UNITEDTable STATES of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Fiscal Year Ended April 30, 2005
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

(Mark one)

~~Commission~~þ ~~File~~ANNUAL ~~Number:~~REPORT ~~0-30869~~ PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~STRATOS~~For ~~INTERNATIONAL~~the Fiscal Year Ended April 30, ~~INC.~~2007

~~(Exact~~o ~~Name~~TRANSITION ofREPORT ~~Registrant~~PURSUANT asTO ~~Specified~~SECTION in13 ~~its~~OR ~~Charter~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the transition period from to

~~Registrant’s~~Commission ~~telephone~~File ~~number, including area code~~Number: 0-30869

STRATOS INTERNATIONAL, INC. ~~(708) 867-9600~~

~~Securities~~(Exact ~~registered~~Name ~~pursuant~~of toRegistrant ~~Section 12(b)~~as ofSpecified ~~the Act:~~in ~~None~~ its Charter)

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


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

7444 West Wilson Avenue, Chicago, Illinois		60706
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (~~Title~~708) 867-9600 Securities ofregistered ~~Class~~pursuant to Section 12(b) of the Act:

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


Title of each class		Name of each exchange which registered
$.01 par value Common Stock		The NASDAQ Stock Market LLC

~~Indicate~~Securities byregistered ~~check mark if disclosure of delinquent filers~~ pursuant to ~~Item 405~~Section 12(g) of ~~Regulation S-K is not contained herein, and will not be contained, to~~ the ~~best~~Act: ofNone ~~registrant’s~~(Title ~~knowledge, in definitive proxy or information statements incorporated by reference in Part III~~ of ~~this~~Class) ~~Form 10-K or any amendment to the~~ ~~Form 10-K. o~~

Indicate by check mark ~~whether~~if the registrant is ana ~~accelerated filer~~well-known (seasoned issuer, as defined byin Rule ~~12b-2~~ 405 of the Securities Act). Yes o No þ

~~The~~Indicate ~~aggregate~~by ~~market~~check ~~value~~mark ofif the ~~$.01 par~~registrant ~~value~~is ~~common stock~~not ofrequired ~~the~~to ~~registrant~~file ~~held~~reports bypursuant ~~non-affiliates~~to ~~on October~~Section ~~31,~~13 ~~2004,~~or Section ~~based~~15(d) ~~upon~~of the ~~closing sale price on that date as reported in The Wall Street Journal was approximately $63,287,856~~Act. ~~The~~Yes ~~registrant~~o ~~had~~No ~~14,579,310 shares of~~þ ~~$.01 par value common stock outstanding as of July 21, 2005.~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by ~~DOCUMENTS~~Section 13 ~~INCORPORATED~~or BY15(d) ~~REFERENCE~~of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

~~Filings~~Indicate ~~made~~ by ~~companies~~check ~~with~~mark ~~the~~if ~~Securities~~disclosure ~~and~~of ~~Exchange Commission~~delinquent ~~(“SEC”)~~filers ~~sometimes~~pursuant ~~incorporate information “by reference.” This means that we are referring~~ to ~~information~~ ~~that~~Item 405 ~~either~~of ~~was~~Regulation S-K ~~previously filed or will be filed~~is ~~with~~not ~~the~~contained ~~SEC~~herein, and ~~this~~will ~~information~~not isbe ~~considered~~contained, to ~~be part of~~ the ~~document~~best ~~that you are reading. Portions~~ of ~~the proxy statement relating to the~~ registrant’s ~~Annual~~knowledge, ~~Meeting of~~in ~~Stockholders,~~definitive toproxy beor ~~held~~information onstatements ~~September 13, 2005, are~~ incorporated by reference ~~into~~in Part III of this Form 10-K or any amendment to the ~~extent~~Form ~~described therein~~10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~FORWARD~~or an non-~~LOOKING~~accelerated ~~STATEMENTS~~filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

~~Please~~Indicate ~~read~~by ~~the~~check ~~cautionary~~mark ~~statements~~whether ~~included~~the ~~in Item 7~~registrant ~~“Management~~is ~~Discussion~~a ~~and~~shell ~~Analysis~~company ~~of Financial~~(as ~~Condition~~defined ~~and~~in ~~Results of Operations” of this annual report on Form~~Rule 1012b-K2 ~~for a more detailed discussion~~ of the ~~foregoing and other factors that could cause actual~~ ~~results~~Exchange toAct). ~~differ~~Yes ~~materially~~o ~~from~~No ~~those included in the~~þ ~~forward-looking statements and that, among others, should be considered in evaluating our financial outlook.~~

1The aggregate market value of the $.01 par value common stock of the registrant held by non-affiliates on the last business day of the company’s second quarter ended October 31, 2006, based upon the closing sale price on that date as reported in The Wall Street Journal was approximately $94,474,311. The registrant had 14,497,383 shares of $.01 par value common stock outstanding as of July 11, 2007.

TABLETable OFof CONTENTS Contents

Section		Page
	Forward-Looking Statements		1
	PART I
Item 1.	Business		3
Item 2.	Properties		13
Item 3.	Legal Proceedings		14
Item 4.	Submission of Matters to a Vote of Security Holders		15
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		17
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		37
Item 8.	Financial Statements and Supplementary Data		37
	Report of Independent Registered Public Accounting Firm		38
	Notes to Consolidated Financial Statements		44
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		66
Item 9A.	Controls and Procedures		66
	PART III
Item 10.	Directors and Executive Officers of the Registrant		66
Item 11.	Executive Compensation		66
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		67
Item 13.	Certain Relationships and Related Transactions		67
Item 14.	Principal Accountant Fees and Services		67
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		67
	Signatures		68

DOCUMENTS INCORPORATED BY REFERENCE

2Filings made by companies with the Securities and Exchange Commission (“SEC”) sometimes incorporate information “by reference.” This means that we are referring to information that either was previously filed or will be filed with the SEC, and this information is considered to be part of the document that you are reading.

FORWARD-LOOKING STATEMENTS ~~PART I~~

~~Item~~You 1should read the discussions in this report together with our consolidated financial statements and notes to those financial statements, which are included in this report. ~~Business~~This report contains forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. The words “anticipates,” “intends,” “expects,” “could,” “should,” “plans,” “believes,” “estimates,” or words or phrases of similar import generally identify forward-looking statements. You are cautioned that forward-looking statements are subject to risks, trends and uncertainties that could cause actual results, performance or achievements to differ materially from those expressed in any forward-looking statements. Important factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements include, but are not limited to the following: (i) consummation of our proposed merger with Emerson Electric Co.; (ii) the economic climate, the long-term growth and short term trends in the communications, aerospace, and military industries; (iii) our ability to adapt to changing technologies; (iv) our ability to develop and market new products and technology and to make enhancements to existing products and technology on a successful and timely basis; (v) our and our customers’ ability to comply with evolving domestic and international government regulations; (vi) expenditures associated with redesigning products to comply with evolving industry standards or alternative technologies that become the industry standard; (vii) our dependence on sales to the communications and military/aerospace industries; (viii) our ability to develop and manage relationships with large customers that comprise, and will comprise, a significant percentage of our net sales; (ix) the length of sales cycles, which vary by product and customer, and the effect that this length has on net sales and operating expenses; (x) the lack of long-term customer contracts and its effect on customers’ ability to reduce, cancel and defer orders on short notice without significant penalty; (xi) the effect on gross margins of an inability to reduce manufacturing costs or increase sales of higher margin products; (xii) the impact of competitive products and competitive pricing pressure; (xiii) our reliance on a limited number of suppliers and the effect of underestimating or overestimating the need for certain supplies; (xiv) our ability to attract and retain qualified personnel; (xv) the effect of defects in our products; (xvi) the effect of compliance with environmental laws and other legal requirements; (xvii) the effect of economic, political and regulatory risks associated with international operations, including acts of terrorism directed against the United States or U.S. affiliated targets; (xviii) our ability to complete and integrate acquisitions, strategic alliances and joint ventures, including our ability to complete the integration of Stratos and Sterling Holding Company; (xix) our ability to secure and defend intellectual property rights and, when appropriate, license required technology; (xx) adverse outcomes of pending, threatened or future litigation, including suits related to intellectual property matters; (xxi) volatile market prices for securities of technology-related companies; (xxii) the effect of provisions in our organizational documents and Delaware law that may delay or prevent the acquisition of Stratos or may decrease the value of Stratos common stock; and (xxiii) our ability to meet management, analyst and investor expectations. Because forward-looking statements are subject to assumptions and

2 ~~Overview~~

StratosTable International is a leading supplier of shielded electronic and optical interconnects, plus the transceiver components that are used to connect these two transmission line mediums. We design and manufacture interconnect components and subsystems used in telecom communications, datacom, military and video markets for signal networking. Contents

~~Our~~uncertainties, ~~company~~actual ~~has~~results amay ~~rich~~differ ~~history~~materially offrom ~~optical,~~those ~~electrical,~~expressed ~~and~~or implied by such ~~mechanical~~forward-looking ~~packaging~~statements. ~~expertise~~Shareholders ~~and~~are ~~has~~cautioned ~~had~~not ato ~~continuing~~place ~~positive~~undue reliance on such ~~role~~statements, inwhich ~~developing~~speak ~~innovative~~only ~~products~~as ~~often~~of ~~involving miniaturization.~~the Wedate ~~have~~of anthis ~~intellectual~~document ~~property~~or ~~portfolio~~the date of ~~more~~ ~~than~~any ~~100~~document incorporated ~~patents~~by reference. WeAll ~~are~~subsequent awritten ~~market~~and ~~leader~~oral inforward-looking ~~several~~statements ~~niches~~concerning ~~including~~the ~~specialty~~matters ~~optical~~addressed ~~products~~in ~~such~~this asdocument ~~small~~and ~~form~~attributable ~~factor~~to us or any person acting on our behalf ~~transceivers,~~are ~~coax/optical~~expressly ~~media~~qualified ~~interface~~in ~~adapters,~~their ~~optical~~entirety by the cautionary statements contained or referred to in ~~flex~~this ~~circuits,~~section. ~~microwave~~Except ~~flexible~~to ~~cables~~the ~~and~~extent ~~cable~~required ~~assemblies~~by applicable law or regulation, we undertake no ~~and~~obligation ~~radio~~to ~~frequency~~release ~~(“RF”)~~publicly ~~and~~any ~~microwave~~revisions ~~coax~~or ~~and~~updates to such forward-looking statements to ~~triax~~reflect ~~interconnect~~events ~~products.~~or Wecircumstances ~~currently~~after ~~serve~~the ~~several~~date ~~thousand active~~of ~~repeat~~this ~~customers~~document or to reflect the occurrence of unanticipated events.

Please read the cautionary statements included in Item 7 “Management Discussion and Analysis of ~~Industry~~Financial Condition and Results of Operations” of this annual report on Form 10-K for a more detailed discussion of the foregoing and other factors that could cause actual results to differ materially from those included in the forward-looking statements and that, among others, should be considered in evaluating our financial outlook.

~~Increasing Demand for Higher Bandwidth~~3

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

Growth of High Bandwidth Technology in the Enterprise Market


Section		Page
Forward-looking statements			2

PART I

Item 1.	Business		5
Item 1A.	Risk Factors		18
Item 1B.	Unresolved Staff Comments		26
Item 2.	Properties		26
Item 3.	Legal Proceedings		26
Item 4.	Submission of Matters to a Vote of Security Holders		27

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		28
Item 6.	Selected Financial Data		28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		40
Item 8.	Financial Statements and Supplementary Data		41
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		74
Item 9A.	Controls and procedures		75
Item 9B.	Other Information		75

PART III

Item 10.	Directors and Executive Officers of the Registrant		76
Item 11.	Executive Compensation		80
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters		85
Item 13.	Certain Relationships and Related Transactions		88
Item 14.	Principal Accountant Fees and Services		88

PART IV

Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		90
Signatures			91
Consent of BDO Seidman, LLP
Consent of Ernst & Young LLP
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer

4 10 Gigabit Ethernet and Fast Ethernet in Local Area Networks (“LANs”). LANs interconnect computer users within an organization and allow users to share computer resources. Early LANs, which had relatively limited performance requirements, short connection distances and low transmission speeds, were generally interconnected using copper cabling. Most present day LANs use the Ethernet transmission protocol. As performance requirements, transmission distance and bandwidth requirements of network users have increased, transmission protocols have evolved primarily to 100 Mbps Fast Ethernet. We believe that Gigabit Ethernet technology and 10 Gigabit Ethernet technology (which operates at 10,000 Mbps or 10 gigabits per second (“Gbps”))will become increasingly important in the near future for LAN connectivity. Each Ethernet switch port relies on an optical or copper subsystem to transmit and receive data.

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

~~Fiber~~PART ~~Channel in Storage Area Networks (SANs). Data~~I ~~storage technology is evolving rapidly. Early storage networks used a standard interface protocol known as the small computer systems interface or SCSI.~~

~~To address the limitations of SCSI-based storage systems, the Fiber Channel standard was developed in the early 1990s~~Item 1. ~~Current~~Business Fiber Channel technology allows devices to communicate with each other at rates up to 2.125 Gbps over distances of up to 10 kilometers, while maintaining backward compatibility with the installed base of SCSI-based storage systems. The new generations of Fiber Channel products operate at speeds of 4.25 Gbps. Fiber Channel is scalable and the next generation of Fiber Channel, operating at a speed

3OVERVIEW

ofStratos ~~8.50~~International ~~Gbps,~~ is ~~currently~~a ~~under~~leading ~~development.~~supplier ~~Fiber Channel-based~~of ~~SANs~~shielded ~~enable~~electronic ~~enhanced~~and ~~network~~optical ~~applications~~interconnects, ~~such as~~plus ~~storage~~the ~~backup~~transceiver conversion and ~~better~~multiplexing ~~overall~~components ~~storage~~that ~~management~~are ~~achievable through~~used ~~centralized~~to ~~storage~~combine ~~resources~~optical and copper signal transmission lines. ~~Each~~We ~~Fiber~~design ~~Channel~~and ~~switch port~~manufacture ~~relies~~interconnect oncomponents aand ~~subsystem~~subsystems toused in ~~transmit~~military/aerospace, telecommunications, datacom, and ~~receive~~video ~~data~~markets for signal networking.

~~Optical~~Our company has a rich history of optical, electrical, and RFmechanical ~~Technology~~signal interconnect/packaging expertise and has had a continuing positive role in ~~Access~~developing innovative products often involving miniaturization. We have an intellectual property portfolio of more than 100 patents. We are a market leader in several niches including specialty optical products such as small form factor transceivers, ~~Metropolitan~~coax/optical ~~Area~~media interface adapters, ~~Wide~~optical ~~Area~~flex circuits, microwave flexible cable and ~~Telecommunication~~cable ~~Networks~~assemblies, and radio frequency (“RF”) coax, twinaxial and triax interconnect products. We currently serve several thousand active repeat customers.

~~Access.~~On ~~The past several years have seen rapid growth of broadband services for business and residential customers. In particular~~May 14, ~~consumer demand for cable modem and DSL services~~2007, ~~next~~ ~~generation~~we ~~cellular~~announced ~~applications,~~a ~~and~~merger ~~the proliferation of wireless access points~~agreement, issubject ~~increasing~~to ~~bandwidth~~approval ~~capacity requirements~~by ~~from~~our ~~the~~stockholders ~~telecommunication central offices~~ and ~~cable~~certain ~~television~~other ~~headends.~~conditions, ~~This~~pursuant ~~bandwidth demand has caused the telecom and cable television (“CATV”) service providers~~ to ~~embark~~which onall ~~large network upgrades. These network upgrades require the use~~ of ~~higher~~our ~~bandwidth~~outstanding ~~optical~~stock ~~and~~would ~~coaxial technologies to~~ be ~~deployed~~acquired ~~closer~~by Emerson toElectric ~~the end customer~~Co. ~~Fiber~~Emerson, ~~to the~~based ~~home~~in ~~(“FTTH”) is an example of this trend~~St. ~~Another example~~Louis, is ~~the~~a ~~deployment~~global ofleader ~~high~~in ~~speed~~bringing ~~coaxial~~technology ~~DS3~~and engineering ~~signal~~together ~~rates from~~to ~~the~~provide ~~central~~innovative ~~office~~solutions ~~into~~to ~~the~~customers ~~remote~~through ~~terminal~~its ~~and~~network ~~premise~~power, ~~wiring~~process ~~portions~~management, ofindustrial ~~the~~automation, ~~telecom~~climate ~~network~~technologies, ~~extending~~and ~~bandwidth closer~~appliance toand ~~the edge~~tools businesses. ~~Each~~Emerson’s ~~DS3~~sales ~~line~~in isfiscal ~~equal~~2006 towere ~~28 T1 lines~~$20.1 billion.

~~Metropolitan~~Stratos’ ~~and~~fiscal ~~Wide~~reporting ~~Area~~period ~~Networks~~ends ~~(“MANs”~~on ~~and “WANs”, respectively). The increased transmission capabilities of optical and RF technologies have allowed for~~ the ~~geographic~~ ~~extension~~closest ofSaturday ~~LANs and SANs through the use of extended networks, such as MANs and WANs. These networks enable enterprises~~ to ~~interconnect network systems throughout a corporate campus or wide geographic area rather than within a single building~~April 30th. ~~Interconnections~~For ~~between network systems are~~simplicity ~~performed~~purposes byStratos ~~switches~~refers ~~and routers that use optical and RF components and subsystems. These networks enable businesses~~ to ~~use~~ ~~their~~its ~~networks~~fiscal ~~for~~year ~~enhanced~~end ~~applications, such~~ as ~~real-time backup data storage at longer distances for disaster protection~~April 30. ~~In addition, these networks offer organizations a cost-effective way to address increased bandwidth requirements.~~

~~Telecommunication~~We ~~Networks.~~use ~~Optical~~rounding ~~and RF technology is also used~~ in ~~high~~our ~~data~~financial ~~rate~~presentations ~~telecommunication applications, including the intra-office connection of clusters of telecommunication switches based on the synchronous optical network (“SONET”)~~ and ~~asynchronous~~as ~~transfer~~a mode (“ATM”) protocols. SONET switches and ATM access switches are often used in telecommunication networks to switch regional traffic and route long distance traffic. Newer generation networks are also applying Ethernet protocols to these telecommunication networks. In these core networksresult, ~~multiple~~ ~~switches~~certain ~~are~~sums ~~often~~do ~~grouped~~not ~~together within a service provider’s central office network~~foot. ~~RF cable assemblies~~ ~~commonly provide the interconnections between many of these systems.~~

~~Optical,~~INDUSTRY ~~RF, and Microwave Technology in Military and Aerospace Applications~~

~~Modern~~Increasing ~~militaries~~Demand are becoming increasingly dependent on high data rate communications and smart weapons, creating a network centric battlefield, where the application of high bandwidth communication technologies is combined with design attributes suitable for ~~the~~Higher ~~harsh environment in which they are deployed.~~Bandwidth In avionics applications, the high bandwidth and light weight of optical systems serve to increase the performance of aircraft, as well as, use in in-flight entertainment systems. Tactical field communications use both optical and RF technologies to quickly deploy reliable high bandwidth networks in the battlefield. Microwave cable and connector technology is a vital element of phased array radar systems used for threat warning by the military. Militaries often purchase their systems and technologies from large system integrators, often referred to as “prime contractors”. These system integrators typically have strong expertise in system level design and function, with significantly less expertise in components and subsystems. They rely on their suppliers for component and subsystem level expertise, requiring that their suppliers understand both the technology and their particular application environment.

~~Demands~~Over onthe ~~Suppliers~~last decade, the number of ~~Optical~~military and commercial communication networks and the amount of data transmitted over networks has increased substantially due to the growth of data intensive applications/uses such as Internet access, RFe-commerce, photo and ~~Microwave~~other ~~Subsystems~~bandwidth intensive attachments in e-mail, streaming video, multimedia downloading, the movement of large blocks of stored data across networks, the increasing need for large amounts of data access and ~~Components~~transfer on the modern military battlefield, and the proliferation of high definition video transport in professional and consumer markets. In addition, the expansion of data and storage networks for business over a geographically dispersed user base has increased both the amount of data and the distance it is transmitted over communication networks. This growth has exposed the transmission speed and physical space limitations of existing

5 The ability to send high data rate signals over longer distances depends not only on optical and electronic transceiver technology, but also on the performance of the fiber optic and electronic connections within the network. The demand for increasing bandwidth places continued emphasis on the need for high quality

4 Table of Contents

~~connectivity~~networks inthat ~~critical~~are ~~applications~~being ~~such~~addressed asby ~~in telecommunications,~~higher ~~enterprise,~~bandwidth ~~military~~technologies, ~~and~~particularly ~~video~~at ~~networks, where~~ the ~~transmission~~edge of ~~higher data rates over long distances has pushed~~ the ~~limits of signal integrity. Optical and~~ ~~electronic connections within~~ networks ~~may~~where ~~degrade~~users ~~the~~are ~~signal and can substantially reduce the distance over which signals can reliably be sent~~connected. ~~The market demands for networks with ever~~ increasing data rates over longer distances have driven the need for high bandwidth subsystems and components that provide the critical interconnections between devices within these high data rate network systems.

~~Network~~Growth ~~equipment manufacturers and military system integrators increasingly rely on highly integrated subsystem suppliers to rapidly develop major elements~~ of ~~their~~High ~~systems.~~Bandwidth ~~These~~Technology ~~suppliers allow network equipment OEMs and system integrators to better focus on their core competencies~~ in ~~overall~~the ~~product~~Enterprise ~~design,~~Market specifically differentiating product benefits, marketing and distribution. We expect this trend to continue, with network equipment OEMs and military system integrators outsourcing an increasing percentage of their non-core functions to contract manufacturers and integrated subsystem suppliers.

10 Gigabit Ethernet and Fast Ethernet in Local Area Networks (“LANs”). LANs interconnect computer ~~Products~~users within an organization and allow users to share computer resources. Early LANs, which had relatively limited performance requirements, short connection distances and low transmission speeds, were generally interconnected using copper cabling. Most present day LANs use the Ethernet transmission protocol. As performance requirements, transmission distance and bandwidth requirements of network users have increased, transmission protocols have evolved primarily to 100 Mbps Fast Ethernet. We believe that Gigabit Ethernet technology and 10 Gigabit Ethernet technology (which operates at 10,000 Mbps or 10 gigabits per second (“Gbps”)) will become increasingly important in the near future for LAN connectivity. Each Ethernet switch port relies on an optical or copper subsystem to transmit and receive data.

~~Our~~The ~~products~~scalability ~~can~~and bemigration ~~broadly~~capacity ~~segmented~~built into ~~those~~the ~~with~~Ethernet anprotocol ~~optical and~~allows ~~those~~original ~~with a copper emphasis. Transceivers, for example, are~~equipment ~~optical~~manufacturers ~~products,~~(“OEMs”) ~~while~~developing ~~the~~these ~~underlying~~systems ~~technology~~to ofleverage ~~chips, drivers,~~their ~~analytical~~experience ~~diagnostics,~~with ~~and~~this ~~related~~standard ~~software is~~to ~~primarily~~transition ~~electronic,~~to ~~requiring~~a ~~the~~higher ~~translation~~data ofrate. anThis ~~electrical pulse~~next ~~into~~generation ~~an optical signal at the point~~ of ~~the~~high ~~laser~~data ~~driver~~rate ~~or the~~networking ~~optical~~systems ~~receiver. Almost all of our copper products are~~will ~~coaxial,~~require ~~twinaxial,~~even orhigher ~~triaxial~~performance subsystems and ~~involve cable with those same characteristics~~components.

~~Optical~~Fiber ~~Products:~~Channel in Storage Area Networks (SANs). Data storage technology is evolving rapidly. Early storage networks used a standard interface protocol known as the Small Computer Systems Interface or SCSI. Current Fiber Channel technology allows devices to communicate with each other at rates up to 4 Gbps over distances of up to 10 kilometers, while maintaining backward compatibility with the installed base of SCSI-based storage systems. Fiber Channel is scalable and the next generation of Fiber Channel, operating at higher data rates, are now coming to market. Fiber Channel-based SANs enable enhanced network applications such as storage backup and better overall storage management achievable through centralized storage resources. Each Fiber Channel switch port relies on a subsystem to transmit and receive data.

~~Over~~Optical ~~the years, we have built standardized~~ and ~~custom broadband network data communication products, through our optoelectronic, passive fiber,~~ RF ~~and~~Technology Microwave product families. Our legacy optoelectronics products evolved from an early emphasis on a broad range of standardized, multi-source agreement compliant (“MSA”) fiber optic components, including embedded and removable transceivers, multi-channel optical links and custom integrated modules used in ~~telecom~~Access, ~~storage,~~Metropolitan ~~and data networking applications. These products support a wide variety of protocols including Gigabit Ethernet~~Area, ~~Fiber~~Wide ~~Channel~~Area and ~~SONET~~Telecommunication and address a wide range of wavelengths and transmission distances. Today, the Stratos optoelectronics product offerings consist of (i) MSA transceivers for telecom/enterprise, (ii) specialty transceivers, (iii) military and harsh environment components and subsystems, (iv) video components and subsystems and (v) card level and mux/demux solutions. Looking ahead, we see significant advantages for our customers as we combine our existing optoelectronics, multiplexing, copper TDM, and optical coarse wave division multiplexing (“CWDM”) technology, our advanced miniaturization techniques, and innovative packaging for even more fully integrated media adaptor solutions. MSA Transceivers for Telecom/ Enterprise — Our MSA transceivers offerings include 1x9, gigabit interface converter (“GBIC”), small form factor (“SFF”), small form factor pluggable (“SFP”), and CWDM SFP form factors in multiple laser variations for short, medium and long reach applications. Specialty Transceivers — We manufacture a line of specialty transceivers based upon less commonly manufactured standard and non-standard form factors and protocols. These products leverage our packaging, miniaturization and optoelectronic expertise and offer smaller modules with enhanced performance characteristics that are not available from other suppliers. Military and Harsh Environment Components and Subsystems — Our optoelectronics products for the military market meet the shock and vibration requirements of military and harsh environment applications. We sell specialized transceivers and custom integrated modules designed to meet specific customer requirements, including Active Bulkheads and connectors, which combine a transceiver media converter and expanded beam connection in a single integrated package. Video Components and Subsystems — We provide optoelectronic solutions specifically designed for the transport of standard definition and high definition video signals. These products include transceivers, media converters, mux/demux products and subsystems.Networks

5Access. The past several years have seen rapid growth of broadband services for business and residential customers. In particular, consumer demand for cable modem and DSL services, next generation cellular applications, and the proliferation of wireless access points, is increasing bandwidth capacity requirements from the telecommunication central offices and cable television headends. This bandwidth demand has caused the telecom and cable television (“CATV”) service providers to embark on large network upgrades. These network upgrades require the use of higher bandwidth optical and coaxial technologies to be deployed closer to the end customer. Fiber to the Home (“FTTH”) is an example of this trend. Another example is the deployment of high speed coaxial DS3 signal rates from the central office into the remote terminal and premise wiring portions of the telecom network, extending bandwidth closer to the edge. Each DS3 line is equal to 28 T1 lines.

~~CWDM~~Metropolitan ~~Components~~ and ~~Modules~~Wide —Area WeNetworks ~~manufacture and sell 4, 8 and 16-channel multiplexer and demultiplexer modules, one to four channel optical add/drop modules~~ (“~~OADM~~MANs”), ~~integrated modules with pluggable~~ and ~~discrete active components and a dense wave division multiplexing (~~“~~DWDM~~WANs”), ~~interleaver product~~respectively). ~~These~~The ~~products~~increased ~~are~~transmission capabilities ~~typically customized to the specific needs~~ of ~~our~~optical ~~telecom~~ and ~~enterprise~~RF ~~customers.~~technologies ~~Optical Flex Circuits and Multifiber Assemblies — We~~ have ~~proprietary,~~allowed ~~automated and software driven optical flex-circuit manufacturing expertise. Using that expertise, we develop custom circuit cards and backplane solutions~~ for ~~specific~~the ~~customer~~geographic ~~requirements.~~extension ~~The Fiber Optics product line consists~~ of ~~(i)~~LANs ~~CWDM components~~ and SANs ~~modules,~~through (ii) optical flex circuits and multi-fiber assemblies, (iii) harsh environment connectors, (iv) specialty fiber components and assemblies, and (v) connectors and cable assemblies. Harsh Environment Connectors — We supply optical and copper expanded beam and physical contact harsh environment connectors to the ~~military~~use ~~and other end markets. Our expanded beam connector technology utilizes optics to expand the beam~~ of ~~light~~extended ~~at the end of the fiber~~networks, ~~making~~such ~~the~~as ~~connector~~MANs ~~less susceptible to performance degradation due to dust, debris, moisture, shock~~ and ~~vibration~~WANs. WeThese ~~also~~networks ~~have~~enable enterprises ~~developed a series of complementary physical contact connectors~~ to ~~address~~interconnect ~~additional~~network ~~applications.~~systems ~~Specialty~~throughout ~~Fiber~~a ~~Components~~corporate ~~and~~campus ~~Assemblies~~or —wide ~~Our~~geographic ~~products~~area rather ~~include~~than ~~custom~~within ~~optical~~a ~~subassemblies for transceiver and device manufacturers in~~ single ~~and multi-fiber applications~~building. WeInterconnections ~~have~~between ~~developed~~network ~~these~~systems specialized products for the medical device, military fiber sensor, industrial laser and sensing, and oil and gas markets. Optical Connectors and Cable Assemblies — We incorporate industry standard optical connectors in support of our optical flex circuit, CWDM, harsh environment connector and specialty products. Sources and Availability of Raw Materials — Raw materials used in the manufacturing of optical transceivers, connector products and cable assemblies are ~~primarily:~~performed by

Raw Material		Primary Source	Availability
Electrical
	Active	Domestic Dist./Domestic Mfg.	Numerous
	Passive	Domestic Distributors	Stock
	PCB	Domestic Manufacturer	1-8 weeks
Mechanical
	Machined	Domestic Manufacturer	2 days-4 weeks
	Stamped	Domestic Manufacturer	4-6 weeks
	Castings	Domestic Manufacturer	8 weeks
	Plastics	Domestic Manufacturer	1-6 weeks
	Insulators	Domestic Manufacture	1-3 weeks
	Tubings	Domestic Manufacturer	Stock-2 weeks
	Connectors	Domestic Manufacturer	2 days-4 weeks
	Cable	Domestic Manufacturer	2 days-10 weeks
	Heatshrink	Domestic Distributors/Mfg	2 days-2 weeks
	Tubing	Domestic Dist/Mfg	2 days-6 weeks
	Machined Parts	Domestic Manufacturer	2 days-6 weeks
	Plastic Parts	Domestic Manufacturer	2 days-8 weeks
	Military Conn.	Offshore/Domestic Mfg	4-20 weeks
Optical
	Transceivers	Offshore Manufacture/Dom. Mfg	Stock-16 weeks
	Rosa	Offshore Manufacturer	8-10 weeks

6 Table of Contents

Raw Material	Primary Source	Availability
Tosa	Offshore Manufacturer	8-10 weeks
Filters	Offshore Manufacturer	2-12 weeks
Collimators	Offshore Manufacturer	2-12 weeks
Lasers	Offshore Manufacturer	8-18 weeks

switches and routers that use optical and RF components and subsystems. These networks enable businesses to use their networks for enhanced applications, such as real-time backup data storage at longer distances for disaster protection. In addition, these networks offer organizations a cost-effective way to address increased bandwidth requirements.

~~Copper~~Telecommunication ~~Products:~~Networks. Optical and RF technology is also used in high data rate telecommunication applications, including the intra-office connection of clusters of telecommunication switches based on the synchronous optical network (“SONET”) and asynchronous transfer mode (“ATM”) protocols. SONET switches and ATM access switches are often used in telecommunication networks to switch regional traffic and route long distance traffic. Newer generation networks are also applying Ethernet protocols to these telecommunication networks. In these core networks, multiple switches are often grouped together within a service provider’s central office network. RF cable assemblies commonly provide the interconnections between many of these systems.

~~We design~~Optical, ~~manufacture and market two copper product lines. Our Trompeter product line offers~~ RF ~~connectors~~, ~~patch jacks, installation tools, adaptors, cable~~ and ~~cable~~Microwave ~~assemblies.~~Technology ~~Over the past 40 years, Trompeter has carved out a unique position of high customer regard and industry recognition that regularly places it as a leader~~ in ~~independent,~~Military ~~third party performance surveys. We emphasize knowledge of customer application design, extraordinary service levels,~~ and high responsiveness. We sell our RF interconnect products to the telecom, military, and video markets. Our Semflex product line includes flexible microwave frequency bulk cable and cable assemblies for the military, aerospace, and test instrumentation markets. Our microwave cable and cable assemblies business, operated under the Semflex brand, designs and manufactures flexible microwave frequency coaxial cable and custom cable assemblies for the military/aerospace, commercial OEM and test instrumentation markets. Additionally, Semflex manufactures custom connectors, adapters, phase trimmers and other components to meet special application requirements, usually associated with the cable assemblies being built. RF Interconnection Products for Military/Aerospace ~~— We produce impedance controlled Twinax and Triax RF connectors as well as patch jacks that enable high frequency electrical performance in harsh military and industrial environments.~~ Applications for the military/aerospace RF connector products include MIL-STD-1553 databus couplers, forward battlefield command centers, satellite equipment and hermetic interconnects. RF Interconnection Products for Telecom — Our Trompeter BNC and M-BNC connectors are used in DS3 telecom applications in central offices as well as emerging deployments of DS3 line data rates in remote terminal applications. Our product offerings include the 75 ohm DS3 Coaxial BNC series, the mini-BNC series, Western Electric Company (“WECo”) and mini-WECo patch plugs and various other interconnect jacks, plugs, and adaptors. Inside a typical telecommunication central office the high speed digital copper line rate is DS3, and utilizes 75 ohm coaxial technology. We are a leading supplier of telco-grade plugs to the RBOCs and most other CLEC service providers largely due to our commitment to installer training, best-in-class installation tools, and high quality and service levels.

Modern militaries are becoming increasingly dependent on digital communications and increasingly ~~Within~~“smart” aweapons, ~~telecommunications~~creating a network centric battle “theater”, awhere ~~demarcation~~the ~~point~~application of high complexity, multiple platform communication technologies is ~~the~~combined with design attributes ~~point~~suitable ~~where~~for the ~~network~~typically ~~responsibility~~harsh ~~transfers~~environment ~~from~~in ~~one network~~which ~~operator~~they toare ~~another~~deployed. ~~Trompeter’s~~In ~~interconnect~~avionics applications, ~~modules~~the ~~enable~~high abandwidth ~~network~~and ~~access~~light ~~point~~weight ~~immediately~~of ~~adjacent~~optical systems serve to aincrease the performance of ~~demarcation~~aircraft, ~~point~~as well as, ~~enabling~~use ~~operators~~in toin-flight ~~assure~~entertainment asystems. ~~quality~~Tactical field communications use ~~handoff,~~both optical and RF technologies to ~~avoid~~quickly ~~service~~deploy ~~calls~~reliable ~~for~~high ~~network~~bandwidth ~~problems~~networks ~~beyond~~in the ~~their~~battlefield. ~~control~~Microwave cable and connector technology is a vital element of phased array radar systems used for threat warning by the military. InMilitaries ~~addition,~~often ~~these~~purchase ~~products~~their ~~allow~~systems ~~customers~~and technologies from large system integrators, often referred to as “prime contractors”. These system ~~access~~integrators ~~network~~typically ~~points~~have ~~without~~strong ~~disconnecting~~expertise in system level design and function, ~~avoiding~~with ~~service~~significantly ~~disruptions~~less expertise in components and subsystems. They rely on their suppliers for component and subsystem level expertise, requiring that their suppliers understand both the technology and their particular application environment.

RFDemands ~~Interconnection~~on ~~Products~~Suppliers ~~for~~of ~~Video — We manufacture 75 ohm BNC connectors and patch jacks for video signal applications in both WECo~~Optical, ~~and mini-WECo form factors. Our products are used in cable TV and broadcast station signal management, mobile production vehicles, and post-production editing applications.~~ RF ~~Cable Assemblies — We manufacturer coaxial cable assemblies~~, ~~servicing primarily telecom service providers~~ and ~~their central office installers, as well as military communications shelter manufacturers.~~ Microwave ~~Cable~~Subsystems ~~— We manufacture high performance, flexible microwave cable,~~ and market those under the Semflex brand. Our production process delivers low attenuation characteristics over length and at microwave frequencies. This capability allows us to produce low-loss tuned cable assemblies where the performance of the cable is matched to the connector design. Applications are primarily high power or low loss or a combination of both.Components

7The ability to send high data rate signals over longer distances depends not only on optical and electronic transceiver technology, but also on the performance of the fiber optic and electronic connections within the network. The demand for increasing bandwidth places continued emphasis on the need for high quality connectivity in critical applications such as in telecommunications, enterprise, military, and video networks, where the transmission of higher data rates over long distances has pushed the limits of signal integrity. Optical and electronic interconnect points within networks can contribute to signal degradation and can substantially reduce the distance over which signals can reliably be sent. The market demands for networks with ever increasing data rates over longer distances have driven the need for high bandwidth subsystems and components that provide the critical interconnections between devices within these high data rate network systems.

