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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-Q



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(Mark One)

|  |  |                                                                                                                                         
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|x |  | Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended July 31, 2003, or

|  |  |                                                                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|o |  | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period
from __________ to __________

Commission file number 0-30869

STRATOS LIGHTWAVE, INC.

(Exact name of Registrant as specified in its charter)




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|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 36-4360035
(I.R.S. Employer Identification No.)

7444 West Wilson Avenue
Chicago, Illinois 60706
(708) 867-9600
(Address, including zip code, and telephone number, including
area code, of Registrants principal executive offices)



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Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes  x  No  o

As of September 12, 2003, there were 7,368,261 shares of the Registrants
common stock outstanding.





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TABLE OF CONTENTS



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



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STRATOS LIGHTWAVE, INC.

INDEX

| |                   |                                                                                                               |  |      |   | 
| | ----------------- | ------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
| |                   |                                                                                                               |  | Page
| |                   |                                                                                                               |  |     
| | PART I            | FINANCIAL INFORMATION                                                                                         |  |      |   | 
| | Item 1.           | Financial Statements                                                                                          |  |      | 1 | 
| |                   | Condensed Consolidated Balance Sheets as of April 30, 2003 and July 31, 2003
(unaudited)                      |  |      | 1 | 
| |                   | Condensed Consolidated Statements of Operations (unaudited) for the
three months
ended July 31, 2002 and 2003 |  |      | 2 | 
| |                   | Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months
ended July 31, 2002 and 2003 |  |      | 3 | 
| |                   | Notes to Condensed Consolidated Financial Statements (unaudited) July 31, 2003                                |  |      | 4 | 
| | Item 2.           | Managements Discussion and Analysis of Financial Condition and Results
of Operation                          |  | 9    |   | 
| | Item 3.           | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 29   |   | 
| | Item 4.           | Controls and Procedures                                                                                       |  | 29   |   | 
| | PART II.          | OTHER INFORMATION                                                                                             |  |      |   | 
| | Item 1.           | Legal Proceedings                                                                                             |  | 31   |   | 
| | Item 2.           | Changes in Securities and Use of Proceeds                                                                     |  | 32   |   | 
| | Item 6.           | Exhibits and Reports on Form 8-K                                                                              |  | 34   |   | 
| | SIGNATURES        |                                                                                                               |  | 35   |  
| | INDEX TO EXHIBITS |                                                                                                               |  | 36   |  

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PART I

FINANCIAL INFORMATION





Item 1.     Financial Statements.




STRATOS LIGHTWAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                     |                                         |                            |                                            |          |           |         |          |          |             |         | 
|------------------------------------ | --------------------------------------- | -------------------------- | ------------------------------------------ | -------- | --------- | ------- | -------- | -------- | ----------- | ------- | 
|                                     |                                         |                            |                                            |          | April 30, |         | July 31,
|                                     |                                         |                            |                                            |          | 2003      |         | 2003    
|                                     |                                         |                            |                                            |          |           |         |         
|                                     |                                         |                            |                                            |          |           |         |          |          | (unaudited)
|ASSETS                               |                                         |                            |                                            |          |           |         |          |         
|Current assets:                      |                                         |                            |                                            |          |           |         |          |         
|                                     | Cash and cash equivalents               |                            | $                                          | 43,649   |           |         | $        | 32,630   |            
|                                     | Short-term investments                  |                            |                                            | 17,879   |           |         |          | 28,581   |            
|                                     | Accounts receivable, less allowance     |                            |                                            | 7,701    |           |         |          | 5,396    |            
|                                     | Inventories:                            |                            |                                            |          |           |         |          |          |            
|                                     |                                         | Finished products          |                                            |          | 864       |         |          |          | 1,109       |        
|                                     |                                         | Work in process            |                                            |          | 797       |         |          |          | 285         |        
|                                     |                                         | Materials                  |                                            |          | 6,133     |         |          |          | 6,158       |        
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         |                            | 7,794                                      |          |           |         | 7,552    |         
|                                     | Recoverable income taxes                |                            |                                            | 2,391    |           |         |          | 2,391    |            
|                                     | Prepaid expenses                        |                            |                                            | 2,083    |           |         |          | 2,148    |            
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         | Total current assets       |                                            |          | 81,497    |         |          |          | 78,698      |        
|Other assets:                        |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         | Deferred income taxes      |                                            |          | 6,437     |         |          |          | 6,437       |        
|                                     |                                         | Assets held for sale       |                                            |          | 3,484     |         |          |          | 408         |        
|                                     |                                         | Other                      |                                            |          | 6,942     |         |          |          | 6,833       |        
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         |                            | 16,863                                     |          |           |         | 13,678   |         
|Property, plant and equipment        |                                         |                            | 93,667                                     |          |           |         | 95,157   |         
|                                     | Less allowances for depreciation        |                            |                                            | 67,415   |           |         |          | 68,928   |            
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         |                            | 26,252                                     |          |           |         | 26,229   |         
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         | Total assets               |                                            | $        | 124,612   |         |          | $        | 118,605     |        
|                                     |                                         |                            |                                            |          |           |         |          |         
|LIABILITIES AND STOCKHOLDERS EQUITY |                                         |                            |                                            |          |           |         |          |         
|Current liabilities:                 |                                         |                            |                                            |          |           |         |          |         
|                                     | Accounts payable                        |                            | $                                          | 5,063    |           |         | $        | 6,561    |            
|                                     | Other current liabilities               |                            |                                            | 5,006    |           |         |          | 5,979    |            
|                                     | Current portion of long-term debt       |                            |                                            | 6,331    |           |         |          | 3,429    |            
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         | Total current liabilities  |                                            |          | 16,400    |         |          |          | 15,969      |        
|Long-term debt, less current portion |                                         |                            | 298                                        |          |           |         | 2,295    |         
|Deferred income taxes                |                                         |                            | 6,519                                      |          |           |         | 6,528    |         
|Minority interest                    |                                         |                            | 350                                        |          |           |         | 280      |         
|Stockholders equity:                |                                         |                            |                                            |          |           |         |          |         
|                                     | Preferred stock                         |                            |                                            |         |           |         |          |         |            
|                                     | Common stock                            |                            |                                            | 74       |           |         |          | 74       |            
|                                     | Additional paid-in capital              |                            |                                            | 284,254  |           |         |          | 284,311  |            
|                                     | Accumulated deficit                     |                            |                                            | (183,406 | )         |         |          | (190,673 | )          
|                                     | Foreign currency translation adjustment |                            |                                            | 154      |           |         |          | 69       |            
|                                     | Cost of common stock in treasury        |                            |                                            | (31      | )         |         |          | (248     | )          
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         | Total stockholders equity |                                            |          | 101,045   |         |          |          | 93,533      |        
|                                     |                                         |                            |                                            |          |           |         |          |         
|                                     |                                         |                            | Total liabilities and stockholders equity |          | $         | 124,612 |          |          | $           | 118,605 | 
|                                     |                                         |                            |                                            |          |           |         |          |         

See notes to condensed consolidated financial statements.

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STRATOS LIGHTWAVE, INC.




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

|                                                      |                                                                   |                          |         |                             |        |      |        |        |        | 
|----------------------------------------------------- | ----------------------------------------------------------------- | ------------------------ | ------- | --------------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                      |                                                                   |                          |         | Three Months Ended July 31,
|                                                      |                                                                   |                          |         |                            
|                                                      |                                                                   |                          |         | 2002                        |        | 2003
|                                                      |                                                                   |                          |         |                             |        |     
|Revenue:                                              |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Net sales                                                         |                          | $       | 10,722                      |        |      | $      | 6,571  |       
|                                                      | License fees and royalties                                        |                          |         | 207                         |        |      |        | 506    |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|                                                      |                                                                   | Total                    |         |                             | 10,929 |      |        |        | 7,077  | 
|Costs and expenses:                                   |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Costs of sales                                                    |                          |         | 10,757                      |        |      |        | 7,478  |       
|                                                      | Research and development                                          |                          |         | 6,745                       |        |      |        | 2,890  |       
|                                                      | Sales and marketing                                               |                          |         | 2,220                       |        |      |        | 1,519  |       
|                                                      | General and administrative                                        |                          |         | 3,437                       |        |      |        | 2,698  |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|                                                      |                                                                   | Total costs and expenses |         |                             | 23,159 |      |        |        | 14,585 | 
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Loss from operations                                              |                          |         | (12,230                     | )      |      |        | (7,508 | )     
|                                                      | Investment income                                                 |                          |         | 375                         |        |      |        | 240    |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Loss before income taxes                                          |                          |         | (11,855                     | )      |      |        | (7,268 | )     
|                                                      | Provision for income taxes                                        |                          |         |                            |        |      |        |       |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Loss before cumulative effect of a change in accounting principle |                          |         | (11,855                     | )      |      |        | (7,268 | )     
|                                                      | Cumulative effect of a change in accounting principle             |                          |         | (16,982                     | )      |      |        |       |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|Net loss                                              |                                                                   | $                        | (28,837 | )                           |        | $    | (7,268 | )     
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|Net loss per share, basic and diluted:                |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Before cumulative effect of a change in accounting principle      |                          | $       | (1.63                       | )      |      | $      | (0.99  | )     
|                                                      | Cumulative effect of a change in accounting principle             |                          |         | (2.33                       | )      |      |        |       |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Net loss                                                          |                          | $       | (3.96                       | )      |      | $      | (0.99  | )     
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|Weighted average number of common shares outstanding: |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Basic                                                             |                          |         | 7,278                       |        |      |        | 7,364  |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       
|                                                      | Diluted                                                           |                          |         | 7,278                       |        |      |        | 7,364  |       
|                                                      |                                                                   |                          |         |                             |        |      |        |       

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

See notes to condensed consolidated financial statements.

