       |     |  |   |     | 
|Cash charge           |  |           | 2,060 |         |  |                  | 2,900 |           |  |   | 4,560 |     |  |   | 400 | 
|Asset impairment      |  |           |      |         |  |                  | 200   |           |  |   | 200   | (1) |  |   |    | 
|                      |  |           |       |         |  |                  |       |           |  |   |       |     |  |   |     | 
|Non-cash charge       |  |           |      |         |  |                  | 200   |           |  |   | 200   |     |  |   |    | 
|                      |  |           |       |         |  |                  |       |           |  |   |       |     |  |   |     | 
|Total charge          |  | $         | 2,060 |         |  | $                | 3,100 |           |  | $ | 4,760 |     |  | $ | 400 | 
|                      |  |           |       |         |  |                  |       |           |  |   |       |     |  |   |     | 

F-16



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


|                      |  |           |   |         |  |                  |        |           |  |   |        |     |  |   |       | 
|--------------------- |  | --------- | - | ------- |  | ---------------- | ------ | --------- |  | - | ------ | --- |  | - | ----- | 
|                      |  | Balance   |   |         |  |                  |        | Balance  
|                      |  | April 30, |   | 2002    |  | Utilized through |        | April 30,
|                      |  | 2001      |   | Charges |  | April 30, 2002   |        | 2002     
|                      |  |           |   |         |  |                  |        |          
|Employee costs        |  | $         |  |         |  | $                | 850    |           |  | $ |       |     |  | $ | 850   | 
|Legal and other costs |  |           |  |         |  |                  | 1,850  |           |  |   | 640    |     |  |   | 1,210 | 
|                      |  |           |   |         |  |                  |        |           |  |   |        |     |  |   |       | 
|Cash charge           |  |           |  |         |  |                  | 2,700  |           |  |   | 640    |     |  |   | 2,060 | 
|Asset impairment      |  |           |  |         |  |                  | 13,700 |           |  |   | 13,700 | (1) |  |   |      | 
|Goodwill impairment   |  |           |  |         |  |                  | 8,500  |           |  |   | 8,500  | (1) |  |   |      | 
|Inventory             |  |           |  |         |  |                  | 6,300  |           |  |   | 6,300  | (1) |  |   |      | 
|                      |  |           |   |         |  |                  |        |           |  |   |        |     |  |   |       | 
|Non-cash charge       |  |           |  |         |  |                  | 28,500 |           |  |   | 28,500 |     |  |   |      | 
|                      |  |           |   |         |  |                  |        |           |  |   |        |     |  |   |       | 
|Total charge          |  | $         |  |         |  | $                | 31,200 |           |  | $ | 29,140 |     |  | $ | 2,060 | 
|                      |  |           |   |         |  |                  |        |           |  |   |        |     |  |   |       | 



---



|    |                                                         
|--- | --------------------------------------------------------
|(1) | Offset against carrying values of respective
    assets.

These expenses have been classified in the
Consolidated Statement of Operations as follows:

|                           |       |                            |       |       |  |      |       |       |  |   |        |        | 
|-------------------------- | ----- | -------------------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ------ | ------ | 
|                           |       |                           
|                           |       | Fiscal Year Ended April 30
|                           |       |                           
|                           |       | 2004                       |       | 2003  |  | 2002
|                           |       |                            |       |       |  |     
|Cost of sales              |       | $                          | 363   |       |  | $    | 900   |       |  | $ | 8,300  |       
|Research and development   |       |                            | 474   |       |  |      | 1,100 |       |  |   | 500    |       
|General and administrative |       |                            | 2,229 |       |  |      | 1,100 |       |  |   | 22,400 |       
|                           |       |                            |       |       |  |      |       |       |  |   |        |       
|                           | Total |                            | $     | 3,066 |  |      | $     | 3,100 |  |   | $      | 31,200 | 
|                           |       |                            |       |       |  |      |       |       |  |   |        |       

The Company terminated 95, 198 and 94
employees in fiscal 2004, 2003 and 2002, respectively, during
the restructuring of its operations, including both production
and administrative personnel. Severance pay in the amount or
$120 relative to these terminations will be paid out during
fiscal 2005 and the remainder will be paid out in fiscal 2006.



|        |             
|------- | ------------
|Note 6. | Income Taxes

The Company has recorded a valuation allowance
against deferred income tax assets primarily associated with tax
loss carry forwards based on the significant operating losses
experienced. As a result, valuation allowances of $55,309 were
recorded through April 30, 2003, which eliminated the tax
benefit attributable to the losses incurred in fiscal years 2002
and 2003. We have continued to experience operating losses
during the fiscal year 2004, and an additional valuation reserve
of $9,930 was recorded, which eliminated the tax benefit
attributable to the net loss incurred in fiscal 2004.

F-17



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


Significant components of the Companys
deferred tax assets and liabilities were as follows:

|                                    |                                                                                                      |                 |         |         |   |   |        |         |  
|----------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------- | ------- | ------- | - | - | ------ | ------- | -
|                                    |                                                                                                      |                
|                                    |                                                                                                      | As of April 30,
|                                    |                                                                                                      |                
|                                    |                                                                                                      | 2004            |         | 2003   
|                                    |                                                                                                      |                 |         |        
|Deferred income tax assets:         |                                                                                                      |                 |         |         |   |   |        |        
|                                    | Allowance for doubtful accounts                                                                      |                 | $       | 206     |   |   | $      | 166     |  
|                                    | Inventory reserves                                                                                   |                 |         | 4,388   |   |   |        | 4,773   |  
|                                    | Basis difference in assets                                                                           |                 |         |        |   |   |        | 4,729   |  
|                                    | Impairment of long-lived assets                                                                      |                 |         | 11,131  |   |   |        | 14,842  |  
|                                    | Deferred compensation                                                                                |                 |         | 238     |   |   |        | 100     |  
|                                    | Net operating loss carryforwards                                                                     |                 |         | 62,854  |   |   |        | 36,819  |  
|                                    | Vacation accrual                                                                                     |                 |         | 332     |   |   |        | 168     |  
|                                    | Other                                                                                                |                 |         | 406     |   |   |        |        |  
|                                    |                                                                                                      |                 |         |         |   |   |        |        
|                                    |                                                                                                      |                 | 79,555  |         |   |   | 61,597 |        
|                                    | Valuation allowance                                                                                  |                 |         | (65,239 | ) |   |        | (55,309 | )
|                                    |                                                                                                      |                 |         |         |   |   |        |        
|Deferred income tax liabilities:    |                                                                                                      |                 | 14,316  |         |   |   | 6,288  |        
|                                    | Accelerated tax depreciation                                                                         |                 |         | (8,033  | ) |   |        | (5,875  | )
|                                    | Additional depreciation and amortization on the
    step-up in value of fixed assets and intangibles |                 |         | (5,800  | ) |   |        |        |  
|                                    | Investment basis differences                                                                         |                 |         | (928    | ) |   |        | (495    | )
|                                    |                                                                                                      |                 |         |         |   |   |        |        
|                                    |                                                                                                      |                 | (14,761 | )       |   |   | (6,370 | )      
|                                    |                                                                                                      |                 |         |         |   |   |        |        
|Net deferred income tax liabilities |                                                                                                      | $               | (445    | )       |   | $ | (82    | )      
|                                    |                                                                                                      |                 |         |         |   |   |        |        

Income taxes consisted of the following:

|         |                  |                             |        |        |   |      |   |   |  |   |        |        |  
|-------- | ---------------- | --------------------------- | ------ | ------ | - | ---- | - | - |  | - | ------ | ------ | -
|         |                  |                            
|         |                  | Fiscal Year Ended April 30,
|         |                  |                            
|         |                  | 2004                        |        | 2003   |   | 2002
|         |                  |                             |        |        |   |     
|Current: |                  |                             |        |        |   |      |   |   |  |   |        |       
|         | Federal (credit) |                             | $      |       |   |      | $ |  |  |   | $      | (2,778 | )
|         | Foreign          |                             |        |       |   |      |   |  |  |   |        |       |  
|         | State (credit)   |                             |        | (1,797 | ) |      |   |  |  |   |        | (224   | )
|         |                  |                             |        |        |   |      |   |   |  |   |        |       
|         |                  |                             | (1,797 | )      |   |      |  |   |  |   | (3,002 | )     
|Deferred |                  |                             |       |        |   |      |  |   |  |   | 421    |       
|         |                  |                             |        |        |   |      |   |   |  |   |        |       
|         |                  | $                           | (1,797 | )      |   | $    |  |   |  | $ | 2,581  |       
|         |                  |                             |        |        |   |      |   |   |  |   |        |       

The current state credit represents the
additional carryback of net operating losses to the taxable
income of prior years.