~~Microwave~~Network ~~Cable~~equipment ~~Assemblies~~manufacturers —and ~~Our~~military ~~cable~~system ~~assemblies~~integrators ~~are~~increasingly ~~typically~~rely ~~phase~~on ~~matched~~highly integrated ~~microwave~~subsystem ~~frequency~~suppliers ~~custom~~to ~~designs~~rapidly ofdevelop ~~both~~major ~~the~~elements ~~cable~~of ~~and~~their ~~connector~~systems. ~~for~~These asuppliers allow ~~variety~~network ofequipment ~~military,~~OEMs ~~precision~~and ~~test,~~system ~~and~~integrators ~~wireless~~to ~~applications.~~better Wefocus ~~sell~~on ~~both~~their ~~flexible~~core ~~and~~competencies ~~semi~~in overall ~~rigid~~product ~~cable~~design, ~~assemblies~~specifically todifferentiating ~~the~~product ~~military~~benefits, marketing and ~~aerospace industries~~distribution. We ~~Sources~~expect ~~and~~this ~~Availability~~trend ofto ~~Raw~~continue, ~~Materials~~with —network ~~Raw~~equipment ~~materials~~OEMs ~~used~~and inmilitary ~~the~~system ~~manufacturing~~integrators outsourcing an increasing percentage of RFtheir ~~and~~non-core ~~Microwave~~functions ~~connector~~to ~~and~~contract ~~cable~~manufacturers ~~products~~and integrated ~~are~~subsystem ~~primarily:~~suppliers.

Raw Material	Primary Source	Availability
PTFE tape and rod	Distributor or foundry	Numerous
Brass	Local Distributor	Stock
Stainless Steel	Local Distributor	Stock
BeCu	Local Distributor	Stock
PTFE Rod	Local Distributor	Stock
PTFE Tapes	Domestic Manufacturer	Manufactured from stock
Copper Conductors	Domestic Manufacturer	Manufactured from stock
FEP Jacket Mat’l	Domestic Manufacturer	Manufactured from stock
Polyurethane Jacket Mat’l	Domestic Manufacturer	Manufactured from stock
RF Cable	Domestic Manufacturer	Manufactured from stock
Polyolefin Sleeving	Local Distributor	Stock
Machine Parts	Domestic/Offshore/ Internal	Stock to 8 weeks

Customers Table of Contents

PRODUCTS During fiscal 2005, sales to General Dynamics UK Ltd. and Tellabs, Inc. and their respective contract manufacturers amounted to 8% and 4%, respectively, of consolidated net sales. For fiscal 2004, our two largest customers and their respective contract manufacturers accounted for 9% of our net sales, with General Dynamics UK and Tellabs accounting for 6% and 3% of our consolidated net sales.

For accounting purposes, our products fall into one industry segment. Within that segment, our ~~Backlog~~products can be broadly split into those with an optical and those with a copper emphasis. Transceivers, for example, are optical products, while the underlying technology of chips, drivers, analytical diagnostics, and related software is primarily electronic, requiring the translation of an electrical pulse into an optical signal at the point of the laser driver or the optical receiver. Almost all of our copper products are coaxial, twinaxial, or triaxial and involve cable with those same characteristics.

~~Backlog~~Optical ~~consists of written purchase orders for products for~~Products: which we have assigned shipment dates within the following 12 months. As of April 30, 2005 and 2004, our backlog was approximately $11.5 million and $13.0 million, respectively. Orders in backlog are firm, but are subject to cancellation or rescheduling by the customer.

Over the years, we have built standardized and custom broadband network data communication products ~~Manufacturing~~through our optoelectronic and passive fiber product families. Our legacy optoelectronics products evolved from an early emphasis on a broad range of standardized, multi-source agreement (“MSA”) compliant fiber optic components, including embedded and removable transceivers, multi-channel optical links and custom integrated modules used in telecom, storage, and data networking applications. These products support a wide variety of protocols including Gigabit Ethernet, Fiber Channel and SONET and address a wide range of wavelengths and transmission distances. Today, the Stratos optoelectronics product offerings are offered under the Stratos Optical Technologies brand and consist of (i), specialty optical transceivers, (ii) military and harsh environment optical interconnect components and port-embedded transceivers, (iii) video components and subsystems and (iv) card level and mux/demux (or multiple/demultiflex) solutions, optical flex circuits, and MSA transceivers for telecom/enterprise. Looking ahead, we see significant advantages for our customers as we combine our existing optoelectronics, multiplexing, expanded beam optical connectors, and optical coarse wave division multiplexing (“CWDM”) technology, our advanced miniaturization techniques, and innovative packaging for even more fully integrated media adaptor solutions.

WeSpecialty ~~provide~~Transceivers ~~integrated~~— ~~engineering~~We ~~and~~manufacture ~~manufacturing~~a ~~capabilities at~~line ~~each~~ of ~~our~~specialty ~~three~~transceivers ~~manufacturing~~based ~~locations,~~upon ~~including~~less ~~product~~commonly ~~design,~~manufactured ~~fabrication,~~standard ~~assembly,~~and ~~packaging~~non-standard ~~and~~form ~~testing,~~factors and ~~deliver~~ ~~quality~~protocols. ~~assurance~~These ~~through~~products leverage our packaging, ~~ISO~~miniaturization ~~9001/2000~~and ~~certified processes~~optoelectronic expertise and ~~procedures.~~offer Wesmaller ~~also~~modules ~~have~~with ~~proprietary processes~~enhanced ~~such~~performance ascharacteristics ~~autocalibration~~that ~~and~~are ~~automated~~not ~~multifiber~~available ~~polishing~~from ~~to ensure~~other ~~that~~suppliers. weStratos ~~meet~~has ~~stringent~~a ~~customer~~core competency ~~requirements.~~in ~~Our integrated~~extreme ~~engineering/manufacturing~~miniaturization ~~business~~and ~~model~~has ~~allows~~used usthis to ~~reduce~~ ~~development~~achieve ~~times~~form factors in transceivers and media ~~respond~~converters tothat ~~customer~~are ~~needs~~half the size of conventional devices.

~~Chicago,~~Military ~~IL:~~and WeHarsh ~~currently~~Environment ~~manufacture~~Components ~~all~~and ofSubsystems ~~our optoelectronic~~— Our optoelectronics products, ~~CWDM~~for ~~components~~the military ~~and~~market ~~modules,~~meet ~~optical flex~~the ~~circuits~~shock and ~~multifiber~~vibration ~~assemblies,~~requirements of military and harsh environment ~~assemblies~~applications. ~~for~~We ~~the~~sell ~~domestic~~specialized ~~market~~transceivers inand ~~our~~custom ~~89,000 square foot~~integrated ~~facility.~~modules ~~The~~designed ~~facility~~to ~~includes~~meet specific ~~two~~customer ~~high-capacity~~requirements, ~~pick~~including active bulkheads and ~~place~~ ~~lines~~connectors, ~~surface~~either ~~mount~~of ~~(“SMT”)~~which ~~capability, wave~~may ~~and~~combine ~~convection-reflow~~a ~~soldering~~transceiver ~~systems,~~media ~~automated~~converter and ~~semi-automated~~ ~~chip-to-wire~~optical ~~bonding~~interconnect ~~equipment,~~in ~~and~~a ~~custom~~single ~~laser welding~~integrated ~~systems~~package.

~~Our~~Video ~~optical~~Components ~~flex~~and ~~circuit~~Subsystems ~~products~~— ~~are~~We ~~assembled~~provide byoptoelectronic ~~a proprietary,~~solutions ~~software-driven~~specifically ~~automated~~designed ~~fiber~~for ~~routing~~the transport of standard definition and ~~embedding~~ ~~system,~~high ~~along~~definition ~~with~~video ~~semi-automated~~signals. ~~multi-fiber~~These products include ~~connector~~transceivers, ~~polishing~~media ~~machines~~converters, mux/demux products, splitter/combiner products, and ~~processes~~subsystems.

TheTable CWDM operation features micro-optic alignment equipment and processes. We have also developed proprietary test methods to increase throughput of these multi-wavelength modules. The facility also includes extensive test laboratories with Telcordia, Highly Accelerated Life Test (“HALT”) and Highly Accelerated Stress Screen (“HASS”) capabilities, 3,000 square feet of clean-room capacity and an in-house toolroom. Contents

CWDM Components and Modules — We manufacture and sell 4, 8 and 16-channel multiplexer and ~~The~~demultiplexer ~~Chicago~~modules, ILone ~~operations~~to ~~are~~four ~~ISO~~channel ~~9001:2000~~optical ~~certified~~add/drop ~~and~~modules (“OADM”), integrated modules ~~operate~~with pluggable and discrete active components and a JDdense ~~Edwards~~wave ~~ERP~~division ~~system~~multiplexing (“DWDM”) interleaver product. These products are typically customized to the specific needs of our telecom and enterprise customers.

~~Mesa,~~MSA ~~Arizona:~~Transceivers Infor ~~July~~Telecom/ ~~2003,~~Enterprise ~~Sterling~~- ~~Holding~~Our ~~Company (“Sterling”)~~MSA ~~began~~transceivers toofferings ~~consolidate~~include ~~all~~1x9, ~~of the~~gigabit ~~manufacturing~~interface ~~for~~converter ~~Trompeter~~(“GBIC”), ~~and~~small ~~Semflex~~form ~~products~~factor ~~into the Mesa~~(“SFF”), ~~Arizona~~ ~~facility.~~small ~~This~~form ~~consolidation~~factor ispluggable ~~now~~(“SFP”), ~~complete~~ and ~~substantially~~CWDM ~~all~~SFP ~~Trompeter~~form ~~and~~factors ~~Semflex products are manufactured~~ in ~~the~~multiple ~~Mesa~~laser ~~facility.~~variations ~~The 50,000 square foot, two building complex includes a full function vertically-integrated manufacturing facility~~ for ~~Semflex’s low loss~~short, ~~tape wrapped, flexible microwave cable line, close coupled with a~~ medium ~~capacity machining facility with significant computer-controlled turning, milling~~ and ~~drilling capability~~long ~~for~~reach ~~turn-key production~~applications. ~~This operation also produces~~ ~~medium and low volume Swiss screw machine type contacts for the Trompeter RF connector line.~~

InOptical ~~addition,~~Flex ~~the~~Circuits ~~Mesa~~and ~~facility~~Multifiber ~~houses~~Assemblies a— ~~recently~~We ~~installed automated~~have ~~nickel plating line~~proprietary, ~~primarily~~automated ~~for~~and ~~the Trompeter~~software ~~connector~~driven ~~business~~optical asflex-circuit ~~well~~manufacturing asexpertise. aUsing ~~recently~~that ~~upgraded~~expertise, ~~gold~~we ~~plating~~develop custom ~~line~~circuit ~~used~~cards ~~for all RF~~ and ~~microwave~~backplane ~~contacts~~solutions infor ~~support~~specific ofcustomer ~~all product lines~~requirements. ~~Many~~The ofFiber ~~the~~Optics ~~other RF connector~~ product ~~line~~ ~~components~~line ~~are~~consists ~~sourced~~of ~~from~~(i) CWDM ~~various~~components ~~low~~and ~~cost~~modules, ~~suppliers.~~(ii) optical ~~The facility~~flex ~~also~~circuits ~~houses~~and a multi-~~shift assembly and test capability~~fiber ~~for~~assemblies, ~~all~~(iii) harsh ~~product~~environment ~~lines. Additionally~~connectors, ~~we own approximately 4.5~~(iv) ~~acres~~specialty offiber ~~land~~components ~~adjacent~~and toassemblies, ~~the Mesa facility that we can~~and ~~use~~(v) connectors ~~for~~and ~~future~~cable ~~expansion needs~~assemblies.

~~The~~Optical ~~Mesa~~Harsh ~~facility~~Environment isConnectors ~~ISO~~— ~~9001~~We ~~certified~~supply optical expanded beam and ~~meets~~physical contact harsh environment connectors to the military and other end markets. Our expanded beam connector ~~requirements~~technology utilizes optics to expand the beam of ~~MIL-Q-9858A~~light at the end of the fiber, making the connector less susceptible to performance degradation due to dust, debris, moisture, shock and vibration. ~~other~~We ~~military~~also ~~standard~~have developed a series of complementary physical contact connectors to address ~~requirements~~additional applications, including adaptors from physical contact to expanded beam to help bridge these technologies.

~~Haverhill,~~Specialty ~~United~~Fiber ~~Kingdom:~~Components ~~Stratos’ Haverhill, United Kingdom facility currently manufactures our harsh environment connectors~~ and ~~cable~~Assemblies ~~assemblies~~— ~~and~~Our ~~specialty fiber~~ products ininclude ~~30,000 square~~custom ~~feet~~optical ofsubassemblies ~~leased space. The harsh~~for ~~environment~~transceiver ~~connector~~and ~~components~~device ~~are~~manufacturers ~~produced~~in ~~with~~single ~~a seven axis machining center~~ and ~~two micro~~multi-~~turn~~fiber ~~lathes, featuring 0~~applications.1 ~~micron repeatability.~~We ~~Metrology~~have ~~equipment supports production, quality~~developed ~~and~~these ~~development~~specialized ~~and~~products ~~includes~~for ~~ultra~~the ~~high~~medical ~~precision air gauging (up to 0.1 mm accuracy)~~device, amilitary ~~three-micron accuracy measuring center, environmental test chambers and a tensile load tester. The specialty~~ fiber ~~components and assembly business is supported by a Class 10~~sensor,~~000~~ ~~clean~~industrial ~~room, Electro Static Discharge (“ESD”) flooring, high vacuum plasma vapor deposition (“PVD”) equipment, RF induction heating systems, a high power CO2~~ laser ~~machining~~ and ~~laser~~ ~~cleaving centers~~sensing, and aoil ~~scanning~~and ~~electron~~gas ~~microscope~~markets.

Optical Connectors and Cable Assemblies — We incorporate industry standard optical connectors in ~~Research~~support of our optical flex circuit, CWDM, harsh environment connector and ~~Development~~specialty products.

AsSources ofand ~~April 30,~~Availability ~~2005,~~of weRaw ~~had~~Materials 50– ~~employees~~Raw ~~engaged~~materials used in ~~research~~ ~~and~~the ~~development.~~manufacturing ~~Our~~of ~~research and development expenses~~optical ~~were $9.5 million~~transceivers, ~~$8.8 million~~connector products and ~~$20.1 million in~~cable ~~fiscal~~assemblies ~~2005,~~are ~~2004 and 2003, respectively.~~primarily:

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


Raw Material	Primary Source	Availability
Electrical
Active	Domestic Dist./ Mfg. Numerous
Passive	Domestic Distributors	Stock
PCB	Domestic Manufacturer	1-8 weeks

Mechanical
Machined	Domestic Manufacturer	2 days-4 weeks
Stamped	Domestic Manufacturer	4-6 weeks
Castings	Domestic Manufacturer	8 weeks
Plastics	Domestic Manufacturer	1-6 weeks
Insulators	Domestic Manufacturer	1-3 weeks
Tubings	Domestic Manufacturer	Stock-2 weeks

9 ~~Technology and Intellectual Property~~

WeTable have a rich history of product innovation and have been a pioneer in developing several optical devices. This innovation has allowed us to amass a strong IP portfolio, certain segments of which we have crossed-licensed with leading technology companies including Agilent, IBM and Tyco. We collect licensing fees through upfront payments and/or ongoing royalties. As of April 30, 2005, we had in excess of 100 U.S. patents issued and 26 pending patent applications for innovations in the areas of optoelectronics, optical interconnects, RFID products and RF and microwave applications. We protect our other proprietary information such as know-how through trade secrets. Contents


Raw Material	Primary Source	Availability
Connectors	Domestic Manufacturer	2 days-4 weeks
Cable	Domestic Manufacturer	2 days- 10 weeks
Heatshrink	Domestic Dist/Mfg.	2 days-2 weeks
Tubing	Domestic Dist/Mfg.	2 days- 6 weeks
Machined Parts	Domestic Manufacturer	2 days- 6 weeks
Plastic Parts	Domestic Manufacturer	2 days- 8 weeks
Military Conn.	Offshore/Domestic Mfg.	4- 20 weeks

Optical
Transceivers	Offshore /Domestic Mfg.	Stock-16 weeks
Rosa	Offshore /Domestic Mfg.	8-10 weeks
Tosa	Offshore / Domestic Mfg.	8-10 weeks
Filters	Offshore Manufacturer	2-12 weeks
Collimators	Offshore Manufacturer	2-12 weeks
Lasers	Offshore Manufacturer	8-18 weeks

~~Active~~Copper ~~Components and Subsystems (Optoelectronics)~~Products:

We ~~have~~design, amanufacture ~~number~~and ofmarket ~~issued~~two ~~patents~~copper ~~in the areas of electromagnetic interference (~~“~~EMI~~branded”) ~~and~~product ~~radio frequency interference (“RFI”), specifically relating to the electromagnetic energy emissions from the space between the optoelectronic device and the chassis of the host device~~lines.

Separate from providing solutions for EMI and RFI problems, we also have patents covering certain aspects of the electrical circuit architecture or electrical circuit operation of optoelectronic devices. These patents cover functions such as a laser feedback system, a laser diode stabilizer, a transceiver module having variable voltage capability, and an optoelectronic transceiver having an adaptable logic level signal detect output.

	•		Our Trompeter brand product line offers RF connectors, patch jacks, installation tools, adaptors, cable and cable assemblies. Over the past 40 years, Trompeter has carved out a unique position of high customer regard and industry recognition that regularly places it as a leader in independent, third party supplier performance surveys. We emphasize knowledge of customer application design, extraordinary service levels, and high responsiveness to customer needs. We primarily sell our RF interconnect products to the telecom, military/aerospace, and video markets.

	•		Our Semflex brand product line includes flexible microwave frequency bulk cable and cable assemblies for the military, aerospace, and test instrumentation markets. Our microwave cable and cable assemblies business, operated under the Semflex brand, designs and manufactures flexible microwave frequency coaxial cable and custom cable assemblies for the military/aerospace, commercial OEM and test instrumentation markets. Additionally, Semflex manufactures custom connectors, adapters, phase trimmers and other components to meet special application requirements, usually associated with the cable assemblies being built.

~~Active~~RF ~~Integrated~~Interconnection ~~Modules~~Products for Military/ Aerospace — We produce impedance controlled Twinax and Triax ~~Passive~~RF ~~Components~~connectors as well as patch jacks that enable high frequency electrical performance in harsh military and ~~Subsystems~~industrial ~~(Fiber~~environments. ~~Optics)~~Applications for the military/aerospace RF connector products include MIL-STD-1553 databus couplers, forward battlefield command centers, video control rooms, space based satellite equipment and hermetic interconnects.

WeRF ~~have~~Interconnection ~~developed~~Products afor ~~number~~Telecom of— ~~fiber~~Our ~~management~~Trompeter ~~solutions~~BNC ~~that organize~~and ~~optical~~M-BNC ~~fibers~~connectors ~~through~~are ~~“flex~~widely ~~circuitry”~~used orin ~~bonding~~telecom ~~fibers~~applications toin ~~flexible~~central ~~substrates,~~offices ~~and~~as ~~high~~well ~~capacity/high density~~as ~~solutions~~emerging ~~that~~deployments ~~use~~of ~~radio~~coaxial ~~frequency~~technology ~~identification~~in ~~(“RFID”)~~remote ~~tags~~terminal ~~that~~applications. ~~are~~Our ~~specifically~~product ~~applied~~offerings toinclude ~~fiber optic~~the ~~systems.~~75 ~~These~~ohm ~~solutions~~Coaxial ~~enable~~BNC ~~operators~~series, ~~to organize and~~the ~~manage~~mini-BNC ~~their~~series, ~~numerous~~Western ~~optical~~Electric ~~fibers~~Company ~~interconnecting~~(“WECo”) ~~their~~and ~~host devices.~~mini-WECo ~~The~~patch ~~RFID~~plugs ~~system~~and ~~enables~~various ~~operators to associate a~~other ~~specific~~interconnect ~~optical~~jacks, ~~fiber~~plugs, ~~with~~and aadaptors. ~~specific~~Inside ~~port of~~ a ~~host~~typical ~~device.~~telecommunication ~~We have~~central ~~twelve~~office ~~issued patents related to~~ the ~~design or~~ ~~manufacturing~~high ofspeed ~~flex~~digital ~~circuitry,~~copper ~~including~~line ~~optical~~rate ~~and electrical~~is ~~flex circuitry~~DS3, and ~~have~~utilizes ~~pending~~75 ~~patent~~ohm ~~applications related~~coaxial ~~to the application of RFID techniques to optical systems~~technology. InWe ~~addition,~~are ~~we have many issued patents that relate to~~a ~~various~~leading ~~aspects~~supplier of ~~optical~~telco-grade ~~connectors.~~plugs Weto ~~also~~the ~~have~~newly ~~patents~~re-consolidated ~~that cover~~RBOCs ~~certain~~and ~~aspects~~most ofCLEC ~~single fiber ferrules, multifiber~~service ~~ferrules~~providers ~~and~~largely ~~metallization~~due ~~of an optical fiber.~~to

~~RF and Microwave Interconnect Products (RF/ Microwave)~~10

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

~~Sales~~our commitment to installer training, best-in-class installation tools, and ~~Technical~~high ~~Support~~quality and service levels for the public switched telephone network.

~~Stratos~~Within ~~sells through~~ a telecommunications network, ofa ~~representatives, distributors,~~demarcation ~~and~~point ~~direct~~is ~~sales~~the ~~professionals~~point ~~primarily~~where ~~across~~the network ~~North~~responsibility ~~America,~~transfers ~~Europe,~~from ~~Asia,~~one ~~and~~network ~~Central~~operator ~~America~~to ~~including Mexico~~another. ~~Our~~Trompeter’s ~~sales~~interconnect ~~teams~~modules enable ~~are~~a ~~organized~~network ~~into~~access ~~three~~point ~~groups, including~~immediately ~~Stratos~~adjacent ~~Lightwave~~to ~~(active~~a ~~and~~demarcation ~~passive optical components and subsystems)~~point, ~~Trompeter~~enabling ~~(RF~~operators ~~interconnects) and~~to ~~Semflex~~assure ~~(microwave~~a ~~cable~~quality handoff, and ~~cable~~to ~~assemblies).~~avoid ~~Stratos maintains~~service ~~three~~calls ~~overlapping~~for ~~sales~~network ~~organizations~~problems tobeyond ~~focus~~their ~~selling~~control. In ~~efforts~~addition, onthese ~~specific~~products ~~customer~~allow ~~types~~customers ~~and~~ to ~~capture~~access ~~the~~and ~~strong brand~~test ~~identity~~network ~~each~~points ~~has~~without ~~developed~~disconnecting, avoiding inservice ~~its respective marketplace~~disruptions.

WeRF ~~believe~~Interconnection ~~our~~Products ~~ability~~for toVideo ~~deliver~~– ~~value-added~~We ~~customer~~manufacture ~~service and~~75 ~~technical~~ohm ~~support~~BNC isconnectors ~~essential to our business. Our sales force~~ and ~~design~~patch ~~engineers~~jacks ~~work closely with our customers~~for ~~through~~video ~~the~~signal ~~design~~applications ~~and~~in ~~manufacturing~~both ~~process.~~WECo ~~We also provide extensive technical support to our customers after the design~~ and ~~qualification~~mini-WECo ~~process~~form ~~is complete~~factors. WeOur ~~intend~~products toare ~~strengthen our~~used ~~current~~in ~~customer relationships by continuing to deliver a~~cable ~~high~~TV ~~level of value-added service~~ and ~~technical~~broadcast ~~support~~station ~~and leveraging~~signal ~~our~~management, ~~reputation~~mobile ~~for~~production ~~high~~vehicles, ~~quality products~~ and ~~service to~~post-production ~~establish relationships with new customers~~editing applications.

RF Cable Assemblies — We manufacture coaxial and twinax cable assemblies, servicing primarily ~~Marketing~~telecom service providers and their central office installers, as well as military communications shelter manufacturers.

~~The~~Microwave ~~marketing~~Cable ~~group~~- isWe ~~responsible~~manufacture ~~for~~high ~~developing~~performance, ~~marketing strategies~~flexible ~~and~~microwave ~~programs~~cable ~~that~~and ~~support~~market these under the ~~sale~~Semflex ofbrand. ~~Stratos’ products~~Our ~~and~~production ~~enhance~~process ~~its~~delivers ~~reputation~~low inattenuation ~~the~~characteristics ~~industry.~~over ~~These strategies~~length and at ~~programs~~microwave ~~include~~frequencies. ~~(i) ongoing~~This ~~interaction with~~capability ~~customers~~allows ~~for~~us to produce low-loss tuned cable assemblies where the ~~development~~performance of ~~new~~the ~~products~~cable ~~and~~is ~~technical~~matched to the connector design. Applications are primarily ~~support,~~high power or low loss or a combination of both.

10Microwave Cable Assemblies — Our cable assemblies are typically phase matched microwave frequency custom designs of both the cable and connector for a variety of military, precision test, and wireless applications. We sell both flexible and semi rigid cable assemblies to the military and aerospace industries.

~~(ii) advertising~~Sources and ~~other~~Availability ~~promotional~~of ~~activities~~Raw ~~in industry~~Materials ~~trade~~– ~~journals~~Raw ~~and~~materials ~~publications~~used ~~targeting design engineers, (iii) participation~~ in ~~major trade show events and conferences in~~ the ~~communications~~manufacturing ~~network industry to promote Stratos’ broad lines~~ of ~~active~~RF and ~~passive optical~~ ~~and~~Microwave RFconnector and ~~microwave~~cable ~~components and subsystems, (iv) public relations covering new~~ products ~~and~~are ~~company capabilities,~~primarily: (v) market research to guide R&D investment, (vi) corporate branding to create a consistent and accurate message across the Stratos Lightwave, Trompeter and Semflex brands, and (vii) interaction with its customers and peers in industry associations to promote and further enhance related technologies, and to validate Stratos’ emerging role as the technology innovator for solutions in our served markets.

Competition


Raw Material	Primary Source	Availability
Brass	Local Distributor	Stock
Stainless Steel	Local Distributor	Stock
BeCu	Local Distributor	Stock
PTFE Rod	Local Distributor	Stock
PTFE Tapes	Domestic Manufacturer	Manufactured from stock
Copper Conductors	Domestic Manufacturer	Manufactured from stock
FEP Jacket Material	Domestic Manufacturer	Manufactured from stock
Polyurethane Jacket Material	Domestic Manufacturer	Manufactured from stock
RF Cable	Domestic Manufacturer	Manufactured from stock
Polyolefin Sleeving	Local Distributor	Stock
Machine parts	Domestic/Offshore/Internal	Stock to 8 weeks

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

•Table Data rate, port density, reliability and other performance features • Ability to rapidly scale production for high volumes • Timeliness of new product introductions • Length of product design cycle • Compatibility with emerging industry standards • Scope and responsiveness of service and technical support • Price and performance characteristics • Established reputation with key customersContents

CUSTOMERS Within the optoelectronics market, we compete primarily with Agilent Technologies, Inc., Finisar Corporation, JDS Uniphase Corporation and Optical Communications Products, Inc. Within the fiber optics market, we compete primarily with Amphenol Corporation, Molex, Inc. and Tyco International, Ltd. and numerous other smaller companies. Within the RF market we compete with ADC Telecommunications, Inc, Amphenol, ITT Cannon (a subsidiary of ITT Industries), Kings Electronics Co., Inc, Radiall, S.A. and numerous other companies globally. In the microwave products business, we compete with Times Microwave, Inc., WL Gore Associates, Inc., Huber+Suhner and a large number of smaller companies. Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing, distribution and other resources than we do, and as a result, may be able to:

•During ~~Respond~~fiscal ~~more~~2007 ~~quickly~~sales to ~~new~~our orfive ~~emerging~~largest ~~technologies~~customers oraccounted ~~standards~~for ~~and~~20% of consolidated net sales. Sales to ~~changes~~our inlargest single customer, ~~requirements~~General •Dynamics ~~Devote~~Corporation ~~greater~~and ~~resources~~its respective contract manufacturers, accounted for 7% of consolidated sales and sales to ~~the~~our ~~development~~second largest customer, EDO, ~~promotion~~accounted ~~and~~for ~~sale~~7% of ~~their~~consolidated ~~products~~net •sales. ~~Deliver~~In ~~competitive~~fiscal ~~products~~2006, atsales ato ~~lower~~General ~~price~~Dynamics Corporation and its respective contract manufacturers amounted to 8% of consolidated net sales.

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

~~Some~~Backlog consists of ~~our~~written ~~critical~~purchase ~~components~~orders ~~used~~for ~~in production of certain of our~~ products ~~are~~for ~~purchased~~which ~~from~~we ahave ~~key~~assigned ~~supplier,~~shipment ~~which has been~~dates ~~acquired~~within ~~by a competitor of~~ the ~~Company~~following 12 months. IfAs ~~this~~of ~~supplier increases prices~~April 30, ~~reduces~~2007 ~~quantities~~and ~~available to us or ceases to supply us~~2006, our ~~business~~backlog ~~and~~was ~~results~~approximately ~~of operations may be significantly harmed~~$17. ~~We may not be able to compete successfully~~5 ~~against~~million ~~either~~and ~~current~~$13.6 million, ~~or future competitors~~respectively. ~~Increased competition~~Orders ~~could result~~ in ~~significant~~backlog ~~price~~are ~~erosion~~firm, ~~reduced revenue,~~but ~~lower~~are ~~margins~~subject ~~or loss of market share, any of which~~to ~~would~~cancellation ~~significantly~~or ~~harm~~rescheduling ~~our~~by ~~business~~the customer.

11MANUFACTURING

We provide integrated engineering and manufacturing capabilities at each of our three manufacturing ~~Regulatory~~locations, ~~Matters~~including product design, fabrication, assembly, packaging and testing, and deliver quality assurance through our ISO 9001/2000 certified processes and procedures. We also have proprietary processes such as autocalibration and automated multifiber polishing to ensure that we meet stringent customer requirements. Our integrated engineering/manufacturing business model allows us to reduce development times and respond to customer needs.

~~Our~~Chicago, ~~properties~~Illinois: ~~and~~We ~~business~~currently ~~operations~~manufacture ~~are~~the ~~subject~~majority toof aour ~~wide variety~~video oftransport ~~federal~~optoelectronic products, ~~state,~~CWDM ~~local,~~components and ~~foreign environmental~~modules, ~~health~~ ~~and~~optical ~~safety~~flex ~~laws~~circuits and ~~other~~most ~~legal~~multifiber ~~requirements~~assemblies, ~~including those relating to the storage, use, discharge~~ and ~~disposal of~~ ~~toxic,~~harsh ~~volatile~~environment orassemblies ~~otherwise~~for ~~hazardous~~the ~~substances~~domestic ~~used~~market in our ~~manufacturing~~ ~~processes.~~89,000 Ifsquare wefoot ~~fail~~Chicago ~~to obtain required permits~~facility. orSome ~~otherwise~~products ~~fail~~are tomanufactured ~~operate within these or future legal requirements, we may be required~~ to ~~pay substantial penalties, suspend~~ our ~~operations~~design orat ~~make~~offshore ~~costly~~contract ~~changes to our~~ manufacturing ~~processes or~~ facilities. ~~Although~~in ~~we believe that~~Asia; wesome are inpurchased ~~compliance~~as ~~and~~Stratos ~~have~~private ~~complied~~labeled ~~with all applicable legal requirements~~products, wedesigned ~~may~~and bemanufactured ~~required~~by ~~to incur additional costs to~~other ~~comply~~manufacturers ~~with~~in ~~current~~the orFar ~~future legal requirements~~East.

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

The CWDM operation features micro-optic alignment equipment and processes. We have also developed Asproprietary test methods to increase throughput of ~~May 1,~~these ~~2005~~multi-wavelength modules. The facility also includes extensive test laboratories with Telcordia, ~~the~~Highly ~~Company~~Accelerated ~~had~~Life ~~approximately~~Test ~~554~~and Highly ~~employees~~Accelerated ~~including~~Stress 21Screen ~~senior~~capabilities, ~~level~~3,000 ~~corporate~~square ~~executives~~feet of clean-room capacity and ~~administrative~~ ~~employees~~an in-house toolroom.

~~Executive~~The ~~Officers~~Chicago ofoperations ~~the~~are ~~Registrant~~ISO 9001:2000 certified and operate a JD Edwards ERP system.

Mesa, Arizona: Most of the Trompeter and Semflex products are assembled in the Mesa facility. The 50,000 ~~following~~square ~~table~~foot, ~~sets~~two ~~forth~~building ~~information~~complex ~~concerning~~includes ~~executive~~a full function vertically-integrated ~~officers~~manufacturing offacility ~~Stratos~~for asSemflex’s oflow ~~July 22~~loss, ~~2005:~~tape wrapped, flexible microwave cable line; close coupled with a medium capacity machining facility with significant computer-controlled turning, milling and drilling capability for turn-key production. This operation also produces medium and low volume Swiss screw machine type contacts for the Trompeter RF connector line.

12 Phillip A. Harris (58): President and Chief Executive Officer of Stratos since December 2004 and as a director of Stratos since November 2003. Prior to being elected as President and Chief Executive Officer, Mr. Harris served as Chairman of the corporate governance and nominating committee and as a member of the compensation committee. Mr. Harris was a director of Sterling from 2002 through the closing of Stratos’ acquisition of Sterling in November 2003. Mr. Harris was Executive Vice President of Sprint North Supply (a telecommunications equipment distributor) from 1994 until his retirement in 2001. From 1978 until 1994, Mr. Harris held a number of senior operating positions with Sprint Corporation (a telecommunications provider).

BarryTable Hollingsworth (40): Chief Financial Officer of Stratos since February 2005. From 2004 until his appointment as CFO, Mr. Hollingsworth was Vice President of Finance & Administration for Stratos. Prior to joining Stratos, he was Director of Finance at Heidrick & Struggles International from 2000 through 2003, and was employed by Tribune Company from 1994 through 2000, where he served in various capacities including internal audit and investor relations. Contents

~~Newell~~In V.addition, ~~Starks~~the ~~(53):~~Mesa ~~Mr. Starks~~facility ishouses ~~Chief~~an ~~Strategic Officer~~automated ofnickel ~~Stratos~~plating ~~and~~line, ~~Vice~~primarily ~~Chairman~~for of the ~~Board of Directors.~~Trompeter Heconnector ~~was~~business, ~~Chairman~~as ofwell ~~Sterling’s~~as ~~board~~an ofupgraded ~~directors~~gold ~~during 2003~~plating ~~and~~line aused ~~director~~for ofall ~~Sterling~~RF ~~from~~and ~~its~~microwave ~~organization~~ contacts in ~~1989 through~~support ~~the~~of ~~closing~~all ofproduct ~~Stratos’~~lines. ~~acquisition~~Many of ~~Sterling~~the ~~in November~~other ~~2003.~~RF ~~From~~connector ~~1984~~product ~~until~~line ~~1991,~~components ~~Mr. Starks was~~are ~~employed~~sourced byfrom ~~Citicorp~~various ~~Venture~~low ~~Capital,~~cost ~~Ltd~~suppliers. ~~(“CVC”), most~~The ~~recently~~facility asalso ~~Vice~~houses ~~President,~~a ~~where~~multi-shift heassembly ~~was~~and ~~in charge of~~test ~~CVC’s~~capability ~~initial~~for ~~investment~~all inproduct ~~Sterling~~lines. ~~Since~~Additionally, ~~leaving~~we ~~CVC, Mr. Starks~~own ~~has~~approximately ~~served~~4.5 asacres aof ~~private~~land ~~consultant~~adjacent to ~~technology~~ ~~companies,~~the ~~including~~Mesa ~~Sterling,~~facility onthat ~~strategic~~we ~~matters~~can ~~and~~use ~~also~~for ~~has been~~future aexpansion ~~private investor~~needs.