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STRATOS LIGHTWAVE, INC.




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

|                                                 |                                                                                           |                                             |         |                             |        |      |         |         |        |  
|------------------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | --------------------------- | ------ | ---- | ------- | ------- | ------ | -
|                                                 |                                                                                           |                                             |         | Three Months Ended July 31,
|                                                 |                                                                                           |                                             |         |                            
|                                                 |                                                                                           |                                             |         | 2002                        |        | 2003
|                                                 |                                                                                           |                                             |         |                             |        |     
|Operating activities:                            |                                                                                           |                                             |         |                             |        |      |         |        
|Net loss                                         |                                                                                           | $                                           | (11,855 | )                           |        | $    | (7,268  | )      
|                                                 | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                             |         |                             |        |      |         |         |       
|                                                 |                                                                                           | Provision for depreciation and amortization |         |                             | 3,339  |      |         |         | 1,354  |  
|                                                 |                                                                                           | Gain on sale of assets held for sale        |         |                             |       |      |         |         | (1,304 | )
|                                                 |                                                                                           | Change in operating assets and liabilities  |         |                             | (1,227 | )    |         |         | 4,755  |  
|                                                 |                                                                                           |                                             |         |                             |        |      |         |        
|                                                 | Net cash used in operating activities                                                     |                                             |         | (9,743                      | )      |      |         | (2,463  | )     
|Investing activities:                            |                                                                                           |                                             |         |                             |        |      |         |        
|                                                 | Purchases of property, plant and equipment                                                |                                             |         | (1,041                      | )      |      |         | (1,330  | )     
|                                                 | Purchases of short-term investments                                                       |                                             |         | (5,000                      | )      |      |         | (14,631 | )     
|                                                 | Sales of short-term investments                                                           |                                             |         | 7,700                       |        |      |         | 3,929   |       
|                                                 | Sale of assets held for sale                                                              |                                             |         | 336                         |        |      |         | 4,381   |       
|                                                 | Acquisitions                                                                              |                                             |         | (142                        | )      |      |         |        |       
|                                                 |                                                                                           |                                             |         |                             |        |      |         |        
|                                                 | Net cash (used in) provided by investing activities                                       |                                             |         | 1,853                       |        |      |         | (7,651  | )     
|Financing activities:                            |                                                                                           |                                             |         |                             |        |      |         |        
|                                                 | Repayment of borrowings                                                                   |                                             |         | (3,625                      | )      |      |         | (905    | )     
|                                                 |                                                                                           |                                             |         |                             |        |      |         |        
|                                                 | Net cash used in financing activities                                                     |                                             |         | (3,625                      | )      |      |         | (905    | )     
|                                                 |                                                                                           |                                             |         |                             |        |      |         |        
|Net decrease in cash and cash equivalents        |                                                                                           |                                             | (11,515 | )                           |        |      | (11,019 | )      
|Cash and cash equivalents at beginning of period |                                                                                           |                                             | 61,020  |                             |        |      | 43,649  |        
|                                                 |                                                                                           |                                             |         |                             |        |      |         |        
|Cash and cash equivalents at end of period       |                                                                                           | $                                           | 49,505  |                             |        | $    | 32,630  |        
|                                                 |                                                                                           |                                             |         |                             |        |      |         |        

See notes to condensed consolidated financial statements.

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STRATOS LIGHTWAVE, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

July 31, 2003

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
period ended July 31, 2003 are not necessarily indicative of the results that
may be expected for the year ending April 30, 2004. This unaudited quarterly
information should be read in conjunction with the audited consolidated
financial statements and related notes for the fiscal year ended April 30, 2003
included in the Companys Annual Report on Form 10-K filed with the Securities
and Exchange Commission.

Comprehensive loss consists of net loss and foreign currency translation
adjustments and totaled $28,772,000 and $7,353,000 for the first quarters of
fiscal 2003 and 2004.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (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 accrued a pre-tax charge of approximately $1.0 million in
the first quarter of fiscal 2003 when Company management approved the current
restructuring plan. If the Company had accounted for this restructuring plan
under SFAS No. 146, $706,000 of the $1.0 million charge would have been
recognized as incurred and not accrued at July 31, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transaction and Disclosure.SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation,to provide alternative methods of
transition to SFAS No. 123s fair value method of accounting for stock-based
employee compensation. SFAS No. 148 does not require companies to account for
employee stock options using the fair value method but does require additional
footnote disclosures. The Company adopted these disclosure requirements
beginning in fiscal 2003. See Note 9 for the disclosure required by SFAS 148.

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

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embedded in other contracts. SFAS No.
149 is effective for contracts entered into or modified
after June 30, 2003. The Company does not expect that the adoption of
this statement will have a material effect on the Companys financial
statements.

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

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities,an Interpretation of Accounting Research Bulletin
(ARB) 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
2003. The Company has no variable interest entities.

2. 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 the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements. Intangible assets with finite lives will continue to be amortized
over their useful lives. Goodwill amortization expense in fiscal year 2003 was
$848,000. The following table discloses pro forma results for net income and
earnings per share as if the non-amortization of goodwill provisions of SFAS
No. 142 were adopted at the beginning of fiscal year 2002.

|                                          |  |                    |         |      |  |   |        |  
|----------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------ | -
|                                          |  | Three Months Ended
|                                          |  | July 31           
|                                          |  |                   
|(in thousands, except per share amounts)  |  | 2002               |         | 2003
|                                          |  |                    |         |     
|Reported net loss                         |  | $                  | (28,837 | )    |  | $ | (7,268 | )
|Add back: Goodwill amortization           |  |                    | 215     |      |  |   |       |  
|                                          |  |                    |         |      |  |   |        |  
|Adjusted net loss                         |  | $                  | (28,622 | )    |  | $ | (7,268 | )
|                                          |  |                    |         |      |  |   |        |  
|Reported basic and diluted loss per share |  | $                  | (3.96   | )    |  | $ | (0.99  | )
|Add back: Goodwill amortization per share |  |                    | .03     |      |  |   |       |  
|                                          |  |                    |         |      |  |   |        |  
|Adjusted basic and diluted loss per share |  | $                  | (3.93   | )    |  | $ | (0.99  | )
|                                          |  |                    |         |      |  |   |        |  

Financial Accounting Standards No. 141, Business Combinations

In accordance with the provisions of SFAS No. 141, $1,367,000 and
$8,566,000 of the purchase price for the Tsunami and Paracer acquisitions,
respectively, in fiscal year 2002 previously allocated to goodwill in our
preliminary purchase price allocation has been reallocated based upon
independent appraisals, to other intangible assets which are being amortized
over their estimated useful lives.

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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 $2,070,000 charge
to in-process research and development during the second quarter of fiscal
2003.

Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets

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 an impairment existed within the active 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 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 as well as 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 approximately $17.0 million.
This one time non-cash charge is nonoperational in nature and is reflected as
a cumulative effect of a change in accounting principle in the Statement of
Operations for the three months ended July 31, 2002. Going forward any
additional impairment of goodwill will be recorded in the period the goodwill
is determined to be impaired.

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3. Restructuring Charges

The Company recorded restructuring charges of approximately $1.0 million
relating to employee costs in the first quarter of fiscal 2003.

Accruals related to the restructuring charges and their utilization are
summarized as follows:

|               |  |                |         |         |  |                  |   |               |  |   |        |  |  |   |         | 
|-------------- |  | -------------- | ------- | ------- |  | ---------------- | - | ------------- |  | - | ------ |  |  | - | ------- | 
|               |  | Balance        |         | 2004    |  | Utilized through |   | Balance      
|               |  | April 30, 2003 |         | Charges |  | July 31, 2003    |   | July 31, 2003
|               |  |                |         |         |  |                  |   |              
|Employee costs |  | $              | 400,000 |         |  |                  |  |               |  | $ | 77,000 |  |  | $ | 323,000 | 
|               |  |                |         |         |  |                  |   |               |  |   |        |  |  |   |         | 

The Company terminated 63 employees in the three months ended July 31,
2002 for the restructuring of its operations, including both production and
administrative personnel.

4. 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, valuation reserves of $55.2 million were recorded
through April 30, 2003, which eliminated the tax benefit attributable to the
losses incurred in fiscals 2002 and 2003. We have continued to experience
similar reductions in business levels during the three months ended July 31,
2003, and an additional valuation reserve of $2.7 million was recorded, which
eliminated the tax benefit attributable to the net loss incurred in the first
quarter of fiscal 2004.

We have net operating loss carry forwards of approximately $121.2 million
that are available to offset taxable income in the future. The net operating
loss carry forwards will expire in 2022 through 2024.