F-18



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


A reconciliation of the consolidated provisions
for income taxes to amounts determined by applying the
prevailing statutory federal income tax rate of 35% to pre-tax
earnings is as follows:

|                                    |                                                                                    |                             |         |        |   |      |         |        |   |   |         |        |  
|----------------------------------- | ---------------------------------------------------------------------------------- | --------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                    |                                                                                    |                            
|                                    |                                                                                    | Fiscal Year Ended April 30,
|                                    |                                                                                    |                            
|                                    |                                                                                    | 2004                        |         | 2003   |   | 2002
|                                    |                                                                                    |                             |         |        |   |     
|Income tax credit at statutory rate |                                                                                    | $                           | (10,109 | )      |   | $    | (42,102 | )      |   | $ | (26,169 | )     
|                                    | Effect of state income taxes                                                       |                             |         | (1,105 | ) |      |         | (3,609 | ) |   |         | (2,242 | )
|                                    | State income tax carryback                                                         |                             |         | (1,797 | ) |      |         |       |   |   |         |       |  
|                                    | Tax exempt investment income                                                       |                             |         | 68     |   |      |         | 217    |   |   |         | 785    |  
|                                    | Impairment of goodwill                                                             |                             |         |       |   |      |         | 14,772 |   |   |         |       |  
|                                    | Valuation allowance                                                                |                             |         | 9,930  |   |      |         | 30,462 |   |   |         | 24,697 |  
|                                    | Effect of step-up in value of fixed assets and
    intangibles of acquired company |                             |         | 6,313  |   |      |         |       |   |   |         |       |  
|                                    | Filing differences from prior years                                                |                             |         | (5,284 | ) |      |         |       |   |   |         |       |  
|                                    | Other-net                                                                          |                             |         | 187    |   |      |         | 260    |   |   |         | 348    |  
|                                    |                                                                                    |                             |         |        |   |      |         |        |   |   |         |       
|Income tax credit                   |                                                                                    | $                           | (1,797  | )      |   | $    |        |        |   | $ | 2,581   |       
|                                    |                                                                                    |                             |         |        |   |      |         |        |   |   |         |       

Income taxes are based on pre-tax losses which
are distributed geographically as follows:

|         |  |                             |         |      |  |      |          |   |  |   |         |  
|-------- |  | --------------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|         |  |                            
|         |  | Fiscal Year Ended April 30,
|         |  |                            
|         |  | 2004                        |         | 2003 |  | 2002
|         |  |                             |         |      |  |     
|Domestic |  | $                           | (27,912 | )    |  | $    | (101,171 | ) |  | $ | (73,278 | )
|Foreign  |  |                             | (970    | )    |  |      | (2,138   | ) |  |   | (1,493  | )
|         |  |                             |         |      |  |      |          |   |  |   |         |  
|         |  | $                           | (28,882 | )    |  | $    | (103,309 | ) |  | $ | (74,771 | )
|         |  |                             |         |      |  |      |          |   |  |   |         |  

At April 30, 2004 and 2003, recoverable
income taxes represent the future recovery of taxes paid with
the fiscal 2001 and fiscal 2000 federal and state income tax
returns.

The Company has net operating loss carryforwards
of approximately $157,000 that are available to offset taxable
income in the future. The net operating loss carryforwards will
expire in 2022 through 2024.



|        |               
|------- | --------------
|Note 7. | Long-Term Debt

Long-term debt represents two notes payable for
the purchase of computer software and hardware in connection
with the implementation of a new information technology system
in fiscal 2002, and several equipment financing arrangements. At
April 30, 2004, information relating to these notes is as
follows:

|                |  |                        |         |           |  |           |           |       |  |   |         |   |  |   |       | 
|--------------- |  | ---------------------- | ------- | --------- |  | --------- | --------- | ----- |  | - | ------- | - |  | - | ----- | 
|                |  |                        |         |           |  |          
|                |  | Information Technology |         |           |  |          
|                |  |                        |         | Equipment |  |          
|                |  | Note 1                 |         | Note 2    |  | Financing |           | Total
|                |  |                        |         |           |  |           |           |      
|Current portion |  | $                      | 1,896   |           |  | $         | 298       |       |  | $ | 36      |   |  | $ | 2,230 | 
|Long-term       |  |                        | 801     |           |  |           |          |       |  |   |        |   |  |   | 801   | 
|                |  |                        |         |           |  |           |           |       |  |   |         |   |  |   |       | 
|                |  | $                      | 2,697   |           |  | $         | 298       |       |  | $ | 36      |   |  | $ | 3,031 | 
|                |  |                        |         |           |  |           |           |       |  |   |         |   |  |   |       | 
|Interest rate   |  |                        | 5.50    | %         |  |           | 3.52      | %     |  |   | 13.72   | % |  |   |       | 
|Payment terms   |  |                        | Monthly |           |  |           | Quarterly |       |  |   | Monthly |   |  |   |       | 
|Maturity        |  |                        | 2006    |           |  |           | 2005      |       |  |   | 2005    |   |  |   |       | 

F-19



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


Information Technology Note 1 is supported
by a letter of credit in the amount of $2,700 that expires on
August 1, 2005.

Cash payments and interest expense in fiscal
2004, 2003 and 2002 for interest on debt amount to $226, $564
and $219, respectively.

The aggregate amount of scheduled annual
maturities of long-term debt for each of the next five years is:

|            |  |        |       | 
|----------- |  | ------ | ----- | 
|Fiscal Year |  | Amount
|            |  |       
|2005        |  | $      | 2,230 | 
|2006        |  |        | 801   | 
|2007        |  |        |      | 
|2008        |  |        |      | 
|2009        |  |        |      | 
|            |  |        |       | 
|            |  | $      | 3,031 | 
|            |  |        |       | 



|        |              
|------- | -------------
|Note 8. | Stock Options

On June 17, 2002, the Board of Directors of
the Company approved a voluntary stock option exchange program
under which eligible employees of the Company had the
opportunity to exchange their existing options for new options
to be granted in the future under the Stratos Lightwave, Inc.
2000 Plan, as amended and restated (the 2000 Plan)
and the Stratos Lightwave, Inc. 2002 Plan for Acquired Companies
(the 2002 Plan). The offer period for the exchange
program began on Monday, July 8, 2002 and ended on
August 5, 2002.

All properly tendered stock options were
exchanged under the program for a promise by the Company to
grant the optionee new options no earlier than the first
business day that is six months and one day after the
cancellation date, August 6, 2002. On February 7,
2003, to complete the exchange, the Company granted 479,251 new
options under the 2000 Plan and 66,742 under the 2002 Plan. The
exercise price of the new options was equal to the closing price
of the Companys common stock on the grant date. The new
options were 25% vested and exercisable on the grant date and
the remaining options vest ratably over periods of 18 to
42 months.

In fiscal 2001, the Company adopted the 2000
Plan. The 2000 Plan permits the Company to award stock options,
restricted stock and stock appreciation rights to present and
future directors, officers and employees of the Company.
Pursuant to the 2000 Plan, the maximum number of shares for
which awards may be issued is 900,000 shares and the number
of shares for which restricted stock awards may be issued may
not exceed 187,500 shares. These amounts take into
consideration the 1 for 10 reverse split effected
October 21, 2002.

F-20



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


Stock options granted to date generally vest over
a period of 12 to 48 months after the date of grant and
have a term of 10 years.

|               |  |                     |          |                     |  |        |        |                |  |  |         |  |  |   |        | 
|-------------- |  | ------------------- | -------- | ------------------- |  | ------ | ------ | -------------- |  |  | ------- |  |  | - | ------ | 
|               |  |                     |          |                     |  |       
|               |  | Options Outstanding |          |                    
|               |  | at April 30, 2004   |          | Options Exercisable
|               |  |                     |          |                    
|               |  |                     |          | Weighted            |  |        |        | Weighted      
|               |  |                     |          | Average             |  |        |        | Average       
|               |  | Shares              |          | Exercise Price      |  | Shares |        | Exercise Price
|               |  |                     |          |                     |  |        |        |               
|April 30, 2001 |  |                     | 512,727  |                     |  | $      | 189.80 |                |  |  | 2,500   |  |  | $ | 210.00 | 
|Granted        |  |                     | 347,632  |                     |  |        | 56.20  |                |  |  |         |  |  |   |        | 
|Cancelled      |  |                     | (101,305 | )                   |  |        | 164.40 |                |  |  |         |  |  |   |        | 
|               |  |                     |          |                     |  |        |        |                |  |  |         |  |  |   |        | 
|April 30, 2002 |  |                     | 759,054  |                     |  | $      | 132.20 |                |  |  | 196,711 |  |  | $ | 186.60 | 
|Granted        |  |                     | 577,913  | (A)                 |  |        | 2.69   |                |  |  |         |  |  |   |        | 
|Exchanged      |  |                     | (550,773 | )                   |  |        | 137.20 |                |  |  |         |  |  |   |        | 
|Cancelled      |  |                     | (123,154 | )                   |  |        | 103.90 |                |  |  |         |  |  |   |        | 
|Exercised      |  |                     | (2,455   | )                   |  |        | 2.63   |                |  |  |         |  |  |   |        | 
|               |  |                     |          |                     |  |        |        |                |  |  |         |  |  |   |        | 
|April 30, 2003 |  |                     | 660,585  |                     |  | $      | 13.81  |                |  |  | 179,673 |  |  | $ | 29.36  | 
|Granted        |  |                     | 173,204  |                     |  |        | 5.05   |                |  |  |         |  |  |   |        | 
|Cancelled      |  |                     | (52,105  | )(B)                |  |        | 6.07   |                |  |  |         |  |  |   |        | 
|Exercised      |  |                     | (98,790  | )                   |  |        | 2.66   |                |  |  |         |  |  |   |        | 
|               |  |                     |          |                     |  |        |        |                |  |  |         |  |  |   |        | 
|April 30, 2004 |  |                     | 682,894  |                     |  | $      | 9.12   |                |  |  | 428,974 |  |  | $ | 18.38  | 
|               |  |                     |          |                     |  |        |        |                |  |  |         |  |  |   |        | 



