**Exhibit 99.1**
**Risks Relating to Our Business**
**We have recently incurred significant net losses, primarily due to the currenteconomic climate. Unless we are able to increase our sales or further reduceour costs, we will continue to incur net losses.**
     The current economic climate has resulted in reduced capital spending fromits peak for optical networking products. As a result, many of our customersexpressed uncertainty as to their future requirements. We experiencedsignificant decreases in net sales and incurred net losses during fiscal 2003and the first nine months of fiscal 2004. We expect difficult industryconditions to continue for at least the next 6 to 12 months and may continuefor a longer period. Any continued or further decline in demand for ourcustomers’ products or in general economic conditions would likely result infurther reduction in demand for our products and our business, operatingresults and financial condition would suffer.
     Although we have implemented personnel reductions and other cost reductionprograms, many of our costs are fixed in the near term and we expect tocontinue to incur significant manufacturing, research and development, salesand marketing and administrative expenses. Consequently, we will need togenerate higher revenues while containing costs and operating expenses if weare to return to profitability. If our efforts to increase our revenues andcontain 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 meetanalysts’ or investors’ expectations.**
     Our quarterly net sales and operating results have varied significantly inthe past and are likely to vary significantly in the future, which makes itdifficult to predict our future operating results. Accordingly, we believethat quarter-to-quarter comparisons of our net sales and operating results arenot meaningful and should not be relied upon as an indicator of our futureperformance. Some of the factors which cause our net sales and operatingresults 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;  • the introduction of new products or technologies by us or our competitors;  • the timing of our receipt of license fees and royaltypayments relating to our intellectual property; and  • general economic factors.
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     Our net sales and operating results have been and in one or more futurequarters will likely be below the expectations of public market analysts andinvestors. If this occurs, the price of our common stock would likely decline.
**Our success depends on the long-term growth of the communications industry andits use of our technologies. If these events do not occur, our net sales maydecline and our business would likely be significantly harmed.**
     Our subsystems and components are used primarily in military, videobroadcast, industrial, enterprise, metropolitan area, wide area andtelecommunication networks. These markets are rapidly evolving and it isdifficult to predict their potential size or future growth rate. In addition,there is uncertainty as to the extent to which communication technologies willbe used throughout these markets. Our success in generating revenue in thesemarkets will depend on the long-term growth of these markets and their use ofcommunication technologies. If these markets do not grow, or if the use ofcommunication technologies in these markets does not expand, our net sales maydecline and our business would likely be significantly harmed.
     The market for communications equipment is changing rapidly and isdominated by several large manufacturers. Our future growth will depend, inpart, upon (1) our ability to develop and introduce new products for thismarket and (2) the growth of the communications equipment market and (3) ourability to compete successfully in our sales to the communications industry.The growth in the market for communications equipment products and services isdependent 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, voiceand other network services.
     We cannot predict the growth rate of the market for telecommunicationsequipment products and services. The current economic climate, changes andconsolidation in the service provider market and constraints on capitalavailability have had a material adverse effect on many of our service providercustomers, causing some of these customers to go out of business and a numberof other customers to substantially reduce their expansion plans and purchases.
**We must develop new products and technology as well as enhancements to existingproducts 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 rapidtechnological change, new and improved product introductions, changes incustomer requirements and evolving industry standards. Our future success willdepend to a substantial extent on our ability to develop, introduce and supportnew products and technology on a successful and timely basis. If we fail todevelop and deploy new products and technologies or enhancements of existingproducts on a successful and timely basis or we experience delays in thedevelopment,
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introduction or enhancement of our products and technologies, our productswill no longer be competitive and our net sales will decline. The introductionof new and enhanced products may cause our customers to defer or cancel ordersfor existing products. In addition, a slowdown in demand for existing productsahead of a new product introduction could result in a write down in the valueof inventory on hand relating to existing products.