5. Long-Term Debt

Long-term debt consists of two notes payable for the purchase of computer
software and hardware in connection with the implementation of a new
information technology system and several equipment financing arrangements. At
July 31, 2003, information relating to these notes and financing arrangements
is as follows:

|                |  |                        |           |           |  |           |           |       |  |   |         |   |  |   |           | 
|--------------- |  | ---------------------- | --------- | --------- |  | --------- | --------- | ----- |  | - | ------- | - |  | - | --------- | 
|                |  | Information Technology |           |           |  |           |           |      
|                |  |                        |           | Equipment |  |           |           |       | 
|                |  | Note 1                 |           | Note 2    |  | Financing |           | Total
|                |  |                        |           |           |  |           |           |      
|Current portion |  | $                      | 1,783,000 |           |  | $         | 1,176,000 |       |  | $ | 470,000 |   |  | $ | 3,429,000 | 
|Long-term       |  |                        | 2,295,000 |           |  |           |          |       |  |   |        |   |  |   | 2,295,000 | 
|                |  |                        |           |           |  |           |           |       |  |   |         |   |  |   |           | 
|                |  | $                      | 4,078,000 |           |  | $         | 1,176,000 |       |  | $ | 470,000 |   |  | $ | 5,724,000 | 
|                |  |                        |           |           |  |           |           |       |  |   |         |   |  |   |           | 
|Interest rate   |  |                        | 5.50      | %         |  |           | 3.52      | %     |  |   | 13.72   | % |  |   |           | 
|Payment terms   |  | Monthly                |           | Quarterly |  | Monthly   |           |       |  |   |        
|Maturity        |  |                        | 2006      |           |  |           | 2004      |       |  |   | 2005    |   |  |   |           | 

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6. Loss Per Share

|                                 |                                                                                        |   |                             |       |      |   |        |       | 
|-------------------------------- | -------------------------------------------------------------------------------------- | - | --------------------------- | ----- | ---- | - | ------ | ----- | 
|                                 |                                                                                        |   | Three Months Ended July 31,
|                                 |                                                                                        |   |                            
|                                 |                                                                                        |   | 2002                        |       | 2003
|                                 |                                                                                        |   |                             |       |     
|Numerator  net loss             |                                                                                        | $ | (28,837                     | )     |      | $ | (7,268 | )    
|                                 |                                                                                        |   |                             |       |      |   |        |      
|Denominator:                     |                                                                                        |   |                             |       |      |   |        |      
|                                 | Denominator for basic and diluted
loss per share - weighted-average
shares outstanding |   |                             | 7,278 |      |   |        | 7,364 | 
|                                 |                                                                                        |   |                             |       |      |   |        |      
|Basic and diluted loss per share |                                                                                        | $ | (3.96                       | )     |      | $ | (0.99  | )    
|                                 |                                                                                        |   |                             |       |      |   |        |      

The net loss per share for the three months ended July 31, 2002 is restated to
reflect the reverse stock split effective October 21, 2002.

7. Sale of a Business

Effective May 23, 2003, the Company sold the assets and business of its
wholly-owned subsidiary, Bandwith Semiconductor LLC, located in Hudson, New
Hampshire. The Company realized a net gain of approximately $1,200,000 which
is reflected as a reduction of general and administrative expenses in the
statement of operations for the three months ended July 31, 2003.

8. Merger

Pursuant to a merger agreement dated as of July 2, 2003, the Company
agreed to acquire Sterling Holding Company, a privately-held company based in
Mesa, Arizona that designs and manufactures RF and Microwave interconnect
products via its two operating units, Trompeter Electronics, Inc. and Semflex,
Inc. Under the terms of the agreement, Sterling will become a wholly-owned
subsidiary of the Company. Sterling shareholders will receive approximately
6.1 million shares of the Companys common stock and 50,000 shares of the
Companys Series B preferred stock. The preferred stock has 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 transaction is expected to close in the Companys third fiscal
quarter of 2004 and the parties intend to take the position that the
transaction will qualify as a tax-free reorganization. The transaction is
subject to approval by both the Companys and Sterlings shareholders and other
customary conditions. In connection with the transaction, the Company will
expand its Board of Directors to nine members. The new board will be comprised
of four members of the Companys current Board, four members from Sterlings
Board, and an additional director chosen by Sterling.

9. Stock-Based Compensation

In the first quarter of fiscal year 2004, the Company adopted SFAS No.
148, Accounting for Stock-Based Compensation.The Company will continue to
account for stock-based compensation plans using the intrinsic value method
described in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations.All stock options granted by
the Company are granted at market price and thus no compensation expense is
recorded in the Companys results of operations. Under FASB No. 148, the
Company is required to report quarterly pro forma net loss and loss per share
as if the Company had accounted for its stock options plans under the fair
value method. The following table shows the

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Companys pro forma net loss and
loss per share as if the Company had recorded the fair value of stock options
as compensation expense.

|                                                 |  |                    |         |      |  |   |        |  
|------------------------------------------------ |  | ------------------ | ------- | ---- |  | - | ------ | -
|                                                 |  | Three Months Ended
|                                                 |  |                   
|(Dollars in thousands, except per share amounts) |  | 2002               |         | 2003
|                                                 |  |                    |         |     
|Reported net loss                                |  | $                  | (28,837 | )    |  | $ | (7,268 | )
|Stock-based compensation net of tax              |  |                    | (5,144  | )    |  |   | (597   | )
|Pro forma net loss                               |  |                    | (33,981 | )    |  |   | (7,865 | )
|Reported basic and diluted net loss per share    |  |                    | (3.96   | )    |  |   | (0.99  | )
|Pro forma basic and diluted net loss per share   |  |                    | (4.67   | )    |  |   | (1.07  | )




Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and related notes thereto included elsewhere in this Form 10-Q. 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 those set forth under Factors That May Affect Our Future Results.

Overview

We develop, manufacture and sell optical 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 and
government applications, and other industrial markets and applications. We
plan to continue to diversify our end markets and expand our product offerings
through internal and external growth. Our optical subsystems are compatible
with the advanced transmission protocols used in these networks, including
Gigabit Ethernet, Fast Ethernet, Fibre Channel, and synchronous optical network
(SONET).

Pursuant to a merger agreement dated as of July 2, 2003, the Company
agreed to acquire Sterling Holding Company, a privately-held company based in
Mesa, Arizona that designs and manufactures RF and Microwave interconnect
products via its two operating units, Trompeter Electronics, Inc. and Semflex,
Inc. Under the terms of the agreement, Sterling will become a wholly-owned
subsidiary of the Company. Sterling shareholders will receive approximately
6.1 million shares of the Companys common stock and 50,000 shares of the
Companys Series B preferred stock. The preferred stock has 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 transaction is expected to close in the Companys third fiscal
quarter of 2004 and the parties intend to take the position that the
transaction will qualify as a tax-free reorganization. The transaction is
subject to approval by both the Companys and Sterlings shareholders and other
customary conditions. In connection with the transaction, the Company will
expand its Board of Directors to nine members. The new board will be comprised
of four members of the Companys current Board, four members from Sterlings
Board, and an additional director chosen by Sterling.

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Our net sales are derived principally from the sale of optical subsystems
to original equipment manufacturers (OEMs). Our net sales have fluctuated from
period to period based on customer demand for our products, the size and timing
of customer orders, particularly from our largest customers, and based on any
canceled, delayed or rescheduled orders in the relevant period. We determine
reserves for rapid technological change 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 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 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 on a timely basis new products that
incorporate features that can be sold at higher average selling prices.

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 all of these license agreements extends
until the expiration of the licensed patents. 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. Substantially
all 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.
Accordingly, a significant portion of our cost of sales is fixed over the near
term. 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 or introduce new products to offset anticipated
decreases in the average selling prices of our products.

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

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invest in research and development programs
in future periods for the purpose of enhancing or reducing the cost of current
optical subsystems, and developing new optical subsystems.

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 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 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 original equipment manufacturers and
distributors. Sales to these customers have varying degrees of collection risk
associated with them. Judgment is required in assessing the realization of
these receivables based on aging, historical experience and 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 fulfill 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 years projected usage.
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.

Customer Returns

It is our policy to establish a reserve for customer returns based on any
known and anticipated returns based on past experience. Occasionally, we 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 the contemplation of future
business from the customer. We will continue to consider these requests in the
future, however, we are not able to predict that we will enter into any
additional agreements in the future, and, if so, the amount of any returns.

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 is still considered
under development until it matures to the point where its production yields
(volumes) are consistent with other mature products and any engineering effort
is predominately dedicated to customer applications and/or quality support.