~~Richard~~The ~~C.E.~~Mesa ~~Durrant~~facility ~~(44):~~is ~~Executive~~ISO ~~Vice~~9001 ~~President~~certified ~~of Stratos International since November 2004, Executive Vice President Passive Subsystems 2002 through November 2004,~~ and ~~the Managing~~meets ~~Director of our UK Stratos Limited subsidiary since its acquisition in December 1998. Mr. Durrant previously served as~~ the ~~Managing~~requirements ~~Director~~ of ~~Methode~~MIL-Q-9858A ~~Fiber~~and ~~Optic Europe Ltd. from~~other ~~1997~~military ~~through~~standard ~~April 2000~~requirements. ~~From~~The ~~1989~~Mesa ~~through~~facility ~~1997~~operates ~~Mr. Durrant served~~on asa ~~Sales~~DataFlo ~~Director~~ERP ~~of Mikon Ltd~~system.~~, a Methode subsidiary.~~

~~Joe~~Haverhill, D.United ~~Norwood (63)~~Kingdom: ~~Executive~~Stratos’ ~~Vice~~Haverhill, ~~President~~United ofKingdom ~~Stratos~~facility currently manufactures our harsh environment connectors and ~~President~~cable assemblies and ~~Chief~~advanced ~~Executive~~fiber ~~Officer~~products ofin ~~Sterling.~~30,000 square feet ~~Mr. Norwood~~of ~~has~~leased ~~served~~space. asThe ~~President~~harsh ~~and~~environment ~~Chief~~connector ~~Executive Officer~~components ofare ~~Sterling~~produced ~~since~~with ~~2001.~~a ~~Also,~~seven inaxis machining ~~2002~~center and ~~2003, Mr. Norwood~~two ~~served~~micro-turn aslathes, afeaturing ~~director~~0.1 ofmicron ~~Corona~~repeatability. ~~Optical Systems,~~Metrology ~~Inc.~~equipment ~~During~~supports ~~2001~~production, hequality ~~served~~and asdevelopment ~~Executive~~and ~~Vice~~includes ~~President~~ultra ~~and Chief~~high ~~Operating~~precision ~~Officer~~gauging (up ofto ~~Sterling;~~0.1mm ~~from~~accuracy), ~~1997~~a toprecision ~~2001~~measuring center, heenvironmental ~~was President~~test ofchambers ~~Sterling’s~~and ~~Trompeter~~a ~~Electronics~~tensile load ~~subsidiary~~tester. He ~~served~~The asspecialty ~~Vice~~fiber ~~President~~components ofand ~~Amphenol~~assembly ~~Corporation~~business inis ~~charge~~supported ofby a Class 10,000 ~~their~~clean ~~RF/~~room, ~~Microwave~~Electro ~~and~~Static ~~Fiber~~Discharge ~~Optic~~flooring, ~~Products~~high ~~divisions~~vacuum ~~from~~plasma ~~1986~~vapor deposition equipment, RF ~~until~~induction ~~1992~~heating ~~and~~systems, ~~again~~a ~~from~~high ~~1995~~power toCO2 ~~1996~~laser asmachining aand ~~Vice~~laser ~~President~~cleaving ~~of their~~centers, ~~Time~~and ~~Fiber~~a scanning ~~Communications~~electron ~~subsidiary~~microscope. ~~From~~The ~~1992~~United toKingdom ~~1994~~facility ~~he served~~operates ason a ~~Vice~~Pegasus ERP system.

12RESEARCH AND DEVELOPMENT

~~President~~As of ~~ITT~~April 30, ~~Cannon~~2007, we had 58 employees engaged in ~~charge~~research ofand ~~Military~~development. ~~Aerospace~~Our research and ~~other~~development ~~North~~expenses ~~American~~were ~~operations~~$8.2 million, Mr$8.3 ~~Norwood~~million ~~holds~~and a$9.5 million ~~BSEE degree~~in ~~from~~fiscal ~~Arizona~~2007, ~~State~~2006 ~~University~~and 2005, respectively.

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

~~Information~~TECHNOLOGY ~~concerning~~AND ~~our~~INTELLECTUAL ~~operations in different geographic~~PROPERTY ~~regions is set forth in Note 19 to our financial statements included in Item 8 of this annual report on Form 10-K.~~

We have a ~~Available~~rich ~~Information~~history of product innovation and have been a pioneer in developing several RF and optical devices. These innovations have allowed us to amass a strong IP portfolio, certain segments of which we have crossed-licensed with leading technology companies including Agilent, IBM and Tyco. We collect licensing fees through upfront payments and/or ongoing royalties. As of April 30, 2007, we had in excess of 100 U.S. patents issued and 26 pending patent applications for innovations in the areas of optoelectronics, optical interconnects, RFID products, and RF/microwave products. We protect our other proprietary information such as know-how through trade secrets.

WeActive ~~make~~Components ~~available free of charge through our website, www.stratosinternational.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,~~ and ~~all~~Subsystems ~~amendments to those reports as~~(Optoelectronics) soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. These reports may also be obtained free of charge by contacting Investor Relations, Stratos International, Inc, 7444 West Wilson Avenue, Chicago, Illinois 60706; telephone 708-867-9600. Our Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

~~Item~~We 2.have ~~Properties~~a number of issued patents in the areas of electromagnetic interference (“EMI”) and radio frequency interference (“RFI”), specifically relating to the electromagnetic energy emissions from the space between the optoelectronic device and the chassis of the host device.

				Own or lease
Location	Function	Sq. ft.		(Lease Expiration)
Active operations
Chicago, IL	Corporate headquarters, administrative offices, sales and marketing, engineering, research and development facilities, and primary optical subsystems manufacturing facility		89,360	Owned
Mesa, AZ	RF/ Microwave administrative offices, sales and marketing, engineering, research and development facilities, and manufacturing facility		50,000	Owned
Haverhill, UK	Administrative offices, sales and marketing, engineering, research and development facilities, and manufacturing facility for fiber optic passive products		30,000	Leased (2010)
Westlake Village, CA	RF/ Microwave administrative offices, sales and marketing office		9,929	Leased (2005)
Melbourne, FL	Military subsystems administrative offices and engineering, research and development facilities		7,752	Leased (2007)
Inactive facilities
Chicago, IL	Limited use		61,590	Owned (actively marketed for sale)
Mountlake, WA	Limited use		2,178	Leased (2006) $7,100/month
Mountain View, CA	Limited use		38,000	Leased (2007) $62,000/month

WeTable own and lease office, administrative and manufacturing facilities. We are actively marketing limited use facilities, because we do not need that space at the current level of our business. We have recorded a reserve through the end of the lease term in 2007 for future rental obligations for our Mountain View, Contents

13Separate from providing solutions for EMI and RFI problems, we also have patents covering certain aspects of the electrical circuit architecture or electrical circuit operation of optoelectronic devices. These patents cover functions such as a laser feedback system, a laser diode stabilizer, a transceiver module having variable voltage capability, and an optoelectronic transceiver having an adaptable logic level signal detect output.

~~California~~Active ~~leased~~Integrated ~~facility,~~Modules ~~which~~and wePassive ~~have~~Components ~~been~~and ~~unable~~Subsystems ~~to sub-lease~~(Fiber ~~in light of current rental conditions in the area.~~Optics)

~~Item~~We 3have developed a number of fiber management solutions that organize optical fibers through “flex circuitry” or bonding fibers to flexible substrates, and high capacity/high density solutions that use radio frequency identification (“RFID”) tags that are specifically applied to fiber optic systems. ~~Legal~~These ~~Proceedings~~solutions enable operators to organize and manage their numerous optical fibers interconnecting their host devices. The RFID system enables operators to associate a specific optical fiber with a specific port of a host device. We have twelve issued patents related to the design or manufacturing of flex circuitry, including optical and electrical flex circuitry, and have pending patent applications related to the application of RFID techniques to optical systems. In addition, we have other issued patents that relate to various aspects of optical connectors. We also have patents that cover certain aspects of single fiber ferrules, multifiber ferrules and metallization of an optical fiber.

~~From~~RF ~~time to time, Stratos becomes involved in various lawsuits~~ and ~~legal~~Microwave ~~proceedings~~Interconnect ~~that~~Products ~~arise~~(RF/ ~~in the normal course of~~Microwave) ~~business. We believe that the resolution of these lawsuits and legal proceedings will not have a significant effect on our business, financial condition or results of operations.~~

~~Stratos~~Through ~~and~~Trompeter ~~certain of our directors~~ and ~~executive~~Semflex, ~~officers~~we have ~~been~~ ~~named~~an asintellectual ~~defendants~~property inportfolio ~~purported~~consisting ~~class~~of ~~action~~patents ~~lawsuits~~and ~~filed~~trade insecrets ~~the~~for ~~United~~RF ~~States~~and ~~District~~microwave ~~Court,~~connectors ~~Southern~~and ~~District~~various ~~of New~~interconnection ~~York~~modules. ~~The~~One ~~first of these lawsuits, filed on July 25,~~innovation ~~2001,~~includes isa ~~captioned~~visual ~~Kucera v.~~indicator ~~Stratos~~to ~~Lightwave,~~ensure ~~Inc. et al.~~a ~~No. 01~~plug-side CVconnector ~~6821.~~is ~~Three~~fully ~~other~~engaged ~~similar~~with ~~lawsuits have~~a ~~also been filed against Stratos and certain of our~~jack-side ~~directors~~connector ~~and~~so ~~executive officers. The complaints also name~~ as ~~defendants~~ ~~the~~to ~~underwriters~~form ~~for~~a ~~Stratos’~~“failsafe” ~~initial~~mated ~~public offering~~condition. The ~~complaints~~visual ~~are~~indication ~~substantially~~allows ~~identical to numerous other complaints filed against other companies that went public during~~ the ~~time~~operator ~~of Stratos’ IPO. The complaints generally~~to ~~allege,~~notice ~~among~~from ~~other~~a ~~things,~~distance that the ~~registration~~electrical ~~statement~~hardware ~~and prospectus~~is ~~from~~properly ~~our June 26~~engaged, ~~2000~~which ~~initial~~is ~~public~~more ~~offering~~cost ~~failed~~effective tothan ~~disclose~~an ~~certain~~operator ~~alleged~~manually ~~actions~~verifying byeach ~~the underwriters for the offering~~connection. ~~The~~This ~~complaints~~function ~~charge~~is ~~Stratos and several of~~especially ~~our~~valuable ~~directors~~when ~~and~~the ~~executive~~electrical ~~officers~~hardware ~~with~~is ~~violations~~in ~~of Sections 11~~buildings ~~and~~that 15are ofsubject ~~the~~to ~~Securities~~shock ~~Act~~and ~~of 1933, as~~vibration. ~~amended,~~Another ~~and/or~~innovation ~~Section 10(b)~~is ~~and Section 20(a) to~~ the ~~Security~~ ~~Exchange~~M-BNC ~~Act~~small ofform ~~1934,~~factor asbayonet ~~amended.~~coupling ~~The~~sleeve ~~complaints~~RF ~~also allege~~connector ~~claims~~which ~~solely against the underwriting defendants under~~allows ~~Section 12(a)(2)~~miniaturization ofin the ~~Securities~~telco ~~Act~~space offor ~~1933,~~DS3 ~~as amended~~connectivity.

InSALES ~~2003,~~AND weTECHNICAL ~~agreed to a Memorandum of Understanding, which~~SUPPORT reflects a settlement of these class actions as between the purported class action plaintiffs, Stratos and the defendant officers and directors, and our liability insurer. Under the terms of the Memorandum of Understanding, our 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 Stratos and our officers and directors, and we will assign to the plaintiffs certain claims that it may have against the underwriters. The plaintiffs have filed with the court a motion for preliminary approval of the settlement, which, if granted, will lead to the mailing of class-wide notices of the settlement and a hearing date for approval of the settlement. The issuers, including Stratos filed a statement joining in the plaintiffs’ motion for preliminary approval of the settlement. The underwriter defendants opposed the motion. On February 15, 2005, the Court issued its ruling granting the plaintiffs’ motion for preliminary approval of the settlement with the issuers, pending certain changes to the bar order to be included as part of the settlement and to the notice to the class. The settlement still remains subject to final approval by the Court after notice of the settlement is sent to the class and the class members and other parties have an opportunity to have their objections, if any, to the settlement heard at a final fairness hearing.

InStratos ~~February~~sells ~~2002,~~through ~~we acquired Tsunami Optics, Inc. The acquisition agreement contemplated~~ a ~~potential~~network ~~earn-out payment~~ of ~~up to $18 million in common stock if certain financial targets were achieved following the acquisition. In June 2002~~representatives, ~~Catherine~~ ~~Lego~~distributors, asand ~~representative~~direct ofsales ~~the former Tsunami~~professionals ~~shareholders,~~primarily ~~filed~~across aNorth ~~lawsuit~~America, ~~against Stratos alleging~~Europe, ~~among other things~~Asia, ~~that~~and ~~Stratos~~Central ~~breached~~America. ~~the~~Our ~~acquisition~~sales ~~agreement~~teams byare organized ~~refusing~~into tothree ~~allow Tsunami to operate as a separate subsidiary~~groups, ~~firing~~ ~~the~~including ~~Tsunami~~Stratos ~~executives~~Optical ~~that~~Technologies ~~were~~(active ~~necessary~~and topassive ~~operate~~optical ~~the~~components ~~business,~~ and ~~thereby~~subsystems ~~making~~including itoptical ~~impossible~~video ~~for~~and ~~Tsunami~~military ~~to achieve~~products), ~~the~~Trompeter ~~targets~~(RF ~~required~~interconnects) ~~to receive any earnout payments.~~and ~~The~~Semflex ~~complaint~~(microwave ~~also~~cable ~~alleged fraud~~ and ~~violations~~cable ~~of federal securities laws in connection with the acquisition of Tsunami~~assemblies). ~~Plaintiffs~~ ~~sought~~Stratos ~~$38 million~~maintains inthree ~~damages~~distinct ~~or the rescission~~sales oforganizations ~~the~~to ~~acquisition~~focus ~~agreement.~~selling ~~Stratos~~efforts ~~filed~~on aspecific ~~counterclaim against~~customer ~~Ms. Lego~~types and ~~several~~to ~~other~~capture ~~shareholders~~the ~~and officers~~strong ~~of Tsunami which alleged fraud, breach of contract and~~brand ~~violations~~identity ofeach ~~federal~~has ~~securities~~developed ~~laws.~~in ~~The~~its ~~counterclaim~~respective ~~sought compensatory and punitive damages~~marketplace.

InWe ~~April~~believe ~~2004,~~our ~~the~~ability ~~Court~~to ~~entered~~deliver anvalue-added ~~order~~customer inservice ~~favor~~and oftechnical ~~Stratos~~support tois essential ~~dismiss~~to ~~with~~our ~~prejudice~~business. 11Our ofsales 13force ~~counts~~and ofdesign ~~the~~engineers ~~plaintiffs’~~work closely with our customers through the ~~complaint~~design and manufacturing process. ~~The~~We ~~damages~~also ~~sought~~provide ~~for~~extensive ~~the~~technical ~~plaintiffs’~~support ~~two remaining~~to ~~claims~~our ~~(breach~~customers after ofthe ~~contract~~design and ~~rescission)~~qualification ~~remained unchanged~~process atis ~~$38 million~~complete. AWe ~~trial~~intend ofto ~~this~~strengthen ~~action~~our ~~was held~~current incustomer ~~December~~relationships ~~2004~~by incontinuing ~~the~~to ~~United~~deliver ~~States~~a ~~District~~high ~~Court,~~level ~~Northern~~of value-added service and technical ~~District~~support ofand ~~California.~~leveraging Onour ~~February 16,~~reputation ~~2005,~~for ~~the~~high ~~Court~~quality products and service to establish ~~entered~~relationships ~~judgment~~with innew customers.

Stratos’Table favor on both of plaintiffs’ two remaining claims. The Court entered judgment against Stratos on its counterclaim against the plaintiffs. The plaintiffs filed a timely notice of appeal of the trial court’s judgment in Stratos’ favor on plaintiffs’ claims for breach of contract and rescission, and of the trial court’s earlier dismissal of plaintiffs’ other claims including federal securities fraud claims. Stratos did not appeal the trial court’s judgment in plaintiffs’ favor on Stratos’ counterclaims. Plaintiffs’ opening brief on the appeal is due August 19, 2005. Stratos’ response brief will be due on September 19, 2005. Contents

MARKETING In August 2002, James Campbell, the former CEO of Tsunami, filed a lawsuit against Stratos alleging wrongful termination in breach of his employment contract, fraud and age discrimination. Campbell’s claims were subsequently amended to include intentional infliction of emotional distress. Campbell seeks unspecified damages, punitive damages and attorney’s fees. During the first quarter of fiscal year 2006 we settled this litigation.

InThe ~~August~~marketing ~~2004,~~group ~~Federal~~is ~~Insurance~~responsible ~~Company,~~for ~~issuer~~developing ofmarketing ~~the Directors’~~strategies and ~~Officers’~~programs ~~Insurance~~that ~~policy for Stratos,~~support ~~filed~~the ~~suit~~sale ~~against~~of Stratos’ products and ~~others~~enhance its reputation in the ~~United~~industry. ~~States District~~These ~~Court,~~strategies ~~Northern~~and programs ~~District~~include of(i) ongoing ~~Illinois.~~interaction ~~The~~with ~~Complaint~~customers for ~~Declaratory~~ ~~Judgment~~the ~~has~~development ~~been~~of ~~filed~~new toproducts ~~deny~~and technical ~~coverage to Stratos~~support, ~~under~~ ~~our~~(ii) advertising ~~Director~~ and ~~Officer~~other ~~policy,~~promotional ~~for~~activities ~~the~~in ~~Lego~~industry ~~and~~trade ~~Campbell~~journals and ~~lawsuits.~~publications ~~The~~targeting ~~suit~~design ~~was~~engineers, ~~filed~~(iii) participation in ~~response~~major totrade ~~Stratos’~~show events and ~~submission~~conferences ofin athe ~~claim~~communications ~~for~~network ~~insurance~~industry ~~coverage~~to ~~for~~promote ~~the~~Stratos’ ~~Lego~~broad lines of active and ~~Campbell~~passive ~~lawsuits~~optical and ~~the~~RF ~~tender~~and ofmicrowave ~~defense~~components ~~costs~~and tosubsystems, ~~the~~(iv) public ~~insurer~~relations covering new ~~for~~products ~~reimbursement.~~and ~~Federal~~company ~~does~~capabilities, ~~not~~(v) market ~~seek~~research ~~damages~~to ~~from~~guide ~~Stratos~~R&D investment, (vi) corporate ~~and~~branding ~~Stratos~~to ~~disputes~~create ~~denial~~a ofconsistent and accurate message across the ~~coverage.~~Stratos ~~The~~Optical ~~Court~~Technologies, ~~determined~~Trompeter inand ~~June~~Semflex ~~2005~~brands, ~~that~~and ~~Federal~~(vii) interaction iswith ~~not~~its ~~responsible~~customers ~~for~~and ~~the~~peers in industry ~~claim~~associations ~~for~~to ~~insurance~~promote ~~coverage~~and ~~nor~~further ~~the~~enhance ~~reimbursement~~related oftechnologies, ~~the defense~~and ~~costs.~~to Wevalidate ~~have~~Stratos’ ~~not~~emerging role ~~yet~~as ~~determined~~the iftechnology weinnovator ~~will~~for ~~appeal~~solutions ~~this ruling~~in our served markets.

COMPETITION In March 2003, Alcatel USA filed suit against Stratos and others, seeking unspecified damages and alleging breach of contract, breach of warranty, negligent misrepresentation, fraud and conspiracy in connection with Alcatel’s purchase of certain goods from the defendants over a period spanning 2000 and 2001. We asserted certain counterclaims against Alcatel relating to the same type of goods at issue in Alcatel’s complaint. In April 2004, Alcatel and Stratos executed a written settlement agreement resolving all disputes. Pursuant to the terms of the written settlement agreement, the parties executed mutual releases and the case was dismissed with prejudice on August 13, 2004.

~~During~~The ~~the~~market ~~first~~for ~~quarter of fiscal 2006~~optical, ~~Stratos~~RF ~~settled~~and ~~two patent~~microwave ~~infringement~~subsystems ~~suits~~and ~~with~~components ~~Picolight,~~is ~~Inc.~~highly ~~The~~competitive ~~cases were~~and ~~pending~~subject into ~~the~~rapidly Uchanging technology.~~S. District~~ ~~Court~~We ~~for~~believe the ~~District~~primary ~~of Delaware~~competitive ~~and~~factors ~~were~~impacting ~~dismissed~~our business ~~with prejudice on June 10, 2005.~~include:

~~During~~• ~~the~~Data ~~second~~rate, ~~quarter~~port ofdensity, ~~fiscal~~reliability ~~year~~and ~~2005~~other weperformance ~~settled~~features, ~~a patent~~• ~~infringement~~Ability ~~case~~to ~~and~~rapidly asscale aproduction ~~result~~for high volumes, • Timeliness of ~~this~~new ~~settlement~~product ~~we received~~introductions, ~~approximately~~• ~~$1.4 million~~Length of product design cycle, ~~which~~• ~~was~~Compatibility ~~recorded~~with ~~as litigation~~emerging ~~settlements~~industry instandards, ~~the~~• ~~consolidated~~Scope ~~statement~~and responsiveness of ~~operations~~ service and technical support, • Price and performance characteristics, and • Established reputation with key customers.

~~During~~Within the ~~first~~optoelectronics ~~quarter~~market, ofwe ~~fiscal~~compete ~~2006,~~primarily ~~Stratos~~with ~~received~~Agilent aTechnologies, ~~lump~~Inc., Finisar ~~sum~~Corporation, ofJDS $5Uniphase Corporation and Optical Communications Products, Inc.~~5 million~~ ~~from~~Within the ~~settlement~~fiber optic ofpassives ~~litigation~~market, inwe compete primarily with Amphenol Corporation, Molex, Inc. and Tyco ~~fiscal~~International, ~~2003~~Ltd. ~~The~~and ~~present~~numerous ~~value~~other ofsmaller ~~this~~companies. ~~amount~~Within ~~was~~the ~~recorded~~RF asmarket we compete with ADC ~~litigation~~Telecommunications, ~~settlements~~Inc, inAmphenol, ~~the~~ITT ~~fiscal~~Cannon ~~2003~~(a ~~Consolidated~~subsidiary ~~Statement~~ of ~~Operations~~ITT Industries), Kings Electronics Co., Inc, Radiall, S.A. and numerous other companies globally. In ~~addition~~the microwave products business, we ~~Stratos~~compete ~~paid~~with $1Times Microwave, Inc.~~8 million~~, inWL Gore Associates, Inc., Huber+Suhner and a large number of ~~the~~smaller ~~first~~companies. ~~quarter~~Many of ~~fiscal~~our ~~2006~~current inand ~~settlement~~potential ofcompetitors ~~two~~have ~~cases.~~significantly greater ~~This~~financial, ~~amount~~technical, ~~was~~marketing, ~~recorded~~purchasing, asdistribution ~~litigation~~and ~~settlements~~other inresources ~~the~~than ~~fiscal~~we do, and as a ~~2005~~result, ~~Consolidated~~may ~~Statement~~be ofable ~~Operations.~~to:

~~Item~~• 4Respond more quickly to new or emerging technologies or standards and to changes in customer requirements. ~~Submission~~• ofDevote ~~Matters~~greater resources to athe ~~Vote~~development, promotion and sale of ~~Security~~their ~~Holders~~products, and • Deliver competitive products at a lower price.

~~Our~~In ~~Annual Meeting of Shareholders was held on March 8~~addition, ~~2005.~~ Atsome ~~this meeting, Stratos solicited the vote~~ of ~~shareholders~~ onour ~~the~~existing ~~six proposals set forth below~~ and ~~received for~~potential ~~each~~customers ~~proposal~~are ~~the~~also ~~votes~~current ~~indicated. Proposals 1, 2~~ and 6potential ~~were~~competitors. ~~approved~~These atcompanies ~~this~~may ~~meeting~~attempt ~~and proposals 3, 4 and 5 were adjourned~~ to aintegrate ~~meeting~~their ~~held~~operations onby ~~March 22,~~producing ~~2005.~~their ~~At the~~own ~~reconvened~~subsystems ~~meeting~~or oncomponents ~~March 22,~~or ~~2005,~~by ~~proposals~~acquiring 3one ~~and~~of ~~4 were~~our ~~approved and proposal 5 was adjourned to a meeting held on April 5~~competitors, ~~2005.~~thereby Ateliminating the ~~reconvened~~need ~~meeting, on April 5,~~to ~~2005,~~purchase ~~proposal 5 was approved.~~our

EachTable proposalof was adopted by the margin indicated: Contents

products. Furthermore, larger companies in other related industries may develop or acquire ~~PROPOSAL 1:~~technologies ~~ELECTION~~and OFapply ~~DIRECTORS:~~their significant resources, including their distribution channels and brand name recognition, to capture significant market share.

Some of our critical components used in production of certain of our products are purchased from a ~~The~~key ~~following~~supplier, ~~Directors~~which ~~were~~has ~~elected~~been acquired by a competitor. If this supplier increases prices, inreduces quantities ~~each~~available ~~case~~to us or ceases to supply us, our business and results of operations may be significantly harmed. We may not be able to ~~serve~~compete successfully against either current or future ~~until~~competitors. ~~the~~Increased ~~annual~~competition ~~meeting~~could ~~following~~result ~~Stratos’~~in ~~April 30~~significant price erosion, reduced revenue, ~~2005 year-end~~lower margins or loss of market share, any of which would significantly harm our business.

	Votes For		Authority withheld
Reginald W. Barrett		13,010,413		407,106
Phillip A. Harris		13,072,747		334,772
David Y. Howe		13,011,961		405,558
Charles Daniel Nelsen		13,029,372		388,147
Edward J. O’Connell		12,999,784		417,735
Newell V. Starks		13,056,441		361,078

REGULATORY MATTERS

Our properties and business operations are subject to a wide variety of federal, state, local, and ~~PROPOSAL 2:~~foreign TOenvironmental, ~~APPROVE~~health ANand ~~AMENDMENT~~safety TOlaws ~~OUR~~and ~~RESTATED~~other legal requirements, including those ~~CERTIFICATE~~relating OFto ~~INCORPORATION~~the TOstorage, ~~PROVIDE~~use, ~~THAT~~discharge ~~ALL~~and ~~DIRECTORS~~disposal BEof toxic, volatile or otherwise hazardous ~~ELECTED~~substances ~~ANNUALLY~~used TOin ~~ONE-YEAR~~our ~~TERMS:~~manufacturing processes. If we fail to obtain required permits or otherwise fail to operate within these or future legal requirements, we may be required to pay substantial penalties, suspend our operations or make costly changes to our manufacturing processes or facilities. Although we believe that we are in compliance and have complied with all applicable legal requirements, we may be required to incur additional costs to comply with current or future legal requirements.

For: 13,129,743		Against: 257,249
Abstain: 30,527		Broker non-votes: 0

RoHS (Reduction of Hazardous Substances), lead-free legislation, is being enforced throughout the European Community (EU) commencing July 1, 2006. Full compliance with RoHS (including the use of lead free soldering agents) will be costly and will involve significant engineering investments going forward in product redesign. Stratos is already well into its compliance effort and has achieved a significant set of milestones. Relative to other companies faced with this same regulatory issue, we believe we are matching customer expectations and, in some cases, are well ahead of our competition on this matter.

EMPLOYEES ~~PROPOSAL 3: TO APPROVE AN AMENDMENT TO OUR RESTATED CERTIFICATE OF INCORPORATION TO PROVIDE THAT STOCKHOLDERS BE PERMITTED TO TAKE ACTION BY WRITTEN CONSENT:~~

For: 11,471,361		Against: 72,603
Abstain: 96,965		Broker non-votes: 1,806,700

As of April 30, 2007, we had approximately 524 employees including 14 senior level corporate executives and administrative employees.

~~PROPOSAL 4:~~EXECUTIVE TOOFFICERS ~~APPROVE AN AMENDMENT TO OUR RESTATED CERTIFICATE~~ OF ~~INCORPORATION~~THE ~~TO PROVIDE THAT STOCKHOLDERS BE~~REGISTRANT ~~PERMITTED TO CALL A SPECIAL MEETING OF STOCKHOLDERS:~~

For: 11,496,449		Against: 50,096
Abstain: 94,384		Broker non-votes: 1,806,700

The following table sets forth information concerning executive officers of Stratos as of July 11, 2007:

Phillip A. Harris (60): President and Chief Executive Officer of Stratos since December 2004 and a ~~PROPOSAL~~director of Stratos since November 5:2003. TOPrior ~~APPROVE~~to ANbeing ~~AMENDMENT~~elected TOas ~~OUR~~President ~~RESTATED~~and Chief Executive ~~CERTIFICATE~~Officer, OFMr. Harris ~~INCORPORATION~~served TOas ~~PROVIDE~~Chairman ~~THAT~~of ~~THE~~the ~~PERCENTAGE~~corporate OFgovernance and nominating committee and as ~~STOCKHOLDERS~~a ~~REQUIRED~~member TOof ~~AMEND~~the ~~CERTAIN~~compensation ~~PROVISIONS~~committee. OFMr. Harris ~~OUR~~was a director of Sterling Holding Company from ~~RESTATED~~2002 ~~CERTIFICATE~~through OFthe ~~INCORPORATION~~closing ~~AND~~of ~~OUR~~Stratos’ ~~BYLAWS~~acquisition BEof ~~REDUCED~~Sterling in November 2003. Mr. Harris was ~~FROM~~Executive ~~80%~~Vice TOPresident Aof ~~MAJORITY:~~Sprint North Supply (a telecommunications equipment distributor) from 1994 until his retirement in 2001. From 1978 until 1994, Mr. Harris held a number of senior operating positions with Sprint Corporation (a telecommunications provider).

For: 11,430,115		Against: 121,880
Abstain: 99,516		Broker non-votes: 2,010,190

PROPOSAL 6:Table TOof APPROVE AN AMENDMENT TO OUR RESTATED CERTIFICATE OF INCORPORATION TO PROVIDE THAT CERTAIN OBSOLETE PROVISIONS BE DELETED: Contents

For: 13,279,393		Against: 48,365
Abstain: 89,771		Broker non-votes: 60

Barry Hollingsworth (42): Chief Financial Officer of Stratos since February 2005. From 2004 until his appointment as CFO, Mr. Hollingsworth was Vice President of Finance & Administration for Stratos. Prior to joining Stratos, he was Director of Finance at Heidrick & Struggles International from 2000 through 2003, and was employed by Tribune Company from 1994 through 2000, where he served in various capacities including internal audit and investor relations.

16Richard C.E. Durrant (46): Executive Vice President of Stratos since November 2004, Executive Vice President Passive Subsystems 2002 through November 2004, and the Managing Director of our UK subsidiary (Stratos Ltd.) since it was acquired by our predecessors in December 1998. Mr. Durrant previously served as the Managing Director of Methode Fiber Optic Europe Ltd. from 1997 through April 2000. From 1989 through 1997 Mr. Durrant served as Sales Director of Mikon Ltd., a Methode subsidiary.

Joe D. Norwood (65): Executive Vice President of Stratos since 2003. Mr. Norwood has served as ~~PART~~President and Chief Executive Officer of Sterling since 2001. During 2001, he served as Executive Vice President and Chief Operating Officer of Sterling; from 1997 to 2001, he was President of Sterling’s Trompeter Electronics subsidiary. He served as Vice President of Amphenol Corporation in charge of their RF/Microwave and Fiber Optic Products divisions from 1986 until 1992 and again from 1995 to 1996 as a Vice President of their Time Fiber Communications subsidiary. From 1992 to 1994 he served as a Vice President of ITT Cannon in charge of Military Aerospace and other North American operations. Mr. IINorwood holds a BSEE degree from Arizona State University.

~~Item~~Dale 5Reed (58): Senior Vice President Sales and Marketing since 2006. ~~Market~~Mr. Reed ~~for~~was ~~Registrant~~head of sales and marketing at Trompeter from 1996 to 2006. Prior to joining Trompeter in 1996, Mr. Reed spent 6 years as general manager of a microwave frequency circuit board design/fabrication shop, leading that business’s ~~Common~~transition ~~Equity~~from a narrow defense segment to a broader industrial customer base. Mr. Reed graduated with an Economics degree from Trinity College Hartford in 1970 and added post-graduate work from a variety of institutions over the years including Northwestern, ~~Related~~Kent State, ~~Stockholder~~Bryant, ~~Matters~~Stanford, and ~~Issuer~~Georgia ~~Purchases~~State (MBA in Marketing in 1979). An active industry influence, he has authored over 40 published articles, is a senior member of ~~Equity~~IEEE ~~Securities~~and is President and is on the Board of Directors of IICIT (International Institute of Connectors and Interconnect Technology).

~~Our~~GEOGRAPHIC ~~common stock is traded on the NASDAQ National Market under~~AREAS ~~the symbol “STLW.” The following table sets forth the range of high and low closing sales prices of our common stock for the periods indicated:~~

	Market price per share
	2005				2004
	High		Low		High		Low
First quarter	$	5.73	$	4.14	$	6.76	$	4.19
Second quarter		4.97		3.89		6.41		4.97
Third quarter		5.00		3.80		8.29		6.08
Fourth quarter		4.64		3.56		7.42		4.95

Information concerning our operations in different geographic regions is set forth in Note 19 to our financial statements included in Item 8 of this annual report on Form 10-K.

~~The~~AVAILABLE ~~closing price of our common stock on July 21, 2005 was~~INFORMATION ~~$5.26. The approximate number of stockholders of record on July 21, 2005 was 492, excluding shares held in street name.~~

We ~~have~~make ~~never~~available ~~declared~~free orof ~~paid~~charge ~~dividends~~through onour website, www.stratosinternational.com, our ~~common~~annual reports ~~stock~~on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all ~~currently~~amendments doto ~~not~~those ~~intend~~reports toas ~~pay~~soon ~~dividends~~as inreasonably ~~the~~practicable ~~foreseeable~~after such material is electronically ~~future~~filed sowith ~~that~~the weSecurities and Exchange Commission. These reports may ~~reinvest~~also ~~our~~be ~~earnings~~obtained infree ~~the~~of charge ~~development~~by contacting Investor Relations, Stratos International, Inc, 7444 West Wilson Avenue, ofChicago, ~~our~~Illinois ~~business.~~60706; ~~Any~~telephone ~~payment~~708-867-9600. ofOur ~~dividends~~Internet inwebsite and the ~~future~~information contained ~~will~~therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K. You may read and copy any materials we file with the SEC at the ~~discretion~~SEC’s ofPublic Reference ~~our~~Room ~~Board~~at 450 Fifth Street, N.W., Washington, DC 20549. You may obtain information on the operation of ~~Directors~~the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at

17 ~~Equity Compensation Plan Information~~

TheTable following table provides information about shares of our common stock that may be issued upon exercise of stock options under all of our existing equity compensation plans as of April 30, 2005. Contents

Number of securities

remaining available for

Number of securities

future issuance under

to be issued

Weighted-average

equity compensation

upon exercise of

exercise price of

plans (excluding

outstanding options,

securities reflected

warrants and rights

in column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by security holders

348,308

16.18

517,889

Equity compensation plans not approved by security holders

20,395

2.63

—

Total

368,703

15.43

517,889

www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Stratos’ only equity compensation plan not approved by security holders is the Stratos Lightwave, Inc. 2002 Stock Plan for Acquired Companies (the “2002 Plan”). Following shareholder approval of the Stratos Lightwave, Inc. 2003 Stock Plan (the “2003 Plan”) on NovemberItem ~~6, 2003 no additional awards may be granted under the 2000 and 2002 Plans~~1A. ~~The~~ ~~approval~~Risk ~~of the 2003 Plan, however, has not affected and~~Factors ~~will not affect any awards granted under the 2000 and 2002 Plans prior to November 6, 2003. See Note 14 to our financial statements included in Item 8 of this Annual Report on Form 10-K.~~

~~Item~~BUSINESS 6.RISK ~~Selected Financial Data.~~FACTORS:

~~You~~In ~~should read~~ the ~~following~~past, ~~selected~~we ~~consolidated~~have ~~financial data~~incurred insignificant ~~conjunction~~net ~~with~~losses, ~~“Management’s~~primarily ~~Discussion~~due ~~and Analysis~~to ofthe ~~Financial~~economic ~~Condition~~climate ~~and~~in ~~Results of Operations” and our consolidated financial statements and~~ the ~~related notes~~ ~~included~~communications ~~elsewhere in this annual report on Form 10-K~~industry.