---



|    |                                         
|--- | ----------------------------------------
|(A) | Includes 86,750 restricted stock awards.

|    |                                         
|--- | ----------------------------------------
|(B) | Includes 10,000 restricted stock awards.

|                         |  |        |         |              |  |                |     |  |  |   |        | 
|------------------------ |  | ------ | ------- | ------------ |  | -------------- | --- |  |  | - | ------ | 
|                         |  |        |         | Average      |  | Average       
|                         |  |        |         | Remaining    |  | Weighted      
|Range of Exercise Prices |  | Shares |         | Life (Years) |  | Exercise Price
|                         |  |        |         |              |  |               
|$2.63  6.97             |  |        | 594,558 |              |  |                | 9.0 |  |  | $ | 3.64   | 
|$20.60  32.00           |  |        | 2,187   |              |  |                | 8.0 |  |  |   | 27.19  | 
|$52.00  99.60           |  |        | 67,772  |              |  |                | 7.6 |  |  |   | 52.72  | 
|$105.80  241.30         |  |        | 18,372  |              |  |                | 6.2 |  |  |   | 185.19 | 
|                         |  |        |         |              |  |                |     |  |  |   |        | 
|                         |  |        | 682,894 |              |  |                | 7.7 |  |  | $ | 13.47  | 
|                         |  |        |         |              |  |                |     |  |  |   |        | 

In fiscal 2002, the Company adopted the Stratos
Lightwave, Inc. 2002 Stock Plan for Acquired Companies (the
2002 Plan). The 2002 Plan permits the Company to
award stock options, restricted stock and stock appreciation
rights to present and future directors, officers and employees
of the Company. These amounts take into consideration the 1 for
10 reverse split effected October 21, 2002. Stock options
granted to

F-21



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


date generally vest over a period of 12 to
48 months after the date of grant and have a term of
10 years. Shareholder approval was not solicited for this
plan.

|               |  |                        |         |                     |  |        |       |                  |  |  |        |  |  |   |      | 
|-------------- |  | ---------------------- | ------- | ------------------- |  | ------ | ----- | ---------------- |  |  | ------ |  |  | - | ---- | 
|               |  |                        |         |                     |  |       
|               |  | Options Outstanding at |         |                    
|               |  | April 30, 2004         |         | Options Exercisable
|               |  |                        |         |                    
|               |  |                        |         | Weighted Average    |  |        |       | Weighted Average
|               |  | Shares                 |         | Exercise Price      |  | Shares |       | Exercise Price  
|               |  |                        |         |                     |  |        |       |                 
|April 30, 2001 |  |                        |        |                     |  | $      |      |                  |  |  |       |  |  |   |     | 
|Granted        |  |                        | 111,250 |                     |  |        | 41.90 |                  |  |  |        |  |  |   |      | 
|Cancelled      |  |                        | (10,187 | )                   |  |        | 47.90 |                  |  |  |        |  |  |   |      | 
|               |  |                        |         |                     |  |        |       |                  |  |  |        |  |  |   |      | 
|April 30, 2002 |  |                        | 101,063 |                     |  |        | 41.30 |                  |  |  |       |  |  |   |     | 
|Granted        |  |                        | 66,742  |                     |  |        | 2.63  |                  |  |  |        |  |  |   |      | 
|Exchanged      |  |                        | (66,742 | )                   |  |        | 43.80 |                  |  |  |        |  |  |   |      | 
|Cancelled      |  |                        | (26,424 | )                   |  |        | 42.10 |                  |  |  |        |  |  |   |      | 
|               |  |                        |         |                     |  |        |       |                  |  |  |        |  |  |   |      | 
|April 30, 2003 |  |                        | 74,639  |                     |  | $      | 4.69  |                  |  |  | 18,510 |  |  | $ | 4.67 | 
|Granted        |  |                        | 2,000   |                     |  |        | 4.30  |                  |  |  |        |  |  |   |      | 
|Cancelled      |  |                        | (37,615 | )                   |  |        | 2.63  |                  |  |  |        |  |  |   |      | 
|               |  |                        |         |                     |  |        |       |                  |  |  |        |  |  |   |      | 
|April 30, 2004 |  |                        | 39,024  |                     |  | $      | 6.58  |                  |  |  | 18,148 |  |  | $ | 6.78 | 
|               |  |                        |         |                     |  |        |       |                  |  |  |        |  |  |   |      | 

|                         |  |        |        |              |  |                |     |  |  |   |       | 
|------------------------ |  | ------ | ------ | ------------ |  | -------------- | --- |  |  | - | ----- | 
|                         |  |        |        | Average      |  | Average       
|                         |  |        |        | Remaining    |  | Weighted      
|Range of Exercise Prices |  | Shares |        | Life (Years) |  | Exercise Price
|                         |  |        |        |              |  |               
|$1.90  8.00             |  |        | 35,661 |              |  |                | 8.7 |  |  | $ | 2.64  | 
|$23.80  50.00           |  |        | 3,363  |              |  |                | 7.8 |  |  |   | 48.32 | 
|                         |  |        |        |              |  |                |     |  |  |   |       | 
|                         |  |        | 39,024 |              |  |                | 8.2 |  |  | $ | 6.58  | 
|                         |  |        |        |              |  |                |     |  |  |   |       | 

Under the terms of the acquisition agreements,
the Company has assumed all outstanding options held by the
employees of Tsunami Optics, Inc. and Paracer, Inc. at the date
of acquisition. These options were converted into options to
purchase shares of the Companys common stock. The number
of shares and the exercise price of the Tsunami and Paracer
options that converted into Stratos options were adjusted using
a conversion formula set per the purchase agreement. The
resulting Stratos options have maintained the original vesting
provisions and option period. The Tsunami and Paracer options
converted into 110,498 options under the 2002 Plan to purchase
shares of the Companys common stock at a weighted average
price of $0.50.

In fiscal 2004, the Company adopted the Stratos
Lightwave, Inc. 2003 Stock Plan (the 2003 Plan). The
2003 Plan permits the Company to award stock, options, stock
appreciation rights and restricted stock awards to present and
future directors, officers, employees and others performing
services to the Company or any of its subsidiaries or
affiliates. Pursuant to the 2003 Plan, the maximum number of
shares for which awards may be issued is 1,370,000. During
fiscal 2004, the Company granted 745,351 of restricted stock
awards with a fair market value of $5.11 per share at date
of grant. At April 30, 2004, awards for 624,649 shares
under the 2003 Plan are reserved for issuance in the future. The
restricted shares vest over a period of five years from date of
grant based upon the annual performance of the Company. Aside
from the annual performance requirements the awards vest 100% on
the fifth anniversary of date of grant.

The weighted average estimated fair value of
options granted during fiscal 2004, 2003 and 2002 was $4.22,
$2.47 and $4.96, respectively. In computing the fair value of
stock options granted the fair value of each

F-22



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions:

|                              |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                              |  | 2004 |       | 2003 |  | 2002
|                              |  |      |       |      |  |     
|Risk free interest rates      |  |      | 3.3   | %    |  |      | 5.0   | % |  |  | 5.6   | %
|Expected option life in years |  |      | 6.5   |      |  |      | 7.0   |   |  |  | 7.0   |  
|Expected volatility           |  |      | 118.7 | %    |  |      | 124.8 | % |  |  | 126.4 | %
|Dividend yield                |  |      | 0.0   | %    |  |      | 0.0   | % |  |  | 0.0   | %

The Company has reserved for issuance
624,649 shares of its common stock under the 2003 Plan.
Following shareholder approval of the 2003 Plan on
November 6, 2003, no additional awards may be granted under
the 2000 Plan or the 2002 Plan. The approval of the 2003 Plan,
however, has not affected and will not affect any awards granted
under the 2000 Plan or the 2002 Plan prior to November 6,
2003.



|        |                                        
|------- | ---------------------------------------
|Note 9. | Redeemable Series B Preferred
    Stock

The Series B Preferred Stock has a par value
of $0.01 per share and a stated value and a liquidation
preference of $100 per share, plus accrued and unpaid
dividends. The authorized number of shares of Series B
Preferred is 50,000.