Results of Operations

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

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|                           |                                                                   |                          |         |                             |        |      |         |         |        | 
|-------------------------- | ----------------------------------------------------------------- | ------------------------ | ------- | --------------------------- | ------ | ---- | ------- | ------- | ------ | 
|                           |                                                                   |                          |         | Three Months Ended July 31,
|                           |                                                                   |                          |         |                            
|                           |                                                                   |                          |         | 2002                        |        | 2003
|                           |                                                                   |                          |         |                             |        |     
|Revenue:                   |                                                                   |                          |         |                             |        |      |         |        
|                           | Net sales                                                         |                          |         | 100.00                      | %      |      |         | 100.00  | %     
|                           | License fees and royalties                                        |                          |         | 1.93                        |        |      |         | 7.70    |       
|                           |                                                                   |                          |         |                             |        |      |         |        
|                           |                                                                   | Total                    |         |                             | 101.93 |      |         |         | 107.70 | 
|Costs and expenses:        |                                                                   |                          |         |                             |        |      |         |        
|                           | Cost of sales                                                     |                          |         | 100.33                      |        |      |         | 113.80  |       
|                           | Research and development                                          |                          |         | 62.90                       |        |      |         | 43.98   |       
|                           | Sales and marketing                                               |                          |         | 20.71                       |        |      |         | 23.12   |       
|                           | General and administrative                                        |                          |         | 32.06                       |        |      |         | 41.06   |       
|                           |                                                                   |                          |         |                             |        |      |         |        
|                           |                                                                   | Total costs and expenses |         |                             | 216.00 |      |         |         | 221.96 | 
|                           |                                                                   |                          |         |                             |        |      |         |        
|Loss from operations       |                                                                   |                          | (114.07 | )                           |        |      | (114.26 | )      
|Investment income, net     |                                                                   |                          | 3.50    |                             |        |      | 3.65    |        
|                           |                                                                   |                          |         |                             |        |      |         |        
|Loss before income taxes   |                                                                   |                          | (110.57 | )                           |        |      | (110.61 | )      
|Provision for income taxes |                                                                   |                          |        |                             |        |      |        |        
|                           |                                                                   |                          |         |                             |        |      |         |        
|                           | Loss before cumulative effect of a change in accounting principle |                          |         | (110.57                     | )      |      |         | (110.61 | )     
|                           | Cumulative effect of a change in accounting principle             |                          |         | (158.38                     | )      |      |         |        |       
|                           |                                                                   |                          |         |                             |        |      |         |        
|Net loss                   |                                                                   |                          | (268.95 | )%                          |        |      | (110.61 | )%     
|                           |                                                                   |                          |         |                             |        |      |         |        

Three Months Ended July 31, 2003 and 2002

Net Sales.Net sales decreased to $6.6 million in the three months ended
July 31, 2003 from $10.7 million in the three months ended July 31, 2002. Of
this $4.1 million decrease, $2.9 million is from a decrease in net sales into
the storage end market, $740,000 is from a decrease in net sales into the data
networking end market and $660,000 is from a decrease in net sales into the
telecom/metro end market. These decreases were offset in part by a $200,000
increase in net sales into the military/governmental end market.

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 decreased to $4.7
million as of July 31, 2003 from $5.0 million as of April 30, 2003. 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 increased to $506,000 in the
three months ended July 31, 2003 from $207,000 in the three months ended July
31, 2002. The increase relates to the receipt of higher royalties from three
licensees in the first quarter of fiscal 2004. License fees consist of both
fixed schedule payments and contingent payments based on sales volumes of
licensed products.

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Cost of Sales and Gross Margins. Cost of sales decreased to $7.5 million
in the three months ended July 31, 2003 from $10.7 million in the three months
ended July 31, 2002. Gross profit as a percentage of net sales, or gross margin, decreased to
negative (13.8)% in the three months ended July 31, 2003 from negative (.3)% in
the three months ended July 31, 2002. Approximately 10.90 percentage points of
the 13.50 percentage point decrease was due to the increase in charges for
obsolete and slow moving inventory, 3.85 percentage points was due to employee
severance pay related to the restructuring of operations and 3.10 percentage
points was due to the decline in sales and the decline in the average selling
price for our products. These factors were offset by 4.35 percentage points
for the sale of approximately $427,000 of inventory previously considered
excess and fully reserved.

Research and Development. Research and development expenses decreased to
$2.9 million in the three months ended July 31, 2003 from $6.7 million in the
three months ended July 31, 2002. This decrease of $3.8 million was due
primarily to a decrease of $1.5 million in personnel costs dedicated to
research and development, a decrease of $1.2 million in material and overhead
costs related to major product development projects and a decrease of $1.1
million in the cost of research and development facilities.

Sales and Marketing. Sales and marketing expenses decreased to $1.5
million in the three months ended July 31, 2003 from $2.2 million for the three
months ended July 31, 2002. The $700,000 decrease was due to a $400,000
decrease in sales and marketing salaries, fringe benefits, bonuses and
commissions, and a decrease of $300,000 in field sales operating costs
supporting our sales.

General and Administrative. General and administrative expenses decreased
to $2.7 million in the three months ended July 31, 2003 from $3.4 million in
the three months ended July 31, 2002. This $700,000 decrease was due to a
reduction of $500,000 of costs for facilities and staff and a decrease of
$200,000 in corporate management and legal costs.

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 74 days at July 31, 2003 compared to 50 days at April 30, 2003.

Investment Income, Net. Investment income, net of investment expense,
decreased to $240,000 in the three months ended July 31, 2003 from $375,000
million in the three months ended July 31, 2002. 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 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, valuation reserves of $55.2 million
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 similar reductions in business levels during the three
months ended July 31, 2003,

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and an additional valuation reserve of $2.7 million
was recorded, which eliminated the tax benefit attributable to the net loss
incurred in the first quarter of fiscal 2004.

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 for the three months ended July 31, 2002. See Note 2 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 $2.5 million for the three
months ended July 31, 2003. The use of cash in operating activities resulted
primarily from a net loss offset in part by decreases in accounts receivable
and inventories and increases in accounts payable and accrued expenses. Net
cash used in operating activities totaled $9.7 million for the three months
ended July 31, 2002. The use of cash in operating activities resulted
primarily from a net loss and decrease in notes payable, accounts payable and
accrued expenses offset in part by decreases in accounts receivable and
inventories.

Net cash used in investing activities was $7.6 million in the three months
ended July 31, 2003. Net cash used in investing activities related primarily
to the purchase of short-term investments and the purchase of equipment and
facilities offset in part by the sales of short-term investments and assets
held for sale. Net cash provided by investing activities was $1.9 million in
the three months ended July 31, 2002. Net cash provided by investing
activities related primarily to the sales of short-term investments and assets
held for sale offset in part by the purchase of short-term investments and the
purchases of equipment and facilities.

Net cash used in financing activities was $3.6 million and $900,000 in the
three months ended July 31, 2002 and 2003, respectively, and represents
repayments on borrowings.

As of July 31, 2003, our principal source of liquidity was approximately
$61.2 million in cash, cash equivalents and short-term investments. Our future
capital requirements will depend on a number of factors, including our future
net sales and our ability to lower operating expenses. Our only cash
commitment is the repayment of long-term debt of approximately $5.7 million.
We believe that our current cash balances will be sufficient to meet our cash
needs for working capital, capital expenditures and repayments of long-term
debt for the next 12 months.

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Factors That May Affect Our Future Results

Risks Relating to Our Business

We have recently incurred significant net losses, primarily due to the current
economic downturn. Unless we are able to increase our sales or further reduce
our costs, we will continue to incur net losses.

The current economic downturn has resulted in reduced capital spending for
optical networking products. As a result, many of our customers have
significantly reduced, cancelled or rescheduled orders for our products and
expressed uncertainty as to their future requirements. We experienced a
decrease in net sales of 39% and incurred a net loss of $7.3 million during the
three months ended July 31, 2003. We experienced a decrease in net sales of
34% and incurred a net loss of $120.3 million during fiscal 2003. We expect
difficult industry conditions to continue for at least the next 6 to 12 months
and 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.

Although we have implemented personnel reductions and other cost reduction
programs, many of our costs are fixed in the near term and 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.

Our net sales and operating results vary significantly from quarter to quarter,
and our stock price may fall if our quarterly performance does not meet
analysts or investors expectations.

Our quarterly net sales and operating results have varied significantly in
the past and are likely to vary significantly in the future, which makes it
difficult to predict our future operating results. Accordingly, we believe
that quarter-to-quarter comparisons of our net sales and operating results are
not meaningful and should not be relied upon as an indicator of our future
performance. Some of the factors which cause our net sales and operating
results to vary include:



| |  |  | the timing of customer orders, particularly from our largest customers;
| | - |  | -----------------------------------------------------------------------
|
| |  |  | the level of demand for our customers products;                       
|
| |  |  | the cancellation or postponement of orders;                            
|
| |  |  | our ability to manufacture and ship our products on a timely basis;    
|
| |  |  | changes in our product mix;                                            
|
| |  |  | competitive pressures resulting in lower prices;                       
|
| |  |  | our ability to control costs and expenses;                             

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| |  |  | the introduction of new products or technologies by us or our competitors;                               
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | the timing of our receipt of license fees and royalty
payments relating to our intellectual property; and
|
| |  |  | general economic factors.                                                                                

Our net sales and operating results have been and in one or more future
quarters will likely be below the expectations of public market analysts and
investors. If this occurs, the price of our common stock would likely decline.

Our success depends on the long-term growth of communication networks and their
use of optical communication technologies. If these events do not occur, our
net sales may decline and our business would likely be significantly harmed.

Our optical subsystems and components are used primarily in military,
video broadcast, industrial, enterprise, metropolitan area, wide area and
telecommunication networks. These markets are rapidly evolving and it is
difficult to predict their potential size or future growth rate. In addition,
there is uncertainty as to the extent to which optical communication
technologies will be used throughout these markets. Our success in generating
revenue in these markets will depend on the long-term growth of these markets
and their use of optical communication technologies. If these markets do not
grow, or if the use of optical communication technologies in these markets does
not expand, our net sales may decline and our business would likely be
significantly harmed.