     The development of new, technologically advanced products is a complex anduncertain process requiring high levels of innovation and highly skilledengineering and development personnel, as well as the accurate anticipation oftechnological and market trends. We cannot assure you that we will be able toidentify, develop, manufacture, market or support new or enhanced productssuccessfully, if at all, or on a timely basis. Further, we cannot assure youthat our new products will gain market acceptance or that we will be able torespond effectively to product announcements by competitors, technologicalchanges or emerging industry standards. Any failure to respond totechnological change would significantly harm our business.
**Our products are incorporated into larger systems which must comply withvarious domestic and international government regulations. If the performanceof our products contributes to our customers’ inability to comply with theserequirements, we may lose these customers and our net sales will decline.**
     In the United States, our products are incorporated into larger systemswhich must comply with various regulations and standards defined by the FederalCommunications Commission and Underwriters Laboratories. Internationally, ourproducts are incorporated into larger systems which must also comply withstandards established by local authorities in various countries which may varyconsiderably. If the performance of our products contributes to our customers’inability to comply with existing or evolving standards established byregulatory authorities or to obtain timely domestic or foreign regulatoryapprovals we may lose these customers and our net sales will decline.
**If our products fail to comply with evolving industry standards or alternativetechnologies in our markets, we may be required to make significantexpenditures to redesign our products.**
     Our products comprise only a part of an entire networking system and mustcomply with evolving industry standards in order to gain market acceptance. Inmany cases, we introduce a product before an industry standard has becomewidely accepted and we depend on the companies that provide other components tosupport industry standards as they evolve. Because industry standards do notexist in some cases at the time we are developing new products, we may developproducts that do not comply with the eventual industry standard. If thisoccurs, we would need to redesign our products to comply with adopted industrystandards. In addition, if alternative technologies were adopted as anindustry standard within our target markets, we would have to dedicatesignificant time and resources to redesign our products to meet this newindustry standard. If we are required to redesign our products, we may incursignificant expenses and losses due to lack of customer demand, unusablepurchased components for these products and the diversion of our engineers fromfuture product development efforts. If we are not successful in redesigningour products or developing new products to meet new standards or any otherstandard that may emerge, our net sales will decline.
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**We are also dependent on sales to the military/aerospace industry, includingU.S. and foreign government entities.**
     Approximately 26.2% of our sales for the period ended January 31, 2004came from direct and indirect sales to the military/aerospace industry, whichis heavily dependent on sales to U.S. and foreign government entities, eitherdirectly through contracts with such entities or indirectly throughdistributors and to prime contractors or subcontractors who are buildingsystems or subsystems for them. A significant decline in U.S. and foreigngovernment expenditures could have a material adverse effect on our sales.
**We may continue to derive a significant portion of our net sales from a fewlarge customers, and our net sales may decline significantly if any of thesecustomers cancels, reduces or delays purchases of our products.**
     Our success will depend on our continued ability to develop and managerelationships with significant customers. For the nine months ended January31, 2004, our two largest customers and their respective contract manufacturersaccounted for 9% of our net sales, with General Dynamics UK Ltd. andConnectivity Technologies accounting for 6% and 3% of our net sales,respectively. For the nine months ended January 31, 2003, our two largestcustomers and their respective contract manufacturers accounted for 15% of ournet sales, with Redfern Broadband and QLogic accounting for 9% and 6% of ournet sales, respectively. We expect our dependence on sales to a small numberof large customers to continue.
     Certain markets in which we sell our products are dominated by arelatively small number of systems manufacturers, thereby limiting the numberof our potential customers. As a result, our relationships with thesecustomers are critically important to our business. We cannot assure you thatwe will be able to retain our largest customers, that we will be able toattract additional customers or that our customers will be successful inselling their products that incorporate our products. Our customers have inthe past sought price concessions from us and will continue to do so in thefuture. Also, many of our customers have canceled, reduced or delayedpurchases of our products. Further, some of our customers may in the futureshift their purchases of products from us to our competitors or to jointventures between these customers and our competitors. The loss of or asignificant reduction in orders from one or more of our largest customers, ourinability to successfully develop relationships with additional customers orfuture price concessions that we may make could cause our net sales tosignificantly decline.