With respect to dividend rights and rights on
liquidation, dissolution and winding up, the Series B
Preferred Stock ranks senior to all classes of stock of the
Company, except those classes of preferred stock expressly
designated as ranking senior or on parity with the Series B
Preferred Stock.

The holders of Series B Preferred Stock are
entitled to receive, when and as declared by the board of
directors of the Company out of funds legally available
therefor, cumulative cash dividends until the dividend
termination date. The cash dividend per share is equal to
(1) seven percent per annum, or an increased rate in the
case of the Companys failure to pay dividends in
accordance with the provisions of the certificate of designation
relating to the Series B Preferred Stock, multiplied by
(2) $100 per share, subject to adjustment, plus the
amount of accrued but unpaid dividends with respect to each
share of Series B Preferred. Dividends, to the extent
declared by the board of directors of the Company, will be
payable quarterly. In addition, the Company may, at any time
following the fifth anniversary of the issuance of the
Series B Preferred, declare an optional special dividend of
$100 on each issued and outstanding share of Series B
Preferred, plus the amount of all accrued but unpaid dividends
with respect to each such share, in which case no further cash
dividends are required to be paid. The Company may not pay or
declare dividends on any securities ranking junior to the
Series B Preferred, unless (i) the holders of 75% of
the outstanding shares of Series B Preferred consent to
such payment or (ii) all accrued and unpaid dividends on
the shares of Series B Preferred have been paid or set
aside for payment.

No later than 60 days following the
occurrence of certain events relating to Stratos
achievement of $250 million in annual revenue or
$500 million in market capitalization, the Company must
redeem all shares of Series B Preferred Stock at a
redemption price initially equal to $100 per share, plus an
amount equal to all accrued and unpaid dividends thereon to and
including the date of redemption. The initial redemption price
is subject to adjustment as follows. If, on the last day
immediately preceding the redemption event, the market
price (as defined in the certificate of designation
relating to the Series B Preferred Stock) of the Company
common stock is (1) $7.00 or less per share, there will be
no adjustment to the initial redemption price; (2) greater
than $7.00 and less than $12.00 per share, the initial
redemption price will be increased by $25 per share for
every whole dollar by which the market price exceeds
$7.00 per share and (3) $12.00 or more per share, the
initial redemption price will be increased by $125 per
share. If, however, the optional special

F-23



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


dividend has been declared, the redemption price
for each share of the Series B Preferred Stock will be
reduced by $100 per share after taking into account the
above adjustments.

In addition, at any time following the fifth
anniversary of the issuance of the Series B Preferred
Stock, the Company, at its option, is entitled to redeem any or
all shares of Series B Preferred Stock, at a redemption
price of $125 per share, plus an amount equal to all
unaccrued and unpaid dividends thereon to and including the date
of redemption, minus $100 per share if the optional special
dividend has been declared prior to such redemption.

Each holder of Series B Preferred Stock is
entitled to one vote for each share held on the record date for
determining the shareholders entitled to vote with respect to
all matters presented to Company shareholders for their action
and, except as otherwise provided, the holders of Series B
Preferred Stock and any other outstanding series of stock will
vote together with the holders of shares of common stock as a
single class.

In general, the vote of at least 75% of the
outstanding Series B Preferred Stock, voting separately as
a class, is required to (1) amend any terms of the
Series B Preferred or (2) approve any merger,
reorganization, consolidation or similar transaction or any
reclassification of outstanding securities that would have a
material adverse effect on the dividend, liquidation or
redemption rights of the Series B Preferred. However, the
vote of at least 90% of the outstanding Series B Preferred
is required to amend any terms of the Series B Preferred
that govern dividends or payments to be made upon a liquidation,
dissolution or winding-up of the Company. Furthermore, no
separate vote is required if any of the foregoing is in
connection with a change in ownership of the
Company. For purposes of the certificate of designation relating
to the Series B Preferred Stock, change in ownership means
(1) any sale or transfer of all or substantially all of the
Companys assets in any transaction or series of
transactions, and (2) any merger, reorganization or
consolidation to which the Company is a party, unless after
giving effect to such merger, reorganization or consolidation
the holders of the Companys outstanding capital stock
immediately prior to such merger, reorganization or
consolidation will continue to own the Companys
outstanding capital stock possessing the voting power to elect a
majority of the Companys board of directors.

Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the combined company, the holders
of Series B Preferred Stock will be entitled to receive
liquidating distributions in the amount of $100 per share
plus all accrued and unpaid dividends thereon to the date fixed
for distribution, before any distribution or payment is made to
the holders of Company common stock or on any other class of
Company stock ranking junior to the Series B Preferred
Stock. If a change in ownership (as defined above) of the
Company occurs, the holders of the Series B Preferred Stock
will be entitled to receive liquidating distributions of
$100 per share, subject to adjustment based on the market
price of Stratos common stock, as described more fully above.

The Series B Preferred will not be
convertible into Company common stock and will not be entitled
to the benefit of a sinking fund.



|         |                             
|-------- | ----------------------------
|Note 10. | Employee 401(k) Savings Plan

The Company sponsors a 401(k) Savings Plan (the
Plan) which covers substantially all of its
employees. The Plan is a salary reduction plan that allows
employees to defer a percentage of wages subject to Internal
Revenue Service limits. The Plan also allows for Company
discretionary contributions equal to 3% of eligible
compensation. The Company provided for discretionary
contributions to the Plan totaling approximately $413, $567 and
$475 for fiscal 2004, 2003 and 2002, respectively.

F-24



---



##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)




|         |       
|-------- | ------
|Note 11. | Leases

The Company leases various facilities under
operating leases that expire through 2010. Rental expense was
approximately $1,300 in fiscal 2004 and 2003, respectively.

Future minimum rental expense under all non
cancelable operating leases with terms greater than one year
including $740 relating to underutilized facilities recorded as
a restructuring charge, are as follows:

|            |  |   |       | 
|----------- |  | - | ----- | 
|Fiscal 2005 |  | $ | 1,181 | 
|Fiscal 2006 |  |   | 1,133 | 
|Fiscal 2007 |  |   | 1,086 | 
|Fiscal 2008 |  |   | 510   | 
|Fiscal 2009 |  |   | 252   | 
|Fiscal 2010 |  |   | 252   | 
|            |  |   |       | 
|            |  | $ | 4,414 | 
|            |  |   |       | 



|         |                               
|-------- | ------------------------------
|Note 12. | Shareholders Rights Agreement

On March 22, 2001, the Companys Board
of Directors declared a dividend of one preferred share purchase
right (a Right) for each outstanding share of Common
Stock, par value $0.01 per share (the Common
Shares) outstanding on April 3, 2001 (the
Record Date) to the stockholders of record on that
date. Each Right entitles the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $0.01 per share
(the Preferred Shares), of the Company, at a price
of $800.00 (the Purchase Price), subject to
adjustment. The description and terms of the Rights are set
forth in a Rights Agreement, dated as of March 23, 2001, as
amended (the Rights Agreement), between the Company
and Mellon Investor Services LLC, as Rights Agent (the
Rights Agent).

On July 2, 2003, the Agreement and Plan of
Merger, dated as of July 2, 2003 (the Merger
Agreement) was entered into among the Company, Sleeping
Bear Merger Corp. and Sterling Holding Company. Pursuant to the
Merger Agreement, the Company agreed to amend the Rights
Agreement.

Until the earlier to occur of
(i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an
Acquiring Person) has acquired beneficial ownership
of 15% or more of the outstanding Common Shares or (ii) 10
business days (or such later date as may be determined by action
of the Board of Directors prior to such time as any Person
becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange
offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding
Common Shares (the earlier of such dates being called the
Distribution Date), the Rights will be evidenced,
with respect to any of the Common Share certificates outstanding
as of the Record Date, by such Common Share certificate with a
copy of the summary of rights attached thereto. Under the terms
of the Rights Agreement, neither Citicorp Venture Capital Ltd.
(CVC), nor any Affiliate or Associate (as such terms
are defined in the Rights Agreement) of CVC will become an
Acquiring Person, unless CVC or any Affiliate or Associate of
CVC becomes the Beneficial Owner (as defined in the Rights
Agreement) of an aggregate of 15% or more of the Common Shares
of the Company then outstanding, other than the Common Shares of
the Company acquired pursuant to the Merger Agreement.