We must develop new products and technology as well as enhancements to existing
products and technology in order to remain competitive. If we fail to do so,
our products will no longer be competitive and our net sales will decline.

The market for our products and technology is characterized by rapid
technological change, new and improved product introductions, changes in
customer requirements and evolving industry standards. Our future success will
depend to a substantial extent on our ability to develop, introduce and support
new products and technology on a successful and timely basis. If we fail to
develop and deploy new products and technologies or enhancements of existing
products on a successful and timely basis or we experience delays in the
development, introduction or enhancement of our products and technologies, our
products will no longer be competitive and our net sales will decline. The
introduction of new and enhanced products may cause our customers to defer or
cancel orders for existing products. In addition, a slowdown in demand for
existing products ahead of a new product introduction could result in a write
down in the value of inventory on hand relating to existing products.

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

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product announcements by competitors, technological
changes or emerging industry standards. Any failure to respond to
technological change would significantly harm our business.

Our products are incorporated into larger systems which must comply with
various domestic and international government regulations. If the performance
of our products contributes to our customers inability to comply with these
requirements, we may lose these customers and our net sales will decline.

In the United States, our products are incorporated into larger systems
which must comply with various regulations and standards defined by the Federal
Communications Commission and Underwriters Laboratories. Internationally, our
products are incorporated into larger systems which must also comply with
standards established by local authorities in various countries which may vary
considerably. If the performance of our products contributes to our customers
inability to comply with existing or evolving standards established by
regulatory authorities or to obtain timely domestic or foreign regulatory
approvals we may lose these customers and our net sales will decline.

If our products fail to comply with evolving industry standards or alternative
technologies in our markets, we may be required to make significant
expenditures to redesign our products.

Our products comprise only a part of an entire networking system and must
comply with evolving industry standards in order to gain market acceptance. In
many cases, we introduce a product before an industry standard has become
widely accepted and we depend on the companies that provide other components to
support industry standards as they evolve. Because industry standards do not
exist in some cases at the time we are developing new products, we may develop
products that do not comply with the eventual industry standard. If this
occurs, we would need to redesign our products to comply with adopted industry
standards. In addition, if alternative technologies were adopted as an
industry standard within our target markets, we would have to dedicate
significant time and resources to redesign our products to meet this new
industry standard. If we are required to redesign our products, we may incur
significant expenses and losses due to lack of customer demand, unusable
purchased components for these products and the diversion of our engineers from
future product development efforts. If we are not successful in redesigning
our products or developing new products to meet new standards or any other
standard that may emerge, our net sales will decline.

We derive a significant portion of our net sales from a few large customers,
and our net sales may decline significantly if any of these customers cancels,
reduces or delays purchases of our products.

Our success will depend on our continued ability to develop and manage
relationships with significant customers. For the three months ended July 31,
2003, our two largest customers and their respective contract manufacturers
accounted for 9.0% of our net sales, with the Procurement Department for the
German Ministry of Defense and with Manufacturing Services accounting for 4.8%
and 4.2% of our net sales, respectively. For the three months ended July 31,
2002, QLogic and its contract manufacturers accounted for 11% of our net sales.
We expect our dependence on sales to a small number of large customers to
continue.

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The markets in which we sell our products are dominated by a relatively
small number of systems manufacturers, thereby limiting the number of our
potential customers. As a result, our relationships with these customers are critically important to our
business. We cannot assure you that we will be able to retain our largest
customers, that we will be able to attract additional customers or that our
customers will be successful in selling their products that incorporate our
products. Our customers have in the past sought price concessions from us and
will continue to do so in the future. Also, many of our customers have
canceled, reduced or delayed purchases of our products. Further, some of our
customers may in the future shift their purchases of products from us to our
competitors or to joint ventures between these customers and our competitors.
The loss of or a significant reduction in orders from one or more of our
largest customers, our inability to successfully develop relationships with
additional customers or future price concessions that we may make could cause
our net sales to significantly decline.

Our sales cycle runs from our customers initial design to production for
commercial sale. This cycle is long and unpredictable and may cause our net
sales to decline or increase our operating expenses.

We cannot predict the timing of our sales accurately because of the length
of our sales cycles. As a result, if sales forecasts from specific customers
are not realized, we may be unable to compensate for the sales shortfall and
our net sales may decline. The period of time between our initial contact with
a customer and the receipt of a purchase order may span up to a year or more,
and varies by product and customer. During this time, customers may perform,
or require us to perform, extensive evaluation and qualification testing of our
products. Generally, they consider a wide range of issues before committing to
purchase our products, including ability to interoperate with other subsystems
and components, product performance and reliability. We may incur substantial
sales and marketing expenses and expend significant management effort while our
potential customers are qualifying our products. Even after incurring these
costs, we ultimately may not sell any or only small amounts of our products to
these potential customers. Consequently, if new sales do not result from our
efforts to qualify our products, our operating expenses will increase.

Our customers may cease purchasing our products at any time and may cancel or
defer purchases on short notice, which may cause our net sales to decline or
increase our operating expenses.

We generally do not have long-term contracts with our customers. Sales
are typically made pursuant to individual purchase orders, often with extremely
short lead times, that may be canceled or deferred by customers on short notice
without significant penalty. Our customers base their orders for our products
on the forecasted sales and manufacturing schedules for their own products.
Our customers have in the past significantly accelerated, canceled or delayed
orders for our products in response to unanticipated changes in the
manufacturing schedules for their own products, and will likely do so again in
the future. During the last twelve months, our customers have cancelled a
significant number of orders. The reduction, cancellation or delay of
individual customer purchase orders has caused and could continue to cause our
net sales to decline. Moreover, these uncertainties complicate our ability to
accurately plan our manufacturing schedule and may increase our operating
expenses.

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If we do not decrease our manufacturing costs or increase sales of higher
margin products as the average unit price of our existing products decreases,
our gross margins will decline.

The average unit prices of our products generally decrease as the products
mature in response to increased competition, the introduction of new products
and increased unit volumes. Substantially all of our products are designed and
manufactured in our own facilities. Accordingly, a significant portion of our
cost of sales is fixed over the near term. In order to remain competitive, we
must continually reduce our manufacturing costs through design and engineering
changes and increases in manufacturing efficiencies. We must also continue to
develop and introduce on a timely basis new products that incorporate features
that can be sold at higher average selling prices. Our inability to reduce
manufacturing costs or introduce new products with higher average selling
prices will cause our gross margins to decline, which would significantly harm
our operating results.

The market for optical subsystems and components is highly competitive, which
may result in lost sales or lower gross margins.

The markets for optical subsystems are highly competitive and are expected
to intensify in the future. We compete primarily with Agilent Technologies,
Inc., Finisar Corporation, Infineon Technologies Corp, JDS Uniphase
Corporation, Lucent Technologies Inc., Molex, Inc., Optical Communications
Products, Inc., Tyco International, Ltd. and a number of other smaller
companies. Many of these companies have substantially greater financial,
technical, marketing and distribution resources and brand name recognition than
we have. As a result, these competitors are able to devote greater resources
than we can to the development, promotion, sale and support of their products.
In addition, several of our competitors have large market capitalizations or
cash reserves and are much better positioned than we are to acquire other
companies in our consolidating industry in order to gain new technologies or
products. Many of our competitors have much greater name recognition, more
extensive customer bases, better-developed distribution channels and broader
product offerings. These companies can leverage their customer bases and
broader product offerings and adopt aggressive pricing policies to gain market
share. In addition, companies with diversified product offerings can better
sustain an economic downturn.

We expect that more companies, including some of our customers, will enter
the markets for our products. We may not be able to compete successfully
against either current or future competitors. Competitive pressures, combined
with weakening demand, may result in further price reductions, lower margins
and loss of market share. In addition, some of our current and potential
customers are attempting to integrate their operations by producing their own
optical subsystems or components or acquiring one or more of our competitors
which may eliminate the need to purchase our products. Furthermore, larger
companies in other related industries are developing and acquiring technologies
and applying their significant resources, including their distribution channels
and brand name recognition, in an effort to capture significant market share.
While this trend has not historically impacted our competitive position, it may
result in future decreases in our net sales.

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We depend on suppliers for several key components. If we underestimate or
overestimate our requirements for these components, our business could be
significantly harmed.

We purchase several key components that are incorporated into our products
from a limited number of suppliers. We have experienced shortages and delays
in obtaining key components in the past and expect to experience shortages and
delays in the future. These shortages and delays have typically occurred when
demand within the industry has increased rapidly and exceeds the capacity of
suppliers of key components in the short term. Delays and shortages also often
occur in the early stages of a products life cycle. The length of shortages
and delays in the past has varied from several days to a month. We are unable
to predict the length of any future shortages or delays.

The inability to obtain sufficient quantities of these components that
meet our quality requirements may interrupt and delay the manufacturing of our
products or result in the cancellation of orders for our products. In
addition, our suppliers could discontinue the manufacture or supply of these
components at any time. We may not be able to identify and integrate
alternative sources of supply in a timely fashion, or at all. Any transition
to alternative suppliers may result in delays in shipment and increased
expenses and may limit our ability to deliver products to our customers.
Furthermore, if we are unable to identify an alternative source of supply, we
may have to redesign or modify our products, which may cause delays in
shipments, increased design and manufacturing costs and increased prices for
our products.