**Our sales cycle runs from our customers’ initial design to production forcommercial sale. This cycle is long and unpredictable and may cause our netsales to decline or increase our operating expenses.**
     We cannot predict the timing of our sales accurately because of the lengthof our sales cycles. As a result, if sales forecasts from specific customersare not realized, we may be unable to compensate for the sales shortfall andour net sales may decline. The period of time between our initial contact witha 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 ourproducts. Generally, they consider a wide range of issues before committing topurchase our products, including ability to
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interoperate with other subsystems and components, product performance andreliability. We may incur substantial sales and marketing expenses and expendsignificant management effort while our potential customers are qualifying ourproducts. Even after incurring these costs, we ultimately may not sell any ormay only sell small amounts of our products to these potential customers.Consequently, if new sales do not result from our efforts to qualify ourproducts, our operating expenses will increase.
**Our customers may cease purchasing our products at any time and may cancel ordefer purchases on short notice, which may cause our net sales to decline orincrease our operating expenses.**
     We generally do not have long-term contracts with our customers. Salesare typically made pursuant to individual purchase orders, often with extremelyshort lead times, that may be canceled or deferred by customers on short noticewithout significant penalty. Our customers base their orders for our productson the forecasted sales and manufacturing schedules for their own products.Our customers have in the past significantly accelerated, canceled or delayedorders for our products in response to unanticipated changes in themanufacturing schedules for their own products, and will likely do so again inthe future. During the last twelve months, our customers have cancelled anumber of orders. The reduction, cancellation or delay of individual customerpurchase orders has caused and could continue to cause our net sales todecline. Moreover, these uncertainties complicate our ability to accuratelyplan our manufacturing schedule and may increase our operating expenses.
**If we do not decrease our manufacturing costs or increase sales of highermargin 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 productsmature in response to increased competition, the introduction of new productsand increased unit volumes. Most of our products are designed and manufacturedin our own facilities. Accordingly, a significant portion of our cost of salesis fixed over the near term. In order to remain competitive, we mustcontinually reduce our manufacturing costs through design and engineeringchanges and increases in manufacturing efficiencies. We must also continue todevelop and introduce on a timely basis new products that incorporate featuresthat can be sold at higher average selling prices. Our inability to reducemanufacturing costs or introduce new products with higher average sellingprices will cause our gross margins to decline, which would significantly harmour operating results.
**The market for our products is highly competitive, which may result in lostsales or lower gross margins.**
     The markets for optical subsystems and components are highly competitiveand are expected to intensify in the future. In these markets, we competeprimarily with Agilent Technologies, Inc., Finisar Corporation, InfineonTechnologies Corp, Intel Corporation, JDS Uniphase Corporation, Molex, Inc.,Optical Communications Products, Inc., Tyco International, Ltd. and a number ofother smaller companies.
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     The Radio Frequency (“RF”) and microwave interconnect components andassemblies industries are also highly competitive. In that market, we competeprimarily with Tyco International Ltd., Amphenol Corporation, Kings ElectronicsCo., Inc., ITT Cannon (a subsidiary of ITT Industries), ADC Telecommunications,Inc., Radiall, S.A., Switchcraft, Inc., Canare Electric Co., Ltd. and numerousother companies globally.
     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 canto the development, promotion, sale and support of their products. Inaddition, several of our competitors have large market capitalizations or cashreserves and are much better positioned than we are to acquire other companiesin our consolidating industry in order to gain new technologies or products.Many of our competitors have much greater name recognition, more extensivecustomer bases, better-developed distribution channels and broader productofferings than we do. These companies can leverage their customer bases andbroader product offerings and adopt aggressive pricing policies to gain marketshare. In addition, companies with diversified product offerings can bettersustain an economic downturn.