Pursuant to the Rights Agreement: (1) no
person will become an Acquiring Person (as defined in the Rights
Agreement) and (2) a Distribution Date (as defined in the
Rights Agreement) shall not occur as a result of (a) the
execution and delivery of the Merger Agreement, (b) the
public announcement of the

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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


Merger Agreement, (c) the consummation of
any of the transactions contemplated by the Merger Agreement in
accordance with its terms or (d) the execution, delivery
and performance of any document contemplated by the Merger
Agreement, including without limitation the Voting Agreements
(as defined in the Merger Agreement).

The Rights Agreement provides that, until the
Distribution Date, the Rights will be transferred with and only
with the Common Shares. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Share
certificates issued after the Record Date or upon transfer or
new issuance of Common Shares will contain a notation
incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the
Rights), the surrender for transfer of any certificates for
Common Shares outstanding as of the Record Date, even without
such notation or a copy of the summary of rights being attached
thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such
certificate. As soon as practicable following the Distribution
Date, separate certificates evidencing the Rights (Right
Certificates) will be mailed to holders of record of the
Common Shares as of the Close of Business (as defined in the
Rights Agreement) on the Distribution Date and such separate
Right Certificates alone will evidence the Rights.

The Rights are not exercisable until the
Distribution Date. The Rights will expire on April 3, 2011
(the Final Expiration Date), unless the Final
Expiration Date is extended or unless the Rights are earlier
redeemed by the Company, in each case, as described below.

The Purchase Price payable, and the number of
Preferred Shares or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification
of, the Preferred Shares, (ii) upon the grant to holders of
the Preferred Shares of certain rights or warrants to subscribe
for or purchase Preferred Shares at a price, or securities
convertible into Preferred Shares with a conversion price, less
than the then current market price of the Preferred Shares or
(iii) upon the distribution to holders of the Preferred
Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained
earnings or dividends payable in Preferred Shares) or of
subscription rights or warrants (other than those referred to
above).

The number of outstanding Rights and the number
of one one-hundredths of a Preferred Share issuable upon
exercise of each Right are also subject to adjustment in the
event of a stock split of the Common Shares or a stock dividend
on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring,
in any such case, prior to the Distribution Date.

Preferred Shares purchasable upon exercise of the
Rights will not be redeemable. Each Preferred Share will be
entitled to a quarterly dividend payment of 100 times the
dividend declared per Common Share. In the event of liquidation,
the holders of the Preferred Shares will be entitled to an
aggregate payment of 100 times the aggregate payment made per
Common Share. Each Preferred Share will have 100 votes, voting
together with the Common Shares. In the event of any merger,
consolidation or other transaction in which Common Shares are
exchanged, each Preferred Share will be entitled to receive
100 times the amount received per Common Share. These
rights are protected by customary antidilution provisions.

Because of the nature of the Preferred
Shares dividend, liquidation and voting rights, the value
of the one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the
value of one Common Share.

From and after the occurrence of an event
described in Section 11(a)(ii) of the Rights Agreement, if
the Rights evidenced by the Right Certificate are or were at any
time on or after the earlier of (x) the date of such event
and (y) the Distribution Date (as such term is defined in
the Rights Agreement) acquired or beneficially owned by an
Acquiring Person or an Associate or Affiliate of an Acquiring
Person (as such terms

F-26



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


are defined in the Rights Agreement), such Rights
shall become null and void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.

In the event that, at any time after a Person
becomes an Acquiring Person, the Company is acquired in a merger
or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold, proper provision
will be made so that each holder of a Right will thereafter have
the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of
common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise
price of the Right. In the event that any person becomes an
Acquiring Person, proper provision shall be made so that each
holder of a Right, other than Rights beneficially owned by the
Acquiring Person and its Affiliates and Associates (which will
thereafter be null and void), will thereafter have the right to
receive upon exercise that number of Common Shares having a
market value of two times the exercise price of the Right. If
the Company does not have sufficient Common Shares to satisfy
such obligation to issue Common Shares, or if the Board of
Directors so elects, the Company shall deliver upon payment of
the exercise price of a Right an amount of cash or securities
equivalent in value to the Common Shares issuable upon exercise
of a Right; provided that, if the Company fails to meet such
obligation within 30 days following the date a Person
becomes an Acquiring Person, the Company must deliver, upon
exercise of a Right but without requiring payment of the
exercise price then in effect, Common Shares (to the extent
available) and cash equal in value to the difference between the
value of the Common Shares otherwise issuable upon the exercise
of a Right and the exercise price then in effect. The Board of
Directors may extend the 30-day period described above for up to
an additional 60 days to permit the taking of action that
may be necessary to authorize sufficient additional Common
Shares to permit the issuance of Common Shares upon the exercise
in full of the Rights.

At any time after any Person becomes an Acquiring
Person and prior to the acquisition by any person or group of a
majority of the outstanding Common Shares, the Board of
Directors of the Company may exchange the Rights (other than
Rights owned by such person or group which have become null and
void), in whole or in part, at an exchange ratio of one Common
Share per Right (subject to adjustment).

With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative adjustments
require an adjustment of at least 1% in such Purchase Price. No
fractional Preferred Shares will be issued (other than fractions
which are integral multiples of one one-thousandth of a
Preferred Share, which may, at the election of the Company, be
evidenced by depositary receipts) and in lieu thereof, an
adjustment in cash will be made based on the market price of the
Preferred Shares on the last trading day prior to the date of
exercise.

At any time prior to the time any Person becomes
an Acquiring Person, the Board of Directors of the Company may
redeem the Rights in whole, but not in part, at a price of
$0.10 per Right, subject to adjustment (the
Redemption Price). The redemption of the Rights may
be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right
of the holders of Rights will be to receive the Redemption Price.

The terms of the Rights may be amended by the
Board of Directors of the Company without the consent of the
holders of the Rights, except that from and after such time as
any person becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights
(other than the Acquiring Person and its Affiliates and
Associates).

Until a Right is exercised, the holder thereof,
as such, will have no rights as a stockholder of the Company,
including, without limitation, the right to vote or to receive
dividends.

F-27



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


A copy of the Rights Agreement is available free
of charge from the Company. This summary description of the
Rights does not purport to be complete and is qualified in its
entirety by reference to the Rights Agreement, which is hereby
incorporated herein by reference.



|         |               
|-------- | --------------
|Note 13. | Loss Per Share

The following table sets forth the computation of
basic and diluted loss per share:

|           |                                                                                            |                             |   |         |   |      |   |          |   |  |   |         |  
|---------- | ------------------------------------------------------------------------------------------ | --------------------------- | - | ------- | - | ---- | - | -------- | - |  | - | ------- | -
|           |                                                                                            |                            
|           |                                                                                            | Fiscal Year Ended April 30,
|           |                                                                                            |                            
|           |                                                                                            | 2004                        |   | 2003    |   | 2002
|           |                                                                                            |                             |   |         |   |     
|Numerator: |                                                                                            |                             |   |         |   |      |   |          |   |  |   |        
|           | Net Loss                                                                                   |                             | $ | (27,085 | ) |      | $ | (120,291 | ) |  | $ | (72,190 | )
|           | Preferred stock dividend requirements                                                      |                             |   | (142    | ) |      |   |         |   |  |   |        |  
|           |                                                                                            |                             |   |         |   |      |   |          |   |  |   |        
|           | Net loss attributable to common shareholders                                               |                             | $ | (27,227 | ) |      | $ | (120,291 | ) |  |   | (72,190 | )
|           | Denominator for basic and diluted loss per
    share  weighted average shares outstanding |                             |   | 10,444  |   |      |   | 7,317    |   |  |   | 6,525   |  
|           |                                                                                            |                             |   |         |   |      |   |          |   |  |   |        
|           | Basic and diluted loss per share                                                           |                             | $ | (2.61   | ) |      | $ | (16.44   | ) |  | $ | (11.06  | )
|           |                                                                                            |                             |   |         |   |      |   |          |   |  |   |        

Net loss per share for fiscal 2002 has been
restated to reflect a 1 for 10 reverse split effected on
October 21, 2002.

Options to purchase 645,168, 650,929 and
860,118 shares of common stock at a weighted average option
price of $9.51, $13.48 and $121.00 were outstanding during
fiscal 2004, 2003 and 2002, respectively, but were not included
in the computation of diluted loss per share because of the net
loss and, therefore, the effect would have been antidilutive.



|         |                                                        
|-------- | -------------------------------------------------------
|Note 14. | Material Customers and Concentration of Credit
    Risk

During fiscal 2004, sales to General Dynamics
UK Ltd. and Tellabs and their respective contract
manufacturers amounted to 6% and 3%, respectively, of
consolidated net sales.