The ~~consolidated~~economic ~~statement~~climate ofin ~~operations~~the ~~data~~communications ~~set~~industry ~~forth~~has ~~below~~resulted in reduced capital spending for networking products from peak spending patterns. Spending for ~~the~~networking ~~fiscal~~products ~~years~~appears ~~ended~~to ~~April 30,~~have stabilized ~~2005~~and may see a rebound, ~~2004~~although it is not expected to return to peak levels for the foreseeable future. As a result, ~~and~~many ~~2003~~of our customers continue to express uncertainty as to their ~~and~~future requirements. We do not expect substantial growth in the ~~consolidated~~markets ~~balance~~we ~~sheet~~serve. ~~data~~Any asdecline in demand for our customers’ products or a deterioration of ~~April 30,~~general economic conditions in the ~~2005~~communications ~~and~~industry ~~2004~~would ~~are~~likely ~~derived~~result ~~from~~in reduction in demand for our products and our business, operating results and financial condition would suffer.

17Although we have implemented personnel reductions and other cost reduction programs and have recently achieved profitability, many of our costs are fixed in the near term. Consequently, we will need to contain our costs and operating expenses if we are to maintain profitability. If our efforts to contain our costs are not successful, we will continue to incur net losses.

~~are~~Our ~~qualified~~success bydepends ~~reference~~on ~~to,~~the ~~our~~long-term ~~audited~~growth ~~consolidated financial~~of ~~statements~~the ~~included~~communications ~~elsewhere~~industry inand ~~this~~its ~~annual~~use ~~report~~of onour ~~Form 10-K~~technologies. ~~The~~If ~~consolidated~~these ~~statement~~events ofdo ~~operations~~not ~~data set forth below for the fiscal year ended April 30~~occur, ~~2002 and~~our ~~2001~~net ~~and~~sales ~~the~~may ~~consolidated~~decline ~~balance sheet data as of April 30, 2003, 2002~~ and ~~2001~~our ~~are~~business ~~derived~~would ~~from consolidated~~likely ~~audited~~be ~~financial~~significantly ~~statements previously filed with the SEC~~harmed.

		Fiscal years ended April 30,
		2005			2004			2003			2002			2001
Statement of Operations Data:
Revenues		$	80,454		$	50,369		$	38,416		$	58,870		$	130,025
Cost of revenues			52,642			41,954			45,809			56,413			89,617
Gross profit (loss)			27,812			8,415			(7,393	)		2,457			40,408
Operating expenses:
	Research and development		9,518			8,800			20,138			27,587			14,729
	Sales and marketing		10,467			8,225			7,063			7,999			9,146
	General and administrative		21,907			20,799			12,706			14,949			13,367
	Impairment of goodwill		—			—			28,429			8,500			—
	Impairment of other assets		—			—			37,105			13,700			—
	Write off in-process research and development		—			—			2,070			—			—
	Restructuring and other charges		4,679			3,066			3,100			9,000			—
	Litigation settlements, net		(2,553	)		(454	)		(13,218	)		(1,139	)		(1,750	)
Total operating expenses			44,018			40,436			97,393			80,596			35,492
Income (loss) from operations			(16,206	)		(32,021	)		(104,786	)		(78,139	)		4,916
Gain on sale of business			—			1,305			—			—			—
Investment income, net			553			777			1,117			3,360			7,832
Other income (expense)			464			1,057			360			8			(62	)
Income (loss) before income taxes			(15,189	)		(28,882	)		(103,309	)		(74,771	)		12,686
Income tax (provision) credit			(118	)		1,797			—			2,581			(3,510	)
Income (loss) before cumulative effect of change in accounting principle			(15,307	)		(27,085	)		(103,309	)		(72,190	)		9,176
Cumulative effect of change in accounting principle			—			—			(16,982	)		—			—
Net income (loss)			(15,307	)		(27,085	)		(120,291	)		(72,190	)		9,176
Preferred stock dividend requirements			(350	)		(142	)		—			—			—
Net income (loss) attributable to common shareholders		$	(15,657	)	$	(27,227	)	$	(120,291	)	$	(72,190	)	$	9,176
Net income (loss) per share, basic and diluted:
	Before cumulative effect of a change in accounting principle	$	(1.13	)	$	(2.60	)	$	(14.12	)	$	(11.06	)	$	1.47
	Cumulative effect of change in accounting principle		—			—			(2.32	)		—			—
Net income (loss)			(1.13	)		(2.60	)		(16.44	)		(11.06	)		1.47
Preferred stock dividend requirements			(0.03	)		(0.01	)		—			—			—
Net income (loss) attributable to common shareholders		$	(1.16	)	$	(2.61	)	$	(16.44	)	$	(11.06	)	$	1.47

Our subsystems and components are used primarily in military, video broadcast, industrial, enterprise, MANS, WANS 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 communications 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 communications technologies. If these markets do not grow, or if the use of communications technologies in these markets does not expand, our net sales may decline and our business would likely be significantly harmed.

18The market for communications equipment is changing rapidly and is dominated by several large manufacturers. 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 and (3) our ability to compete successfully in the communications industry. The growth in the market for communications equipment products and services is dependent on a number of factors, including without limitation:

~~Research~~• The amount of capital expenditures by network providers • Regulatory and ~~development~~legal ~~expenses~~developments ~~for~~• ~~fiscal~~Changes ~~2002~~to ~~include~~capital ~~$6,300 of~~expenditure ~~expenses~~rates asby ~~the~~network ~~result~~providers of• aThe ~~change~~addition inof ~~our~~new ~~policy~~customers onto ~~research and~~the ~~development~~market ~~expenses.~~• ~~Such~~End-user ~~expenses~~demand ~~were~~for ~~classified~~integrated asInternet, ~~cost of~~data, ~~sales~~video, ~~under~~voice ~~the~~and ~~previous~~other ~~policy.~~ network services

18 ~~Net income (loss) per share for fiscal 2002 and 2001 has been restated to reflect a 1 for 10 reverse split effected on October 21, 2002.~~

	April 30,
	2005		2004		2003		2002		2001
Balance Sheet Data:
Cash and short-term investments	$	31,828	$	36,989	$	61,528	$	91,920	$	145,838
Total assets		114,980		129,050		118,175		250,102		280,448
Total liabilities		24,507		24,271		17,130		29,622		25,549
Working capital (current assets less current liabilities)		52,073		52,974		65,097		98,040		178,514
Shareholders’ equity		90,473		104,779		101,045		220,480		254,899

~~Item~~We 7cannot predict the growth rate of the market for telecommunications equipment products and services. ~~Management’s~~The ~~Discussion~~economic climate in the communications industry, changes and ~~Analysis~~consolidation in the service provider market and constraints on capital availability have had a material adverse effect on many of ~~Financial~~our ~~Condition~~service provider customers, causing some of these customers to go out of business and ~~Results~~a number of ~~Operations~~other customers to substantially reduce their expansion plans and purchases.

~~The~~We ~~following~~must ~~discussion~~develop ofnew ~~our~~products ~~financial condition~~ and ~~results~~ oftechnologies ~~operations~~as ~~should~~well beas ~~read~~enhancements into ~~conjunction~~existing ~~with~~products ~~the consolidated financial statements~~ and ~~related notes included~~ ~~elsewhere~~technologies in ~~this~~order ~~annual~~to ~~report~~remain ~~of Form 10-K~~competitive. ~~The~~If ~~following discussion~~we ~~contains~~fail ~~forward-looking~~to ~~statements~~do ~~that~~so, ~~involve risks~~our ~~and~~products ~~uncertainties.~~will ~~Our~~no ~~actual~~longer ~~results could differ~~be ~~substantially~~competitive ~~from~~and ~~those~~our ~~anticipated~~net insales ~~these~~will ~~forward-looking statements as a result of several factors including, the cautionary statements set forth under “Business Risk Factors”~~decline.

The market for our products and technologies is characterized by rapid technological change, new ~~Overview~~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 technologies 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 the value of inventories relating to existing products being written down.

~~Stratos~~The development of new, technologically advanced products is ana ~~innovative~~complex ~~international~~and ~~supplier~~uncertain process requiring high levels of ~~shielded electronic~~innovation and ~~optical~~highly ~~interconnects~~skilled engineering and development personnel, ~~plus~~as well as the ~~transceiver components~~accurate ~~that~~anticipation ~~are~~of ~~used~~technological and market trends. We may not be able to identify, ~~connect~~develop, ~~these~~manufacture, ~~two~~market ~~transmission~~or ~~line~~support new or enhanced products successfully, if at all, ~~mediums~~or on a timely basis. WeFurther, ~~design~~our ~~and~~new ~~manufacture~~products ~~interconnect~~may ~~components~~be unable to gain market acceptance and we may ~~subsystems~~not ~~used~~be inable ~~telecom~~to ~~communications,~~respond ~~datacom~~effectively to product announcements by competitors, ~~military~~technological ~~and~~changes ~~video~~or ~~markets~~emerging ~~for~~industry ~~signal~~standards. ~~networking~~Any failure to respond to technological change would significantly harm our business.

OnOur ~~November 6, 2003, Stratos acquired Sterling, a privately-held company based in Mesa, Arizona that designs and manufactures RF and microwave interconnect~~ products ~~via~~are ~~its~~incorporated ~~two operating~~into ~~units,~~larger ~~Trompeter Electronics~~systems, ~~Inc. and Semflex, Inc. At closing, Sterling became a wholly-owned subsidiary of Stratos, with Sterling stockholders receiving 6,082,000 shares of Stratos’ common stock,~~ which ~~represented~~ ~~approximately~~must ~~82%~~comply ~~of Stratos’ total shares outstanding immediately prior to the consummation of the merger. Of such amount, 608,189 shares were placed in escrow to provide indemnification to Stratos~~ with ~~respect~~various todomestic ~~certain~~and ~~matters~~international ~~provided~~government ~~for in the merger agreement (which shares were released from escrow during the third quarter of fiscal 2005)~~regulations. ~~Stratos~~ ~~common~~If ~~shares issued in this transaction were valued at $5.09 a share,~~ the ~~closing~~performance ~~price on July 2, 2003, the day the merger was announced. Stratos also issued 50,000 shares~~ of ~~Series B~~our ~~redeemable~~products ~~preferred~~adversely ~~stock~~affects ~~with a face value of~~our ~~$5.0 million~~customers’ ~~and~~ability ~~a contingent value of up~~ to ancomply ~~additional $6.25 million~~with ~~based~~these ~~on certain events~~requirements, ~~including~~we ~~the~~may ~~future performance~~lose ofthese ~~Stratos’~~customers ~~share price. The total purchase consideration was $38.8 million, consisting of common~~ and ~~preferred~~ ~~shares~~our ofnet ~~Stratos stock valued at $36.0 million~~sales ~~and~~will $2decline.~~8 million of acquisition related costs. Our~~ ~~financial statements reflect the acquisition of Sterling since November 6, 2003.~~

InOur ~~May~~products ~~2004,~~are weincorporated ~~announced~~into ~~that~~larger ~~our~~systems, ~~board~~which ofmust ~~directors~~comply ~~had decided~~with ~~to explore~~ various ~~strategic~~regulations ~~alternatives~~and standards toestablished ~~maximize shareholder~~by ~~value~~different countries, ~~including~~which amay ~~possible~~vary ~~sale~~considerably. ofIf ~~Stratos.~~the ~~After~~performance of ~~exploring~~our ~~various~~products ~~alternatives,~~adversely weaffects ~~came~~our customers’ ability to ~~the~~comply ~~conclusion~~with ~~in January~~existing ~~2005~~or ~~that~~evolving ~~the~~standards established ~~best~~by ~~alternative~~regulatory ~~was~~authorities or to ~~implement~~obtain atimely domestic or foreign regulatory approvals, ~~restructuring~~we ~~plan~~may tolose ~~put~~these ~~Stratos~~customers onand aour ~~path~~net tosales ~~profitability~~will decline.

InIf ~~November~~our ~~2004~~products ~~Stratos~~fail ~~announced~~to ~~that~~comply ~~James~~with W.evolving ~~McGinley resigned~~industry ~~effective~~standards ~~that~~or ~~date,~~alternative astechnologies ~~President~~in ~~and Chief Executive~~our ~~Officer~~markets, ~~and~~we ~~director~~may ofbe ~~Stratos.~~required Into ~~addition,~~make ~~Stratos~~significant ~~announced that~~expenditures ~~Brian~~to J.redesign ~~Jackman~~our ~~had~~products.

19Our 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

19 ~~resigned as a director of Stratos effective the same date. On March 8, 2005, the term of William T. Comfort, III expired. As a result, the Board currently has six members.~~

InTable December 2004, the Board elected Phillip A. Harris as President and Chief Executive Officer of Stratos. Contents

Weour products to meet this new industry standard. If we are arequired ~~leading~~to ~~designer~~redesign our products, ~~developer~~we may incur significant expenses and ~~manufacturer~~losses due to lack of RFcustomer ~~and microwave~~demand, unusable purchased components, ~~active~~for these products and ~~passive~~the ~~optical,~~diversion of our engineers from future product development ~~optoelectronic,~~efforts. ~~subsystems~~If ~~and~~we ~~interconnect~~are ~~products~~not ~~used~~successful in redesigning our products or developing new products to meet ~~telecom,~~new ~~enterprise~~standards or any other standard that may emerge, ~~military~~our ~~and~~net ~~video~~sales ~~markets~~will decline.

We ~~have~~are aalso ~~rich~~dependent ~~history~~on ofsales ~~optical~~to ~~and~~the ~~mechanical~~military/aerospace ~~packaging expertise and have been a pioneer in developing several optical devices using innovative form factors for telecom~~industry, ~~datacom, video,~~including ~~military, and harsh environment applications~~U. ~~We have a broad range of products and a strong intellectual property portfolio of more than 100 patents~~S. ~~We are a market leader in several niches including specialty optical products such as RJ~~ and ~~low rider transceivers, Media Interface Adapters, flex~~foreign ~~circuits,~~government ~~as well as high performance RF and microwave coax and triax interconnect products~~entities. ~~We currently serve more than 1,300~~ ~~active customers in telecom, military and video markets.~~

~~The~~Approximately ~~average~~36% ~~unit prices~~ of ~~many of~~ our ~~products~~sales ~~generally decrease~~for as the ~~products~~fiscal ~~mature~~year in2007 ~~response~~came tofrom ~~factors~~direct ~~such as increased competition, the introduction of new products~~ and ~~increased~~ ~~unit~~indirect ~~volumes.~~sales Weto ~~anticipate that average selling~~the ~~prices~~military/aerospace ofindustry, ~~many~~which ofis ~~our~~heavily ~~products~~dependent ~~will~~on ~~continue~~sales to ~~decline~~U.S. ~~in future periods, although the timing~~ and ~~degree~~foreign ofgovernment entities, ~~the~~either ~~declines cannot~~directly bethrough ~~predicted~~contracts with ~~any~~such ~~certainty.~~entities Weor ~~must~~indirectly ~~continue~~through todistributors ~~develop~~ and ~~introduce~~to ~~new~~prime ~~products~~contractors ~~that~~or ~~incorporate~~subcontractors ~~features that~~who ~~can~~are bebuilding ~~sold~~systems ator ~~higher~~subsystems ~~average~~for ~~selling~~them. ~~prices,~~A significant ondecline ain ~~timely basis~~U.S. ~~There~~and ~~can~~foreign begovernment noexpenditures ~~assurance~~could ~~that~~have wea ~~will~~material ~~be able to~~adverse ~~introduce~~effect ~~new~~on ~~products to offset the anticipated decrease in the average selling prices of~~ our ~~products~~sales.

~~License~~Our ~~fees~~sales ~~and~~cycle ~~royalties~~runs ~~represent payments received~~ from ~~licensees~~ of our ~~patented~~customers’ ~~technology,~~initial ~~which~~design isto ~~also~~production ~~used~~for bycommercial ~~us in our optical subsystems~~sale. ~~These license agreements generally~~This ~~provide~~cycle ~~for~~is ~~up-front~~long ~~payments~~ and~~/or~~ ~~future~~unpredictable ~~fixed payments or ongoing royalty payments based on a percentage of sales of the licensed products. The timing~~ and ~~amounts~~may ofcause ~~these payments is beyond~~ our ~~control.~~net ~~Accordingly,~~sales ~~the amount received in any given period is expected~~ to ~~vary~~decline ~~significantly.~~or ~~The~~our ~~duration~~operating ~~of these~~expenses ~~license agreements extend generally until the expiration of the licensed patents which range from 2005~~ to ~~2024. We will~~ consider entering into similar agreements in the future, however, we are not able to predict whether we will enter into any additional licenses in the future and, if so, the amount of any license fees or royaltiesincrease.

~~Our~~Because ~~cost~~ of ~~revenues~~the ~~consists~~length of ~~materials~~our sales cycles, ~~salaries~~our ~~and~~ability ~~related expenses~~to ~~for~~accurately ~~manufacturing~~predict ~~personnel~~the ~~and~~timing ~~manufacturing~~of ~~overhead.~~our Wesales ~~purchase~~is ~~several~~limited. ~~key~~As ~~components~~a ~~used~~result, inif sales forecasts from specific customers are not realized, we may be unable to compensate for the ~~manufacture~~sales shortfall and our net sales may decline. The period of time between our ~~products~~initial ~~from~~contact with a ~~limited~~customer ~~number~~and the receipt of ~~suppliers.~~a Wepurchase ~~have~~order may span over a ~~periodically~~year ~~experienced~~or ~~shortages~~more, and ~~delivery~~varies ~~delays~~by ~~for~~product ~~these materials~~and customer. InDuring ~~some~~this ~~circumstances~~time, wecustomers ~~maintain~~may anperform, ~~inventory of~~or ~~limited~~require ~~source~~us ~~components~~ to ~~decrease~~perform ~~the~~extensive ~~risk~~evaluation ofand ~~shortage.~~qualification ~~If we~~testing ~~overestimate~~of our ~~requirements~~products. Generally, they weconsider ~~may~~a ~~have~~wide ~~excess~~range ~~inventory~~ of ~~these~~issues ~~components.~~before ~~The~~committing ~~majority~~to ofpurchase our products, ~~are~~including ~~designed~~ability ~~and~~to ~~manufactured~~interoperate inwith ~~our~~other ~~own~~subsystems ~~facilities.~~and Incomponents, ~~the~~product ~~future~~performance weand reliability. We may ~~expand~~incur ~~the~~substantial ~~volume~~sales ofand ~~products~~marketing ~~manufactured~~expenses byand ~~third~~expend ~~parties.~~significant Inmanagement effort while our ~~order~~potential tocustomers ~~remain~~are ~~competitive~~qualifying our products. Even after incurring these costs, we ~~must~~ultimately may ~~continually~~not ~~reduce~~sell ~~our manufacturing~~any ~~costs~~or ~~through~~may ~~design~~only ~~and~~sell ~~engineering~~small ~~innovations and~~amounts ~~increases~~of inour ~~manufacturing~~products ~~efficiencies~~to these potential customers. Consequently, ~~There~~if ~~can~~new besales ~~no assurance~~do ~~that~~not weresult ~~will~~from beour ~~able~~efforts to ~~reduce~~qualify our ~~manufacturing~~products, ~~costs~~our operating expenses will increase.

~~Research~~Our ~~and~~customers ~~development~~may ~~expenses~~cease ~~consist~~purchasing ~~primarily~~our ofproducts ~~salaries and~~at ~~related~~any ~~expenses~~time ~~for design engineers, scientists~~ and ~~other technical~~may ~~personnel,~~cancel ~~depreciation~~or ofdefer ~~test~~purchases ~~and prototyping~~on ~~equipment~~short notice, ~~and~~which ~~tooling.~~may ~~Research~~cause ~~and~~our ~~development~~net ~~expenses~~sales ~~also consist of materials and operating expenses related~~ to ~~major product~~decline ~~development~~or ~~projects.~~increase Weour ~~charge~~operating ~~all research and development~~ expenses ~~to operations as incurred~~.

We ~~market~~generally ~~and~~do ~~sell~~not have long-term contracts with our ~~products~~customers. ~~domestically~~Sales ~~and~~are ~~internationally~~typically made pursuant ~~through~~to ~~our~~individual ~~direct~~purchase ~~sales~~orders, ~~force~~often with short lead times, ~~local~~that ~~resellers~~may ~~and~~be canceled or deferred by ~~manufacturers’~~customers ~~representatives~~on short notice without significant penalty. ~~Specifically,~~Our wecustomers ~~have~~base their orders for our ~~established~~products ~~relationships~~on ~~with~~the ~~resellers~~forecasted sales and ~~manufacturers’~~manufacturing schedules for their own products. Our customers ~~representatives~~have in ~~North~~the ~~America,~~past ~~Europe~~significantly accelerated, ~~South~~canceled ~~America,~~or ~~Asia~~delayed orders for our products in response to unanticipated changes in the manufacturing schedules for their own products, and ~~various~~will ~~other~~likely ~~countries~~do so again in the future.

~~Stratos~~If ~~sells~~we ~~through~~do anot ~~network~~decrease ofour ~~representatives, distributors,~~manufacturing ~~and~~costs ~~direct~~or increase sales ~~professionals~~of ~~primarily~~higher ~~across North~~margin ~~America,~~products ~~Europe,~~as ~~Asia, and Central America including~~the ~~Mexico.~~average ~~Stratos~~unit ~~sales~~price ~~teams~~of ~~are~~our ~~organized~~existing ~~into~~products ~~three~~decreases, ~~groups including~~our ~~Stratos~~gross ~~Lightwave~~margins ~~(active~~will ~~and passive optical~~decline. ~~components and~~

20The average unit prices of our products frequently decrease as the products mature in response to increased competition, the introduction of new products and increased unit volumes. Most 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

20 subsystems), Trompeter (RF interconnects) and Semflex (microwave cable and cable assemblies). Stratos maintains three overlapping sales organizations to focus selling efforts on specific customer types and to capture the strong brand identity each has developed in its respective marketplace.

TheTable marketing group is responsible for developing marketing strategies and programs that support the sale of Stratos’ products and enhance its reputation in the industry. These strategies and programs include (i) ongoing interaction with customers for the development of new products and technical support, (ii) advertising and other promotional activities in industry trade journals and publications targeting design engineers, (iii) participation in major trade show events and conferences in the communications network industry to promote the Company’s broad lines of active and passive optical and RF and microwave components and subsystems, (iv) public relations covering new products and company capabilities, (v) market research to guide R&D investment, (vi) corporate branding to create a consistent and accurate message across the Stratos Lightwave, Trompeter and Semflex brands, and (vii) interaction with its customers and peers in industry associations to promote and further enhance related technologies, and to validate Stratos’ emerging role as the technology innovator for solutions in our served markets. Contents

~~Sales~~manufacturing ~~and marketing expenses consist primarily of personnel~~ costs, ~~including~~or ~~sales~~introduce ~~commissions,~~new ~~travel~~products ~~costs,~~with ~~outside consulting~~higher ~~services,~~average ~~and~~selling ~~product~~prices ~~marketing~~will ~~and~~cause ~~promotion costs.~~our Wegross ~~expect~~margins to ~~continue~~decline, towhich ~~make~~would ~~significant~~significantly ~~expenditures~~harm ~~for~~our ~~sales and~~operating ~~marketing services~~results.

~~General~~The ~~and~~market ~~administrative expenses consist primarily of personnel costs~~ for our ~~administrative~~products ~~and~~is ~~financial~~highly ~~groups~~competitive, ~~as well~~which asmay ~~legal,~~result ~~accounting,~~in ~~information~~lost ~~technology~~sales ~~and~~or ~~other professional~~lower ~~fees. We expect to continue to make significant~~gross ~~expenditures for general and administrative services~~margins.

The market for our products is highly competitive. For optoelectronics, we compete primarily with ~~Critical~~Agilent ~~Accounting~~Technologies, ~~Policies~~Inc., Finisar Corporation, JDS Uniphase Corporation and Optical Communications Products, Inc. For fiber optics, we compete primarily with Amphenol Corporation, Molex, Inc. and Tyco International, Ltd. and numerous other smaller companies. For RF products we compete with ADC Telecommunications, Inc, Amphenol, ITT Cannon (a subsidiary of ITT Industries), Kings Electronics Co., Inc, Radiall, S.A. and numerous other companies globally. In the microwave products business, we compete with Times Microwave, Inc., WL Gore Associates, Inc., Huber+Suhner, and a large number of smaller companies.

~~Accounts~~Many ~~Receivable~~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 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 than we do. These companies may 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 ~~sell~~expect that more companies, including some of our customers, will enter the markets for our products. ~~primarily~~We may not be able to ~~various~~compete ~~OEMs~~successfully ~~and~~against ~~distributors~~either current or future competitors. ~~Sales~~Competitive topressures, ~~these~~combined ~~customers~~with ~~have~~weakening ~~varying~~demand, ~~degrees~~may ofresult ~~collection~~in ~~risk~~further price reductions, ~~associated~~lower ~~with~~margins ~~them~~and loss of market share. ~~Management~~In ~~periodically~~addition, ~~assesses collection~~some ~~risk~~of our current and ~~the~~potential ~~related~~customers are ~~allowance~~attempting ~~for~~to ~~doubtful~~integrate ~~accounts~~their operations by producing their own subsystems or components or ~~based~~acquiring onone ~~the~~or ~~aging~~more of ~~accounts~~our competitors, ~~historical~~which ~~experience~~may ~~and~~eliminate the ~~customer’s~~ ~~financial~~need ~~condition~~to purchase our products. Furthermore, Iflarger 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 ~~account~~effort ~~becomes~~to capture significant market share. While this trend has not ~~uncollectible~~historically impacted our competitive position, it ismay ~~charged~~result ~~against~~in ~~the~~future ~~allowance~~decreases ~~for~~in ~~doubtful accounts~~our net sales.

~~Inventory~~Further, ~~Reserves~~we manufacture many of our products in the United States and the United Kingdom. Our manufacturing costs are higher than the manufacturing costs of some of our competitors, particularly those located in foreign countries that benefit from lower-priced labor and government subsidies. If our current or potential future customers 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.

ItWe isdepend ~~our~~on ~~policy~~suppliers tofor ~~reserve~~several ~~100%~~key ofcomponents. ~~the~~If ~~value of inventory~~ we ~~specifically~~ ~~identify~~underestimate ~~and consider obsolete~~ or ~~excessive~~overestimate to fulfilling future sales estimates. We define obsolete inventory as inventory that will no longer be used in the manufacturing process or items that have potential quality problems. Excess inventory is defined as inventory in excess of one to two years projected usage depending upon the product. Excess inventory is determined using our ~~best estimate of future demand at the time,~~ ~~based~~requirements ~~upon~~for ~~information~~these ~~then available to us. In general~~components, our ~~policy~~ isbusiness tocould ~~scrap inventory determined to~~ be ~~obsolete~~significantly ~~shortly after the determination is made and to keep excess inventory for a reasonable amount of time before it is discarded~~harmed. 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~~We purchase several key components that are incorporated into our products from a limited number of suppliers. ~~Long-Lived~~We ~~Assets~~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

21 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.

21 Table of Contents

~~Revenue~~occurred ~~Recognition~~when demand within the industry has increased rapidly and exceeded 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.

~~Revenue~~Some ~~from~~of ~~product~~our ~~sales,~~critical ~~net~~components ofused ~~trade~~in ~~discounts,~~production ~~is recognized~~of ~~when~~certain ~~title~~of ~~passes,~~our ~~which~~products ~~generally~~are ~~occurs~~purchased ~~upon~~from a ~~shipment.~~key Wesupplier, ~~handle~~which ~~returns~~has been acquired by ~~replacing,~~one ~~repairing~~of orour ~~issuing credit~~competitors. ~~for~~If ~~defective~~this ~~products~~supplier ~~when~~increases prices, ~~returned.~~reduces Wequantities ~~establish~~available ~~a reserve~~to ~~for~~us ~~returns~~or ~~based~~ceases onto ~~any~~supply ~~known~~us, ~~and~~our ~~anticipated~~business ~~returns~~ and ~~accordingly~~results ~~adjust~~of operations ~~revenue,~~may ~~accounts~~be ~~receivable~~significantly ~~and inventories~~harmed.

~~Customer~~The ~~Returns~~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.

ItWe ismake forecasts for our ~~policy~~component requirements based on anticipated product orders. Although from time to ~~establish~~time awe ~~reserve~~enter into long-term agreements for ~~customer~~the ~~returns~~purchase of key components, our ~~based~~purchases of key components are generally made on ~~any~~a ~~known~~purchase ~~returns~~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 ~~anticipated~~the ~~returns~~lead-time ~~based~~required onto ~~past~~obtain key ~~experience~~components. If we overestimate our requirements, we may have excess inventory, which may become obsolete and ~~accordingly~~would ~~adjust~~increase ~~revenue~~our costs. If we underestimate our requirements, ~~accounts~~we ~~receivable~~may have inadequate inventory, which could interrupt our manufacturing and ~~inventories~~delay delivery of our products to our customers. Either of these occurrences would significantly harm our business.

~~Customer~~Our ~~demand~~success isdepends aon ~~changing~~our ~~dynamic.~~ability ~~Occasionally,~~to wehire ~~have~~ and ~~will~~ ~~receive~~retain ~~requests~~qualified ~~from~~personnel, ~~customers~~and toif ~~accept the return of merchandise for which they had previously accepted delivery. Although~~ we ~~have~~are nounable ~~obligation~~ to do so, ~~each~~our ~~such~~product ~~request~~development ~~is evaluated~~efforts inand ~~light of contemplated future business from that~~ customer. Werelations will ~~continue to consider these requests in the future, however, we are not able to predict the amount of any such returns~~suffer. ~~The sales of our products do not allow the~~ ~~customer the right of return.~~

Our products require sophisticated manufacturing, research and development, marketing and sales, ~~Results~~and technical support. Our success depends on our ability to attract, train and retain qualified technical personnel in each of ~~Operations~~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.

~~Fiscal~~Our ~~years~~products ~~ended April 30~~may contain defects, ~~2005~~which may cause us to incur significant costs, divert our attention from product development efforts and ~~2004~~result in a loss of customers.

		2005						2004						Change
		Dollars			%			Dollars			%			Dollars			%
Revenues:
	Net sales	$	79,931			99	%	$	49,379			98	%	$	30,552			62	%
	License fees and royalties		523			1	%		990			2	%		(467	)		(47	)%
Total revenues			80,454			100	%		50,369			100	%		30,085			60	%
Cost of revenues			52,642			65	%		41,954			83	%		10,688			25	%
Gross profit			27,812			35	%		8,415			17	%		19,397			231	%
Operating expenses
	Research and development		9,518			12	%		8,800			18	%		718			8	%
	Sales and marketing		10,467			13	%		8,225			16	%		2,242			27	%
	General and administrative		21,907			27	%		20,799			41	%		1,108			5	%
	Restructuring and other charges		4,679			6	%		3,066			6	%		1,613			53	%
	Litigation settlements, net		(2,553	)		(3	)%		(454	)		(1	)%		(2,099	)		462	%
Total operating expenses			44,018			55	%		40,436			80	%		3,582			9	%
Loss from operations			(16,206	)		(20	)%		(32,021	)		(63	)%		15,815			(49	)%
Gain on sale of business			—			—			1,305			3	%		(1,305	)		(100	)%
Investment income, net			553			1	%		777			2	%		(224	)		(29	)%
Other income			464			1	%		1,057			2	%		(593	)		(56	)%
Loss before income taxes			(15,189	)		(18	)%		(28,882	)		(56	)%		13,693			(47	)%
Income tax (provision) credit			(118	)		—			1,797			4	%		(1,915	)		(107	)%
Net loss			(15,307	)		(18	)%		(27,085	)		(52	)%		11,778			(43	)%
Preferred stock dividend requirements			(350	)		—			(142	)		0	%		(208	)		146	%
Net loss attributable to common shareholders		$	(15,657	)		(18	)%	$	(27,227	)		(52	)%	$	11,570			(42	)%

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 systems 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.

22 Net Sales: Net sales increased to $79.9 million in fiscal 2005 from $49.4 million in fiscal 2004. This $30.5 million increase represents a $14.8 million increase in the net sales into the military/governmental end

22 Table of Contents

~~market,~~The ~~$1.7 million~~length ~~increase~~of ~~into~~any ~~the~~future ~~storage/enterprise end~~manufacturing ~~market,~~delays ~~$7.3 million~~in ~~increase~~connection ~~into~~with ~~the~~a ~~telecom/metro end~~product ~~market~~defect ~~and~~will ~~$9.4 million~~depend ~~increase in sales into other~~on ~~end~~the ~~markets.~~nature ~~These~~of ~~increases~~the ~~were~~defect, ~~offset~~and inwhether ~~part~~we byor ~~a $2.7 million~~one ~~decrease~~ of ~~net~~our ~~sales~~component ~~into~~suppliers was the ~~data~~source ~~networking end~~of ~~market~~the defect. ~~Included~~Moreover, in the ~~amounts~~occurrence ~~above~~of isdefects, ~~$42.5 million and~~whether ~~$19.6 million~~caused inby ~~sales~~our ~~for~~products ~~fiscal~~or ~~years~~technology ~~2005~~or ~~and 2004,~~the ~~respectively,~~products ~~from~~of ~~product~~another ~~lines~~vendor, ~~acquired~~may result in ~~the~~significant ~~merger~~customer ~~with Sterling.~~relations ~~Excluding~~problems ~~the~~and ~~sales~~injury ~~attributable~~ to ~~the product lines~~our ~~acquired~~reputation ~~from~~and ~~Sterling,~~may ~~sales~~impair ~~increased $7.6 million in~~ the ~~year~~ ~~ended~~market ~~April 30,~~acceptance ~~2005~~of ~~over~~our ~~fiscal~~products ~~2004~~and technologies.

~~Our~~We ~~total~~are ~~sales~~subject ~~order backlog decreased~~ to ~~$11.5 million~~environmental ~~as of~~laws ~~April 30,~~and ~~2005~~other ~~from~~legal ~~$13.0 million~~requirements asthat ~~of April 30,~~have ~~2004.~~the ~~This~~potential ~~decrease reflects a decline in the~~to ~~backlog~~subject inus ~~most~~to ~~end~~substantial ~~markets~~liability ~~we service, reflecting customer push-outs~~ and ~~cancellation~~increase ofour ~~orders,~~costs ~~due in part to delays in the launch~~ of ~~new~~doing ~~product programs by our customers~~business.

Our properties and business operations are subject to a wide variety of environmental, health and ~~License~~safety ~~Fees~~laws and ~~Royalties:~~other ~~License~~legal ~~fees~~requirements, including those relating to the storage, use, discharge and ~~royalties~~disposal of toxic, volatile or otherwise hazardous substances used in our manufacturing ~~decreased~~processes. toThese $0legal requirements may impose on us the need for additional capital expenditures or other requirements.~~5 million~~ inIf ~~fiscal~~we ~~2005~~fail ~~from~~to obtain required permits or otherwise fail to operate within $1these 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.~~0 million~~ Although we believe that we are in ~~fiscal~~compliance ~~2004.~~and ~~License~~have ~~fees~~complied ~~consist~~with ofall applicable legal requirements, we may also be ~~payments~~required ~~contingent~~to onincur ~~sales~~additional ~~volume~~costs ofto ~~licensed~~comply ~~products~~with current or future legal requirements.

~~Cost~~Economic, ofpolitical ~~Revenues~~ and ~~Gross~~regulatory ~~Margins:~~risks ~~Cost~~associated ofwith ~~revenues increased~~international tooperations ~~$52.6 million~~may inlimit fiscal 2005 from $42.0 million in fiscal 2004. Gross profit as a percentage of total revenues, or gross margin, increased to 34.6% in fiscal 2005 from 16.7% in fiscal 2004. This increase results from higher profit margins in our ~~product lines acquired in the~~ ~~Sterling acquisition that were not fully reflected in the prior fiscal year because the date of acquisition was November 6, 2003. In addition, the increase in~~ sales and ~~the~~increase ~~reduction~~our ~~in fixed overhead and other manufacturing~~ costs ~~as a result~~ of ~~restructuring~~ ~~activities,~~doing ~~had~~business ~~a positive effect on the gross margin in fiscal 2005~~abroad. ~~A decrease of $0.9 million in the~~ charge for obsolete and slow moving inventory in fiscal 2005 compared to fiscal 2004 and the sale in fiscal 2005 of $0.5 million of inventory that was previously considered excess and fully reserved, were each a contributing factor to the increase in gross margin in fiscal 2005.