     We expect that more companies, including some of our customers, will enterthe markets for our products. We may not be able to compete successfullyagainst either current or future competitors. Competitive pressures, combinedwith weakening demand, may result in further price reductions, lower marginsand loss of market share. In addition, some of our current and potentialcustomers are attempting to integrate their operations by producing their ownsubsystems or components or acquiring one or more of our competitors which mayeliminate the need to purchase our products. Furthermore, larger companies inother related industries are developing and acquiring technologies and applyingtheir significant resources, including their distribution channels and brandname recognition, in an effort to capture significant market share. While thistrend has not historically impacted our competitive position, it may result infuture decreases in our net sales.
     Further, we manufacture many of our products in the United States and theUnited Kingdom. Our manufacturing costs are higher than the manufacturingcosts of some of our competitors, particularly those located in foreigncountries that benefit from lower-priced labor and government subsidies. Ifour current or potential future customers decide to purchase products fromthese lower-cost competitors, we could suffer a significant decline in oursales, which could have a material adverse effect on our business, operatingresults and financial condition.
**We depend on suppliers for several key components. If we underestimate oroverestimate our requirements for these components, our business could besignificantly harmed.**
     We purchase several key components that are incorporated into our productsfrom a limited number of suppliers. We have experienced shortages and delaysin obtaining key components in the past and expect to experience shortages anddelays in the future. These shortages and delays have typically occurred whendemand within the industry has increased rapidly and exceeds the capacity ofsuppliers of key components in the short term. Delays and shortages also oftenoccur in the early stages of a product’s life cycle. The length of shortagesand delays in the past has varied from several days to a month. We areunable to predict the length of any future shortages or delays.
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     Some of our critical components used in production of certain of ourproducts are purchased from a key supplier which has been acquired by acompetitor of the Company. If this supplier increases prices, reducesquantities available to us or ceases to supply us, our business and results ofoperations may be significantly harmed.
     The inability to obtain sufficient quantities of these components thatmeet our quality requirements may interrupt and delay the manufacturing of ourproducts or result in the cancellation of orders for our products. Inaddition, our suppliers could discontinue the manufacture or supply of thesecomponents at any time. We may not be able to identify and integratealternative sources of supply in a timely fashion, or at all. Any transitionto alternative suppliers may result in delays in shipment and increasedexpenses and may limit our ability to deliver products to our customers.Furthermore, if we are unable to identify an alternative source of supply, wemay have to redesign or modify our products, which may cause delays inshipments, increased design and manufacturing costs and increased prices forour products.
     We make forecasts for our component requirements based on anticipatedproduct orders. Although we enter into long-term agreements for the purchaseof key components from time to time, our purchases of key components aregenerally made on a purchase order basis. We may also maintain an inventory oflimited source components to limit the potential impact of a componentshortage. We may not accurately predict the demand for our products and thelead-time required to obtain key components. If we overestimate ourrequirements, we may have excess inventory, which may become obsolete and wouldincrease our costs. If we underestimate our requirements, we may haveinadequate inventory, which could interrupt our manufacturing and delaydelivery of our products to our customers. Either of these occurrences wouldsignificantly harm our business.
**Our success depends on our ability to hire and retain qualified personnel, andif we are unable to do so, our product development efforts and customerrelations will suffer.**
     Our products require sophisticated manufacturing, research anddevelopment, marketing and sales, and technical support. Our success dependson our ability to attract, train and retain qualified technical personnel ineach of these areas. Competition for personnel in all of these areas isintense and we may not be able to hire or retain sufficient personnel toachieve our goals or support the anticipated growth in our business. Themarket for the highly-trained personnel we require is very competitive, due tothe limited number of people available with the necessary technical skills andunderstanding of our products and technology. If we fail to hire and retainqualified personnel, our product development efforts and customer relationswill suffer.