During fiscal 2003, sales to Redfern Broadband
and QLogic and their respective contract manufacturers amounted
to 8% and 5%, respectively, of consolidated net sales.

During fiscal 2002, sales to McData Corporation
and its contract manufacturers amounted to 24% of consolidated
net sales.

Accounts receivable are generally due within 30
to 60 days. Credit losses relating to all customers
consistently have been within managements expectations.



|         |                    
|-------- | -------------------
|Note 15. | Segment Information

The Company operates in one industry segment, the
development, manufacture and sale of optical, RF, and microwave
components and subsystems for various applications and multiple
end markets. These subsystems are designed for use in storage,
data networking, metro and wide area telecom networks, military,
aerospace, video, government security, oil and gas, and other
industrial markets and applications.

F-28



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


Information about the results of the
Companys operations in different geographic regions is as
follows:

|                              |               |                             |         |         |   |      |          |          |   |   |         |         |  
|----------------------------- | ------------- | --------------------------- | ------- | ------- | - | ---- | -------- | -------- | - | - | ------- | ------- | -
|                              |               |                            
|                              |               | Fiscal Year Ended April 30,
|                              |               |                            
|                              |               | 2004                        |         | 2003    |   | 2002
|                              |               |                             |         |         |   |     
|Net sales                     |               |                             |         |         |   |      |          |          |   |   |         |        
|                              | United States |                             | $       | 39,994  |   |      | $        | 29,418   |   |   | $       | 47,010  |  
|                              | Foreign       |                             |         | 9,385   |   |      |          | 7,818    |   |   |         | 9,377   |  
|                              |               |                             |         |         |   |      |          |          |   |   |         |        
|                              |               | $                           | 49,379  |         |   | $    | 37,236   |          |   | $ | 56,387  |        
|                              |               |                             |         |         |   |      |          |          |   |   |         |        
|Net loss                      |               |                             |         |         |   |      |          |          |   |   |         |        
|                              | United States |                             | $       | (25,653 | ) |      | $        | (115,956 | ) |   | $       | (70,697 | )
|                              | Foreign       |                             |         | (1,432  | ) |      |          | (4,335   | ) |   |         | (1,493  | )
|                              |               |                             |         |         |   |      |          |          |   |   |         |        
|                              |               | $                           | (27,085 | )       |   | $    | (120,291 | )        |   | $ | (72,190 | )      
|                              |               |                             |         |         |   |      |          |          |   |   |         |        
|Property, plant and equipment |               |                             |         |         |   |      |          |          |   |   |         |        
|                              | United States |                             | $       | 25,052  |   |      | $        | 25,400   |   |   | $       | 65,813  |  
|                              | Foreign       |                             |         | 1,901   |   |      |          | 852      |   |   |         | 3,085   |  
|                              |               |                             |         |         |   |      |          |          |   |   |         |        
|                              |               | $                           | 26,956  |         |   | $    | 26,252   |          |   | $ | 68,898  |        
|                              |               |                             |         |         |   |      |          |          |   |   |         |        



|         |           
|-------- | ----------
|Note 16. | Litigation

The Company and certain of its directors and
executive officers have been named as defendants in purported
class action lawsuits filed in the United States District Court,
Southern District of New York, The first of these lawsuits,
filed on July 25, 2001, is captioned Kucera v. Stratos
Lightwave, Inc. et.al. No. 01 CV 6821. Three
other similar lawsuits have also been filed against the Company
and certain of its directors and executive officers. The
complaints also name as defendants the underwriters for the
Companys initial public offering. The complaints are
substantially identical to numerous other complaints filed
against other companies that went public over the last several
years. The complaints generally allege, among other things, that
the registration statement and prospectus from the
Companys June 26, 2000 initial public offering failed
to disclose certain alleged actions by the underwriters for the
offering. The complaints charge the Company and two or three of
its directors and executive officers with violations of
Sections 11 and 15 of the Securities Act of 1933, as
amended, and/or Section 10(b) and Section 20(a) to the
Security Exchange Act of 1934, as amended. The complaints also
allege claims solely against the underwriting defendants under
Section 12(a)(2) of the Securities Act of 1933, as amended.

In 2003, the Company agreed to a Memorandum of
Understanding, which reflects a settlement of these class
actions as between the purported class action plaintiffs, the
Company and the defendant officers and directors, and the
Companys liability insurer. Under the terms of the
Memorandum of Understanding, the Companys liability
insurers will pay certain sums to the plaintiffs, with the
amount dependent upon the plaintiffs recovery from the
underwriters in the IPO class actions as a whole. The plaintiffs
will dismiss with prejudice their claims against the Company and
its officers and directors, and the Company will assign to the
plaintiffs certain claims that it may have against the
underwriters. The plaintiffs have filed with the court a motion
for preliminary approval of the settlement, which, if granted,
will lead to the mailing of class-wide notices of the settlement
and a hearing date for approval of the settlement.

In February 2002, Stratos acquired Tsunami
Optics, Inc. The acquisition agreement contemplated a potential
earn-out payment of up to $18 million in common stock if
certain financial targets were achieved following the
acquisition. In June 2002, Catherine Lego, as representative of
the former Tsunami

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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


shareholders, filed a lawsuit against the Company
alleging, among other things, that the Company breached the
acquisition agreement by refusing to allow Tsunami to operate as
a separate subsidiary, firing the Tsunami executives that it
believed were necessary to operate the business and thereby
making it impossible for Tsunami to achieve the targets required
to receive any earnout payments. The complaint also alleged
fraud and violations of federal securities laws in connection
with the acquisition of Tsunami. Plaintiffs sought
$38 million in damages or the rescission of the acquisition
agreement. The Company filed a counterclaim against
Ms. Lego and several other shareholders and officers of
Tsunami which alleges fraud, breach of contract and violations
of federal securities laws. The counterclaim seeks compensatory
and punitive damages.

In April 2004, the Court entered an order in
favor of the Company to dismiss with prejudice 11 of
13 counts of the plaintiffs complaint. The alleged
damages sought for the plaintiffs two remaining claims
(breach of contract and rescission) remain unchanged at
$38 million. The Company believes that the plaintiffs
remaining claims are without merit and intends to vigorously
defend against these claims. The court denied the
plaintiffs motion to dismiss the Companys
counterclaims of fraud and violations of federal securities law
and granted the plaintiffs motion to dismiss the
allegation of breach of contract. This action is currently set
for trial on October 19, 2004.

In August 2002, James Campbell, the former CEO of
Tsunami, filed a lawsuit against the Company alleging wrongful
termination in breach of his employment contract, fraud and age
discrimination. Campbell seeks unspecified damages, punitive
damages and attorneys fees. The Company believes that this
lawsuit is without merit and intends to vigorously defend
against these claims. This action is currently set for trial on
August 23, 2004.

In March 2003, Alcatel USA, seeking unspecified
damages and alleging breach of contract, breach of warranty,
negligent misrepresentation, fraud and conspiracy in connection
with Alcatels purchase of certain goods from the
defendants over a period spanning 2000 and 2001. The Company
asserted certain counterclaims against Alcatel relating to the
same type of goods at issue in Alcatels complaint. In
April 2004, Alcatel and the Company executed a written
settlement agreement resolving all disputes and the Company
expects that by the end of August 2004, Alcatel and the Company
will execute and deliver mutual releases and the matter will be
dismissed with prejudice.

We are plaintiffs in several lawsuits relating to
our intellectual property rights. The defendants in these
lawsuits include E2O, Inc. (District of Delaware), and
Picolight, Inc. (District of Delaware). In these actions, the
Company alleges that optoelectronic products sold by the
defendants infringe numerous of the Companys patents. We
are seeking monetary damages and injunctive relief. The
defendants in these lawsuits have asserted various affirmative
defenses and filed counterclaims and contend that the patents
are invalid, unenforceable and/or not infringed by the products
sold by the defendants. For example, Picolight has asserted an
antitrust counterclaim based on the alleged unenforceability of
our patents. If successful, defendants are seeking
attorneys fees and costs in connection with the lawsuits.
We intend to pursue these lawsuits and defend against these
counterclaims vigorously. On November 24, 2003, a jury
returned a verdict finding that Picolight infringed six Stratos
patents. The trial is now proceeding to the patent validity and
damages phases.

The Companys management believes that the
resolution of these lawsuits will not have a significant effect
on the Companys business or financial condition.