~~Cost~~A significant portion of our sales ~~was~~is ~~charged~~generated ~~approximately~~from $1customers located outside the United States, principally in Europe.~~0 million~~ ~~and~~Sales to customers located outside of the United States were approximately $131.~~9 million~~0% inof our net sales during fiscal ~~2005~~year 2007 and ~~2004,~~approximately to29% ~~increase~~of our net sales during fiscal year 2006. We also operate a manufacturing facility in the United Kingdom. Our international ~~reserve~~operations ~~for~~are ~~obsolete~~subject to a number of risks and ~~excess~~uncertainties, ~~inventory.~~including:

~~Research~~• ~~and~~Difficulties ~~Development:~~in ~~Research~~managing ~~and~~operations ~~development expenses~~in ~~increased~~different tolocations ~~$9.5 million~~• Changes in ~~fiscal~~foreign ~~2005~~currency ~~from $8.8 million~~rates in• ~~fiscal~~Longer ~~2004.~~accounts ~~The~~receivable ~~$0.7 million~~collection ~~increase was~~cycles ~~the~~• ~~result~~Difficulties ofassociated awith ~~$0.3 million~~enforcing ~~increase~~agreements inthrough ~~the~~foreign ~~cost~~legal ~~of research~~systems ~~and~~• ~~development~~Trade ~~facilities~~protection measures and ~~$0.7 million increase~~import inand ~~personnel~~export ~~costs~~licensing ~~dedicated~~requirements to• ~~research~~Changes ~~and development~~in ~~offset~~a ~~partially~~specific bycountry’s aor ~~$0.3 million~~region’s ~~decrease~~political ~~in material~~or ~~and~~economic ~~overhead~~conditions ~~cost~~• ~~related~~Potentially toadverse ~~major~~tax ~~product~~consequences ~~development.~~ • The ~~above~~potential ~~amounts~~difficulty ~~include~~in ~~$0.6 million~~enforcing ~~and $0.3 million~~intellectual ofproperty ~~research~~rights ~~and~~in ~~development~~some ~~expenses~~foreign incountries ~~fiscal years~~• ~~2005~~Acts ~~and~~of ~~2004,~~terrorism ~~respectively,~~directed ~~attributable~~against to the ~~product lines~~United ~~acquired~~States ~~from~~or ~~Sterling~~U. S. affiliated targets

~~Sales~~These, and ~~Marketing:~~other ~~Sales~~factors ~~and~~could ~~marketing~~adversely ~~expenses increased~~impact toour ~~$10.5 million~~international insales ~~fiscal~~or ~~2005 from $8.2 million in fiscal 2004. This~~ increase ~~was~~our ~~due~~costs ~~to an increase~~ of ~~$2.3 million in sales and marketing salaries,~~ ~~fringe~~doing ~~benefits,~~business ~~bonuses~~abroad ~~and~~or ~~commissions.~~impair ~~The~~our ~~above~~ability ~~amounts include~~to ~~$5.8 million~~expand ~~and~~into ~~$2.7 million~~international ofmarkets, ~~sales~~ and ~~marketing~~ ~~expenses for fiscal years 2005 and 2004, respectively,~~therefore ~~attributable~~could tosignificantly ~~the~~harm ~~product~~our ~~lines acquired from Sterling~~business.

~~General~~We ~~and~~may ~~Administrative:~~pursue ~~General~~additional ~~and administrative expenses increased to $21~~acquisitions.~~9 million~~ inIf ~~fiscal~~we ~~2005~~are ~~from $20.8 million~~unable into ~~fiscal~~successfully ~~2004.~~integrate ~~This~~any ~~$1.1 million~~businesses ~~increase~~or ~~was~~technologies ~~due~~that towe aacquire ~~$0.9 million increase~~ in ~~corporate management~~the ~~costs~~future ~~and~~or aare ~~$0.2 million~~unable ~~increase~~to inrealize ~~general expenses.~~the ~~The~~intended ~~above~~benefits ~~amounts include $4.7 million and $2.1 million~~ of ~~general and administration expenses in~~any ~~fiscal~~future ~~years 2005 and 2004 respectively~~acquisitions, ~~attributable~~our tobusiness ~~the product~~will ~~lines~~be ~~acquired from Sterling~~harmed.

~~Restructuring~~As ~~and~~part ~~Other~~of ~~Charges:~~our ~~During fiscal years 2005 and 2004~~strategy, we ~~recorded~~may ~~restructuring~~pursue ~~and~~opportunities to buy other ~~charges~~businesses ~~related~~or totechnologies that ~~the~~would ~~consolidation~~complement ~~and~~our ~~elimination~~current ofproducts, ~~various~~expand ~~operating activities.~~our ~~Such~~markets ~~charges~~or ~~included~~enhance ~~personnel~~our ~~severance~~technical ~~expenses~~capabilities, or ~~lease~~that ~~expenses~~may ~~for~~otherwise ~~limited-use~~offer ~~facilities,~~growth ~~and~~opportunities. ~~write-down~~Our ofexperience ~~the~~in acquiring other businesses and ~~values~~technologies ofis ~~certain~~limited. ~~assets~~Acquisitions ~~related~~could toresult ~~the~~in ~~restructuring~~a number of financial consequences, ~~operations.~~including:

23 On January 25, 2005, we announced that we had concluded the process initiated in May 2004 to explore various strategic alternatives for Stratos to maximize shareholder value and that we had adopted broad company-wide plans to enhance out strategic and operational direction. As part of the plans, we terminated 45 employees, primarily administrative personnel, to allow us to compete more effectively in our markets and to create a cost structure more in line with the current level of our business. As a result, we recorded $4.7 million

23 Table of Contents

in• ~~restructuring~~Use ~~charges~~of insignificant ~~fiscal~~amounts ~~2005,~~ of ~~which, $2.7 million~~cash ~~related~~• toThe ~~personnel~~incurrence ~~and~~of ~~severance~~debt ~~costs~~ and ~~$2.0 million~~ ~~related~~contingent toliabilities ~~the~~• ~~lease~~Potentially ~~obligation~~dilutive ~~for~~issuances aof ~~limited use~~equity ~~facility~~securities ~~that~~• weLarge ~~have~~one-time ~~been unable to sub~~write-~~lease~~offs ~~through~~• ~~the end~~Amortization ofexpenses ~~its~~related ~~lease~~to ~~term~~intangible ~~in 2007. We completed the workforce reduction during our third quarter of fiscal 2005.~~ assets

~~During~~Acquisitions ~~fiscal~~also ~~year~~involve ~~2004,~~numerous weoperational ~~terminated~~risks, ~~95 employees~~ including: both production and administrative personnel and recorded $3.1 million in restructuring charges in accordance with the restructuring plan adopted in fiscal 2003. The $3.1 million consisted of $1.1 million related to personnel and severance costs, $0.9 million related to the write-down of the values of certain assets, $0.7 million related to idle facilities and $0.4 million of other costs related to the restructuring of operations.

~~Litigation~~• ~~Settlements,~~Difficulties ~~Net:~~in ~~Stratos~~integrating ~~has~~operations, ~~recorded $2.6 million~~products, technologies and ~~$0.5 million~~personnel of• ~~net~~Unanticipated ~~litigation settlement~~costs ~~income~~or inwrite-offs ~~fiscal~~associated ~~years~~with ~~2005~~the ~~and~~acquisition ~~2004~~• ~~respectively.~~Diversion ~~In fiscal 2005, Stratos received $4.4 million in net settlements~~ of ~~several~~management’s ~~patent~~attention ~~infringement~~from ~~cases.~~other ~~This~~business ~~amount was~~concerns ~~partially~~• ~~offset~~Diversion byof ~~$1.8 million~~capital inand ~~settlements~~other ~~paid~~resources ~~by Stratos~~from ~~related~~our toexisting ~~outstanding~~businesses ~~litigation.~~• ~~The~~Potential ~~settlement~~loss ~~amount was~~of ~~disbursed~~key inemployees ~~fiscal~~of ~~2006.~~ purchased organizations

~~Gain~~If onwe ~~Sale~~are ofunable ~~Business:~~to ~~Effective~~successfully ~~May 23,~~integrate ~~2003,~~other ~~we sold~~businesses ~~the~~or ~~assets~~technologies ~~and~~that ~~business~~we ofmay ~~our~~acquire ~~wholly-owned subsidiary,~~in ~~Bandwidth~~the ~~Semiconductor~~future ~~LLC,~~or ~~located~~are inunable ~~Hudson,~~to ~~New~~realize ~~Hampshire, realizing~~the aintended ~~net~~benefits ~~gain~~ of ~~approximately~~any ~~$1.3 million~~future ~~in fiscal~~acquisitions, ~~year~~our ~~2004. The Bandwidth~~ business ~~was not a separate~~ ~~business~~will ~~segment~~be ~~or considered a discontinued operation given the nature of its operations~~harmed.

~~Investment~~Our ~~Income,~~inability ~~Net: Investment income, net of investment expense, decreased~~ to ~~$0.6 million~~protect inour ~~fiscal 2005~~intellectual ~~from~~property ~~$0.8 million~~rights inwould ~~fiscal~~significantly ~~2004.~~impair ~~Investment~~their ~~income~~value ~~consists of earnings on the short-term investment of excess cash balances~~ and ~~the~~our ~~decrease~~competitive ~~of this income in fiscal 2005 reflects the reduction of excess cash balances~~position.

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as ~~Other~~confidentiality ~~Income:~~agreements ~~Other~~and ~~income~~licensing inarrangements, ~~fiscal~~to ~~2005~~establish and ~~2004~~protect our proprietary ~~principally~~rights. ~~represents~~Although ~~unrealized~~we have numerous issued patents and pending patent applications, we cannot be sure that any patents will be issued 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, we cannot be sure 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 ~~exchange~~countries ~~gains~~do onnot protect our proprietary rights ~~intercompany~~to ~~loans~~the ~~recorded~~same inextent as the laws of the United States. Further, enforcing our ~~operations~~intellectual property rights could result in the ~~United~~expenditure of significant financial and managerial resources and the ~~Kingdom~~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. Such 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.

~~Income~~Various ~~Taxes:~~litigation ~~Through April 30~~matters, ~~2004~~in which we ~~had~~are ~~recorded a valuation allowance of $65.2 million against deferred income tax assets primarily associated with tax loss carry forwards~~defendants, ~~because~~could ~~the~~result ~~significant operating losses experienced~~ in ~~recent~~significant ~~years establishes a presumption that realization of~~monetary ~~these~~damages ~~income tax benefits does not meet a “more likely than not” standard. We continued to experience operating losses during fiscal year 2005,~~ and anexpenses ~~additional~~or ~~valuation~~restrictions ~~allowance of~~on ~~$14.2 million~~our ~~was~~ability ~~recorded, which eliminated the tax benefit attributable~~ to ~~the~~sell ~~net~~our ~~loss incurred in fiscal year 2005~~products.

We ~~have~~are ~~net~~involved ~~operating~~in ~~loss~~various ~~carry~~litigation ~~forwards~~matters ~~of approximately $172.3 million. We believe~~ that ~~our~~arise ~~acquisition~~from oftime ~~Sterling Holding~~to ~~Company~~time in ~~November~~the ~~2003~~ordinary ~~triggered~~course of ~~Internal~~business. ~~Revenue~~Our ~~Code Section 382~~Annual ~~limitations~~Reports on ~~the~~Form ~~net~~10-K ~~operating~~and ~~loss~~quarterly ~~that existed~~reports ~~prior~~on toForm ~~the~~10-Q ~~acquisition,~~describe ~~which was approximately~~certain ~~$132~~litigation matters.~~5 million.~~ OfSee ~~that~~discussion ~~amount~~under Part I, weItem 3: ~~believe~~“Legal ~~the~~Proceedings” ~~available utilization~~below ofand the footnotes ~~net operating loss is limited~~ to ~~approximately~~ ~~$2 million~~our onfinancial ~~an annual basis~~statements. ~~Our net~~ ~~operating loss carry forwards will expire between 2022 and 2025.~~

24In 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

		Fiscal years ended April 30,
		2004						2003						Change
		Dollars			%			Dollars			%			Dollars			%
Revenues:
	Net sales	$	49,379			98	%	$	37,236			97	%	$	12,143			33	%
	License fees and royalties		990			2	%		1,180			3	%		(190	)		(16	)%
Total revenues			50,369			100	%		38,416			100	%		11,953			31	%
Cost of revenues			41,954			83	%		45,809			119	%		(3,855	)		(8	)%
Gross profit (loss)			8,415			17	%		(7,393	)		(19	)%		15,808			(214	)%
Operating expenses
	Research and development		8,800			18	%		20,138			53	%		(11,338	)		(56	)%
	Sales and marketing		8,225			16	%		7,063			18	%		1,162			16	%
	General and administrative		20,799			41	%		12,706			33	%		8,093			64	%
	Impairment of goodwill		—			—			28,429			74	%		(28,429	)		(100	)%
	Write off of in-process research and development		—			—			2,070			5	%		(2,070	)		(100	)%
	Impairment of other assets		—			—			37,105			97	%		(37,105	)		(100	)%
	Restructuring and other charges		3,066			6	%		3,100			8	%		(34	)		(1	)%
	Litigation settlements, net		(454	)		(1	)%		(13,218	)		(34	)%		12,764			(97	)%
Total operating expenses			40,436			80	%		97,393			254	%		(56,957	)		(58	)%
Loss from operations			(32,021	)		(63	)%		(104,786	)		(273	)%		72,765			(69	)%
Gain on sale of business			1,305			3	%		—			—			1,305
Investment income, net			777			2	%		1,117			3	%		(340	)		(30	)%
Other income			1,057			2	%		360			1	%		697			194	%
Loss before income taxes			(28,882	)		(56	)%		(103,309	)		(269	)%		74,427			(72	)%
Income tax credit			1,797			4	%		—			0	%		1,797			—
Loss before cumulative effect of change in accounting principle			(27,085	)		(52	)%		(103,309	)		(269	)%		76,224			(74	)%
Cumulative effect of change in accounting principle			—			—			(16,982	)		—			16,982			(100	)%
Net loss			(27,085	)		(52	)%		(120,291	)		(269	)%		93,206			(77	)%
Preferred stock dividend requirements			(142	)		—			—			—			(142	)		—
Net loss attributable to common shareholders		$	(27,227	)		(52	)%	$	(120,291	)		(269	)%	$	93,064			(77	)%

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

intellectual property rights to technologies used in our business. In addition, our rights to use ~~Excluding~~our ~~the~~name ~~sales~~or ~~attributable~~other trademarks are subject to ~~the~~challenge ~~product~~by ~~lines~~others. ~~acquired from~~Any ~~Sterling~~claims, ~~sales~~with ~~decreased~~or ~~$7.4 million~~without merit, could be time-consuming, result in costly litigation, and divert the ~~year ended~~efforts ~~April 30,~~of ~~2004~~our technical ~~over~~and ~~fiscal~~management ~~2003~~personnel. ~~The~~If ~~decrease~~we are unsuccessful in ~~sales~~ ~~was~~defending ~~primarily~~ourselves ~~due~~against tosuch claims, ~~lower~~we ~~customer~~could ~~demand~~be ~~due~~subject to ~~the current~~significant ~~economic~~monetary ~~climate~~damages and ~~reduced~~may ~~capital~~be ~~spending~~required ~~for optical~~to ~~networking~~do ~~equipment.~~one ~~Sales~~or ~~were~~more of ~~also~~the ~~negatively impacted~~following: by(1) stop ~~declines~~using inthe ~~average~~challenged ~~unit~~technology ~~prices~~or ~~for~~selling our products that use or ~~resulting~~incorporate ~~from~~such ~~pricing~~technology, ~~pressure~~(2) attempt ~~and~~to ~~changes~~obtain ina ~~product~~license ~~mix.~~to ~~Our~~sell or use the relevant ~~total~~technology, ~~sales~~which ~~order~~license ~~backlog~~may ~~increased~~not be available on reasonable terms or at all, (3) attempt to license ~~$13.0~~a substitute technology on reasonable terms or (4) ~~million~~redesign asthe ofapplicable products to ~~April 30,~~avoid infringement.

25In the event a claim against us were 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.

~~2004~~RISKS ~~from~~RELATING ~~$5.0 million~~TO asTHE ofSECURITIES ~~April 30,~~MARKETS ~~2003.~~AND ~~This increase~~OWNERSHIP ~~reflected~~OF aOUR ~~significant~~COMMON ~~increase in the backlog in our~~STOCK: ~~military/governmental end market and $4.1 million from the merger with Sterling.~~

~~License~~The ~~Fees~~market ~~and~~prices ~~Royalties.~~for ~~License~~securities ~~fees~~of ~~and~~technology ~~royalties decreased~~related tocompanies ~~$1.0 million~~have inbeen ~~fiscal~~volatile ~~2004 from $1.2 million~~ in ~~fiscal~~recent ~~2003. License fees consist of both~~years ~~fixed schedule payments~~ and ~~contingent~~our ~~payments~~stock ~~based~~price oncould ~~sales volumes~~fluctuate ~~of licensed products~~significantly.

~~Cost~~Our ofcommon ~~Revenues~~stock ~~and~~has ~~Gross~~been ~~Margins:~~publicly ~~Cost~~traded ofonly ~~revenues decreased~~since ~~to $42.0~~June ~~million~~27, ~~in fiscal 2004 from $45~~2000.~~8 million~~ inThe ~~fiscal~~market ~~2003.~~price ~~Gross profit as a percentage~~ of ~~total revenues, or gross margin, increased to 16.7% in fiscal 2004 from negative 19.2% in fiscal 2003. This increase results from higher profit margins in~~ our ~~product lines acquired in the~~common ~~Sterling~~stock ~~acquisition~~has ~~that~~been ~~were~~subject ~~not~~to ~~reflected~~significant influctuations ~~the~~since ~~prior fiscal year because~~ the date of ~~acquisition~~our ~~was~~initial ~~November 6,~~public ~~2003~~offering. InThese ~~addition,~~fluctuations ~~the~~could ~~increase in sales and the reduction in fixed overhead and other manufacturing costs as a result of restructuring activities had a positive effect on the gross margin in fiscal 2004~~continue. AFactors ~~decrease of $4.9 million in the charge for obsolete and slow moving inventory in fiscal 2004 compared to fiscal 2003 and the sale in fiscal 2004 of $0.7 million of inventory~~ that ~~was~~could ~~previously~~affect ~~considered excess~~our ~~and~~stock ~~fully~~price ~~reserved, were each a contributing factor to~~include: ~~the increase in gross margin in fiscal 2004.~~

~~Research~~• ~~and~~Strategic ~~Development:~~moves ~~Research~~by ~~and~~us ~~development expenses~~or ~~decreased~~our tocompetitors, ~~$8.8 million~~such inas ~~fiscal~~acquisitions ~~2004~~(including ~~from $20.1 million~~our inannounced ~~fiscal~~merger ~~2003.~~with ~~The~~Emerson ~~$11~~Electric Co.~~3 million decrease~~) ~~was~~• ~~due~~Economic toand astock ~~reduction~~market ofconditions ~~$6.7 million~~generally and specifically as they may impact participants in ~~costs~~the ~~of research~~communications industry • Earnings and ~~development~~other ~~facilities~~announcements by, ~~$3.9 million~~and ~~decrease~~ changes in ~~personnel~~market ~~costs~~evaluations ~~dedicated~~of, toparticipants ~~research~~in ~~and~~the ~~development~~communications ~~and $0.7 million~~industry ~~decrease~~• Changes in ~~material~~financial estimates and ~~overhead~~recommendations ~~cost~~by ~~related to~~securities ~~major~~analysts ~~product~~following ~~development.~~our ~~The~~stock ~~above~~• ~~amounts~~Announcements ~~include $0.3 million~~or inimplementation ~~research~~by ~~and~~us ~~development~~or ~~expenses attributable~~our tocompetitors ~~the~~of ~~product~~technical ~~lines~~innovations ~~acquired~~or ~~from~~new ~~Sterling.~~ products, and

~~Sales~~In ~~and~~addition, ~~Marketing:~~the ~~Sales~~securities ~~and~~of ~~marketing~~many ~~expenses increased~~companies tohave ~~$8.2 million~~experienced inextreme ~~fiscal~~price ~~2004~~and ~~from~~volume ~~$7.1 million~~fluctuations in ~~fiscal~~recent ~~2003.~~years, ~~This~~often ~~increase~~unrelated ~~was due~~ to ~~an increase~~the ofcompanies’ $1operating performance.~~0 million~~ Specifically, inmarket ~~sales~~prices ~~and~~for ~~marketing~~securities ~~salaries, fringe~~of ~~benefits,~~technology ~~bonuses~~related ~~and~~companies ~~commissions,~~have ~~and~~frequently ~~$0.1 million~~reached inelevated ~~field~~levels, ~~sales~~often ~~operating~~following ~~costs~~their ~~supporting~~initial ~~our~~public ~~sales volume~~offerings. ~~The above~~These ~~amounts~~levels ~~include~~may ~~$2.7 million~~not ofbe sustainable ~~sales~~ and ~~marketing expenses~~may ~~attributable~~not tobear ~~the~~any ~~product~~relationship ~~lines~~to ~~acquired~~these ~~from Sterling~~companies’ operating performances.

~~General~~Provisions ~~and~~in ~~Administrative:~~our ~~General~~charter documents and ~~administrative expenses~~Delaware ~~increased~~law toand ~~$20.8 million~~our inshareholder ~~fiscal~~rights ~~2004~~plan ~~from $12.7 million~~may indelay ~~fiscal 2003. The $8.1 million~~or ~~increase~~prevent ~~was~~an ~~due~~acquisition ~~primarily to $2.1 million for the settlement~~ of ~~litigation~~our company, awhich ~~$4.6 million~~could ~~increase~~decrease ~~in general~~the ~~expenses~~value ~~and $2.1 million~~ of ~~general and administrative expenses attributable to~~ the ~~product~~shares ~~lines acquired~~of ~~from~~our ~~Sterling. These increases were partially offset by~~common ~~a decrease of $0~~stock.~~7 million in corporate management costs.~~

~~Other~~Our ~~Operating~~restated ~~Expenses:~~certificate ~~Other~~of ~~operating~~incorporation ~~expense~~and ~~in fiscal~~bylaws ~~2003~~and ~~includes~~Delaware ~~expenses~~law ~~previously~~contain ~~classified~~provisions inthat ~~other~~could ~~expense~~make ~~categories~~it inmore difficult for a third party to acquire us without the ~~Statement~~consent of ~~Operations~~our inBoard ~~prior~~of ~~years~~Directors. These ~~expenses~~provisions include the ~~following:~~authority of our Board of Directors has the right to issue preferred stock without shareholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes some restrictions on mergers and business combinations between us and any holder of 15% or more of our outstanding common stock. These provisions apply even if the

a. A $28.4 million charge for goodwill impairment per Stratos’ annual goodwill impairment review, in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. b. Write off of $2.1 million of costs of the acquisitions of Tsunami Optics, Inc. and Paracer, Inc. that were allocated to intangible in-process research and development based on the final purchase price allocations associated with these fiscal 2002 acquisitions. c. A $37.1 million charge for impairment of long-lived assets in accordance with provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”.25

RestructuringTable and Other Charges: During fiscal years 2004 and 2003, we recorded restructuring and other charges related to the consolidation and elimination of various operating activities. Such charges included personnel severance expenses, lease expenses for limited use facilities, the write-down of the values of certain assets and legal costs related to the restructuring of operations. Contents

26offer may be considered beneficial by some shareholders. In addition, we have adopted a stockholder rights plan designed to protect Stratos and its shareholders from unfair or coercive takeover tactics, which is similar to stockholder rights plans adopted by many other companies.

~~In fiscal years 2004 and 2003 we terminated 95 and 198 employees, respectively, as a result of restructuring of operations, including both production and administrative personnel~~Item 1B. WeUnresolved ~~recorded~~Staff ~~restructuring and other charges of~~Comments ~~$3.1 million in each of the two fiscal years.~~

~~The~~Not $3Applicable.~~1 million in restructuring and other charges in~~ fiscal 2004 recorded in accordance with our restructuring plan adopted in fiscal 2003, included $1.1 million related to personnel and severance costs, $0.9 million related to the write-down of the values of certain assets, $0.7 million related to idle facilities and $0.4 million of other costs related to the restructuring of operations.

~~The $3.1~~Item ~~million in restructuring and other charges in fiscal 2003, included $~~2.~~8 million~~ ~~related to personnel and~~Properties ~~severance costs, $0.2 million related to the write-down of the values of certain assets, and $0.1 million of legal costs related to the restructuring of operations.~~

Litigation Settlements, Net: Stratos has recorded $0.5 million and $13.2 million of litigation settlement income in fiscal years 2004 and 2003. The amount received in fiscal 2004 represents the net settlement of one patent infringement case.


			Own or lease
Location	Function	Sq. ft.	(Lease Expiration)

Active operations
Chicago, IL	Corporate headquarters, administrative offices, sales and marketing, engineering, research and development facilities, and primary optical subsystems manufacturing facility	89,360	Owned
Mesa, AZ	RF/Microwave administrative offices, sales and marketing, engineering, research and development facilities, and manufacturing facility	50,000	Owned
Haverhill, UK	Administrative offices, sales and marketing, engineering, research and development facilities, and manufacturing facility for fiber optic passive products	30,000	Leased (2013)
Melbourne, FL	Military subsystems administrative offices and engineering, research and development facilities	7,752	Leased (2011)

Inactive facilities
Chicago, IL	Limited use	61,590	Owned (actively marketed for sale)
Mountain View, CA	Limited use	38,000	Leased (2007) $62,000/month

InWe ~~fiscal~~own ~~2003~~and lease office, ~~Stratos~~administrative ~~received~~and $5manufacturing facilities.~~2 million~~ ~~of settlements~~We inare ~~association~~actively marketing ~~with~~limited ~~the~~use ~~settlement~~facilities, ofwhich ~~several~~we ~~patent infringement~~do ~~cases.~~not Inneed ~~addition,~~at the ~~Company~~current ~~recorded~~level inof ~~fiscal~~our business. We ~~2003~~have ~~the~~recorded ~~present~~a ~~value~~reserve ofthrough ~~$2.5 million~~the ~~and $5.5 million~~end of ~~license~~the ~~and~~lease ~~royalty~~term ~~payments~~in to2007 befor ~~received in~~future ~~fiscal~~rental ~~2004~~obligations ~~and~~for our ~~fiscal~~Mountain ~~2006~~View, ~~respectively~~California leased facility, ~~from~~which ~~the settlement~~we have been unable to sub-lease in light of current arental ~~single~~conditions ~~patent~~in ~~infringement~~the ~~case~~area.

~~Investment Income, Net: Investment income, net of investment expense, decreased to $0.8~~Item ~~million in fiscal 2004 from $1~~3.~~1 million~~ inLegal ~~fiscal 2003. Investment income~~Proceedings consists of earnings on the short-term investment of excess cash balances and the decrease of this income in fiscal 2004 reflects the reduction of excess cash balances as well as lower interest rates throughout the marketplace during this period.

~~Other~~From ~~Income:~~time ~~Other~~to ~~income~~time, Stratos becomes involved in ~~fiscal~~various ~~2004~~lawsuits and ~~2003~~legal proceedings ~~principally~~that ~~represents~~arise ~~unrealized~~in ~~foreign~~the ~~exchange~~normal ~~gains~~course onof business. We believe that the resolution of these lawsuits and ~~intercompany~~legal ~~loans~~proceedings ~~recorded~~will innot have a significant effect on our ~~operations~~business, infinancial ~~the~~condition ~~United~~or ~~Kingdom~~results of operations.

26 Income Taxes: Through April 30, 2003 we had recorded a valuation allowance of $55.3 million against deferred income tax assets primarily associated with tax loss carry forwards, because the significant operating losses experienced in recent years establishes a presumption that realization of these income tax benefits does not meet a “more likely than not” standard. We continued to experience operating losses during fiscal year 2004, and an additional valuation allowance of $9.9 million was recorded, which eliminated the tax benefit attributable to the net loss incurred in fiscal year 2004.

TheTable income tax credit of $1.8 million recorded in fiscal 2004 relates to tax benefit generated as a result of the carry back of certain state operating losses that were incurred for the year. Contents

~~Cumulative~~Stratos ~~Effect~~and certain of aour ~~Change~~former directors and executive officers have been named as defendants in ~~Accounting~~purported ~~Principle:~~class action lawsuits filed in the United States District Court, Southern ~~Effective~~District ~~May~~of New York. The first of these lawsuits, filed on July 125, ~~2002~~2001, weis ~~adopted~~captioned Kucera v. Stratos Lightwave, Inc. et al. No. 01 CV 6821. The complaints are substantially identical to numerous other complaints filed against other companies that went public during the ~~provisions~~time of ~~SFAS No~~Stratos’ IPO. ~~142,~~ ~~“Goodwill~~Three other similar lawsuits have also been filed against Stratos and ~~Other~~certain ~~Intangible~~of our ~~Assets”,~~former directors and ~~performed~~executive aofficers. ~~transitional~~The ~~goodwill~~complaints ~~impairment test~~also name as ofdefendants ~~that~~the ~~date~~underwriters for Stratos’ initial public offering. AsThe acomplaints ~~result~~generally allege, weamong ~~determined~~other ~~that~~things, ~~the~~that ~~goodwill~~the ofregistration statement and prospectus from our ~~active~~June 26, ~~optical~~2000 ~~subsystems~~initial ~~reporting~~public ~~unit~~offering ~~had~~failed to ~~been~~disclose ~~impaired~~certain ~~and~~alleged weactions ~~recorded~~by athe ~~one-time~~underwriters ~~non-cash~~for the offering. The complaints charge Stratos and several of ~~approximately~~ ~~$17.0 million.~~our ~~This~~former ~~charge~~directors ~~was~~and ~~recorded~~executive asofficers with violations of ~~May~~ Sections 1,11 and ~~2002~~15 ~~and~~of isthe ~~reflected~~Securities asAct aof ~~cumulative~~1933, ~~effect~~as ofamended, ~~a change~~and/or inSection ~~accounting~~10(b) ~~principle~~and inSection 20(a) to the Security ~~Statement~~Exchange Act of ~~Operations~~1934, as amended. ~~See~~ ~~Note 8~~The tocomplaints ~~the~~also ~~Consolidated~~allege ~~Financial~~claims ~~Statements~~solely ~~located~~against the ~~elsewhere~~underwriting indefendants ~~this~~under ~~filing~~Section 12(a)(2) ~~for~~of ~~further~~the ~~discussion~~Securities Act of ~~this~~1933, ~~item~~as amended.

In 2003, we agreed to a Memorandum and Understanding, which reflects a settlement of these ~~Liquidity~~class actions as between the purported class action plaintiffs, Stratos and ~~Capital~~the ~~Resources:~~former officers and directors, and our liability insurers. Under the terms of the Memorandum of Understanding, our 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 Stratos and our former officers and directors, and Stratos will assign to the plaintiffs certain claims that it may have against the underwriters. The plaintiffs filed with the Court a motion for preliminary approval of the settlement, which, when granted, would lead to the mailing of class-wide notices of the settlement and a hearing date for approval of the settlement. The issuers, including Stratos, filed a statement joining in the plaintiffs’ motion for preliminary approval of the settlement. The underwriter defendants opposed the motion. On February 15, 2005, the Court issued its ruling granting the plaintiffs’ motion for preliminary approval of the settlement with the issuers, subject to certain changes to the bar order to be included as part of the settlement and to the notice to the class, and the Court recently approved the revisions made to the settlement and the notice pursuant to its prior order. The settlement still remains subject to final approval by the Court after notice of the settlement is sent to the class. A final fairness hearing on the settlement was held on April 24, 2006, at which time the Court took final approval of the settlement under advisement.

~~Net~~In ~~cash~~December 2006, ~~used~~the inSecond ~~operating~~Circuit ~~activities~~Court ~~totaled~~of ~~$3.8 million,~~Appeals reversed the district judge’s order ~~$18.1 million~~certifying ~~and~~a ~~$22.8 million~~class ~~for~~in ~~fiscal~~six ~~years~~focus ~~2005~~cases, ~~2004~~ ~~and~~finding ~~2003~~that ~~respectively.~~the ~~The~~purported ~~use~~class of ~~cash~~plaintiffs incannot ~~operating~~be ~~activities~~certified ~~for~~as ~~fiscal~~a ~~2005~~matter ~~resulted~~of ~~primarily~~law. ~~from~~The ~~the~~plaintiffs ~~net~~filed ~~loss~~a petition for rehearing, ~~and~~ ~~increases~~which inthe ~~accounts~~Second Circuit ~~receivable~~denied ~~and~~on ~~inventories~~April 6, ~~offset~~2007. ~~in part~~In bya ~~decreases~~hearing inbefore ~~prepaid~~the ~~expenses~~district ~~and~~court ~~other~~on ~~assets~~May 30, ~~and~~2007, anthe ~~increase~~plaintiffs inacknowledged ~~accounts~~that ~~payable~~they ~~and~~need ~~accrued~~to ~~expenses.~~revise ~~The~~their ~~use~~class ~~of cash~~definition inand ~~operating~~said ~~activities~~that ~~for~~they ~~fiscal~~will file ~~2004~~a ~~resulted~~revised ~~primarily from~~motion to certify the ~~net~~IPO ~~loss~~Securities ~~and~~Litigation ~~increase~~cases inas ~~inventories~~class ~~offset~~actions in ~~part by~~late ~~the~~September 2007. ~~decrease~~On inJune 22, ~~accounts receivable~~2007, ~~other~~the ~~assets~~issuers ~~and~~filed ~~the~~a joint ~~increase~~stipulation interminating ~~accounts~~the ~~payable~~proposed settlement ~~and~~with ~~accrued~~the ~~expenses~~plaintiffs. The ~~use~~Court ~~of cash~~has inallowed ~~operating~~the ~~activities~~plaintiffs into ~~fiscal~~conduct ~~2003~~additional discovery ~~resulted~~relating ~~primarily~~ to class certification issues from the ~~net~~underwriters ~~loss,~~and anthe ~~increase~~issuers.

27Item 4. Submission of Matters to a Vote of Security Holders

inNo ~~prepaid~~matters ~~expenses~~were ~~and~~submitted ~~other~~to ~~assets~~our ~~and~~stockholders aduring ~~decrease~~the infourth ~~accounts payable~~quarter ~~and~~of ~~accrued~~fiscal ~~expenses offset in part by decreases in accounts receivable and inventories~~2007.

27 We operate in markets that have experienced a severe economic downturn several years ago and as a result, many of our customers may, from time to time, stretch their payment terms. Days sales outstanding in accounts receivable was 58 days at April 30, 2005 compared to 57 days at April 30, 2004.

NetTable cash provided by investing activities was $11.2 million, $30.2 million and $31.5 million in fiscal 2005, 2004 and 2003, respectively. These amounts reflect the net proceeds from the sale of short-term investments, the proceeds from the sale of assets, and in fiscal 2004, $8.1 million cash acquired in the merger with Sterling (net of acquisition expenses), offset in part by the purchases of equipment and facilities in all fiscal years. Contents

~~Net~~PART ~~cash used in financing activities for fiscal 2005 represents~~II $2.2 million of repayments of long-term borrowings, and $0.4 million of dividends on preferred stock, offset in part by $0.6 million of proceeds from the exercise of stock options. Net cash used in financing activities for fiscal 2004 represents $3.6 million repayments of long-term borrowings, a $12.0 million distribution to the former owners of Sterling to satisfy a liability assumed in the acquisition, $0.2 million in treasury stock transactions and $0.1 million of dividends on preferred stock, offset in part by $0.3 million of proceeds from the exercise of stock options. Net cash used in financing activities for fiscal 2003 represents repayments of long-term borrowings.