We make forecasts for our component requirements based on anticipated
product orders. Although we enter into long-term agreements for the purchase
of key components from time to time, our purchases of key components are
generally made on a purchase order basis. We may also maintain an inventory of
limited source components to limit the potential impact of a component
shortage. We may not accurately predict the demand for our products and the
lead-time required to obtain key components. If we overestimate our
requirements, we may have excess inventory, which may become obsolete and would
increase our costs. If we underestimate our requirements, we may have
inadequate inventory, which could interrupt our manufacturing and delay
delivery of our products to our customers. Either of these occurrences would
significantly harm our business.

Our success depends on our ability to hire and retain qualified technical
personnel, and if we are unable to do so, our product development efforts and
customer relations will suffer.

Our products require sophisticated manufacturing, research and
development, marketing and sales, and technical support. Our success depends
on our ability to attract, train and retain qualified technical personnel in
each of these areas. Competition for personnel in all of these areas is
intense and we may not be able to hire or retain sufficient personnel to
achieve our goals or support the anticipated growth in our business. The
market for the highly-trained personnel we require is very competitive, due to
the limited number of people available with the necessary technical skills and
understanding of our products and technology. If we fail to hire and retain
qualified personnel, our product development efforts and customer relations
will suffer.

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Our products may contain defects which may cause us to incur significant costs,
divert our attention from product development efforts and result in a loss of
customers.

Our products are complex and may contain defects, particularly when first
introduced or as new versions are released. Our customers integrate our
subsystems and components into systems and products that they develop
themselves or acquire from other vendors. As a result, when problems occur in
equipment or a system into which our products have been incorporated, it may be
difficult to identify the source of the problem. We may be subject to
liability claims for damages related to product defects or experience
manufacturing delays as a result of these defects in the future, any or all of
which could be substantial. The length of any future manufacturing delays in
connection with a product defect will depend on the nature of the defect and
whether we or one of our component suppliers was the source of the defect.
Moreover, the occurrence of defects, whether caused by our products or
technology or the products of another vendor, may result in significant
customer relations problems and injury to our reputation and may impair the
market acceptance of our products and technology.

We are subject to environmental laws and other legal requirements that have the
potential to subject us to substantial liability and increase our costs of
doing business.

Our properties and business operations are subject to a wide variety of
federal, state, and local 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. We cannot assure you that these legal requirements
will not impose on us the need for additional capital expenditures or other
requirements. 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
also be required to incur additional costs to comply with current or future
legal requirements.

Economic, political and regulatory risks associated with international
operations may limit our sales and increase our costs of doing business abroad.

A significant portion of our sales are generated from customers located
outside the United States, principally in Europe. We also operate
manufacturing facilities in China and the United Kingdom. Sales to customers
located outside of the United States were approximately 37.6% of our net sales
during the three months ended July 31, 2003 and approximately 39.1% of our net
sales during the three months ended July 31, 2002. Our international
operations are subject to a number of risks and uncertainties, including:



| |  |  | difficulties in managing operations in different locations;                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in foreign currency rates;                                                                                
|
| |  |  | longer accounts receivable collection cycles;                                                                     
|
| |  |  | difficulties associated with enforcing agreements through foreign legal systems;                                  
|
| |  |  | seasonal reductions in business activities in some parts of
the world, such as during the summer months in Europe;

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| |  |  | trade protection measures and import and export licensing requirements;                          
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | changes in a specific countrys or regions political or economic conditions;                    
|
| |  |  | potentially adverse tax consequences;                                                            
|
| |  |  | the potential difficulty in enforcing intellectual property
rights in some foreign countries; and
|
| |  |  | acts of terrorism directed against the United States or U.S.
affiliated targets.                 

These factors could adversely impact our international sales or increase
our costs of doing business abroad or impair our ability to expand into
international markets, and therefore could significantly harm our business.

We intend to pursue additional acquisitions. If we are unable to successfully
integrate any businesses or technologies that we acquire in the future or are
unable to realize the intended benefits of any future acquisitions, our
business will be harmed.

As part of our strategy, we intend to pursue opportunities to buy other
businesses or technologies that would complement our current products, expand
our markets or enhance our technical capabilities, or that may otherwise offer
growth opportunities. Our experience in acquiring other businesses and
technologies is limited. Acquisitions could result in a number of financial
consequences, including:



| |  |  | use of significant amounts of cash;                                          
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | the incurrence of debt and contingent liabilities;                           
|
| |  |  | potentially dilutive issuances of equity securities;                         
|
| |  |  | large one-time write-offs; and                                               
|
| |  |  | amortization expenses related to goodwill and other intangible assets.       
|
| |  |  | Acquisitions also involve numerous operational risks, including:             
|
| |  |  | difficulties in integrating operations, products, technologies and personnel;
|
| |  |  | unanticipated costs or write-offs associated with the acquisition;           
|
| |  |  | diversion of managements attention from other business concerns;            
|
| |  |  | diversion of capital and other resources from our existing businesses; and   
|
| |  |  | potential loss of key employees of purchased organizations.                  

If we are unable to successfully integrate these businesses or any other
businesses or technologies that we may acquire in the future or are unable to
realize the intended benefits of any future acquisitions, our business will be
harmed.

Our inability to protect our intellectual property rights would significantly
impair their value and our competitive position.

We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. Although we have numerous issued
patents and pending patent applications, we cannot assure you that any patents
will issue as a result of our pending patent applications or, if issued, that
any patent claim allowed will be sufficiently broad to protect our technology.
In addition,

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we cannot assure you that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder would provide us with
meaningful protection of our technology. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. We may be unable to detect the
unauthorized use of our intellectual property or to take appropriate steps to
enforce our intellectual property rights. Policing unauthorized use of our
products and technology is difficult. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. Further, enforcing our intellectual property rights
could result in the expenditure of significant financial and managerial
resources and the success of these efforts cannot be predicted with certainty.
Litigation has been necessary and may continue to be necessary in the future to
enforce our intellectual property rights. This litigation could be costly and
its outcome cannot be predicted with certainty. Our inability to adequately
protect against unauthorized use of our intellectual property would
significantly impair its value and our competitive position.

We are currently involved in pending patent litigation which, if decided
against us, could impair our ability to prevent others from using our
technology, result in the loss of future royalty income and require us to pay
significant monetary damages.

We are plaintiffs in several lawsuits relating to our intellectual
property rights. The defendants in these lawsuits include Infineon
Technologies Corp., E20, Inc. and Picolight, Inc. In these actions, Stratos
alleges that optoelectronic products sold by the defendants infringe upon
certain Stratos patents. The defendants in these lawsuits have filed various
affirmative defenses.

These lawsuits are in the preliminary stage, and we cannot predict their
outcome with certainty. If one or more of these patents were found to be
invalid or unenforceable, we would lose the ability to prevent others from
using the technologies covered by the invalidated patents. This could result
in significant decreases in our sales and gross margins for our products that
use these technologies. In addition, we would lose the future royalty payments
from our current licensees of these patents. We could also be required to pay
significant monetary damages to one or more of the defendants or be required to
reimburse them for their legal fees. Accordingly, if one or more of these
patents were found to be invalid or unenforceable, our business would be
significantly harmed.

Claims that we infringe third-party intellectual property rights could result
in significant monetary damages and expenses or restrictions on our ability to
sell our products.

In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. From time to
time, third parties may assert patent, copyright and other intellectual
property rights to technologies used in our business. In addition, our rights
to use our name or other trademarks are subject to challenge by others. Any
claims, with or without merit, could be time-consuming, result in costly
litigation, and divert the efforts of our technical and management personnel.
If we are unsuccessful in defending ourselves against these types of claims, we
could be subject to significant monetary damages and may be required to do one
or more of the following:

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| |  |  | stop using the challenged trademarks or selling our
products that use or incorporate the relevant technology;                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | attempt to obtain a license to sell or use the
challenged intellectual property, which license may not be
available on reasonable terms or at all; or
|
| |  |  | redesign those products that use the relevant
technology.                                                                                            

In the event a claim against us was successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our business would
be significantly harmed.

Risks Relating to the Securities Markets and Ownership of Our Common Stock

The market prices for securities of technology related companies have been
volatile in recent years and our stock price could fluctuate significantly.

Our common stock has been publicly traded only since June 27, 2000. The
market price of our common stock has been subject to significant fluctuations
since the date of our initial public offering. These fluctuations could
continue. Factors that could affect our stock price include:



| |  |  | economic and stock market conditions generally and
specifically as they may impact participants in the communication
industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | earnings and other announcements by, and changes in market
evaluations of, participants in the optical communication industry;
|
| |  |  | changes in financial estimates and recommendations by
securities analysts following our stock;                                
|
| |  |  | announcements or implementation by us or our competitors of
technical innovations or new products; and                        
|
| |  |  | strategic moves by us or our competitors, such as
acquisitions.                                                               

In addition, the securities of many companies have experienced extreme
price and volume fluctuations in recent years, often unrelated to the
companies operating performance. Specifically, market prices for securities
of technology related companies have frequently reached elevated levels, often
following their initial public offerings. These levels may not be sustainable
and may not bear any relationship to these companies operating performances.

Provisions in our charter documents and Delaware law may delay or prevent an
acquisition of our company, which could decrease the value of your shares.