**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 ofcustomers.**
     Our products are complex and may contain defects, particularly when firstintroduced or as new versions are released. Our customers integrate oursubsystems and components into systems and products that they developthemselves or acquire from other vendors. As a result,
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when problems occur in equipment or a system into which our products havebeen 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 orexperience manufacturing delays as a result of these defects in the future, anyor all of which could be substantial. The length of any future manufacturingdelays in connection with a product defect will depend on the nature of thedefect and whether we or one of our component suppliers was the source of thedefect. Moreover, the occurrence of defects, whether caused by our products ortechnology or the products of another vendor, may result in significantcustomer relations problems and injury to our reputation and may impair themarket acceptance of our products and technology.
**We are subject to environmental laws and other legal requirements that have thepotential to subject us to substantial liability and increase our costs ofdoing business.**
     Our properties and business operations are subject to a wide variety offederal, state, and local environmental, health and safety laws and other legalrequirements, including those relating to the storage, use, discharge anddisposal of toxic, volatile or otherwise hazardous substances used in ourmanufacturing processes. We cannot assure you that these legal requirementswill not impose on us the need for additional capital expenditures or otherrequirements. If we fail to obtain required permits or otherwise fail tooperate within these or future legal requirements, we may be required to paysubstantial penalties, suspend our operations or make costly changes to ourmanufacturing processes or facilities. Although we believe that we are incompliance and have complied with all applicable legal requirements, we mayalso be required to incur additional costs to comply with current or futurelegal requirements.
**Economic, political and regulatory risks associated with internationaloperations may limit our sales and increase our costs of doing business abroad.**
     A significant portion of our sales are generated from customers locatedoutside the United States, principally in Europe. We also operatemanufacturing facilities in China and the United Kingdom. Sales to customerslocated outside of the United States were approximately 34.5% of our net salesduring the nine months ended January 31, 2004 and approximately 44.8% of ournet sales during the nine months ended January 31, 2003. Our internationaloperations 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 ofthe world, such as during the summer months in Europe;  • 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 propertyrights in some foreign countries; and  • acts of terrorism directed against the United States or U.S.affiliated targets.
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     These factors could adversely impact our international sales or increaseour costs of doing business abroad or impair our ability to expand intointernational markets, and therefore could significantly harm our business.
**We may pursue additional acquisitions. If we are unable to successfullyintegrate any businesses or technologies that we acquire in the future or areunable to realize the intended benefits of any future acquisitions, ourbusiness will be harmed.**
     As part of our strategy, we may pursue opportunities to buy otherbusinesses or technologies that would complement our current products, expandour markets or enhance our technical capabilities, or that may otherwise offergrowth opportunities. Our experience in acquiring other businesses andtechnologies is limited. Acquisitions could result in a number of financialconsequences, 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 other businesses ortechnologies that we may acquire in the future or are unable to realize theintended benefits of any future acquisitions, our business will be harmed.
**Our inability to protect our intellectual property rights would significantlyimpair their value and our competitive position.**
     We rely on a combination of patent, copyright, trademark and trade secretlaws, as well as confidentiality agreements and licensing arrangements, toestablish and protect our proprietary rights. Although we have numerous issuedpatents and pending patent applications, we cannot assure you that any patentswill issue as a result of our pending patent applications or, if issued, thatany patent claim allowed will be sufficiently broad to protect our technology.In addition, we cannot assure you that any existing or future patents will notbe challenged, invalidated or circumvented, or that any right grantedthereunder would provide us with meaningful protection of our technology.Despite our efforts to protect our proprietary rights, unauthorized parties mayattempt to copy or otherwise obtain and use our products or technology. We maybe unable to
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detect the unauthorized use of our intellectual property or to takeappropriate steps to enforce our intellectual property rights. Policingunauthorized use of our products and technology is difficult. In addition, thelaws of some foreign countries do not protect our proprietary rights to thesame extent as do the laws of the United States. Further, enforcing ourintellectual property rights could result in the expenditure of significantfinancial and managerial resources and the success of these efforts cannot bepredicted with certainty. Litigation has been necessary and may continue to benecessary in the future to enforce our intellectual property rights. Thislitigation could be costly and its outcome cannot be predicted with certainty.Our inability to adequately protect against unauthorized use of ourintellectual property would significantly impair its value and our competitiveposition.