AsItem of5. ~~April 30,~~Market ~~2005,~~for ~~our~~Registrant’s ~~principal~~Common ~~source~~Equity, ofRelated ~~liquidity~~Stockholder ~~was approximately~~Matters ~~$31.8 million~~and inIssuer ~~cash,~~Purchases ~~cash~~of ~~equivalents~~Equity ~~and short-term investments.~~ Securities

WeOur ~~have~~common ~~implemented~~stock ~~personnel~~is ~~reductions,~~traded ~~shut~~on ~~down~~the ~~certain facilities,~~NASDAQ ~~disposed~~Global ofMarket ~~certain~~under ~~assets and put in place other cost reduction programs. However, since many of our costs are fixed in~~ the ~~near~~symbol ~~term, we expect to continue to incur significant manufacturing, research and development, sales and marketing and administrative expenses~~“STLW.” Consequently, we will need to generate higher revenues while containing costs and operating expenses if we are to return to profitability. If our efforts to increase our revenues and contain our costs are not successful, we will continue to incur net losses. We are also examining and pursuing opportunities for improving gross margins and cash flows. The ~~merger with Sterling combined two companies~~following ~~with~~table ~~brands~~sets ~~that~~forth ~~are~~the ~~well-respected~~range ~~by segments~~ of ~~the telecommunications,~~high ~~military, video~~ and ~~broadcast~~low ~~customer~~closing ~~base, that~~sales ~~seek~~prices ~~solutions to difficult problems at the electrical side~~ of ~~the high-performance, high-bandwidth interface, which are solved by~~ our ~~products.~~common Westock ~~believe~~for ~~that these products, when combined with superior customer service, provide~~ the ~~potential~~periods ~~for improving gross margins and cash flows.~~indicated:

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


	Market price per share
	2007				2006
	High		Low		High		Low
First quarter	$	7.68	$	5.59	$	5.71	$	4.05
Second quarter		6.92		5.96		6.00		5.14
Third quarter		7.93		6.32		6.59		5.09
Fourth quarter		7.90		7.16		8.11		6.44

~~Our future capital requirements will depend on a number of factors, including our ability to generate increased sales and our ability to manage operating expenses.~~ The ~~continued~~ ~~diversification~~closing ofprice ~~our end markets and expansion~~ of our ~~product offerings~~common ~~through~~stock ~~internal~~on ~~and~~July 11, ~~possibly,~~2007 ~~external~~was ~~growth could materially change our level of cash and cash equivalents~~$7. ~~This diversification may require us to seek equity or debt financing~~99. ~~Our~~ ~~cash~~The ~~commitments~~approximate ~~are~~number ~~(i) the repayment~~ of ~~the current~~ ~~portion~~stockholders of ~~our~~record ~~long-term debt in the amount of approximately $0.8 million during the coming year and (ii) the payment of cumulative cash dividends~~ on ~~the Series~~July ~~B Preferred Stock on terms specified in the Certificate of Designation for such stock~~11, in2007 ~~the~~was ~~amount of approximately $0.4 million annually. Also~~650, weexcluding ~~are obligated to redeem all~~ shares ofheld ~~Series B Preferred Stock~~ in ~~accordance~~street with the terms of the Certificate of Designation for such stock no later than 60 days following the occurrence of certain events relating to the achievement of $250 million in annual revenue or $500 million in market capitalizationname. In addition, in the event of a change of control, the Series B Preferred Stock becomes redeemable for an aggregate of $5.0 million, subject to upward adjustment under certain circumstances relating to market price of our Common Stock.

28We have never declared or paid dividends on our common stock and currently do not intend to pay dividends in the foreseeable future so that we may reinvest our earnings in the development of our business. Any payment of dividends in the future will be at the discretion of our Board of Directors.

~~We believe that our current cash balances will be sufficient to meet our cash needs for working capital, capital expenditures, the Series~~Item B6. ~~Preferred~~Selected ~~Stock~~Financial ~~dividend and repayments of borrowings for the next 12 months~~Data.

You should read the following selected consolidated financial data in conjunction with ~~Stratos~~“Management’s ~~contractual~~Discussion ~~obligations~~and asAnalysis of ~~April 30,~~Financial ~~2005~~Condition and Results of Operations” and our ~~are~~consolidated asfinancial ~~follows:~~statements and the related notes included elsewhere in this annual report on Form 10-K.

	Payment due by period (in thousands)
			Less than						More than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
Long-term debt obligations	$	815	$	815	$	—	$	—	$	—
Operating lease obligations		3,290		1,215		1,575		500		—
Purchase obligations		6,782		6,782		—		—		—
Total	$	10,887	$	8,812	$	1,575	$	500	$	—

The consolidated statement of operations data set forth below for the fiscal years ended April 30, 2007, 2006, and 2005 and the consolidated balance sheet data as of April 30, 2007 and 2006 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this annual report on Form 10-K, and are reported in thousands, except par value and per share amounts. The consolidated statement of operations data set forth below for the fiscal year ended April 30, 2004 and 2003 and the consolidated balance sheet data as of April 30, 2005, 2004 and 2003 are derived from consolidated audited financial statements previously filed with the SEC.

28 ~~Off-Balance Sheet Arrangements:~~

WeTable are not party to any transactions, arrangements and other relationships with unconsolidated entities or other persons that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, or capital resources. We have no exposures to off-balance sheet arrangements; no special purpose entities; and no activities that include non-exchange-traded contracts accounted for at fair value. Contents

Business Risk Factors:


	Fiscal years ended April 30,
	2007			2006			2005			2004			2003

Statement of Operations Data
Revenues	$	92,744		$	79,852		$	80,454		$	50,369		$	38,416
Cost of revenues		58,028			50,090			52,642			41,954			45,809

Gross profit (loss)		34,716			29,492			27,812			8,415			(7,393	)

Operating expenses:
Research and development		8,177			8,270			9,518			8,800			20,138
Sales and marketing		11,141			10,212			10,467			8,225			7,063
General and administrative		16,693			15,781			21,907			20,799			12,706
Impairment of goodwill		—			—			—			—			28,429
Impairment of other assets		—			—			—			—			37,105
Write off in-process research and development		—			—			—			—			2,070
Restructuring and other charges		—			1,023			4,679			3,066			3,100
Litigation settlements, net		—			(1,100	)		(2,553	)		(454	)		(13,218	)

Total operating expenses		36,011			34,186			44,018			40,436			97,393


Loss from operations		(1,295	)		(4,694	)		(16,206	)		(32,021	)		(104,786	)
Gain on sale of business		—			—			—			1,305			—
Investment income, net		1,821			1,219			553			777			1,117
Other income		1,118			838			464			1,057			360


Income (loss) before income taxes		1,644			(2,637	)		(15,189	)		(28,882	)		(103,309	)

Income tax (provision) credit		(14	)		(194	)		(118	)		1,797			—
	-
Income (loss) before cumulative effect of change in accounting principle		1,630			(2,831	)		(15,307	)		(27,085	)		(103,309	)
Cumulative effect of change in accounting principle		—			—			—			—			(16,982	)

Net income (loss)		1,630			(2,831	)		(15,307	)		(27,085	)		(120,291	)
Preferred stock dividend requirements		(346	)		(1,147	)		(350	)		(142	)		—
	-
Net income (loss) attributable to common shareholders	$	1,284		$	(3,978	)	$	(15,657	)	$	(27,227	)	$	(120,291	)


Net income (loss) per share, basic and diluted:
Basic earnings (loss) per share (weighted average)	$	0.09		$	(0.29	)	$	(1.16	)	$	(2.61	)	$	(16.44	)
Diluted earnings (loss) per share (weighted average)		0.09			(0.29	)		(1.16	)		(2.61	)		(16.44	)
Cumulative effect of change in accounting principle		—			—			—			—			(2.32	)

Weighted average common shares outstanding:
Basic		13,672			13,888			13,546			10,444			7,317
Diluted		14,602			13,888			13,546			10,444			7,317

Balance Sheet Data
Cash and short-term investments	$	33,570		$	30,742		$	31,828		$	36,989		$	61,528
Total assets		99,499			99,154			114,980			129,050			118,175
Total liabilities		12,811			12,947			24,507			24,271			17,130
Working capital (current assets less current liabilities)		57,205			51,289			52,073			52,974			65,097
Shareholders’ equity	$	86,688		$	86,207		$	90,473		$	104,779		$	101,045

We have incurred significant net losses, primarily due to the current economic climate in the communications industry. Unless we are able to increase our sales or further reduce our costs, we will continue to incur net losses.29

TheTable current economic climate in the communications industry has resulted in reduced capital spending from its peak for networking products. Spending for networking products appears to have stabilized and may see a rebound, although it is not expected to return to peak levels for the foreseeable future. As a result, many of our customers continue to express uncertainty as to their future requirements. While we have experienced a significant increase in net sales, we nevertheless incurred a net loss during fiscal year 2005. The increase in net sales is largely the result of the acquisition of Sterling and a $14.8 million increase in net sales into the military/governmental end market. We do not expect continued substantial growth in the markets we serve. Any decline in demand for our customers’ products or a deterioration of general economic conditions in the communications industry would likely result in reduction in demand for our products and our business, operating results and financial condition would suffer. Contents

~~Although~~Item we7. ~~have~~Management’s ~~implemented~~Discussion ~~personnel reductions~~ and ~~other~~Analysis ~~cost reduction programs, many~~ of ~~our~~Financial ~~costs~~Condition ~~are fixed in the near term. Consequently, we will need to generate higher revenues while containing costs~~ and ~~operating~~Results ~~expenses~~of ~~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.~~ Operations

~~Our~~The ~~success~~following ~~depends~~discussion onof ~~the~~our ~~long-term~~financial ~~growth~~condition and results of operations should be read in conjunction with the ~~communications~~consolidated ~~industry~~financial statements and ~~its~~related ~~use~~notes ofincluded ~~our~~elsewhere ~~technologies~~in this annual report on Form 10-K. IfThe following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these ~~events~~forward-looking dostatements ~~not~~as ~~occur,~~a ~~our~~result ~~net~~of ~~sales~~several ~~may~~factors ~~decline~~including, ~~and~~the cautionary ~~our~~statements ~~business~~set ~~would~~forth ~~likely~~under be“Business ~~significantly~~Risk ~~harmed~~Factors”.

~~Our~~ORGANIZATION ~~subsystems~~OF ~~and components are used primarily in military,~~INFORMATION 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 communications 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 communications technologies. If these markets do not grow, or if the use of communications technologies in these markets does not expand, our net sales may decline and our business would likely be significantly harmed.

29Our Management’s discussion and analysis is comprised of three major sections: Overview, Critical Accounting Policies, and Results of Operations. These sections include the following information:

~~The~~• ~~market~~Overview ~~for~~is ~~communications~~a ~~equipment~~general isdiscussion ~~changing~~of ~~rapidly~~our ~~and is~~business. ~~dominated~~• byCritical ~~several~~Accounting ~~large~~Policies ~~manufacturers.~~are ~~Our~~the ~~future~~policies ~~growth will~~we ~~depend,~~believe inare ~~part,~~important ~~upon~~to ~~(1) our~~understanding ~~ability~~certain toof ~~develop~~the material judgments and ~~introduce~~ ~~new~~assumptions ~~products~~incorporated ~~for~~in ~~this~~our ~~market~~reported ~~and~~financial ~~(2) the~~results. ~~growth~~ • Results of ~~the~~Operations ~~communications~~include ~~equipment~~an ~~market~~overview ~~and~~of ~~(3)~~ our ~~ability to~~consolidated ~~compete~~2007 ~~successfully~~results incompared ~~the~~to ~~communications~~2006, ~~industry.~~and ~~The growth~~2006 inresults ~~the~~compared ~~market~~to ~~for~~2005. ~~communications~~This ~~equipment~~section ~~products~~also ~~and services~~includes isa ~~dependent~~discussion onof akey ~~number~~actions ofand ~~factors,~~events ~~including~~that ~~without limitation:~~ impacted our results.

• 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 • End-user demand for integrated Internet, data, video, voice and other network servicesOVERVIEW

WeStratos ~~cannot~~is ~~predict~~an ~~the~~innovative ~~growth~~international ~~rate~~supplier of ~~the~~shielded ~~market~~electronic ~~for telecommunications equipment products~~ and ~~services.~~optical ~~The economic climate in the communications industry~~interconnects, ~~changes and~~ ~~consolidation~~plus in the ~~service~~transceiver ~~provider~~components ~~market~~that ~~and~~are ~~constraints~~used ~~on capital~~to ~~availability~~connect ~~have~~these ~~had~~two atransmission ~~material~~line ~~adverse~~mediums. ~~effect on many~~We ofdesign ~~our~~and ~~service~~manufacture ~~provider~~interconnect ~~customers,~~components ~~causing some of these customers to go out of business~~ and asubsystems ~~number~~used ofin ~~other~~telecom ~~customers~~communications, todatacom, ~~substantially~~military ~~reduce~~and ~~their~~video ~~expansion~~markets ~~plans~~for ~~and~~signal ~~purchases~~networking.

WeOn ~~must~~November 6, ~~develop~~2003, ~~new~~Stratos ~~products~~acquired ~~and~~Sterling ~~technologies~~Holding asCompany, ~~well~~a asprivately-held ~~enhancements~~company tobased ~~existing~~in Mesa, Arizona that designs and manufactures RF and microwave interconnect products via its two operating units, Trompeter Electronics, Inc. and ~~technologies~~Semflex, Inc. The 6,082,000 Stratos common shares issued in ~~order~~this totransaction ~~remain~~were ~~competitive~~valued at $5.09 Ifa weshare, ~~fail~~which was the closing price on July 2, 2003, the day the merger was announced. Stratos also issued 50,000 shares of Series B redeemable preferred stock with a face value of $5.0 million and a contingent value of up to doan soadditional $6.25 million based on certain events, ~~our~~including ~~products~~the ~~will~~future noperformance ~~longer~~of beStratos’ ~~competitive~~share price. The total purchase consideration was $38.8 million, consisting of common and ~~our~~preferred ~~net~~shares ~~sales~~of Stratos ~~will~~stock ~~decline~~valued at $36.0 million and $2.8 million of acquisition related costs. Our financial statements since November 6, 2003 reflect the acquisition of Sterling.

~~The~~We ~~market~~are ~~for~~a ~~our~~leading ~~products and technologies is characterized by rapid technological change~~designer, ~~new~~developer and ~~improved~~manufacturer ~~product introductions,~~of ~~changes~~RF ~~in customer requirements~~ and ~~evolving industry~~microwave ~~standards. Our future success will depend to a substantial extent on our ability to develop~~components, ~~introduce~~active and ~~support~~passive ~~new~~optical, ~~products~~optoelectronic, ~~and~~subsystems ~~technologies on a successful~~ and ~~timely basis.~~interconnect ~~If we fail to develop and deploy new~~ products ~~and technologies~~used ~~or enhancements of existing products on a successful and timely basis or we experience delays~~ in ~~the development~~telecom, ~~introduction or enhancement of our products and technologies~~enterprise, ~~our products will no longer be competitive and our~~ ~~net~~military ~~sales will decline. The introduction of new~~ and ~~enhanced products~~video ~~may cause our customers to defer or cancel orders for existing products~~markets. ~~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 inventories relating to existing products.~~

30 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 may not be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, our new products may be unable to gain market acceptance and we may not be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological change would significantly harm our business.

OurTable products are incorporated into larger systems, which must comply with various domestic and international government regulations. If the performance of our products adversely affects our customers’ ability to comply with these requirements, we may lose these customers and our net sales will decline.Contents

~~Our~~We ~~products~~have ~~are~~a ~~incorporated~~rich ~~into~~history ~~larger~~of ~~systems,~~optical ~~which~~and ~~must comply~~mechanical ~~with~~packaging ~~various~~expertise ~~regulations~~ and ~~standards~~have ~~established~~been bya pioneer in ~~different~~developing ~~countries~~several optical devices using innovative form factors for telecom, ~~which~~datacom, ~~may~~video, military, ~~vary~~and ~~considerably~~harsh environment applications. IfWe ~~the performance~~have ofa ~~our~~broad range of products ~~contributes~~and toare ~~our~~a ~~customers’~~market ~~inability~~leader toin ~~comply~~several ~~with~~niches ~~existing~~including orspecialty ~~evolving~~optical ~~standards established~~products bysuch ~~regulatory~~as ~~authorities~~RJ orand tolow ~~obtain timely~~rider ~~domestic~~transceivers, orMedia ~~foreign~~Interface ~~regulatory~~Adapters, ~~approvals~~flex circuits, weas ~~may~~well ~~lose~~as ~~these~~high performance RF and microwave ~~customers~~coax and ~~our~~triax ~~net~~interconnect ~~sales~~products. ~~will~~We ~~decline~~currently serve more than 1,300 active customers in telecom, military and video markets.

30The average unit prices of many of our products generally decrease as the products mature in response to factors such as increased competition, the introduction of new products and increased unit volumes. We anticipate that average selling prices of many of our products will continue to decline in future periods, although the timing and degree of the declines cannot be predicted with any certainty. We must continue to develop and introduce, on a timely basis, new products that incorporate features that can be sold at higher average selling prices. There can be no assurance that we will be able to introduce new products to offset the anticipated decrease in the average selling prices of our products.

IfLicense 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. ~~fail~~The timing and amounts of these payments is beyond our control. Accordingly, the amount received in any given period is expected to ~~comply~~vary ~~with~~significantly. ~~evolving~~We ~~industry~~will consider ~~standards~~entering orinto ~~alternative~~similar ~~technologies~~agreements in ~~our~~the ~~markets~~future, however, we ~~may~~are benot ~~required~~able to ~~make~~predict whether ~~significant~~we ~~expenditures~~will toenter ~~redesign~~into ~~our~~any ~~products~~additional licenses in the future and, if so, the amount of any license fees or royalties.

Our ~~products~~cost ~~comprise~~of ~~only~~revenues aconsists ~~part~~ of anmaterials, ~~entire~~salaries ~~networking system~~ and ~~must~~related ~~comply~~expenses ~~with~~for ~~evolving industry standards in order to~~manufacturing ~~gain~~personnel ~~market acceptance. In many cases, we introduce a product before an industry standard has become widely accepted~~ and ~~we depend~~manufacturing onoverhead. ~~the~~We ~~companies~~purchase ~~that~~several ~~provide~~key ~~other~~ components toused ~~support industry standards as they evolve. Because industry standards do not exist~~ in ~~some cases at~~ the ~~time we are developing new~~manufacture ~~products,~~of ~~we may develop products that do not comply with the eventual industry standard. If this occurs, we would need to redesign~~ our products tofrom ~~comply~~a ~~with~~limited ~~adopted~~number ~~industry~~of ~~standards~~suppliers. In ~~addition,~~We ~~if alternative technologies were adopted as an industry standard within our target markets, we would~~ have ~~to dedicate~~periodically ~~significant~~experienced ~~time~~shortages and ~~resources to redesign our products~~ todelivery ~~meet~~delays ~~this~~for ~~new~~these ~~industry standard~~materials. IfIn wesome ~~are required to redesign our products~~circumstances, we ~~may~~maintain ~~incur~~an ~~significant~~inventory ~~expenses~~of ~~and~~limited ~~losses~~source ~~due~~components to ~~lack~~decrease ~~of customer demand, unusable purchased components for these products and~~ the ~~diversion~~risk of ~~our engineers from future product development efforts~~shortage. If we ~~are~~overestimate ~~not successful in redesigning~~ our ~~products~~requirements, orwe ~~developing new products to meet new standards or any other standard that~~ may ~~emerge,~~have ~~our~~excess ~~net~~inventory ~~sales~~of ~~will~~these ~~decline~~components.

WeThe majority of our products are ~~also~~designed ~~dependent~~and onmanufactured ~~sales~~in toour own facilities. In the ~~military/aerospace~~future ~~industry,~~we may ~~including~~expand Uthe volume of products manufactured by third parties.S. In order to remain competitive, we must continually reduce our manufacturing costs through design and ~~foreign~~engineering ~~government~~innovations ~~entities~~and increases in manufacturing efficiencies. There can be no assurance that we will be able to reduce our manufacturing costs.

~~Approximately~~Research ~~36%~~and ofdevelopment ~~our~~expenses ~~sales~~consist ~~for~~primarily ~~the~~of ~~fiscal~~salaries ~~year 2005 came from direct~~ and ~~indirect~~related ~~sales~~expenses tofor ~~the military/aerospace~~design ~~industry~~engineers, ~~which~~scientists isand ~~heavily~~other ~~dependent~~technical onpersonnel, ~~sales~~depreciation toof ~~U.S.~~test and ~~foreign~~ ~~government entities~~prototyping equipment, ~~either~~and ~~directly~~tooling. ~~through~~Research ~~contracts with~~and ~~such~~development ~~entities~~expenses oralso ~~indirectly~~consist ~~through~~of ~~distributors~~materials and tooperating ~~prime~~expenses ~~contractors~~related orto ~~subcontractors~~major ~~who~~product ~~are~~development ~~building systems or subsystems for them~~projects. AWe ~~significant~~charge ~~decline~~all inresearch ~~U.S.~~ and ~~foreign~~development ~~government~~expenses ~~expenditures~~to ~~could~~operations ~~have~~as ~~a material adverse effect on our sales~~incurred.

~~Our~~Stratos ~~sales~~sells ~~cycle~~through ~~runs~~a ~~from~~network ~~our~~of ~~customers’~~representatives, ~~initial~~distributors, ~~design~~and todirect ~~production~~sales ~~for~~professionals primarily ~~commercial~~across ~~sale~~North America, Europe, Asia, and Central America. ~~This~~Stratos’ ~~cycle~~sales isteams ~~long~~are organized ~~and~~into ~~unpredictable~~three ~~and~~groups ~~may~~including ~~cause~~Stratos ~~our~~Optical ~~net~~Technologies ~~sales~~(active toand ~~decline~~passive oroptical components ~~our~~and ~~operating~~subsystems), ~~expenses~~Trompeter to(RF ~~increase~~Interconnects) and Semflex (Microwave Innovations). Stratos maintains three distinct

31 Because of the length of our sales cycles, are ability to accurately predict the timing of our sales is limited. 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 over 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 may only sell 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.

OurTable customersof 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.Contents

Wesales ~~generally~~organizations ~~do not have long-term contracts with our customers. Sales are typically made pursuant~~ to ~~individual~~focus ~~purchase~~selling ~~orders, often~~efforts ~~with short lead times, that may be canceled or deferred by customers~~ on ~~short~~specific ~~notice~~customer ~~without~~types ~~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~~capture in the ~~manufacturing schedules for their own products,~~strong ~~and~~brand ~~will~~identity ~~likely~~each dohas sodeveloped ~~again~~ in ~~the~~its ~~future~~respective marketplace.

31The marketing group is responsible for developing marketing strategies and programs that support the sale of Stratos’ products and enhance its reputation in the industry. These strategies and programs include (i) ongoing interaction with customers for the development of new products and technical support, (ii) advertising and other promotional activities in industry trade journals and publications targeting design engineers, (iii) participation in major trade show events and conferences in the communications network industry to promote our broad lines of active and passive optical and RF and microwave components and subsystems, (iv) public relations covering new products and company capabilities, (v) market research to guide R&D investment, (vi) corporate branding to create a consistent and accurate message across the Stratos Optical Technologies, Trompeter and Semflex brands, and (vii) interaction with its customers and peers in industry associations to promote and further enhance related technologies, and to validate Stratos’ role as the technology innovator for solutions in our served markets.

IfSales weand domarketing ~~not~~expenses ~~decrease~~consist ~~our~~primarily ~~manufacturing~~of personnel costs, orincluding ~~increase~~ sales ofcommissions, travel ~~higher~~costs, ~~margin~~outside ~~products~~consulting asservices, ~~the~~and ~~average~~product ~~unit~~marketing ~~price~~and ofpromotion ~~our~~costs. ~~existing~~We ~~products~~expect ~~decreases,~~to continue ~~our~~to ~~gross~~make ~~margins~~significant ~~will~~expenditures ~~decline~~for sales and marketing services.

~~The~~General ~~average~~and ~~unit~~administrative ~~prices~~expenses ofconsist ~~our~~primarily ~~products frequently decrease as the products mature in response to increased competition, the introduction~~ of ~~new~~personnel ~~products~~costs ~~and~~for ~~increased unit volumes. Most of~~ our ~~products~~administrative ~~are designed~~ and ~~manufactured in our own~~ ~~facilities.~~financial ~~Accordingly~~groups, aas ~~significant~~well ~~portion~~as oflegal, ~~our cost of sales is fixed over the near term. In order to remain competitive~~accounting, weinformation ~~must~~technology ~~continually reduce our manufacturing costs through design~~ and ~~engineering~~other ~~changes~~professional ~~and increases in manufacturing efficiencies~~fees. We ~~must~~expect ~~also~~to continue to ~~develop~~make ~~and introduce~~significant onexpenditures afor ~~timely~~general ~~basis~~and ~~new~~administrative ~~products that incorporate features that can be sold at higher average selling prices~~services. ~~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~~Critical ~~market~~Accounting ~~for our products is highly competitive, which may result in lost sales or lower gross margins.~~Policies

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

~~Many~~We ofsell ~~these~~products ~~companies~~primarily ~~have~~to ~~substantially~~various ~~greater~~OEMs ~~financial, technical, marketing~~ and ~~distribution resources and brand name recognition than we have~~distributors. AsSales ato ~~result,~~ these ~~competitors~~customers ~~are able~~have ~~to devote greater resources than we can to the development,~~varying ~~promotion,~~degrees ~~sale~~of ~~and~~collection ~~support~~risk ofassociated ~~their~~with ~~products~~them. InManagement ~~addition, several~~periodically ofassesses ~~our~~collection ~~competitors have large market capitalizations or~~risk ~~cash reserves~~ and ~~are~~the ~~much~~related ~~better~~allowance ~~positioned~~for ~~than~~doubtful weaccounts ~~are~~based ~~to acquire~~on ~~other~~the ~~companies~~aging ~~in order to gain new technologies or products. Many~~ of ~~our competitors have much greater name recognition~~accounts, ~~more extensive customer bases, better-developed~~historical ~~distribution~~experience ~~channels~~ and ~~broader~~the ~~product~~customer’s ~~offerings~~financial ~~than we do~~condition. ~~These~~ ~~companies~~If ~~may~~an ~~leverage~~account ~~their~~becomes ~~customer bases and broader product offerings and adopt aggressive pricing policies to gain market share. In addition~~uncollectible, ~~companies~~it ~~with diversified product~~is ~~offerings~~charged ~~can~~against ~~better~~the ~~sustain~~allowance anfor ~~economic~~doubtful ~~downturn~~accounts.

WeInventory ~~expect that more companies, including some of our customers,~~Reserves 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 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.

~~Further,~~It weis ~~manufacture~~our ~~many~~policy ofto ~~our~~reserve ~~products~~100% inof the ~~United States~~value of inventory we specifically identify and ~~the~~consider obsolete ~~United~~or ~~Kingdom~~excessive given our future sales estimates. ~~Our~~We ~~manufacturing~~define ~~costs~~obsolete ~~are~~inventory as inventory ~~higher~~that ~~than~~will no longer be used in the manufacturing ~~costs~~process ofor ~~some~~items ofthat ~~our~~have ~~competitors,~~potential quality ~~particularly~~problems. ~~those~~Excess ~~located~~inventory is defined as inventory in ~~foreign~~excess ~~countries~~of ~~that~~one ~~benefit from~~to ~~lower-priced~~two ~~labor~~years ~~and~~projected ~~government~~usage depending ~~subsidies~~upon the product. IfExcess inventory is determined using our ~~current or~~best ~~potential~~estimate of future demand ~~customers~~at ~~decide~~the time, based upon information then available to ~~purchase~~us. ~~products~~In ~~from~~general, our policy is to ~~these~~scrap ~~lower-cost~~inventory ~~competitors,~~determined weto ~~could~~be ~~suffer~~obsolete shortly after the determination is made and to keep excess inventory for a ~~significant~~reasonable amount of time before it is discarded. Occasionally, changed ~~decline~~circumstances in ~~our~~the ~~sales,~~marketplace ~~which~~present ~~could~~us ~~have~~with aan ~~material~~opportunity ~~adverse~~to ~~effect~~sell inventory that was onpreviously ~~our~~determined ~~business,~~to ~~operating~~be ~~results~~excessive ~~and~~or ~~financial~~obsolete. ~~condition~~If this occurs, we vigorously pursue such opportunities.

~~We depend on suppliers for several key components. If we underestimate or overestimate our requirements for these components, our business could be significantly harmed.~~32

WeTable 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 Contents

32Impairment of Long-Lived Assets

~~experience~~We ~~shortages~~review ~~and delays in~~ the ~~future.~~carrying ~~These~~value ~~shortages and~~of ~~delays~~our ~~have~~long-lived ~~typically~~assets ~~occurred~~if ~~when demand within~~ the ~~industry~~ ~~has~~facts ~~increased rapidly~~ and ~~exceeded~~circumstances, ~~the~~such ~~capacity of~~as ~~suppliers~~significant ofdeclines ~~key components~~ in ~~the~~sales, ~~short~~earnings ~~term.~~or ~~Delays~~cash ~~and shortages~~flows ~~also~~or ~~often~~material ~~occur~~adverse changes in the ~~early~~business climate ~~stages~~suggest ofthat ~~a product’s~~they ~~life~~may ~~cycle~~be impaired. ~~The~~If ~~length~~this ofreview ~~shortages~~indicates ~~and~~that ~~delays~~long-lived inassets will ~~the~~not ~~past~~be ~~has~~recoverable, ~~varied~~as ~~from~~determined ~~several~~based ~~days~~on tothe aestimated ~~month.~~undiscounted Wecash ~~are~~flows ~~unable to~~of ~~predict~~ the ~~length~~long-lived asset, ofimpairment ~~any~~is ~~future~~measured ~~shortages~~by orcomparing ~~delays.~~the ~~Some~~carrying value of ~~our~~ ~~critical~~the ~~components~~long-lived ~~used~~asset into ~~production~~fair value. ofFair ~~certain~~value ofis ~~our products~~determined ~~are~~based ~~purchased~~on ~~from~~quoted amarket ~~key supplier~~values, ~~which~~discounted ~~has~~cash ~~been~~flows or ~~acquired~~appraisals. byIf ~~one~~an ofasset ~~our~~is ~~competitors.~~considered Ifheld ~~this~~for ~~supplier increases prices~~sale, ~~reduces~~we ~~quantities~~adjust ~~available~~the tocarrying usvalue orof ~~ceases~~the underlying assets to ~~supply us~~fair value, ~~our~~as ~~business~~determined ~~and~~based ~~results~~on ofthe ~~operations~~estimated ~~may~~net berealizable ~~significantly~~proceeds of ~~harmed~~the assets.

~~The~~Revenue ~~inability to obtain sufficient quantities of these~~Recognition 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.

WeRevenue ~~make~~from ~~forecasts~~product ~~for~~sales, ~~our~~net ~~component~~of ~~requirements~~trade ~~based~~discounts, ~~on anticipated~~is ~~product~~recognized ~~orders.~~when ~~Although~~title ~~from~~passes, ~~time~~which generally tooccurs ~~time~~upon weshipment. ~~enter into~~We ~~long-term~~handle ~~agreements~~returns ~~for~~by ~~the~~replacing, ~~purchase~~repairing ofor ~~key~~issuing ~~components,~~credit for ~~our~~defective ~~purchases~~products ofwhen ~~key~~returned. ~~components~~SEC ~~are~~Staff ~~generally~~Accounting ~~made~~Bulletin onNo. 104 a(“SAB ~~purchase~~104”) provides ~~order~~guidance ~~basis.~~on Wethe ~~may~~recognition, ~~also~~presentation ~~maintain~~and andisclosure ~~inventory~~ of ~~limited~~revenue ~~source components~~in tofinancial ~~limit~~statements. ~~the~~SAB 104 ~~potential~~establishes ~~impact~~the ofSEC’s aview ~~component shortage.~~that Weit ~~may~~is not ~~accurately~~appropriate ~~predict~~to ~~the~~recognize ~~demand~~revenue ~~for~~until ~~our products~~all ~~and~~of the following ~~lead-time~~criteria ~~required~~are tomet: ~~obtain~~(1) persuasive ~~key~~evidence ~~components.~~of ~~If we~~an ~~overestimate~~arrangement ~~our requirements~~exists, we(2) delivery ~~may~~has occurred or services have ~~excess~~been ~~inventory~~rendered, ~~which~~ ~~may~~(3) the ~~become~~seller’s ~~obsolete~~price ~~and~~to ~~would~~the ~~increase~~buyer ~~our~~is ~~costs.~~fixed ~~If we~~or ~~underestimate~~determinable, ~~our~~and ~~requirements,~~(4) collectability weis ~~may~~reasonably ~~have~~assured. ~~inadequate inventory~~Further, ~~which~~SAB ~~could~~104 ~~interrupt~~requires ~~our~~that ~~manufacturing~~both title and ~~delay delivery~~the ofrisks ~~our~~and ~~products~~rewards toof ~~our~~ownership ~~customers.~~be ~~Either~~transferred ofto ~~these occurrences~~the ~~would~~buyer ~~significantly~~before ~~harm~~revenue ~~our~~can ~~business~~be recognized.

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

~~Our~~It ~~products~~is ~~require sophisticated manufacturing, research and development, marketing and sales, and technical support. Our success depends on~~ our ~~ability~~policy to ~~attract,~~establish ~~train~~a ~~and~~reserve ~~retain qualified technical personnel in each of these areas. Competition~~ for ~~personnel~~customer inreturns ~~all~~based ofon ~~these~~any ~~areas~~known isreturns ~~intense~~ and ~~we may not be able to hire or retain sufficient personnel to achieve our goals or support the~~ anticipated ~~growth~~returns inbased ~~our business.~~on ~~The~~past ~~market~~experience ~~for~~and ~~the~~accordingly ~~highly-trained~~adjust ~~personnel we require is very competitive~~revenue, ~~due~~accounts ~~to the limited number of people~~receivable ~~available with the necessary technical skills~~ and ~~understanding of our products and technology~~inventories. ~~If we fail to hire and retain~~ ~~qualified personnel, our product development efforts and customer relations will suffer.~~

~~Our~~Customer ~~products~~demand ~~may~~is ~~contain~~a ~~defects~~changing dynamic. Occasionally, ~~which~~we ~~may~~have ~~cause~~and uswill receive requests from customers to ~~incur~~accept ~~significant~~the ~~costs~~return of merchandise for which they had previously accepted delivery. Although we have no obligation to do so, ~~divert~~each ~~our~~such ~~attention~~request is evaluated in light of contemplated future business from ~~product~~that ~~development~~customer. ~~efforts~~We ~~and~~will ~~result~~continue to consider these requests in athe ~~loss~~future, however, we are not able to predict the amount of ~~customers~~any such returns. The sales of our products do not allow the customer the right of return.

~~Our~~Recent ~~products~~Accounting ~~are~~Pronouncements: ~~complex~~ In ~~and may contain defects~~September 2006, ~~particularly when~~the ~~first~~Financial ~~introduced~~Accounting orStandards asBoard (FASB) issued ~~new~~SFAS ~~versions are released~~No. 157 ~~Our customers~~“Fair ~~integrate~~Value ~~our~~Measurements”. ~~subsystems~~The ~~and~~statement ~~components~~defines ~~into~~fair ~~systems~~value, ~~and~~establishes ~~products that they develop themselves or acquire from other vendors. As~~ a ~~result,~~framework ~~when~~for ~~problems~~measuring ~~occur~~fair invalue ~~equipment~~and ~~or systems~~expands ~~into~~disclosures ~~which~~about ~~our~~fair ~~products have been incorporated, it may~~value ~~be difficult to identify the source of the problem~~measurements. WeThe ~~may~~statement ~~be subject~~applies tounder ~~liability~~other ~~claims~~accounting ~~for~~pronouncements ~~damages~~that ~~related~~require toor ~~product~~permit ~~defects~~fair orvalue ~~experience~~measurements. ~~manufacturing~~The ~~delays~~statement asdoes anot ~~result~~require ~~of these defects in the future,~~ any ornew ~~all~~fair ofvalue ~~which~~measurements ~~could~~and bewe ~~substantial.~~do ~~The~~not ~~length~~expect ~~of any future manufacturing delays in connection with a product defect will depend on~~ the ~~nature~~application of ~~the~~this ~~defect,~~standard ~~and whether~~to wechange ~~or one of~~ our ~~component~~current ~~suppliers was the source of the defect~~practice. ~~Moreover,~~The ~~the~~statement ~~occurrence of defects, whether caused~~is byeffective ~~our~~for ~~products~~financial orstatements ~~technology~~issued orfor ~~the~~fiscal ~~products~~years ofbeginning ~~another~~after ~~vendor~~November 15, ~~may~~ ~~result in significant customer relations problems and injury to our reputation and may impair the market acceptance of our products and technologies~~2007.

33In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 “Accounting for Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB 109 “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 31, 2006, with early adoption permitted. The adoption of FIN 48 does not have a material effect on our consolidated financial position, results of operations or cash flow.

WeIn ~~are~~December 2004, ~~subject~~the FASB issued SFAS No. 123(R), a revision to ~~environmental~~SFAS ~~laws~~No. 123, ~~and~~“Accounting ~~other~~for Stock-Based ~~legal~~Compensation”. ~~requirements~~This ~~that~~standard ~~have~~requires us to measure the ~~potential~~cost toof ~~subject~~employee usservices received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. Stratos was required to ~~substantial~~adopt ~~liability~~SFAS No. 123(R) at the beginning of fiscal 2007 and ~~increase~~adopted ~~our~~the ~~costs~~prospective method of ~~doing~~transition ~~business~~under the statement. Under this method, we will begin recognizing compensation cost for equity based compensation for all new or modified grants after the date of adoption. In addition, we will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. Because, virtually all of Stratos’ outstanding options are vested, we have determined that the effect of the adoption of the statement on our consolidated financial statements is immaterial.