Our restated certificate of incorporation and bylaws and Delaware law
contain provisions that could make it more difficult for a third party to
acquire us without the consent of our board of directors. These provisions
include a classified board of directors and limitations on actions by our
stockholders by written consent. In addition, our board of directors has the
right to issue preferred stock without stockholder approval, which could be
used to dilute the stock ownership of a potential hostile acquiror. Delaware
law also imposes some restrictions on mergers and business combinations between
us and any holder of 15% or more of our outstanding common

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stock. These
provisions apply even if the offer may be considered beneficial by some
stockholders.

Risks Relating to the Merger with Sterling

We may be unable to successfully integrate the operations of Stratos and
Sterling and realize the full cost savings we anticipate.

The merger involves the integration of two companies that previously
operated independently. The difficulties of combining the companies
operations include:



| |  |  | the necessity of coordinating geographically separated
organizations, systems and facilities; and
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | integrating personnel with diverse business backgrounds and
organizational cultures.             

The process of integrating operations could cause an interruption of, or
loss of momentum in, the activities of one or more of the combined companys
business and the possible loss of key personnel. The diversion of managements
attention and any delays or difficulties encountered in connection with the
merger and the integration of the two companies operations could have an
adverse effect on the business, results of operations, financial condition or
prospects of the combined company after the merger.

Among the other factors considered by the Stratos and the Sterling boards
of directors in connection with their respective approvals of the merger
agreement were the opportunities for operating efficiencies that could result
from the merger. We cannot give any assurance that these savings will be
realized within the time periods contemplated or even that they will be
realized at all.

We will incur significant transaction, merger-related and restructuring costs
in connection with the merger.

Stratos expects to incur costs associated with combining the operations of
the two companies, transaction fees and other costs related to the merger. The
total estimate includes approximately $2.3 million for transaction costs and up
to $1,000,000 in legal fees on behalf of Sterling. The estimated $2.3 million
of transaction costs will be recorded as a component of the purchase price.
Stratos also will incur restructuring and integration costs in connection with
the merger. Stratos is in the early stages of making assessments of these
costs and at this time is unable to give an estimate of these costs. Depending
on the nature of the restructuring activity, certain costs may be included as a
liability in the purchase price allocation or as an expense, in accordance with
generally accepted accounting principles in the United States. The amount of
transaction fees is expected to be incurred is a preliminary estimate and
subject to change. Additional unanticipated costs may be incurred in the
integration of the businesses of Stratos and Sterling. Although Stratos and
Sterling expect that the elimination of duplicative costs, as well as the
realization of other efficiencies related to the integration of the businesses,
may offset incremental transaction, merger-related and restructuring costs over
time, we cannot give any assurance that this net benefit will be achieved in
the near term, or at all.

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Charges to earnings resulting from the application of the purchase method of
accounting may adversely affect the market value of Stratos common stock
following the merger.

In accordance with generally accepted accounting principles in the United
States, the merger will be accounted for using the purchase method of
accounting, which will result in charges to earnings that could have an adverse
impact on the market value of Stratos common stock following completion of the
merger. Under the purchase method of accounting, the total estimated purchase
price will be allocated to Sterlings net tangible assets and identifiable
intangible assets based on their fair values as of the date of completion of
the merger. The excess of the purchase price over those fair values will be
recorded as goodwill. The combined company will incur additional amortization
expense based on the identifiable intangible assets acquired in connection with
the merger. Additionally, to the extent the value of goodwill becomes
impaired, the combined company may be required to incur material charges
relating to such impairment. These amortization and potential impairment
charges could have a material impact on the combined companys results of
operations.

Stratos estimates the annual amortization expense for these identifiable
intangible assets will approximate $1,331,000. Based on Sterlings
amortization expense of approximately $12,000 related to identifiable
intangible assets for the year ended December 31, 2002, Stratos will incur
approximately $1,343,000 of annual amortization expense after the completion of
the merger. Changes in earnings per share, including as a result of this
incremental expense, could adversely affect the trading price of the Stratos
common stock.

Risks Relating to the Businesses of Stratos, Sterling and the Combined Company

We may not realize expected benefits from the consolidation of certain Sterling
operations into the Mesa, Arizona facility .

Sterling currently is engaged in a consolidation of the manufacturing
operations associated with its electronic interconnect components and
assemblies business, and a relocation of the manufacturing operations of its
Trompeter subsidiary from Westlake Village, California to Mesa, Arizona.
Although we expect this consolidation to be completed by the end of 2003 and
anticipate synergies and improved operating performance to result from this
consolidation, we cannot guarantee any such benefits. In addition, this
consolidation may affect adversely our ability to retain key employees, which
could affect adversely our operating results.

Stratos and Sterling are the subject of various legal proceedings that could
have a negative impact on the business of the combined company.

Stratos and Sterling are involved in various litigation matters that arise
from time to time in the ordinary course of business. Stratos is a defendant
in several lawsuits that are described in Stratos Annual Report on Form 10-K
for the fiscal year ended April 30, 2003, Sterling is a defendant in a lawsuit
filed in the United States District Court for the Eastern District of
Washington by Telect, Inc., in which Telect claims that Sterlings DSX Cross
Connect Bay, Panel and Module infringe one of Telects parents. Sterling
believes that Telects claim is without merit and is defending the lawsuit
vigorously. If, however, Telects claim against Sterling is successful, and if
the combined company is unable to (1) license the relevant

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technology on acceptable terms, (2) license a substitute technology or (3)
redesign the applicable products to avoid infringement, our business could be
harmed. For information about Stratos legal proceedings, see Stratos Annual
Report on Form 10-K for the fiscal year ended April 30, 2003.

The business of Sterling is subject to the following additional risks:



| |  |  | Sterling is dependent on sales to the United States
government and to the military/aerospace industry.
| | - |  | ------------------------------------------------------------------------------------------------------

Approximately 46% of Sterlings sales for the year ended December 31, 2002
came from direct and indirect sales for U.S. government and government agency
applications and sales to the military/aerospace industry, which is heavily
dependent on sales to the U.S. government and government agency applications
directly through contracts with the U.S. government and government agencies,
and indirectly through distributors and to prime contractors or subcontractors
who are building systems or subsystems for the U.S. government. Direct sales
under contracts with the U.S. government and government agencies represented
approximately 4% of Sterlings sales of the year ended December 31, 2002.
Despite this fact, a significant decline in U.S. government expenditures could
have a material adverse effect on sales of the combined company.



| |  |  | Sterling is dependent on the communications industry.
| | - |  | -----------------------------------------------------

Approximately 29% of Sterling revenues came from sales to the
communications industry for the year ended December 31, 2002. The market is
dominated by several large manufacturers who regularly exert significant price
pressure on their suppliers. We cannot assure you that we will be able to
continue to compete successfully in our sales to the communications industry,
and our failure to do so would impair our operating results.

The market for communications equipment is changing rapidly. Our future
growth will depend, in part, upon (1) our ability to develop and introduce new
products for this market and (2) the growth of the communications equipment
market. The growth in the market for communications equipment products and
services is dependent on a number of factors, including without limitation:



| | § |  | the amount of capital expenditures by network providers;                               
| | - |  | ---------------------------------------------------------------------------------------
|
| | § |  | regulatory and legal developments;                                                     
|
| | § |  | changes to capital expenditure rates by network providers;                             
|
| | § |  | the addition of new customers to the market; and                                       
|
| | § |  | end-user demand for integrated Internet, data, video, voice
and other network services.

We cannot predict the growth rate of the market for communications
equipment products and services. The recent slowdown in the general economy,
changes and consolidation in the service provider market and constraints on
capital availability have had a material adverse effect on many of our service
provider customers, causing some of these customers to go out of business and a
number of other customers to substantially reduce their expansion plans and

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purchases. In addition, technological trends and new product developments
in this market may adversely affect our product offerings. We also cannot
predict whether any new products and services we develop will meet with market
acceptance or be profitable. We may not be able to compete successfully and
competitive pressures could affect, materially and adversely, our business,
operating results and financial condition.



| |  |  | Sterling operates in a highly competitive environment.
| | - |  | ------------------------------------------------------

The electronic interconnect components and assemblies industries are
highly competitive. Sterling competes primarily with Tyco International Ltd.,
Amphenol Corporation, Kings Electronics Co., Inc., ITT Cannon (a subsidiary of
ITT Industries), ADC Telecommunications, Inc., Radiall, S.A., Switchcraft,
Inc., Canare Electric Co., Ltd. and numerous other companies globally. Some of
our competitors may have greater companies that may be planning to enter the
markets in which we compete.

Sterling manufactures its electronic interconnect components, subsystems
and assemblies at its manufacturing facilities in Mesa, Arizona and Westlake
Village, California. Sterlings manufacturing costs are higher than the
manufacturing costs of some of its competitors, particularly those located in
foreign countries that benefit from lower-priced labor and government
subsidies. If current or potential future customers of the combined business
decide to purchase products from these lower-cost competitors, we could suffer
a significant decline in our sales, which could have a material adverse effect
on our business, operating results and financial condition.




Item 3.    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 currencies to which we are exposed are
the pound sterling and Chinese renminbi.

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 has experienced such
reductions in these rates during fiscal year 2003 and the first quarter of
2004.




Item 4.    Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q,
the Company performed an evaluation under the supervision and with the
participation of the Companys management, including its President and Chief
Executive Officer (CEO) and Executive Vice President, Finance and Chief
Financial Officer (CFO), of its disclosure controls and procedures (as
defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)).