During fiscal 2003 and 2002, the Company settled
several patent infringement cases. As a result of these
settlements, the Company received lump-sum payments of
approximately $5,800 in fiscal 2003, and $1,000 in fiscal 2002,
which were recorded as license fees and royalties in the
consolidated statement of operations. In addition, the Company
received $2,500 in fiscal 2004 and will receive $5,500 in fiscal
2006, respectively, from the settlement of one case in fiscal
2003. The present value of these amounts were recorded as
license fees and

F-30



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


royalties in the fiscal 2003 consolidated
statement of operations. Legal fees in connection with some of
these matters of approximately $1,000 in fiscal 2002 were
classified in general and administrative expenses. In addition,
the Company is entitled to fixed future payments and/or ongoing
royalty payments based on a percentage of sales of licensed
products. The timing and/or the amount of these payments is not
within the Companys control. Also, in certain
circumstances, the Company is entitled to other future economic
benefits. Subsequent to April 30, 2004, the Company also
received a net payment of $2,000 related to the settlement of a
patent infringement case.

In addition, certain litigation arising in the
normal course of business is pending against the Company.
Management believes that the resolution of this Companys
litigation will not have a significant effect on the
consolidated financial statements.



|         |                                                
|-------- | -----------------------------------------------
|Note 17. | Quarterly Results of Operations
    (Unaudited)

The following is a summary of unaudited quarterly
results of operations for the two years ended April 30,
2004:

|                                                        |  |                                |        |            |  |            |        |          |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | ------------------------------ | ------ | ---------- |  | ---------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                                        |  |                               
|                                                        |  | Fiscal Year 2004 Quarter Ended
|                                                        |  |                               
|                                                        |  | July 31                        |        | October 31 |  | January 31 |        | April 30
|                                                        |  |                                |        |            |  |            |        |         
|Net sales                                               |  | $                              | 6,571  |            |  | $          | 7,111  |          |  | $ | 16,034 |   |  | $ | 19,663 |  
|Gross profit (loss)                                     |  |                                | (907   | )          |  |            | (909   | )        |  |   | 3,426  |   |  |   | 5,452  |  
|Net loss                                                |  |                                | (7,268 | )          |  |            | (7,521 | )        |  |   | (5,376 | ) |  |   | (6,920 | )
|Preferred stock dividend requirements                   |  |                                |       |            |  |            |       |          |  |   | (55    | ) |  |   | (87    | )
|Net loss attributable to common shareholders            |  |                                | (7,268 | )          |  |            | (7,521 | )        |  |   | (5,431 | ) |  |   | (7,007 | )
|Net loss per share available to common
    shareholders |  |                                | (0.99  | )          |  |            | (1.02  | )        |  |   | (0.40  | ) |  |   | (0.52  | )

|                                                                                                                                                     |  |                                |         |            |  |            |         |          |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | ---------- |  | ---------- | ------- | -------- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                                     |  |                               
|                                                                                                                                                     |  | Fiscal Year 2003 Quarter Ended
|                                                                                                                                                     |  |                               
|                                                                                                                                                     |  | July 31                        |         | October 31 |  | January 31 |         | April 30
|                                                                                                                                                     |  |                                |         |            |  |            |         |         
|Net sales                                                                                                                                            |  | $                              | 10,722  |            |  | $          | 11,051  |          |  | $ | 8,109  |   |  | $ | 7,354   |  
|Gross profit (loss)                                                                                                                                  |  |                                | (35     | )          |  |            | (5,394  | )        |  |   | (3,353 | ) |  |   | (17,096 | )
|Net loss before cumulative effect of a change
    in accounting principle                                                                            |  |                                | (11,854 | )          |  |            | (19,535 | )        |  |   | (9,338 | ) |  |   | (62,582 | )
|Net loss attributable to common shareholders                                                                                                         |  |                                | (28,836 | )          |  |            | (19,535 | )        |  |   | (9,338 | ) |  |   | (62,582 | )
|Net loss attributable to common shareholders
    per basic and diluted common share                                                                  |  |                                | (3.96   | )          |  |            | (2.67   | )        |  |   | (1.27  | ) |  |   | (8.54   | )
|Net loss attributable to common shareholders
    before cumulative effect of a change in accounting principle per
    basic and diluted common share |  |                                | (1.63   | )          |  |            | (2.67   | )        |  |   | (1.27  | ) |  |   | (8.54   | )

Net loss per share for the quarter ended
July 31, 2002 has been restated to reflect a 1 for 10
reverse split effected on October 21, 2002.

The unaudited quarterly results of operations
include a $16,982 cumulative effect of a change in accounting
principle and a $2,070 charge to in-process research and
development in the quarters ended July 31, 2002 and
October 31, 2002, respectively. In addition, the unaudited
quarterly results of operations for the quarter ended
April 30, 2003 includes a charge of $28,429 for goodwill
impairment and a $37,105 charge for impairment of long-lived
assets.

F-31



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##### Table of Contents



STRATOS INTERNATIONAL, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(all amounts in thousands, except share and
per share data)


The unaudited quarterly results of operations for
the quarter ended April 30, 2004 includes $910 of charges
for impairment of long-lived assets, $740 of lease obligations
for limited use facilities and $2,100 for the settlement of
litigation.



|         |                                                  
|-------- | -------------------------------------------------
|Note 18. | Operating Considerations and Management
    Plans

The accompanying consolidated financial
statements have been prepared assuming the Company will continue
as a going concern. As shown in the consolidated financial
statements, the Company has incurred significant net losses in
each of the past three years as a result of operating in markets
that have experienced a severe economic downturn since late in
fiscal 2001. These conditions remained in effect in fiscal 2004,
and we expect them to continue for at least the next 6 to
12 months. Any continued or further decline in demand for
our customers products or in general economic conditions
would likely result in further reduction in demand for our
products and affect our business negatively.

In response to these conditions, the Company has
proactively addressed its operational issues in an effort to
improve profitability and cash flows. The Company has
implemented programs to control other manufacturing, research
and development, sales and marketing, and general and
administrative costs. Management has reduced its overhead cost
structure, improved its efficiency in the use of raw materials
and scrap, and is working with suppliers to further reduce the
cost of raw materials used in the manufacture of its products.
Since April 2001, the Company has also reduced production,
technical, sales, and administrative staff levels, exited
several small unprofitable businesses and consolidated its
remaining operations into three primary locations. The Company
sold its facility in Palm Bay, Florida in May 2004 and is
actively working to sell or sublease several other limited use
facilities.

Management is also examining and pursuing
opportunities for improving gross margins and cash flow. The
merger with Sterling combined two companies with brands that are
well-respected by segments of the telecommunications, military,
video and broadcast customer base that seek solutions to
difficult problems at the electrical side of the
high-performance, high-bandwidth interface which are solved by
products offered by Stratos. Management believes that these
products, when combined with superior customer service, provide
the potential for improving gross margins and cash flows.

Finally, management is examining the requirements
of our customers and the broader potential customer base where
our core competencies could provide value to customers in an
enduring and profitable way. Management is also focused on
improving customer service through better execution of delivery,
support and cycle time, particularly for specialty products to
those customers who value and will pay for this service. The
Company is seeking to create a customer-responsive organization
that executes on demand and stands behind its customers
strategy. Management expects that these efforts will contribute
to sales growth and increase the market potential for our
products.

The Company has also experienced improvement in
sales volume, profitability, operating results, and cash flow in
the third and fourth quarters of fiscal 2004, resulting from the
various initiatives described above. Based on the best
information the Company has available today, it is cautiously
optimistic that this trend will continue.

F-32



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##### Table of Contents





SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES


STRATOS INTERNATIONAL, INC.

YEARS ENDED APRIL 30, 2004, 2003 AND
2002


(in thousands)