33 Our properties and business operations are subject to a wide variety of 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. These legal requirements may 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,Table political and regulatory risks associated with international operations may limit our sales and increase our costs of doing business abroad.Contents

AResults ~~significant portion~~ of ~~our sales is generated from customers~~Operations located outside the United States, principally in Europe. We also operate a manufacturing facility in the United Kingdom. Sales to customers located outside of the United States were approximately 27.3% of our net sales during fiscal year 2005 and approximately 31.7% of our net sales during fiscal year 2004, which only reflected sales from Sterling, after November 6th, 2003. Our international operations are subject to a number of risks and uncertainties, including:

•Fiscal ~~Difficulties~~years inended 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 worldApril 30, ~~such~~2007 ~~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 rights in some foreign countries • The potential difficulty in enforcing intellectual property • Acts of terrorism directed against the United States or U.S. affiliated targets2006

These, and other 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.


	2007						2006						Change
	Dollars			%			Dollars			%			Dollars			%

Revenues:
Net sales	$	91,654			99	%	$	79,042			99	%	$	12,612			16	%
License fees and royalties		1,090			1	%		540			1	%		550			102	%

Total revenues		92,744			100	%		79,582			100	%		13,162			17	%

Cost of revenues		58,028			63	%		50,090			63	%		7,938			16	%

Gross profit		34,716			37	%		29,492			37	%		5,224			18	%

Operating expenses
Research and development		8,177			9	%		8,270			10	%		(93	)		(1	%)
Sales and marketing		11,141			12	%		10,212			13	%		929			9	%
General and administrative		16,693			18	%		15,781			20	%		912			6	%
Restructuring and other charges		—			0	%		1,023			1	%		(1,023	)		(100	%)
Litigation settlements, net		—			0	%		(1,100	)		(1	%)		1,100			(100	%)

Total operating expenses		36,011			39	%		34,186			43	%		1,825			5	%

Loss from operations		(1,295	)		(1	%)		(4,694	)		(6	%)		3,399			(72	%)

Investment income, net		1,821			2	%		1,219			2	%		602			49	%
Other income		1,118			1	%		838			1	%		280			33	%

Income (loss) before income taxes		1,644			2	%		(2,637	)		(3	%)		4,281			(162	%)
Income tax provision		(14	)		(1	%)		(194	)		0	%		180			(93	%)

Net income (loss)		1,630			1	%		(2,831	)		(3	%)		4,461			(158	%)

Preferred stock dividend		(346	)		0	%		(1,147	)		(1	%)		801			(70	%)

Net income (loss) attributable to common shareholders	$	1,284			1	%	$	(3,978	)		(4	%)	$	5,262			(132	%)

WeNet ~~may~~Sales: ~~pursue~~Net ~~additional~~sales ~~acquisitions~~increased to $91.7 million Ifin wefiscal ~~are~~2007 ~~unable~~from $79.0 million in fiscal 2006. The increase is primarily attributed to ~~successfully~~sales ~~integrate~~to ~~any~~new ~~businesses~~customers orand ~~technologies~~increased ~~that~~sales weto ~~acquire~~existing customers. This $12.6 million increase includes a $4.6 million increase in sales into the military/government ~~future~~end ormarket, ~~are~~$4.3 million ~~unable~~increase tointo ~~realize~~other end markets, $2.1 million increase in the ~~intended~~net ~~benefits~~sales into the telecom/metro end market, $1.3 million increase of ~~any~~net ~~future~~sales into ~~acquisitions~~the data networking end market and a $0.3 million increase into the storage/enterprise end market. Our total sales order backlog increased to $17.5 million as of April 30, ~~our~~2007 ~~business~~from ~~will~~$13.6 million beas ~~harmed~~of April 30, 2006.

AsLicense ~~part~~Fees ofand ~~our~~Royalties: ~~strategy,~~License wefees ~~may~~and ~~pursue~~royalties ~~opportunities~~increased to ~~buy other~~$1.1 million ~~businesses~~in orfiscal ~~technologies~~2007 from ~~that~~$0.5 million ~~would~~in ~~complement~~fiscal ~~our current~~2006. ~~products,~~The ~~expand~~increase ~~our~~of ~~markets~~$0.6 million orwas ~~enhance~~attributed ~~our~~to ~~technical~~renegotiating ~~capabilities,~~existing ~~or that may otherwise offer growth opportunities~~agreements. ~~Our~~ ~~experience~~License infees ~~acquiring~~consist ~~other~~of ~~businesses~~payments ~~and~~contingent ~~technologies~~on ~~is limited.~~sales ~~Acquisitions~~volume ~~could result in a number~~ of ~~financial~~licensed ~~consequences, including:~~products.

•Cost ~~Use~~of Revenues and Gross Margins: Cost of ~~significant~~revenues ~~amounts~~increased to $58.0 million in fiscal 2007 from $50.1 million in fiscal 2006. Gross profit as a percentage of ~~cash~~total •revenues, or gross margin increased to 37.4% in fiscal 2007 from 37.1% in fiscal 2006. The ~~incurrence~~increase ofin ~~debt~~gross margins is attributed to more profitable sales mix and ~~contingent~~a ~~liabilities~~reduction in manufacturing costs as a percentage of sales.

34Cost of revenues was charged approximately $0.9 million in fiscal 2007 and $1.4 million in fiscal 2006 to increase the reserve for obsolete and excess inventory.

•Research ~~Potentially~~and ~~dilutive~~Development: ~~issuances~~Research ofand ~~equity~~development ~~securities~~expenses •decreased ~~Large~~to ~~one-time~~$8.2 million ~~write-offs~~in •fiscal 2007 ~~Amortization~~from $8.3 million in fiscal 2006. The $0.1 million decrease consisted of a $0.2 million decrease in operating expenses, ~~related~~$0.2 million decrease in material used for research and development offset in part by an increase of $0.3 million in personnel costs dedicated to ~~intangible~~research ~~assets~~and development.

34 ~~Acquisitions also involve numerous operational risks, including:~~

•Table 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 • Potential loss of key employees of purchased organizationsContents

IfSales weand ~~are~~Marketing: ~~unable~~Sales toand ~~successfully~~marketing ~~integrate~~expenses ~~other~~increased ~~businesses~~to ~~or technologies~~$11.1 million ~~that~~in wefiscal ~~may~~2007 from ~~acquire~~$10.2 million in ~~the~~fiscal ~~future~~2006, oran ~~are~~increase ~~unable~~of to$0.9 million. This increase was directly related ~~realize~~to ~~the~~increased ~~intended~~sales. Sales commissions increased $0.9 million in fiscal 2007. Salaries and benefits ofincreased ~~any~~$0.2 million ~~future~~in ~~acquisitions,~~fiscal ~~our~~2007 offset by a decrease of $0.2 million of operating ~~business~~expenses ~~will~~in befiscal ~~harmed~~2007 as compared to the prior year.

~~Our~~General ~~inability~~and Administrative: General and administrative expenses increased to ~~protect~~$16.7 million ~~our~~in fiscal ~~intellectual~~2007 ~~property~~from ~~rights~~$15.8 million ~~would~~in ~~significantly~~fiscal ~~impair~~2006, ~~their~~an ~~value~~increase of $0.9 million. The increase included incentive pay of $0.9 million earned in fiscal 2007 and ~~our~~increased ~~competitive~~professional ~~position~~fees $0.6 million for Sarbanes-Oxley compliance in fiscal 2007. The increase was partially offset by decreased operating expenses $0.6 million in fiscal 2007 as compared to the prior year.

WeRestructuring ~~rely on a combination of patent, copyright, trademark~~ and ~~trade~~ ~~secret~~Other ~~laws,~~Charges: asDuring ~~well~~fiscal asyears ~~confidentiality~~2006 ~~agreements~~we ~~and licensing~~recorded ~~arrangements,~~restructuring ~~to establish~~ and ~~protect our proprietary~~other ~~rights.~~charges ~~Although~~related weto ~~have~~the ~~numerous~~consolidation ~~issued patents~~ and ~~pending patent~~elimination ~~applications, we cannot be sure that any patents will be issued as a result~~ of ~~our~~various ~~pending~~operating ~~patent applications or, if issued, that any patent claim allowed will be sufficiently broad to protect our technology~~activities. InSuch ~~addition, we cannot be sure that~~charges ~~any~~included ~~existing~~personnel orseverance ~~future patents will not be challenged~~expenses, ~~invalidated~~ orlease ~~circumvented,~~expenses orfor ~~that any right granted~~limited-use ~~thereunder would provide us with meaningful protection of our technology. Despite our efforts to protect our proprietary rights~~facilities, ~~unauthorized parties may attempt to copy or otherwise obtain~~ and ~~use~~write-down ~~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~~values of ~~some~~certain ~~foreign~~assets ~~countries~~related ~~do not protect our proprietary rights~~ to the ~~same~~restructuring ~~extent, as do the laws~~ of ~~the United States~~operations. ~~Further,~~Restructuring ~~enforcing~~and ~~our intellectual~~other ~~property~~charges ~~rights~~were ~~could~~$1.0 million ~~result~~ in ~~the~~fiscal ~~expenditure~~2006, of ~~significant financial~~which, ~~and~~$0.8 million ~~managerial~~related ~~resources~~to ~~and~~ the ~~success~~closing of ~~these efforts~~a ~~cannot be predicted with certainty. Litigation has been~~leased ~~necessary~~facility ~~and may continue to be necessary~~ in ~~the~~Westlake ~~future~~Village, ~~to enforce~~California, ~~our intellectual property rights. Such litigation could be costly~~ and ~~its outcome cannot be predicted with certainty~~$0. ~~Our~~2 million ~~inability~~related to ~~adequately~~other ~~protect~~personnel ~~against unauthorized use of~~severance ~~our intellectual property would significantly impair its value and our competitive position~~expenses.

~~Various~~Litigation Settlements, Net: Stratos recorded $1.1 million of net litigation ~~matters,~~settlement income in fiscal year 2006, of which we$0.7 million ~~are~~related ~~defendants,~~to ~~could~~a ~~result~~settlement infrom ~~significant~~our ~~monetary~~insurance ~~damages~~company ~~and~~for reimbursement ~~expenses~~of orprevious ~~restrictions~~litigation onexpenses, ~~our~~and ~~ability~~$0.4 million related to ~~sell~~patent ~~our products~~infringement settlements.

WeInvestment ~~are~~Income, ~~involved~~Net: inInvestment ~~various~~income, ~~litigation~~net ~~matters~~of ~~that~~investment ~~arise~~expense, ~~from time~~increased to ~~time~~$1.8 million in fiscal ~~the~~2007 ~~ordinary~~from ~~course of business~~$1.2 million ~~Our~~in ~~Annual Reports~~fiscal on2006. ~~Form 10-K~~Investment ~~and~~income ~~quarterly~~consists ~~reports~~of earnings on the ~~Form 10~~short-Qterm ~~describe~~investment ~~certain~~of ~~matters,~~excess incash ~~which~~balances. weThe ~~are defendants.~~increase ~~See~~is ~~discussion~~attributed ~~under~~to ~~Part I,~~increases ~~Item 3:~~in interest ~~“Legal~~rates ~~Proceedings”~~earned ~~above~~throughout fiscal 2007.

InOther ~~recent~~Income: ~~years,~~Other ~~there~~income ~~has~~was ~~been~~$1.1 million ~~significant litigation~~ in ~~the United~~fiscal ~~States~~2007 ~~involving patents~~ and ~~other~~was ~~intellectual~~comprised ~~property~~primarily of ~~rights.~~unrealized ~~From~~foreign ~~time~~exchange togains ~~time,~~on ~~third~~intercompany ~~parties~~loans ~~may~~recorded ~~assert~~in ~~patent, copyright~~our ~~and~~operations ~~other intellectual property rights to technologies used~~ in ~~our~~the ~~business~~United Kingdom. InOther ~~addition,~~income ~~our~~in ~~rights~~fiscal to2006 ~~use~~was ~~our~~$0.8 million ~~name~~and ~~or other~~was ~~trademarks~~due ~~are~~primarily ~~subject~~ to ~~challenge by others~~$0.8 million ~~Any claims,~~of ~~with~~gains orrelated ~~without~~relating ~~merit,~~to ~~could~~the beresolution ~~time-consuming, result in costly litigation,~~ and ~~divert~~reversal ~~the efforts~~ of ~~our~~prior ~~technical~~period accruals, and ~~management~~ ~~personnel~~$0.3 million ~~If we are unsuccessful in defending~~of ~~ourselves~~various ~~against~~other ~~such claims~~items, wepartially ~~could~~offset beby ~~subject~~$0.3 million ~~to significant monetary damages and may be required to do one or more~~ of ~~the~~unrealized ~~following:~~foreign ~~(1) stop~~exchange ~~using~~losses ~~the challenged~~on ~~technology~~intercompany orloans ~~selling~~recorded in our ~~products~~operations ~~that~~in ~~use~~the orUnited ~~incorporate such~~Kingdom. ~~technology, (2) attempt to obtain a license to sell or use the relevant~~

35Income Taxes: Through April 30, 2007 we had recorded a valuation allowance of $80.0 million against deferred income tax assets primarily associated with tax loss carry forwards. This allowance is necessary because our significant operating losses experienced in recent years establishes a presumption that realization of these income tax benefits does not meet a “more likely than not” standard.

~~technology~~As of April 30, ~~which~~2007 ~~license~~we ~~may~~have ~~not~~net beoperating ~~available~~loss oncarry ~~reasonable~~forwards of approximately $183.7 million. We ~~terms~~believe orthat atour ~~all,~~acquisition ~~(3) attempt~~of toSterling ~~license~~Holding aCompany ~~substitute~~in November 2003 triggered Internal ~~technology~~Revenue Code Section 382 limitations on ~~reasonable~~the ~~terms~~net oroperating ~~(4)~~loss that existed prior to the acquisition, which was approximately $132.5 ~~redesign~~million. Of that amount, we believe the available ~~applicable~~utilization ~~products~~of the net operating loss is limited to ~~avoid~~approximately ~~infringement~~$2 million on an annual basis. Our net operating loss carry forwards will expire between 2022 and 2026.

35 In the event a claim against us were 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.

RisksTable Relating to the Securities Markets and Ownership of Our Common Stock: Contents

~~The~~Fiscal ~~market~~years ~~prices~~ended ~~for~~April 30, ~~securities~~2006 ~~of technology related companies have been volatile in recent years~~ and ~~our stock price could fluctuate significantly.~~2005

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:


	2006						2005						Change
	Dollars			%			Dollars			%			Dollars			%
Revenues:
Net sales	$	79,042			99	%	$	79,931			99	%	$	(889	)		(1	%)
License fees and royalties		540			1	%		523			1	%		17			3	%

Total revenues		79,582			100	%		80,454			100	%		(872	)		(1	%)

Cost of revenues		50,090			63	%		52,642			65	%		(2,552	)		(5	%)

Gross profit		29,492			37	%		27,812			35	%		1,680			6	%

Operating expenses
Research and development		8,270			10	%		9,518			12	%		(1,248	)		(13	%)
Sales and marketing		10,212			13	%		10,467			13	%		(255	)		(2	%)
General and administrative		15,781			20	%		21,907			27	%		(6,126	)		(28	%)
Restructuring and other charges		1,023			1	%		4,679			6	%		(3,656	)		(78	%)
Litigation settlements, net		(1,100	)		(1	%)		(2,553	)		(3	%)		1,453			(57	%)

Total operating expenses		34,186			43	%		44,018			55	%		(9,832	)		(22	%)


Loss from operations		(4,694	)		(6	%)		(16,206	)		(20	%)		11,512			(71	%)

Investment income, net		1,219			2	%		553			1	%		666			120	%
Other income		838			1	%		464			1	%		374			81	%

Loss before income taxes		(2,637	)		(3	%)		(15,189	)		(18	%)		12,552			(83	%)
Income tax provision		(194	)		(1	%)		(118	)		0	%		(76	)		64	%

Net loss		(2,831	)		(4	%)		(15,307	)		(18	%)		12,476			(82	%)

Preferred stock dividend		(1,147	)		(1	%)		(350	)		0	%		(797	)		228	%

Net loss attributable to common shareholders	$	(3,978	)		(5	%)	$	(15,657	)		(18	%)	$	11,679			(75	%)

•Net ~~Economic~~Sales: ~~and~~Net ~~stock~~sales ~~market~~decreased ~~conditions~~to ~~generally~~$79.0 million ~~and~~in ~~specifically~~fiscal as2006 ~~they~~from ~~may~~$79.9 million ~~impact~~in ~~participants~~fiscal 2005. This $0.9 million decrease includes a $2.3 million decrease in the ~~communications~~net ~~industry~~sales •into ~~Earnings~~the telecom/metro ~~and~~end ~~other~~market, ~~announcements~~$1.7 million ~~by,~~decrease ~~and~~into ~~changes~~the instorage/enterprise end market ~~evaluations~~and ~~of,~~a ~~participants~~$1.3 million indecrease ~~the~~into ~~communications~~other ~~industry~~end •markets. ~~Changes~~These indecreases ~~financial~~were ~~estimates~~offset ~~and~~in ~~recommendations~~part by ~~securities~~a ~~analysts~~$4.4 million increase ~~following~~of ~~our~~net ~~stock~~sales •into ~~Announcements~~the ordata ~~implementation~~networking byend usmarket. orSales ~~our~~into ~~competitors~~the ofmilitary/government ~~technical~~end market ~~innovations~~were orunchanged ~~new~~year ~~products,~~over ~~and~~year. •Our ~~Strategic~~total ~~moves~~sales byorder usbacklog orincreased ~~our~~to ~~competitors~~$13.6 million as of April 30, ~~such~~2006 from $11.5 million as ~~acquisitions~~of April 30, 2005.

InLicense ~~addition,~~Fees ~~the~~and ~~securities~~Royalties: ofLicense ~~many~~fees ~~companies have experienced extreme price~~ and ~~volume~~royalties ~~fluctuations~~were ~~in recent years, often unrelated to the companies’ operating performance~~$0. ~~Specifically,~~5 million ~~market~~in ~~prices~~fiscal ~~for~~2006 ~~securities~~and ~~of technology related~~in ~~companies~~fiscal ~~have frequently reached elevated levels, often following their initial public offerings~~2005. ~~These~~License ~~levels~~fees ~~may~~consist ~~not be~~of ~~sustainable~~payments ~~and~~contingent ~~may~~on ~~not~~sales ~~bear~~volume ~~any~~of ~~relationship~~licensed ~~to these companies’ operating performances~~products.

~~Provisions~~Cost inof ~~our~~Revenues ~~charter~~and ~~documents~~Gross ~~and~~Margins: ~~Delaware~~Cost ~~law~~of ~~and~~revenues ~~our~~decreased ~~shareholder~~to ~~rights~~$50.1 million ~~plan~~in ~~may~~fiscal ~~delay~~2006 from or$52.6 million ~~prevent~~in anfiscal ~~acquisition~~2005. Gross profit as a percentage of ~~our~~total ~~company~~revenues, ~~which~~or ~~could~~gross ~~decrease~~margin increased ~~the~~to ~~value~~37.1% ofin ~~the~~fiscal ~~shares~~2006 offrom ~~our~~34.6% ~~common~~in ~~stock~~fiscal 2005. The increase in gross margins is attributed to more profitable sales mix and a reduction in manufacturing costs.

~~Our~~Cost ~~restated~~of ~~certificate~~sales ofwas ~~incorporation~~charged ~~and~~approximately ~~bylaws~~$1.4 million 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~~$1.0 million ~~These~~in ~~provisions~~fiscal ~~include~~2006 ~~the~~and ~~authority of our board of directors has the right to issue preferred stock without shareholder approval~~2005, ~~which could be used~~ to ~~dilute the~~ ~~stock~~increase ownership of a potential hostile acquirer. Delaware law also imposes some restrictions on mergers and business combinations between us and any holder of 15% or more of our outstanding common stock. These provisions apply even if the ~~offer~~ ~~may~~reserve befor ~~considered~~obsolete ~~beneficial by some shareholders. In addition, we have adopted a stockholder rights plan designed to protect Stratos~~ and ~~its~~excess ~~shareholders from unfair or coercive takeover tactics, that is similar to stockholder rights plans adopted by many other companies~~inventory.

ItemTable 7A.of Quantitative and Qualitative Disclosures About Market RiskContents

WeResearch ~~are~~and ~~subject~~Development: toResearch ~~certain market risks, including foreign currency fluctuations~~ and ~~interest~~development ~~rates.~~expenses ~~Although~~decreased ~~our~~to ~~Stratos U~~$8.K.3 million ~~subsidiary enters into transactions~~ in ~~currencies other~~fiscal ~~than~~2006 ~~its functional currency, the Pound Sterling, foreign currency exposures arising~~ from ~~these~~$9.5 million ~~transactions~~in ~~are~~fiscal ~~not material to us~~2005. The ~~primary~~$1.2 million ~~foreign~~decrease ~~currency~~was ~~exposure arises from~~ the ~~translation~~result of ~~our~~a ~~net equity investment in our foreign subsidiary to U~~$1.S.2 ~~Dollars.~~million decrease ~~We view our investment~~ in ~~our foreign~~personnel ~~subsidiary~~costs asdedicated ~~long-term. The primary currency~~ to ~~which we~~research ~~are~~and ~~exposed is the Pound Sterling~~development.

WeSales doand ~~not~~Marketing: ~~have~~Sales ~~exposure~~and tomarketing ~~interest~~expenses ~~rate~~decreased ~~risk related~~ to ~~our debt~~$10.2 million ~~obligation~~in ~~because~~fiscal ~~the~~2006 ~~interest~~from $10.5 million ~~rate~~in isfiscal ~~fixed~~2005. ~~Our~~This ~~market risks~~decrease ~~include~~was ~~lower~~due ~~income~~to ~~from~~lower ~~our~~sales ~~short-term~~and ~~investments~~marketing ifsalaries, fringe ~~interest~~benefits, ~~rates~~bonuses ~~decline~~and commissions.

~~Item~~General and Administrative: General and administrative expenses decreased to $15.8 million in fiscal 2006 from $21.9 million ~~Financial~~in ~~Statements~~fiscal 2005. This $6.1 million decrease was due to a $3.5 million decrease in legal and ~~Supplementary~~professional ~~Data~~fees related to litigation that has since been settled, a $1.5 million decrease in general operating expenses, and a $1.1 million decrease in salaries and bonus expense.

Restructuring and Other Charges: During fiscal years 2006 and 2005, we recorded restructuring and ~~Index~~other charges related to ~~Financial~~the ~~Statements~~consolidation and elimination of various operating activities. Such charges included personnel severance expenses, lease expenses for limited-use facilities, and write-down of the values of certain assets related to the restructuring of operations. Restructuring and other charges were $1.0 million in fiscal 2006, of which, $0.8 million related to the closing of a leased facility in Westlake Village, California, and $0.2 million related to other personnel severance expenses. Restructuring charges in fiscal 2005 were $4.7 million, of which $2.7 million related to personnel and severance costs and $2.0 million related to the lease obligation for a limited use facility that we have been unable to sub-lease through the end of its lease term in 2007.

Report of Independent Registered Public Accounting Firm		39
Consolidated Balance Sheets at April 30, 2005 and 2004		40
Consolidated Statements of Operations
	For the fiscal years ended April 30, 2005, 2004, and 2003	41
Consolidated Statements of Shareholders’ Equity
	For the fiscal years ended April 30, 2005, 2004, and 2003	42
Consolidated Statements of Cash Flows
	For the fiscal years ended April 30, 2005, 2004, and 2003	43
Consolidated Statements of Comprehensive Loss
	For the fiscal years ended April 30, 2005, 2004, and 2003	44
Notes to Consolidated Financial Statements		45
Quarterly Results of Operations (Unaudited)		61

Litigation Settlements, Net: Stratos recorded $1.1 million of net litigation settlement income in fiscal year 2006, of which $0.7 million related to a settlement from our insurance company for reimbursement of previous litigation expenses, and $0.4 million related to patent infringement settlements. In fiscal 2005, Stratos recorded $2.6 million of net litigation settlement income, of which $4.4 million related to net settlements of several patent infringement cases, and was partially offset by $1.8 million in settlements paid by Stratos related to outstanding litigation.

37Investment Income, Net: Investment income, net of investment expense, increased to $1.2 million in fiscal 2006 from $0.6 million in fiscal 2005. Investment income consists of earnings on the short-term investment of excess cash balances. The increase is attributed to increases in interest rates earned throughout fiscal 2006.

Other Income: Other income in fiscal 2006 was $0.8 million and was due primarily to $0.8 million ~~REPORT~~of OFgains ~~INDEPENDENT~~related ~~REGISTERED~~relating ~~PUBLIC~~to ~~ACCOUNTING~~the ~~FIRM~~resolution and reversal of prior period accruals, and $0.3 million of various other items, partially offset by $0.3 million of unrealized foreign exchange losses on intercompany loans recorded in our operations in the United Kingdom. Other income in fiscal 2005 was $0.5 million and was comprised primarily of unrealized foreign exchange losses on intercompany loans recorded in our operations in the United Kingdom.

Income Taxes: Through April 30, 2006 we had recorded a valuation allowance of $79.9 million ~~The~~against ~~Board~~deferred income tax assets primarily associated with tax loss carry forwards. This allowance is necessary because our significant operating losses experienced in recent years establishes a presumption that realization of ~~Directors~~these ~~and~~income ~~Shareholders~~tax benefits does not meet a “more likely than not” standard.

37 ~~Stratos International, Inc.~~

WeTable have audited the accompanying consolidated balance sheets of Stratos International, Inc. and subsidiaries as of April 30, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, cash flows and comprehensive loss for each of the three years in the period ended April 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. Contents

WeAs ~~conducted our audits in accordance with the standards~~ of ~~the Public~~April 30, ~~Company~~2006 ~~Accounting Oversight Board (United States). Those standards require that~~ we ~~plan~~have ~~and~~net ~~perform~~operating ~~the~~loss ~~audit~~carry toforwards ~~obtain reasonable~~of ~~assurance~~approximately ~~about~~$178.3 million ~~whether the financial statements are~~at ~~free~~April 30, ~~of material misstatement~~2006. We ~~were~~believe ~~not~~that ~~engaged~~our toacquisition ~~perform an audit~~ of ~~the~~Sterling Holding Company’s ~~internal~~in ~~control over financial~~November 2003 ~~reporting.~~triggered ~~Our~~Internal ~~audits~~Revenue ~~included~~Code ~~consideration~~Section 382 oflimitations ~~internal~~on ~~control over~~the ~~financial~~net ~~reporting~~operating asloss ~~a basis for designing audit procedures~~ that ~~are appropriate in the circumstances, but not~~existed ~~for~~prior ~~the~~to ~~purpose of expressing an opinion on~~ the ~~effectiveness of the Company’s internal control over financial reporting. Accordingly~~acquisition, wewhich ~~express~~was noapproximately ~~such opinion~~$132.5 million. AnOf ~~audit~~that ~~also includes examining~~amount, onwe abelieve ~~test basis, evidence supporting~~ the ~~amounts and~~ ~~disclosures~~available inutilization ~~the~~of ~~financial statements, assessing~~ the ~~accounting~~ ~~principles~~net ~~used~~operating ~~and~~loss ~~significant~~is ~~estimates~~limited ~~made~~to ~~by management,~~approximately ~~and~~$2 million ~~evaluating~~on ~~the~~an ~~overall financial statement~~annual ~~presentation~~basis. WeOur ~~believe~~net ~~that~~operating ~~our~~loss ~~audits~~carry ~~provide~~forwards awill ~~reasonable basis~~expire ~~for~~between ~~our~~2022 ~~opinion~~and 2026.

InLIQUIDITY ~~our~~AND ~~opinion,~~CAPITAL ~~the financial statements referred to above~~RESOURCES: present fairly, in all material respects, the consolidated financial position of Stratos International, Inc. and subsidiaries as of April 30, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended April 30, 2005, in conformity with U.S. generally accepted accounting principles.

~~/s/~~Net ~~Ernst~~cash &provided ~~Young~~(used) in ~~LLP~~operating activities totaled $6.7 million, $6.0 million and ($3.8) million for fiscal years 2007, 2006 and 2005 respectively. Cash provided from operating activities for fiscal 2007 resulted primarily from net income after adding back non-cash items including depreciation and amortization. Cash was also provided from decreases in refundable income tax receivables, prepaid expenses and increases in accounts payable offset in part by increases in inventories and trade receivables. Cash provided from operating activities for fiscal 2006 resulted primarily from net income after adding back non-cash items including depreciation and amortization. Cash was also provided from decreases in inventories, prepaid expenses and increases in accounts payable offset in part by increases in trade receivables.

Day’s sales outstanding in accounts receivable was 57 days at April 30, 2007 compared to 60 days at ~~Chicago~~April 30, ~~Illinois~~2006.

~~June~~Net cash (used) 16provided by investing activities was ($1.5) million, ($1.3) million and $11.2 million in fiscal 2007, 2006 and 2005, respectively. These amounts reflect the net proceeds from the sale of short-term investments, the proceeds from the sale of assets, offset in part by the purchases of equipment and facilities in all fiscal years.

38Net cash (used) by financing activities was ($3.0) million, ($6.3) million and ($2.0) million in fiscal 2007, 2006 and 2005, respectively. Net cash used in financing activities for fiscal 2007 represents $1.9 million for the purchase of treasury shares, $1.0 million for the redemption of preferred shares, $0.3 million of dividends on preferred stock offset in part by $0.2 million of proceeds from the exercise of stock options. Net cash used in financing activities for fiscal 2006 represents $3.0 million for the redemption of preferred shares, $1.6 million for the purchase of treasury shares, $1.1 million of dividends on preferred stock, $0.8 million of repayment of long term debt, offset in part by $0.3 million of proceeds from the exercise of stock options. Net cash used in financing activities from fiscal 2005 represents $2.2 million of repayments of long-term borrowings, and $0.4 million of dividends on preferred stock, offset in part by $0.6 million of proceeds from the exercise of stock options.

~~STRATOS~~As ~~INTERNATIONAL~~of April 30, 2007, our principal source of liquidity was approximately $33.6 ~~INC~~million in cash, cash equivalents and short-term investments.

Since many of our costs are fixed in the near term, we expect to continue to incur significant ~~CONSOLIDATED~~manufacturing, ~~BALANCE~~research ~~SHEETS~~and development, sales and marketing and administrative expenses.

		At April 30,
		2005			2004
		(In thousands, except par
		value and share amounts)
ASSETS
Current assets:
	Cash and cash equivalents	$	13,276		$	7,830
	Short-term investments		18,552			29,159
	Accounts receivable, net		12,926			12,544
	Inventories		15,974			15,964
	Refundable income taxes		4,267			4,176
	Prepaid expenses and other current assets		6,139			1,326
Total current assets			71,134			70,999
Property, plant and equipment, net			21,338			26,956
Intangible assets, net			13,364			14,665
Goodwill and other indefinite-lived assets			6,110			6,110
Assets held for sale			2,936			4,441
Other assets			98			5,879
Total assets		$	114,980		$	129,050
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	6,987		$	8,422
	Accrued expenses		11,259			7,373
	Current portion of long term-debt		815			2,230
Total current liabilities			19,061			18,025
Long-term debt, less current portion			—			801
Deferred income taxes			446			445
Series B redeemable preferred stock			5,000			5,000
Shareholders’ equity:
Preferred stock, $0.01 par value: Authorized 5,000,000 shares; issued and outstanding 50,000 shares of Series B redeemable preferred stock at April 30, 2005 and 2004			—			—
Common stock, $0.01 par value: Authorized 100,000,000 shares; issued and outstanding 14,559,348, and 14,265,510 shares at April 30, 2005 and 2004, respectively			146			143
Cost of shares in treasury			(259	)		(248	)
Additional paid-in capital			320,410			319,212
Unearned compensation			(3,505	)		(3,809	)
Accumulated other comprehensive income (loss)			(29	)		114
Accumulated deficit			(226,290	)		(210,633	)
Total shareholders’ equity			90,473			104,779
Total liabilities and shareholders’ equity		$	114,980		$	129,050

We continue to examine and pursue opportunities for improving gross margins and cash flows. The merger with Sterling combined two companies with brands that are well respected by segments of the

38 ~~See notes to consolidated financial statements~~

39 Table of Contents

telecommunications, military, video and broadcast customer base, and that seek solutions to ~~STRATOS~~difficult ~~INTERNATIONAL~~problems at the electrical side of the high- performance, ~~INC~~ high-bandwidth interfaces. We believe that these products, when combined with superior customer service, provide the potential for improving gross margins and cash flows.

Our future capital requirements will depend on a number of factors, including our ability to ~~CONSOLIDATED~~generate ~~STATEMENTS~~increased OFsales ~~OPERATIONS~~and our ability to manage operating expenses. The continued diversification of our end markets and expansion of our product offerings through internal and, possibly, external growth could materially change our level of cash and cash equivalents. This diversification may require us to seek equity or debt financing. Our cash commitments are the payment of cumulative cash dividends on the Series B Preferred Stock on terms specified in the Certificate of Designation for such stock, in the amount of approximately $0.1 million annually. Also, we are obligated to redeem all shares of Series B Preferred Stock in accordance with the terms of the Certificate of Designation for such stock no later than 60 days following the occurrence of certain events relating to the achievement of $250 million in annual revenue or $500 million in market capitalization. In addition, in the event of a change of control, the outstanding Series B Preferred Stock becomes redeemable for an aggregate of $1.0 million, subject to upward adjustment under certain circumstances relating to market price of our Common Stock.

		For the fiscal years ended April 30,
		2005			2004			2003
		(In thousands, except per share amounts)
Revenues:
	Net sales	$	79,931		$	49,379		$	37,236
	License fees and royalties		523			990			1,180
Total revenues			80,454			50,369			38,416
Cost of revenues			52,642			41,954			45,809
Gross profit (loss)			27,812			8,415			(7,393	)
Operating expenses
	Research and development		9,518			8,800			20,138
	Sales and marketing		10,467			8,225			7,063
	General and administrative		21,907			20,799			12,706
	Impairment of goodwill		—			—			28,429
	Write off of in-process research and development		—			—			2,070
	Impairment of other assets		—			—			37,105
	Restructuring and other charges		4,679			3,066			3,100
	Litigation settlements, net		(2,553	)		(454	)		(13,218	)
Total operating expenses			44,018			40,436			97,393
Loss from operations			(16,206	)		(32,021	)		(104,786	)
Gain on sale of business			—			1,305			—
Investment income, net			553			777			1,117
Other income			464			1,057			360
Loss before income taxes			(15,189	)		(28,882	)		(103,309	)
Income tax (provision) credit			(118	)		1,797			—
Loss before cumulative effect of change in accounting principle			(15,307	)		(27,085	)		(103,309	)
Cumulative effect of change in accounting principle			—			—			(16,982	)
Net loss			(15,307	)		(27,085	)		(120,291	)
Preferred stock dividend requirements			(350	)		(142	)		—
Net loss attributable to common shareholders		$	(15,657	)	$	(27,227	)	$	(120,291	)
Per share data, basic and diluted:
	Loss before cumulative effect of change in accounting principle	$	(1.13	)	$	(2.60	)	$	(14.12	)
	Cumulative effect of change in accounting principle		—			—			(2.32	)
	Net loss		(1.13	)		(2.60	)		(16.44	)
	Preferred stock dividend requirements		(0.03	)		(0.01	)		—
	Net loss attributable to common shareholders	$	(1.16	)	$	(2.61	)	$	(16.44	)
Weighted average number of common shares outstanding
	Basic and diluted		13,546			10,444			7,317

We believe that our current cash balances will be sufficient to meet our cash needs for working capital, capital expenditures, the Series B Preferred Stock dividend and repayments of borrowings for the next 12 months.

40CONTRACTUAL OBLIGATIONS:

~~STRATOS~~Stratos’ ~~INTERNATIONAL,~~contractual obligations as of April ~~INC~~30, 2007 are as follows:

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


	Payment due by period (in thousands)
			Less than						More than
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years
Long-term debt obligations	$	—	$	—	$	—	$	—	$	—
Operating lease obligations		1,906		603		1,055		248		—
Purchase obligations		6,393		6,393		—		—		—

Total	$	8,299	$	6,996	$	1,055	$	248	$	—

~~For~~OFF-BALANCE ~~the~~SHEET ~~fiscal years ended April 30, 2005, 2004 and~~ARRANGEMENTS: ~~2003~~

We are not party to any transactions, arrangements and other relationships with unconsolidated ~~(In~~entities ~~thousands~~or other persons that are reasonably likely to have a current or future material effect on our financial condition, ~~except~~results ~~share~~of ~~amounts)~~operations, liquidity, or capital resources. We have no exposures to off-balance sheet arrangements; no special purpose entities; and no activities that include non-exchange-traded contracts accounted for at fair value.