**We are currently involved in pending patent litigation which, if decidedagainst us, could impair our ability to prevent others from using ourtechnology, result in the loss of future royalty income and require us to paysignificant monetary damages.**
     We are plaintiffs in several lawsuits relating to our intellectualproperty rights. The defendants in these lawsuits include InfineonTechnologies Corp., E20, Inc. and Picolight, Inc. In these actions, we allegethat optoelectronic products sold by the defendants infringe upon certain ofour patents. The defendants in these lawsuits have filed various affirmativedefenses.
     These lawsuits are in various stages, and we cannot predict their outcomewith certainty. If one or more of these patents were found to be invalid orunenforceable, we would lose the ability to prevent others from using thetechnologies covered by the invalidated patents. This could result insignificant decreases in our sales and gross margins for our products that usethese technologies. In addition, we would lose the future royalty paymentsfrom our current licensees of these patents. We could also be required to paysignificant monetary damages to one or more of the defendants or be required toreimburse them for their legal fees. Accordingly, if one or more of thesepatents were found to be invalid or unenforceable, our business would besignificantly harmed.
**Various litigation matters, in which we are a defendant could result insignificant monetary damages and expenses or restrictions on our ability tosell our products.**
     We are involved in various litigation matters that arise from time to timein the ordinary course of business. Our Annual Reports on Form 10-K andquarterly reports on Form 10-Q describe certain matters in which we are adefendant.
     In recent years, there has been significant litigation in the UnitedStates involving patents and other intellectual property rights. From time totime, third parties may assert patent, copyright and other intellectualproperty rights to technologies used in our business. In addition, our rightsto use our name or other trademarks are subject to challenge by others. Anyclaims, with or without merit, could be time-consuming, result in costlylitigation, and divert the efforts of our technical and management personnel.If we are unsuccessful in defending ourselves against such claims, we could besubject to significant monetary damages and may be required to do one or moreof the following: (1) stop using the challenged technology or selling ourproducts that use or incorporate such technology, (2) attempt to obtain alicense to sell or use the relevant technology, which license may not beavailable on reasonable terms or at all, (3) attempt to license a substitute technology on reasonable terms or (4) redesign theapplicable products to avoid infringement.
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     In the event a claim against us was successful and we could not obtain alicense to the relevant technology on acceptable terms or license a substitutetechnology or redesign our products to avoid infringement, our business wouldbe significantly harmed.
     **Risks Relating to the Securities Markets and Ownership of Our Common Stock**
**The market prices for securities of technology related companies have beenvolatile in recent years and our stock price could fluctuate significantly.**
     Our common stock has been publicly traded only since June 27, 2000. Themarket price of our common stock has been subject to significant fluctuationssince the date of our initial public offering. These fluctuations couldcontinue. Factors that could affect our stock price include:
 • economic and stock market conditions generally andspecifically as they may impact participants in the communicationindustry;  • earnings and other announcements by, and changes in marketevaluations of, participants in the optical communication industry;  • changes in financial estimates and recommendations bysecurities analysts following our stock;  • announcements or implementation by us or our competitors oftechnical innovations or new products; and  • strategic moves by us or our competitors, such asacquisitions.
     In addition, the securities of many companies have experienced extremeprice and volume fluctuations in recent years, often unrelated to thecompanies’ operating performance. Specifically, market prices for securitiesof technology related companies have frequently reached elevated levels, oftenfollowing their initial public offerings. These levels may not be sustainableand may not bear any relationship to these companies’ operating performances.