|                                               |  |            |        |            |  |                |        |            |  |           |   |  |  |   |       |     |  |   |        | 
|---------------------------------------------- |  | ---------- | ------ | ---------- |  | -------------- | ------ | ---------- |  | --------- | - |  |  | - | ----- | --- |  | - | ------ | 
|                                               |  |            |        |            |  |                |        |           
|                                               |  |            |        | Additions  |  |                |        |           
|                                               |  | Balance at |        |            |  |                |        | Balance   
|                                               |  | Beginning  |        | Charged to |  | Charged to     |        |            |  | at End of
|Description                                    |  | of Period  |        | expense    |  | other accounts |        | Deductions |  | Period   
|                                               |  |            |        |            |  |                |        |            |  |          
|Reserve for Inventory Obsolescence:            |  |            |        |            |  |                |        |            |  |           |   |  |  |   |       |     |  |   |        | 
|April 30, 2002                                 |  | $          | 3,745  |            |  | $              | 13,835 |            |  | $         |  |  |  | $ | 3,673 | (A) |  | $ | 13,097 | 
|April 30, 2003                                 |  |            | 13,907 |            |  |                | 6,805  |            |  |           |  |  |  |   | 8,682 | (A) |  |   | 12,030 | 
|April 30, 2004                                 |  |            | 12,030 |            |  |                | 1,925  |            |  |           |   |  |  |   | 4,872 | (A) |  |   | 9,083  | 
|Allowance for Doubtful Accounts:               |  |            |        |            |  |                |        |            |  |           |   |  |  |   |       |     |  |   |        | 
|April 30, 2002                                 |  | $          | 401    |            |  | $              | 2,693  |            |  | $         |  |  |  | $ | 2,367 | (B) |  | $ | 727    | 
|April 30, 2003                                 |  |            | 727    |            |  |                | 331    |            |  |           |  |  |  |   | 644   | (B) |  |   | 414    | 
|April 30, 2004                                 |  |            | 414    |            |  |                | 461    |            |  |           |   |  |  |   | 517   | (B) |  |   | 358    | 
|Deferred Income Tax Asset Valuation Allowance: |  |            |        |            |  |                |        |            |  |           |   |  |  |   |       |     |  |   |        | 
|April 30, 2002                                 |  | $          |       |            |  | $              | 24,697 |            |  | $         |  |  |  | $ |      |     |  | $ | 24,697 | 
|April 30, 2003                                 |  |            | 24,697 |            |  |                | 30,612 |            |  |           |  |  |  |   |      |     |  |   | 55,309 | 
|April 30, 2004                                 |  |            | 55,309 |            |  |                | 9,930  |            |  |           |  |  |  |   |      |     |  |   | 65,239 | 



---



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(A) | Represents write-off of obsolete inventory and
    usage of product previously reserved for.
|   
|(B) | Write-off of accounts receivable considered to be
    uncollectible.                        

II-1



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##### Table of Contents



STRATOS INTERNATIONAL, INC.

EXHIBIT INDEX

|        |       |                         |  |                                                                                                                                                                                                                                                                            
|------- | ----- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 2.1   |                         |  | Agreement and Plan of Merger, dated as of
    July 2, 2003, as amended as of August 19, 2003 and
    October 31, 2003, among Stratos Lightwave, Inc., Sleeping
    Bear Merger Corp. and Sterling Holding Company(11)                                                      
|        | 3.1   |                         |  | Restated Certificate of Incorporation of
    Registrant(12)                                                                                                                                                                                                                
|        | 3.2   |                         |  | Bylaws of Registrant(1)                                                                                                                                                                                                                                                    
|        | 3.3   |                         |  | Certificate of Designation of Series A
    Junior Participating Preferred Stock, included as Exhibit A
    to Exhibit 4.3                                                                                                                                                  
|        | 3.4   |                         |  | Certificate of Designation for Series B
    Preferred Stock(10)                                                                                                                                                                                                            
|        | 4.1   |                         |  | Specimen certificate representing the common
    stock(1)                                                                                                                                                                                                                  
|        | 4.2   |                         |  | Specimen Certificate representing the
    Series B Preferred Stock(12)                                                                                                                                                                                                     
|        | 4.3   |                         |  | Rights Agreement, dated as of March 23,
    2001, between Stratos International, Inc. and Mellon Investor
    Services LLC(2)                                                                                                                                              
|        | 4.4   |                         |  | First Amendment, dated as of July 2, 2003,
    to Rights Agreement, dated as of March 23, 2001, between
    Stratos Lightwave, Inc. and Mellon Investor Services LLC, as
    Rights Agent(9)                                                                               
|        | 4.5   |                         |  | Registration Rights Agreement, dated as of
    July 2, 2003, among Stratos Lightwave, Inc., Citicorp
    Venture Capital Ltd., the William N. and Carol A.
    Stout Trust dated 11/24/98 and the William N. and
    Carol A. Stout Charitable Remainder Unit
    Trust(10)
|        | 4.6   |                         |  | Standstill Agreement, dated as of July 2,
    2003, between Stratos Lightwave, Inc. and Citicorp Venture
    Capital Ltd.(10)                                                                                                                                              
|        | 10.1  |                         |  | Form of Indemnity Agreement between Registrant
    and Registrants directors and officers**(1)                                                                                                                                                                            
|        | 10.2  |                         |  | Stratos Lightwave, Inc. 2000 Stock Plan, as
    amended and restated(3)                                                                                                                                                                                                    
|        | 10.3  |                         |  | Agreement and Plan of Reorganization, dated
    January 22, 2002, by and among the Registrant, Tundra
    Acquisition Corp. and Tsunami Optics, Inc.(4)                                                                                                                    
|        | 10.4  |                         |  | Stratos Lightwave, Inc. 2002 Stock Plan for
    Acquired Companies(5)                                                                                                                                                                                                      
|        | 10.5  |                         |  | Agreement and Plan of Reorganization, dated
    March 18, 2002, by and among the Registrant, Polar
    Acquisition Corp. and Paracer, Inc.(6)                                                                                                                              
|        | 10.6  |                         |  | Management Retention Agreement between the
    Registrant and James McGinley**(7)                                                                                                                                                                                          
|        | 10.7  |                         |  | Management Retention Agreement between the
    Registrant and David Slack**(7)                                                                                                                                                                                             
|        | 10.8  |                         |  | Management Retention Agreement between the
    Registrant and Richard Durrant**(7)                                                                                                                                                                                         
|        | 10.9  |                         |  | Stratos Lightwave, Inc. Severance Plan**(7)                                                                                                                                                                                                                                
|        | 10.10 |                         |  | Agreement and Plan of Merger, dated as of
    July 2, 2003, as amended as of August 19, 2003 and
    October 31, 2003, among Stratos Lightwave, Inc., Sleeping
    Bear Merger Corp. and Sterling Holding Company(11)                                                      
|        | 10.11 |                         |  | Amendment to Management Retention Agreement
    between the Registrant and James McGinley**(8)                                                                                                                                                                             
|        | 10.12 |                         |  | Amendment to Management Retention Agreement
    between the Registrant and David Slack**(8)                                                                                                                                                                                
|        | 10.13 |                         |  | Amendment to Management Retention Agreement
    between the Registrant and Richard Durrant**(8)                                                                                                                                                                            
|        | 10.14 |                         |  | Amendment to Stratos Lightwave, Inc. Severance
    Plan**(8)                                                                                                                                                                                                               
|        | 10.15 |                         |  | Stratos Lightwave, Inc. 2003 Stock
    Plan**(10)                                                                                                                                                                                                                          
|        | 10.16 |                         |  | Stratos Lightwave, Inc. 2003 Employee Stock
    Purchase Plan**(10)                                                                                                                                                                                                        
|        | 14    |                         |  | Stratos International, Inc. Code of Business
    Conduct and Ethics*                                                                                                                                                                                                       
|        | 21    |                         |  | List of Subsidiaries*                                                                                                                                                                                                                                                      
|        | 23    |                         |  | Consent of Ernst & Young LLP*                                                                                                                                                                                                                                              



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##### Table of Contents



|        |      |                         |  |                                                                                            
|------- | ---- | ----------------------- |  | -------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Document
|        |      |                        
|        | 24   |                         |  | Power of Attorney (contained in the signature
    page to this annual report on Form 10-K)*
|        | 31.1 |                         |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Executive Officer*                 
|        | 31.2 |                         |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Financial Officer*                 
|        | 32.1 |                         |  | Section 1350 Certification of Chief
    Executive Officer*                                 
|        | 32.2 |                         |  | Section 1350 Certification of Chief
    Financial Officer*                                 
|        | 99   |                         |  | Cautionary Statements*                                                                     



---



| |     |                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the
    Registrants Registration Statement on Form S-1
    effective June 26, 2000.          
|
| | (2) | Incorporated by reference to the
    Registrants Form 8-K dated March 22, 2001.                                           
|
| | (3) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended April 30, 2001.        
|
| | (4) | Incorporated by reference to the
    Registrants Form 8-K dated February 4, 2002.                                         
|
| | (5) | Incorporated by reference to the
    Registrants Registration Statement on Form S-8 dated
    January 31, 2002.           
|
| | (6) | Incorporated by reference to the
    Registrants Form 8-K dated March 28, 2002.                                           
|
| | (7) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended October 31, 2002.
|
| | (8) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2003. 
|
| | (9) | Incorporated by reference to the
    Registrants Form 8-A/ A filed August 7, 2003.                                        



|     |                                                                                                           
|---- | ----------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the
    Registrants Form S-4/ A effective September 29,
    2003.           
|    
|(11) | Incorporated by reference to the
    Registrants Form 8-K dated November 6, 2003.                        
|    
|(12) | Incorporated by reference to the Quarterly Report
    on Form 10-Q for the quarter ended October 31, 2003.



| |   |               
| | - | --------------
| | * | Filed herewith



| |    |                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------
| | ** | Management contract or compensatory plan or
    arrangement required to be filed as an exhibit to this annual
    report on Form 10-K.