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The Companys disclosure controls and procedures are designed to ensure
that the information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions applicable rules and forms. As a result
of this evaluation, the Companys CEO and CFO have concluded that, as of the
date of such evaluation, the Companys disclosure controls and procedures were
effective for their intended purposes.

There have been no changes in the Companys internal control over
financial reporting during the fiscal quarter covered by this quarterly report
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.

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PART II
OTHER INFORMATION




Item 1.     Legal Proceedings.

From time to time, we become involved in various lawsuits and legal
proceedings that arise in the normal course of business. Litigation is subject
to inherent uncertainties and an adverse result in a lawsuit may harm our
business, financial condition or results of operation. Our management 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
operation.

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 Sections 10(b) and
Section 20(a) of the Securities 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.

The Company recently 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.

In June 2002, Catherine Lego, as representative of the former stockholders
of Tsunami Optics, Inc. (Tsunami) filed a lawsuit against the Company in the
Superior Court of California, City and County of Santa Clara, relating to the
Companys acquisition of Tsunami in February 2002. Stratos has removed the
lawsuit to the federal district court for the Northern District of California.
The complaint alleges, among other things, that the Company breached the
acquisition agreement by failing and refusing to allow Tsunami to operate as a
separate subsidiary in the ordinary course and by firing the Tsunami executives
necessary to operate the business in the ordinary course, making it impossible
for Tsunami to achieve the $18 million earn-out payment provided for in the
acquisition agreement. The complaint also alleges fraud and violations of
federal securities laws in connection with the acquisition of Tsunami.
Plaintiffs

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are seeking $18 million in damages or, in the alternative,
rescission of the acquisition agreement. The Company has filed a counterclaim
which alleges, among other things, claims for fraud, breach of contract and
violations of federal securities laws against Lego and several other
shareholders and officers of Tsunami in connection with the acquisition of
Tsunami. The counterclaim seeks compensatory and punitive damages. The
Company believes that the plaintiffs claims in this lawsuit are without merit
and intends to vigorously defend against these claims.

In August 2002, James Campbell filed a lawsuit against the Company and
Tsunami alleging breach of an alleged employment contract, fraud, violation of
the implied covenant of good faith and fair dealing, age discrimination and
wrongful termination in violation of public policy. 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.

In a separate action filed in the Circuit Court of Cook County, Illinois,
the Company filed suit against James P. Campbell and Catherine Lego,
individually. In its complaint, the Company seeks declaratory judgment that
the Company has the right to make changes in Tsunamis business under the
agreement for the Tsunami acquisition. The complaint also includes claims
against Lego and Campbell for fraud and breach of contract for
misrepresentations made by them to the Company in connection with the Tsunami
acquisition and a claim for breach of fiduciary duty against Campbell. The
complaint seeks compensatory and punitive damages.

We are plaintiffs in several lawsuits relating to our intellectual
property rights. The defendants in these lawsuits include Infineon
Technologies Corp. (Northern District of California), E2O, Inc. (District of
Delaware and Northern District of Illinois), and Picolight, Inc. (District of
Delaware and Northern District of Illinois). In these actions, Stratos alleges
that optoelectronic products sold by the defendants infringe numerous Stratos
patents. We are seeking monetary damages and injunctive relief. The
defendants in these lawsuits have filed various affirmative defenses and
contend that the patents are invalid, unenforceable and/or not infringed by the
products sold by the defendants and, if successful, are seeking attorneys fees
and costs in connection with the lawsuits. We intend to pursue these lawsuits
and defend against these counterclaims vigorously.




Item 2.     Changes in Securities and Use of Proceeds.

Stratos Lightwaves 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 Lightwave 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.

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The net proceeds from the offering, after deducting the underwriting
discount and the estimated offering expenses to be paid by Stratos Lightwave,
were approximately $195 million. Uses of proceeds to date include $115.1
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 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,
and research and development. 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 described above in
connection with our Stratos Lightwave-Florida acquisition which was paid to two
of our 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 Stratos Lightwave
director or officer or any of their associates, to any persons owing 10 percent
or more of our common stock, or to any Stratos Lightwave affiliate.

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Item 6.     Exhibits and Reports on Form 8-K.

(a)  Exhibits. Please see the Exhibit Index following the signature page.

(b)  Reports on Form 8-K. A current report on Form 8-K was filed on July
1, 2003 to report results for the fourth quarter and fiscal year ended April
30, 2003. A current report on Form 8-K was filed on July 3, 2003 to report the
execution of the Agreement and Plan of Merger with Sterling Holding Company.
No other reports on Form 8-K were filed by the Registrant in the three months
ended July 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|       |  |                    |  |                         |  |                                      
|------ |  | ------------------ |  | ----------------------- |  | -------------------------------------
|Dated: |  | September 12, 2003 |  | Stratos Lightwave, Inc.
|       |  |                    |  |                         |  |                                      
|       |  |                    |  | By:                     |  | /s/ James W. McGinley                
|       |  |                    |  |                         |  |                                      
|       |  |                    |  |                         |  | James W. McGinley                    
|       |  |                    |  |                         |  | President and Chief Executive Officer
|       |  |                    |  |                         |  |                                      
|       |  |                    |  | By:                     |  | /s/ David A. Slack                   
|       |  |                    |  |                         |  |                                      
|       |  |                    |  |                         |  | David A. Slack                       
|       |  |                    |  |                         |  | Chief Financial Officer              
|       |  |                    |  |                         |  | (Principal Financial and Accounting  
|       |  |                    |  |                         |  | Officer)                             

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EXHIBIT INDEX

|        |       |                         |  |                                                                                                                                                   
|------- | ----- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 3.1   |                         |  | Certificate of Incorporation of Registrant (1)                                                                                                    
|        |       |                         |  |                                                                                                                                                   
|        | 3.2   |                         |  | Restated Certificate of Incorporation of Registrant (1)                                                                                           
|        |       |                         |  |                                                                                                                                                   
|        | 3.3   |                         |  | Bylaws of Registrant (1)                                                                                                                          
|        |       |                         |  |                                                                                                                                                   
|        | 3.4   |                         |  | Certificate of Designation of Series A Junior Participating Preferred
Stock, included as Exhibit A to Exhibit 4.2                                 
|        |       |                         |  |                                                                                                                                                   
|        | 3.5   |                         |  | Certificate of Amendment of Restricted Certificate of Incorporation (7)                                                                           
|        |       |                         |  |                                                                                                                                                   
|        | 4.1   |                         |  | Specimen certificate representing the common stock (1)                                                                                            
|        |       |                         |  |                                                                                                                                                   
|        | 4.2   |                         |  | Rights Agreement, dated as of March 23, 2001, between Stratos Lightwave,
Inc. and Mellon Investor Services LLC (2)                                
|        |       |                         |  |                                                                                                                                                   
|        | 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 22, 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 Robert Scharf (7)                                                                       
|        |       |                         |  |                                                                                                                                                   
|        | 10.9  |                         |  | Management Retention Agreement between the Registrant and Richard Durrant
(7)                                                                     
|        |       |                         |  |                                                                                                                                                   
|        | 10.10 |                         |  | Stratos Lightwave, Inc. Severance Plan (7)                                                                                                        
|        |       |                         |  |                                                                                                                                                   
|        | 10.11 |                         |  | Agreement and Plan of Merger, dated as of July 2, 2003, among Stratos
Lightwave, Inc., Sleeping Bear Merger Corp. and Sterling Holding Company
(8)
|        |       |                         |  |                                                                                                                                                   
|        | 10.12 |                         |  | Amendment to Management Retention Agreement between the Registrant and
James McGinley (9)                                                         
|        |       |                         |  |                                                                                                                                                   
|        | 10.13 |                         |  | Amendment to Management Retention Agreement between the Registrant and
David Slack (9)                                                            
|        |       |                         |  |                                                                                                                                                   
|        | 10.14 |                         |  | Amendment to Management Retention Agreement between the Registrant and
Robert Scharf (9)                                                          
|        |       |                         |  |                                                                                                                                                   
|        | 10.15 |                         |  | Amendment to Management Retention Agreement between the Registrant and
Richard Durrant (9)                                                        
|        |       |                         |  |                                                                                                                                                   
|        | 10.16 |                         |  | Amendment to Stratos Lightwave, Inc. Severance Plan (9)                                                                                           
|        |       |                         |  |                                                                                                                                                   
|        | 31.1  |                         |  | CEO Certification Required Under Rule 13a-14(a) or Rule 15d-14(a) *                                                                               
|        |       |                         |  |                                                                                                                                                   
|        | 31.2  |                         |  | CFO Certification Required Under Rule 13a-14(a) or Rule 15d-14(a)*                                                                                
|        |       |                         |  |                                                                                                                                                   
|        | 32    |                         |  | CEO and CFO Certification Required Pursuant to 18 U.S.C. Section 1350*                                                                            



---

| |  |  |  | 
| |  |  |  | 

|(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 15, 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 April
12, 2002.                               

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|(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 Form 8-K dated July
2 , 2003.                                        
|   
|(9) |  | Incorporated by reference to the Registrants Annual Report on
Form 10-K for the fiscal year ended April 30, 2003. 
|   
|*   |  | Filed herewith                                                                                                     

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