**Provisions in our charter documents and Delaware law may delay or prevent anacquisition of our company, which could decrease the value of your shares.**
     Our restated certificate of incorporation and bylaws and Delaware lawcontain provisions that could make it more difficult for a third party toacquire us without the consent of our board of directors. These provisionsinclude a classified board of directors and limitations on actions by ourshareholders by written consent. In addition, our board of directors has theright to issue preferred stock without shareholder approval, which could beused to dilute the stock ownership of a potential hostile acquiror. Delawarelaw also imposes some restrictions on mergers and business combinations betweenus and any holder of 15% or more of our outstanding common stock. Theseprovisions apply even if the offer may be considered beneficial by someshareholders.
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**Risks Relating to the Merger with Sterling**
**We may be unable to successfully integrate the operations of Stratos andSterling and realize the full cost savings we anticipate.**
     The merger involves the integration of two companies that previouslyoperated independently. The difficulties of combining the companies’operations include:
 • the necessity of coordinating geographically separatedorganizations, systems and facilities; and  • integrating personnel with diverse business backgrounds andorganizational cultures.
     The process of integrating operations could cause an interruption of, orloss of momentum in, the activities of one or more of the combined company’sbusiness and the possible loss of key personnel. The diversion of management’sattention and any delays or difficulties encountered in connection with themerger and the integration of the two companies’ operations could have anadverse effect on the business, results of operations, financial condition orprospects of the combined company after the merger.
     Among the other factors considered by the Stratos and the Sterling boardsof directors in connection with their respective approvals of the mergeragreement were the opportunities for operating efficiencies that could resultfrom the merger. We cannot give any assurance that these savings will berealized within the time periods contemplated or even that they will berealized at all.
**We have incurred and will incur significant transaction, merger-related andrestructuring costs in connection with the merger.**
     Stratos has incurred and will incur costs associated with combining theoperations of the two companies, transaction fees and other costs related tothe merger. Although Stratos expects that the elimination of duplicativecosts, as well as the realization of other efficiencies related to theintegration of the businesses, may offset incremental transaction,merger-related and restructuring costs over time, we cannot give any assurancethat this net benefit will be achieved in the near term, or at all.
**Charges to earnings resulting from the application of the purchase method ofaccounting may adversely affect the market value of Stratos’ common stockfollowing the merger.**
     In accordance with generally accepted accounting principles in the UnitedStates, the merger has been accounted for using the purchase method ofaccounting, which will result in charges to earnings that could have an adverseimpact on the market value of Stratos common stock. Under the purchase methodof accounting, the total purchase price has been allocated to Sterling’s nettangible assets and identifiable intangible assets based on their fair valuesas of the date of completion of the merger. The excess of the purchase priceover those fair values has been recorded as goodwill. The combined companywill incur additional amortization expense based on the identifiable intangibleassets acquired in connection with the merger. Additionally, to the extent thevalue of goodwill becomes impaired, the combined company may be required toincur material charges relating to such impairment. These amortization andpotential impairment charges could have a material impact on the combinedcompany’s results of operations.
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     The annual amortization expense for these identifiable intangible assetswill approximate $1,171,000. Based on Sterling’s annual amortization expenseof approximately $12,000 related to identifiable intangible assets, Stratosexpects to incur approximately $1,329,000 of annual amortization. Changes inearnings per share, including as a result of this incremental expense, couldadversely affect the trading price of the Stratos common stock.
**We may not realize expected benefits from the consolidation of certain Sterlingoperations into the Mesa, Arizona facility.**
     We currently are engaged in a consolidation of the manufacturingoperations associated with our RF and microwave components and assembliesbusiness, and a relocation of the manufacturing operations of our TrompeterElectronics, Inc. subsidiary from Westlake Village, California to Mesa,Arizona. Although we anticipate synergies and improved operating performanceto result from this consolidation, we cannot guarantee any such benefits. Inaddition, this consolidation may affect adversely our ability to retain keyemployees, which could affect adversely our operating results.
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