							Additional						Accum. Other						Total
	Common			Treasury			Paid-In			Unearned			Comprehensive			Accumulated			Shareholders’
	Stock			Shares			Capital			Compensation			Income(Loss)			Deficit			Equity
Balance at April 30, 2002	$	728					$	283,162		$	—		$	(295	)	$	(63,115	)	$	220,480
Net loss																	(120,291	)		(120,291	)
Foreign currency translation adjustments														449						449
Issuance of 507,700 shares of restricted common stock		5						427												432
Option exercises (2,455 shares)		—						6												6
Purchase of 251, 959 shares of common stock for treasury					(31	)														(31	)
Effect of 1 for 10 reverse stock split		(659	)					659												—
Balance at April 30, 2003		74			(31	)		284,254			—			154			(183,406	)		101,045
Net loss																	(27,085	)		(27,085	)
Dividends on redeemable preferred stock																	(142	)		(142	)
Foreign currency translation adjustments														(40	)					(40	)
Issuance of 745,351 shares of restricted common stock		7						3,802			(3,809	)								—
Option exercises (98,675)		1						260												261
Purchase of common stock for treasury					(217	)														(217	)
Consideration for acquisition (6,082,000 shares)		61						30,896												30,957
Balance at April 30, 2004		143			(248	)		319,212			(3,809	)		114			(210,633	)		104,779
Net loss																	(15,307	)		(15,307	)
Dividends on redeemable preferred stock																	(350	)		(350	)
Foreign currency translation adjustments														(143	)					(143	)
Issuance of 383,834 shares of restricted common stock		4						1,658			(1,662	)								—
Modification of stock option agreements		—						377												377
Amortization of restricted stock grants											550									550
Forfeiture of 282,074 shares of restricted common stock		(3	)					(1,448	)		1,416									(35	)
Option exercises (217,749 shares)		2						611												613
Purchase of common stock for treasury					(11	)														(11	)
Balance at April 30, 2005	$	146		$	(259	)	$	320,410		$	(3,505	)	$	(29	)	$	(226,290	)	$	90,473

SeeTable notesof to consolidated financial statements Contents

41Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to certain market risks, including foreign currency fluctuations and interest ~~STRATOS~~rates ~~INTERNATIONAL~~applicable to our investments. Although our Stratos U.K. subsidiary enters into transactions in currencies other than its functional currency, ~~INC~~ the Pound Sterling, 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 subsidiary to U.S. Dollars. We view our investment in our foreign subsidiary as long-term. The primary currencies to which we are exposed are the Pound Sterling and Euro.

We do not have exposure to interest rate risk because we do not have any debt. Our market risks ~~CONSOLIDATED~~include ~~STATEMENTS~~lower OFincome ~~CASH~~from ~~FLOWS~~our short-term investments if interest rates decline.

		For the fiscal years ended April 30,
		2005			2004			2003
		(In thousands)
Operating activities:
Net loss		$	(15,307	)	$	(27,085	)	$	(120,291	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Cumulative effect of a change in accounting principle		—			—			16,982
	Provision for Depreciation		6,550			6,280			13,600
	Provision for amortization of intangible assets		1,630			894			552
	Provision for amortization of stock based compensation		927			—			—
	Provision for impairment of goodwill		—			—			28,429
	Provision for impairment of other assets		—			910			39,175
	Provision for losses on accounts receivable		259			461			331
	Minority interest		—			(350	)		(148	)
	Gain on sale of business		—			(1,305	)		—
	Provision for excess and obsolete inventory		984			1,925			6,805
Changes in operating assets and liabilities:
	Accounts receivable		(641	)		27			213
	Inventories		(994	)		(2,309	)		1,222
	Prepaid expenses and other assets		544			1,746			(4,578	)
	Accounts payable and accrued expenses		2,276			730			(5,082	)
Net cash used in operating activities			(3,772	)		(18,076	)		(22,790	)
Investing activities:
Purchases of property, plant and equipment			(1,003	)		(3,268	)		(2,126	)
Purchases of short-term investments			(9,265	)		(45,896	)		(30,857	)
Sale of short-term investments			19,872			66,862			63,432
Acquisitions, net of cash acquired			—			8,120			(189	)
Net proceeds from sale of assets			1,578			4,381			1,209
Net cash provided by investing activities			11,182			30,199			31,469
Financing activities:
Repayment of long-term borrowings			(2,216	)		(3,598	)		(6,496	)
Dividends paid on preferred stock			(350	)		(142	)		—
Net proceeds from exercise of stock options			613			261			—
Purchase of shares for treasury			(11	)		(217	)		—
Distribution to former owners of acquired company to satisfy assumed liability			—			(12,000	)		—
Net cash used in financing activities			(1,964	)		(15,696	)		(6,496	)
Net increase (decrease) in cash and cash equivalents			5,446			(3,573	)		2,183
Cash and cash equivalents at beginning of year			7,830			11,403			9,220
Cash and cash equivalents at end of year		$	13,276		$	7,830		$	11,403
Supplemental cash flow data
Common stock issued in acquisition of company		$	—		$	30,957		$	—
Issuance of shares of restricted common stock		$	1,662		$	3,809		$	432

SeeTable notesof to consolidated financial statements Contents

42Item 8. Financial Statements and Supplementary Data

~~STRATOS~~Index ~~INTERNATIONAL, INC~~to Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


Reports of Independent Registered Public Accounting Firms			42
Consolidated Balance Sheets at April 30, 2007 and 2006			44
Consolidated Statements of Operations For the fiscal years ended April 30, 2007, 2006, and 2005			45
Consolidated Statements of Shareholders’ Equity For the fiscal years ended April 30, 2007, 2006, and 2005			46
Consolidated Statements of Cash Flows For the fiscal years ended April 30, 2007, 2006, and 2005			47
Consolidated Statements of Comprehensive Income (Loss) For the fiscal years ended April 30, 2007, 2006, and 2005			48
Notes to Consolidated Financial Statements			49

		For the fiscal years ended April 30,
		2005			2004			2003
		(In thousands)
Net loss		$	(15,307	)	$	(27,085	)	$	(120,291	)
Other comprehensive income (loss):
	Foreign currency translation adjustment		(143	)		(40	)		449
Comprehensive loss		$	(15,450	)	$	(27,125	)	$	(119,842	)

SeeTable notesof to consolidated financial statements Contents

43Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders ~~STRATOS~~Stratos ~~INTERNATIONAL~~International, ~~INC~~Inc. ~~AND SUBSIDIARIES~~

We have audited the accompanying consolidated balance sheets of Stratos International, Inc. ~~NOTES~~and TOsubsidiaries ~~CONSOLIDATED~~as ~~FINANCIAL~~of ~~STATEMENTS~~April 28, 2007 and April 29, 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

~~Note~~ In 1our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stratos International, Inc. ~~Summary~~at April 28, 2007 and April 29, 2006, and the results of ~~Significant~~its ~~Accounting~~operations ~~Policies~~and its cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America.

~~Principles~~As ofdiscussed ~~consolidation:~~in ~~The~~Note 1 to the consolidated financial statements, ~~include~~effective April 30, 2006, the ~~accounts~~Company adopted Statement of ~~the~~Financial ~~parent~~Accounting ~~company and~~Standards ~~all~~No. 123(R), ~~subsidiaries~~“Share-Based Payment”, ~~after~~using ~~elimination~~the ofmodified ~~intercompany~~prospective ~~accounts and~~transition ~~transactions~~method.

~~Foreign~~We ~~currency~~also ~~translation:~~have ~~The~~audited, ~~functional currency~~in ofaccordance ~~our~~with ~~foreign~~the ~~subsidiary~~standards isof the ~~local~~Public ~~currency~~Company ~~in the~~Accounting ~~United~~Oversight ~~Kingdom~~Board (~~the~~United ~~Pound Sterling~~States)~~. Accordingly~~, ~~its~~the ~~results~~effectiveness of Stratos International, Inc.’s internal ~~operations~~control ~~are~~over ~~translated~~financial ~~into~~reporting ~~U.S.~~as of April ~~Dollars~~28, ~~using~~2007 ~~average~~based on criteria established in Internal ~~exchange~~Control ~~rates~~— ~~during~~Integrated Framework issued by the ~~year,~~Committee ~~while~~of Sponsoring Organizations of the ~~assets~~Treadway Commission (COSO) and ~~liabilities are~~our ~~translated~~report ~~using~~dated ~~period~~July 11, ~~end~~2007 ~~exchange~~expressed ~~rates.~~an ~~Adjustments~~unqualified asopinion aon ~~result~~management’s assessment of, and the ~~translation~~effective ~~process~~operation ~~are~~of, ~~included~~internal incontrol ~~accumulated other~~over ~~comprehensive income (loss)~~financial reporting.

~~Use~~/s/ ofBDO ~~estimates: We prepare our financial statements in conformity with U.S. generally accepted accounting principles~~Seidman, ~~which requires us to make estimates and~~LLP ~~assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates.~~

~~Revenue recognition: Revenue from product sales~~Chicago, ~~net~~ ~~of trade discounts, is recognized when title passes, which~~Illinois ~~generally occurs upon shipment. We handle returns by replacing~~July 11, ~~repairing~~ ~~or issuing credit for defective products when~~2007 ~~returned. We establish a reserve for returns based on any known and anticipated returns and accordingly adjust revenue, accounts receivable and inventories.~~

42 Revenue from license fees and royalties represents payments received from licensees of patented technologies, which we also use in our own product offerings. These license agreements generally provide for fixed up-front and/or future payments or ongoing royalty payments based on sales volumes of licensed products that are recognized as revenue over the respective licensing periods. The timing and amounts of these payments is beyond our control and may vary significantly between periods. These license agreements expire at various dates through 2024. We will consider entering into similar agreements in the future; however, we cannot predict the timing and resulting amounts of license fees and royalties, if any.

ShippingTable andof handling fees and costs: We include shipping and handling fees billed to customers in “net sales,” and related costs in “sales and marketing” expenses. Shipping and handling fees in fiscal 2005, 2004 and 2003 were $0.3 million, $0.2 million, and $0.1 million, respectively. Product freight out costs in fiscal 2005, 2004, and 2003 were $0.3 million, $0.3 million, and $0.2 million, respectively. Contents

~~Research~~Report ~~and development costs: Costs associated with the development~~ of ~~new~~Independent ~~products~~Registered ~~are~~Public ~~charged~~Accounting ~~to expense when~~Firm ~~incurred.~~

~~Advertising:~~The WeBoard ~~expense~~of ~~all~~Directors ~~advertising costs as incurred. Advertising expenses in fiscal 2005, 2004,~~ and ~~2003~~Shareholders ~~were~~Stratos ~~$0.3 million~~International, $0Inc.~~5 million, and~~ ~~$0.3 million, respectively.~~

~~Stock-based~~We ~~compensation:~~have ~~The~~audited ~~Company~~the ~~has~~consolidated ~~elected to~~balance ~~follow~~sheet ~~Accounting~~of ~~Principles~~Stratos ~~Board~~International, ~~Opinion (“APB”) No~~Inc. ~~25,~~ ~~“Accounting~~and ~~for~~subsidiaries ~~Stock~~as of ~~Issued~~April 30, ~~to Employees~~2005,” and the related ~~interpretations~~consolidated instatements ~~accounting for~~of ~~its~~operations, ~~employee~~shareholders’ ~~stock~~equity, cash ~~options~~flows, and ~~awards.~~comprehensive ~~Under~~loss ~~APB~~for ~~Opinion No. 25, employee stock options are valued using~~ the ~~intrinsic~~ ~~method,~~year ~~and~~then noended. ~~compensation~~These ~~expense~~financial isstatements ~~recognized since~~are the responsibility ~~exercise price~~ of the ~~options~~Company’s ~~equals~~management. orOur responsibility is ~~greater than~~to ~~the~~express ~~fair~~an ~~market~~opinion ~~value~~on ofthese financial ~~the~~statements ~~underlying~~based ~~stock~~on asour ~~of the date of the grant~~audit.

44We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material ~~STRATOS~~respects, ~~INTERNATIONAL~~the consolidated financial position of Stratos International, ~~INC~~Inc. ~~AND~~and ~~SUBSIDIARIES~~subsidiaries as of April 30, 2005 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

~~NOTES~~/s/ TOErnst ~~CONSOLIDATED~~& ~~FINANCIAL~~Young ~~STATEMENTS —~~LLP ~~(Continued)~~

~~(all~~Chicago, ~~amounts in thousands~~Illinois June 16, ~~except share and per share~~2005 ~~data)~~

43 The following table shows the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation.”

	2005			2004			2003
Net loss attributable to common shareholders, as reported	$	(15,657	)	$	(27,227	)	$	(120,291	)
Add: Total stock based compensation recognized under intrinsic method for all awards		927			—			—
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards		(1,240	)		(2,040	)		(6,766	)
Pro forma net loss attributable to common shareholders	$	(15,970	)	$	(29,267	)	$	(127,057	)
Reported basic and diluted net loss per share attributable to common shareholders	$	(1.16	)	$	(2.61	)	$	(16.44	)
Pro forma basic and diluted net loss per share attributable to common shareholders		(1.18	)		(2.80	)		(17.36	)
Shares outstanding, basic and diluted		13,546			10,444			7,317

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

~~Cash~~Consolidated ~~and~~Balance ~~cash equivalents: Cash equivalents consist of time deposits and certificates of deposit with original maturities of three months or less and are carried at their approximate fair values.~~ Sheets

~~Short-term~~At ~~investments:~~April 30, ~~Short-term~~2007 ~~investments represent~~and ~~short-term corporate debt that is available for sale~~2006 to(In ~~meet~~thousands, ~~working~~except ~~capital~~par ~~needs. Cost approximates estimated fair~~ value ~~at the balance sheet date,~~ and ~~gross~~share ~~unrealized gains or losses are not significant. Interest earned relating to these securities is reported as a component of investment income.~~ amounts)

Financial instruments: Our financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and long-term debt. The fair values of these financial instruments approximate their net carrying values at April 30, 2005 and 2004.


	2007			2006
Assets:
Current assets:
Cash and cash equivalents	$	14,070		$	11,742
Short-term investments		19,500			19,000
Accounts receivable, net		15,915			13,606
Inventories		19,092			15,482
Refundable income taxes		87			1,837
Prepaid expenses and other current assets		370			590

Total current assets		69,034			62,257

Property, plant and equipment, net		11,524			16,437
Intangible assets, net		10,566			11,832
Goodwill and other indefinite-lived assets		5,664			5,664
Assets held for sale		2,600			2,864
Other assets		111			100

Total assets	$	99,499		$	99,154


Liabilities and shareholders’ equity:
Current liabilities:
Accounts payable	$	5,282		$	4,724
Accrued expenses		6,371			6,028
Income taxes payable		176			216

Total current liabilities		11,829			10,968

Series B redeemable preferred stock		982			1,979

Shareholders’ equity:
Preferred stock, Series B redeemable $0.01 par value: Authorized 1,000,000 shares; issued and outstanding 9,820 and 19,790 shares at April 30, 2007 and 2006 respectively.		—			—
Common stock, $0.01 par value: Authorized 20,000,000 shares; issued and outstanding 14,500,494, and 14,640,643 shares at April 30, 2007 and 2006, respectively		151			149
Cost of shares in treasury: 582,808 and 301,521 shares at April 30, 2007 and 2006 respectively.		(3,723	)		(1,871	)
Additional paid-in capital		319,847			318,207
Accumulated other comprehensive loss		(602	)		(9	)
Accumulated deficit		(228,985	)		(230,269	)

Total shareholders’ equity		86,688			86,207

Total liabilities and shareholders’ equity	$	99,499		$	99,154

~~Accounts~~See ~~receivable:~~notes ~~Accounts receivable represents amounts due from customers for products shipped or services performed. We make judgments as~~ to ~~the~~consolidated ~~collectibility of~~financial ~~accounts receivable based on historical trends and future~~statements ~~expectations and estimate an allowance for doubtful accounts.~~

44 These allowances adjust gross trade accounts receivable down to net realizable value. Accounts receivable balances are determined to be delinquent when the amount is past due based on payment terms with the customer.

Inventories:Table Inventories are stated at the lower of cost (first-in, first-out basis) or market. Cost includes material and conversion costs. Contents

~~Property~~Stratos International, ~~plant and equipment: Properties are stated on~~Inc ~~the basis of cost. Depreciation and amortization are provided on~~ ~~a straight-line basis over the estimated useful lives of the assets. Accelerated methods are generally used for income tax purposes.~~

~~Assets~~Consolidated ~~held~~Statements for sale: Assets held for sale represent property and equipment that is no longer in use and is actively marketed for sale. When we reclassify an asset to assets held for sale, we adjust the carrying value of ~~the underlying asset to its fair value based on the estimated net realizable proceeds.~~ Operations

45 For the fiscal years ended April 30, 2007, 2006 and 2005

~~STRATOS~~(In ~~INTERNATIONAL~~thousands, ~~INC.~~except ~~AND~~per ~~SUBSIDIARIES~~ share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	2007			2006			2005
Revenues:
Net sales	$	91,654		$	79,042		$	79,931
License fees and royalties		1,090			540			523

Total revenues		92,744			79,582			80,454

Cost of revenues		58,028			50,090			52,642

Gross profit		34,716			29,492			27,812


Operating expenses
Research and development		8,177			8,270			9,518
Sales and marketing		11,141			10,212			10,467
General and administrative		16,693			15,781			21,907
Restructuring and other charges		—			1,023			4,679
Litigation settlements, net		—			(1,100	)		(2,553	)

Total operating expenses		36,011			34,186			44,018


Loss from operations		(1,295	)		(4,694	)		(16,206	)

Investment income, net		1,821			1,219			553
Other income		1,118			838			464

Income (loss) before income taxes		1,644			(2,637	)		(15,189	)
Income tax provision		(14	)		(194	)		(118	)

Net income (loss)		1,630			(2,831	)		(15,307	)

Preferred stock dividend		(346	)		(1,147	)		(350	)


Net income (loss) attributable to common shareholders	$	1,284		$	(3,978	)	$	(15,657	)


Per share data, basic and diluted:
Basic earnings (loss) per share (weighted average)		0.09			(0.29	)		(1.16	)
Diluted earnings (loss) per share (weighted average)		0.09			(0.29	)		(1.16	)

Weighted average number of common shares outstanding:
Basic number of shares outstanding		13,672			13,888			13,546
Diluted number of shares outstanding		14,602			13,888			13,546

~~(all~~See ~~amounts~~notes into ~~thousands,~~consolidated ~~except~~financial ~~share and per share~~statements ~~data)~~

45 Intangible assets: Purchased intangible assets are recorded at fair value. We use discounted cash flow models to value intangible assets, and employ the help of independent appraisers for the valuation of significant intangible assets upon acquisition. The discounted cash flow models require assumptions about the timing and amount of future net cash inflows, risk, the cost of capital and terminal values.

Goodwill:Table We review goodwill for impairment on an annual basis, or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, we further evaluate the amount of impairment loss. Contents

~~Long-lived~~Stratos ~~assets: We review long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. We consider market conditions~~International, ~~legal factors and expected cash~~Inc ~~flows, among other factors, to reach a conclusion about the~~ recoverability of long-lived asset values. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. We measure an impairment loss as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

~~Reclassifications:~~Consolidated ~~Certain~~Statements ~~amounts~~of ~~previously~~Shareholders’ ~~reported in fiscal 2004 and 2003 related primarily to auction rate securities and restructuring activities and have been reclassified to conform to the presentation used in fiscal 2005.~~ Equity

~~The~~For ~~reclassification~~the ~~related~~fiscal toyears ~~restructuring~~ended ~~activities recognized amounts previously disclosed within cost of sales ($0.4~~April ~~million in 2004 and $0.9 million in 2003)~~30, ~~research~~ ~~and development ($0.5 million in 2004 and $1.1 million in 2003)~~2007, ~~and~~2006 ~~general~~ and administrative ($2.2 million in 2004 and $1.1 million in 2003) expenses to a separate restructuring line item within the consolidated statements of operations. The reclassification of auction rate securities reduced cash and cash equivalents and increased short-term investments by $7.7 million in 2004, and increased net cash provided by investing activities by $24.6 million in 2004 and $19.6 million in 2003 within the consolidated statements of cash flows. 2005

~~Recent Accounting Pronouncements:~~ (In ~~December 2004~~thousands, ~~the Financial~~except ~~Accounting~~share ~~Standards Board (FASB~~amounts) issued SFAS No. 153, Exchanges of Nonmonetary Assets. SFAS 153 amends “APB” Opinion No. 29, Accounting for Nonmonetary Transactions, to require exchanges of nonmonetary assets be accounted for at fair value, rather than carryover basis. Nonmonetary exchanges that lack commercial substance are exempt from this requirement. SFAS No. 153 is effective for nonmonetary exchanges entered into in fiscal years beginning after June 15, 2005. We do not enter into exchanges that could be considered nonmonetary; accordingly we do not currently expect the adoption of SFAS No. 153 to have a material impact on our financial statements.

In December 2004, the FASB issued SFAS No. 123(R), a revision to SFAS No. 123, Accounting for Stock-Based Compensation. This standard requires us to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. The Company is required to adopt SFAS No. 123(R) at the beginning of fiscal 2007. We anticipate that we will adopt the prospective method of transition under the statement. Under this method, we will begin recognizing compensation cost for equity based compensation for all new or modified grants after the date of adoption. In addition, we will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. We have not presently determined the effect of the adoption of the statement on our consolidated financial statements.


													Accum.
							Additional						Other Com-						Total
	Common			Treasury			Paid-in			Unearned			prehensive			Accumulated			Shareholders’
	Stock			Shares			Capital			Compensation			Income(Loss)			Deficit			Equity

Balance at April 30, 2004	$	143		$	(248	)	$	319,212		$	(3,809	)	$	114		$	(210,633	)	$	104,779
Net loss																	(15,307	)		(15,307	)
Dividends on redeemable preferred stock																	(350	)		(350	)
Foreign currency translation adjustments														(143	)					(143	)
Issuance of 383,834 shares of restricted common stock		4						1,658			(1,662	)								—
Modification of stock option agreements		—						377												377
Amortization of restricted stock grants											550									550
Forfeiture of 282,074 shares of restricted common stock		(3	)					(1,448	)		1,416									(35	)
Option exercises (217,749 shares)		2						611												613
Purchase of common stock for treasury					(11	)														(11	)

Balance at April 30, 2005		146			(259	)		320,410			(3,505	)		(29	)		(226,290	)		90,473

Net loss																	(2,831	)		(2,831	)
Dividends on redeemable preferred stock																	(1,147	)		(1,147	)
Foreign currency translation adjustments														20						20
Issuance of 278,900 shares of restricted common stock		3						2,020			(2,023	)								—
Amortization of restricted stock grants											987									987
Forfeiture of 28,871 shares of restricted common stock		(1	)					(140	)		141									—
Option exercises (80,043 shares)		1						317												318
Purchase of common stock for treasury					(1,612	)														(1,612	)

Balance at April 30, 2006		149			(1,871	)		322,607			(4,400	)		(9	)		(230,269	)		86,207

Adoption of SFAS No. 123(R)								(4,400	)		4,400									0
Net lncome																	1,630			1,630
Dividends on redeemable preferred stock																	(346	)		(346	)
Foreign currency translation adjustments														(593	)					(593	)
Issuance of 108,000 shares of restricted common stock		1						(1	)											—
Amortization of restricted stock grants and options								1,466												1,466
Forfeiture of 17,854 shares of restricted common stock		—						—												—
Option exercises (49,092 shares)		1						175												176
Purchase of common stock for treasury					(1,852	)														(1,852	)

Balance at April 30, 2007	$	151		$	(3,723	)	$	319,847		$	—		$	(602	)	$	(228,985	)	$	86,688

InSee ~~November~~notes ~~2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs, and spoilage, be charged~~ to ~~expense~~consolidated infinancial ~~the period they~~statements ~~are incurred rather than capitalized as a component of inventory costs. SFAS No. 151 is effective~~

STRATOSTable INTERNATIONAL,of INC. AND SUBSIDIARIES Contents

~~NOTES~~Stratos TOInternational, ~~CONSOLIDATED FINANCIAL STATEMENTS —~~Inc ~~(Continued)~~

~~(all~~Consolidated ~~amounts~~Statements inof ~~thousands,~~Cash ~~except share and per share data)~~ Flows

~~for~~For ~~inventory~~the ~~costs incurred in~~ fiscal ~~periods~~years ~~beginning~~ended ~~after June~~April 1530, 2005. The adoption of this standard may result in higher costs in periods where production levels are lower than normal ranges of production. Because actual future production levels are subject to many factors2007, ~~including~~2006 ~~demand~~and ~~for our products, we cannot presently determine if the adoption of SFAS No. 151 will have a material impact on future results of operations.~~ 2005

(In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, effective for exit or disposal activities initiated after December 31, 2002. Our restructuring plan initiated in fiscal 2003 was not accounted for under SFAS No. 146. Stratos recorded a pre-tax charge of approximately $3.1 million when Stratos management approved the restructuring plan. If we had accounted for this restructuring plan under SFAS No. 146, $0.4 million of the $3.1 million charge would have been recognized as incurred and not accrued in fiscal 2003. thousands)

Note 2. Accounts Receivable


	2007			2006			2005
Operating activities:
Net income (loss)	$	1,630		$	(2,831	)	$	(15,307	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for depreciation		6,088			5,853			6,550
Provision for amortization of intangible assets		1,266			1,532			1,630
Provision for amortization of stock based compensation		1,466			987			927
Provision for losses on accounts receivable		100			320			259
Gain on sale of assets		92			(52	)		—
Provision for excess and obsolete inventory		868			1,372			984
Changes in operating assets and liabilities:
Accounts receivable		(2,618	)		(999	)		(641	)
Inventories		(4,740	)		(880	)		(994	)
Prepaid expenses and other assets		1,953			7,977			544
Accounts payable and accrued expenses		553			(7,281	)		2,276

Net cash provided (used) in operating activities		6,658			5,998			(3,772	)

Investing activities:
Purchases of property, plant and equipment		(1,157	)		(1,024	)		(1,003	)
Purchases of short-term investments		(5,000	)		(13,896	)		(9,265	)
Sale of short-term investments		4,500			13,448			19,872
Net proceeds from sale of assets		154			197			1,578

Net cash provided (used) by investing activities		(1,503	)		(1,275	)		11,182

Financing activities:
Repayment of long-term borrowings		—			(815	)		(2,216	)
Dividends paid on preferred stock		(346	)		(1,147	)		(350	)
Net proceeds from exercise of stock options		176			318			613
Purchase of shares for treasury		(1,852	)		(1,612	)		(11	)
Redemption of preferred shares		(997	)		(3,021	)		—

Net cash (used) in financing activities		(3,019	)		(6,277	)		(1,964	)


Effect of exchange rates on cash		192			20			—

Net increase (decrease) in cash and cash equivalents		2,328			(1,534	)		5,446
Cash and cash equivalents at beginning of year		11,742			13,276			7,830

Cash and cash equivalents at end of year	$	14,070		$	11,742		$	13,276


Supplemental cash flow data
Issuance of shares of restricted common stock	$	670		$	2,023		$	1,662
Release of income tax valuation allowance to goodwill	$	—		$	446		$	—

WeSee ~~reduce~~notes ~~our accounts receivable balance~~ to ~~account~~consolidated ~~for~~financial anstatements ~~allowance for doubtful accounts. The table below shows the activity in the allowance for doubtful accounts during each of the fiscal years ended April 30:~~

Allowance for doubtful accounts	2005			2004			2003
Beginning balance	$	358		$	414		$	727
Charged to expense		259			461			331
Write offs of amounts considered to be uncollectible, net of recoveries		(69	)		(517	)		(644	)
Ending balance	$	548			358			414

NoteTable 3.of InventoriesContents

WeStratos ~~define obsolete inventory as items no longer useful in our manufacturing process or items that have potential quality problems~~International, ~~and record a reserve of 100% of their values. We~~Inc ~~determine excess inventory using estimates for future demand,~~ and record a reserve of 100% of its value if we have in excess of one to two years’ projected usage on hand. We scrap obsolete inventory shortly after we determine its status and keep excess inventory for a reasonable amount of time before we discard it. Occasionally, changing circumstances in the marketplace present us with opportunities to sell inventory that was previously determined to be excessive and reserved for. Details of our inventories and related reserves for the fiscal years ended April 30, are as follows:

Inventories	2005		2004
Raw materials	$	12,678	$	12,091
Work in progress		955		1,042
Finished goods		2,341		2,831
	$	15,974	$	15,964

Consolidated Statements of Comprehensive Income (Loss)

Inventory reserves	2005			2004			2003
Beginning balance	$	9,083		$	12,030		$	13,907
Charged to expense		984			1,925			6,805
Write offs, net of recoveries		(3,332	)		(4,872	)		(8,682	)
Ending balance	$	6,735		$	9,083		$	12,030

For the fiscal years ended April 30, 2007, 2006 and 2005

~~The~~(In ~~write-off of obsolete inventory reserves represents the disposal of related inventory or usage of product previously reserved for.~~ thousands)


	2007			2006			2005

Net income (loss)	$	1,630		$	(2,831	)	$	(15,307	)
Other comprehensive income (loss):
Foreign currency translation adjustment		(593	)		20			(143	)

Comprehensive income (loss)	$	1,037		$	(2,811	)	$	(15,450	)

~~STRATOS~~See ~~INTERNATIONAL,~~notes ~~INC.~~to ~~AND~~consolidated ~~SUBSIDIARIES~~financial statements

48 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

(allTable amountsof in thousands, except share and per share data) Contents

~~Note~~Stratos 4International, Inc. ~~Prepaid Expenses~~ and ~~Other Current Assets~~Subsidiaries

AtNotes ~~April 30, 2005 prepaid expenses and other current assets consist mainly of a $5.5 million receivable related~~ to ~~the favorable~~Consolidated ~~settlement~~Financial of litigation in fiscal 2003. At that time, we recorded income from settlement of this litigation, discounted for the time value of money. We periodically recorded income from settlement of litigation to account for the difference in recorded income and the settlement amount. We received the final settlement payment in the first quarter of fiscal 2006. This receivable was recorded as a non-current asset at April 30, 2004. Statements

~~Note~~(all 5.amounts ~~Property~~in thousands, ~~Plant~~except share and ~~Equipment~~per share data)

~~Details~~NOTE of1. ~~property,~~SUMMARY ~~plant~~OF ~~and~~SIGNIFICANT ~~equipment~~ACCOUNTING ~~at April 30, 2005~~POLICIES ~~and 2004, were as follows:~~

	2005			2004			Useful lives
Land	$	1,721		$	1,721			indefinite
Buildings and building improvements		11,477			11,374			5-35 years
Machinery and equipment		58,005			59,849			3-15 years
Furniture and office equipment		18,677			18,586			5-10 years
Property, plant and equipment at cost		89,880			91,530
Less accumulated depreciation		(68,542	)		(64,574	)
Property, plant and equipment, net	$	21,338		$	26,956

The Company: Stratos International is a leading supplier of shielded electronic and optical interconnects, plus the transceiver conversion and multiplexing components that are used to combine optical and copper signal transmission lines. We design and manufacture interconnect components and subsystems used in telecommunications, datacom, military/aerospace and video markets for signal networking. We provide integrated engineering and manufacturing capabilities at each of our three manufacturing locations, including product design, fabrication, assembly, packaging and testing, and deliver quality assurance through our ISO 9001/2000 certified processes and procedures. Our manufacturing plants are located in Chicago Illinois, Mesa Arizona and Haverhill UK. We also have a research and development facility in Melbourne Florida.

~~During~~Principles fiscal years 2004 and 2003, we reclassified certain real property and machinery and equipment that were no longer in use to “assets held for sale.” We are actively marketing these assets for sale, and we expect to sell them during fiscal 2006. During fiscal year 2005, we sold one facility and several smaller pieces of ~~equipment,~~consolidation: ~~and~~The ~~recorded~~consolidated ~~net~~financial ~~cash~~statements ~~inflows~~include ~~from those~~the ~~sales~~accounts of ~~$1.6 million. In fiscal year 2004, we recorded a charge of $0.9 million to adjust~~ the ~~carrying~~ ~~value~~parent ofcompany ~~assets~~and ~~held~~all ~~for~~subsidiaries, ~~sale~~after toelimination ~~their estimated net realizable value. We used independent appraisals or realtors’ letters~~ of ~~opinion~~intercompany ofaccounts ~~value~~and ~~to determine the estimated net realizable value of assets held for sale~~transactions.

~~Note~~Stratos’ 6fiscal reporting period ends on the closest Saturday to April 30th. ~~Business~~For ~~Combinations~~simplicity purposes Stratos refers to its fiscal year end as April 30.

OnForeign ~~November 6,~~currency ~~2003,~~translation: weThe ~~acquired~~functional ~~Sterling~~currency ~~Holding~~of Company (“Sterling”), a privately held company based in Mesa, Arizona that designs and manufactures Radio Frequency and Microwave Interconnect products via its two operating units, Trompeter Electronics, Inc. and Semflex, Inc. We completed this merger on November 6, 2003, following approval by both our ~~and~~ ~~Sterling’s~~foreign ~~shareholders. At closing, Sterling became a wholly-owned~~ subsidiary, ~~with~~is ~~Sterling shareholders receiving 6,082,000 shares of our common stock, which represented approximately 82% of total shares outstanding immediately prior to~~ the ~~consummation of the merger. Of such amount,~~local ~~608,189 shares~~currency ~~were placed~~ in ~~escrow~~the toUnited ~~provide indemnification~~Kingdom ~~to us with respect to certain matters provided for in~~ (the ~~merger~~Pound ~~agreement~~Sterling). ~~These~~Accordingly, ~~shares~~its ~~were~~results ~~released from escrow and distributed on the first anniversary~~ of ~~the~~operations ~~merger,~~are ~~which~~translated ~~fell~~into ~~in the third quarter of fiscal 2005~~U.S. ~~Our~~Dollars ~~common~~using ~~stock issued~~average inexchange ~~this~~rates ~~transaction~~during ~~was valued at $5.09 per share,~~ the ~~closing price on July 2~~year, ~~2003,~~while the ~~day~~assets ~~the merger was announced. We also issued 50,000 shares of Series B redeemable preferred stock with a face value of $5.0 million~~ and ~~a contingent value of up to an additional~~ ~~$6.3 million~~liabilities ~~based~~are ontranslated ~~certain~~using ~~events,~~period ~~including~~end ~~the~~exchange ~~future performance of our common share price~~rates. IfAdjustments ~~and when any contingent value is established, such amount will be recorded~~ as an ~~increase~~a inresult ~~purchase price and goodwill. The total purchase consideration was $38.8 million, consisting~~ of ~~common and preferred stock valued at $36.0 million, and $2.8 million of acquisition related costs. We valued~~ the ~~redeemable~~translation ~~preferred~~process ~~shares~~are atincluded ~~their face value, which,~~ in ~~view of~~accumulated ~~the~~other ~~rights~~comprehensive ~~and~~income ~~terms of the preferred shares, approximated their fair value~~(loss).

48Use of estimates: We prepare our financial statements in conformity with U. S. generally accepted accounting principles, which requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

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

Revenue from license fees and royalties represents payments received from licensees of patented ~~NOTES~~technologies, TOwhich ~~CONSOLIDATED~~we ~~FINANCIAL~~also ~~STATEMENTS —~~use in our own product offerings. These license agreements generally ~~(Continued)~~provide for fixed up-front and/or future payments or ongoing royalty payments based on sales volumes of licensed products that are recognized as revenue over the respective licensing periods. The timing and amounts of these payments is beyond our control and may vary significantly between periods. We will consider entering into similar agreements in the future; however, we cannot predict the timing and resulting amounts of license fees and royalties, if any.

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

TheTable primary reasons for the acquisition included our desire to expand the size of our business, our belief that Sterling’s electronic interconnect operations would be a positive addition to our existing product lines, and our goal to acquire profitable operations. Sterling’s historical operating results, future operating forecasts and the fair value of assets, less liabilities assumed, contributed to the determination of the purchase price and the recognition of goodwill. Contents

Shipping and handling fees and costs: We include shipping and handling fees billed to customers in ~~The~~“net ~~Sterling~~sales,” ~~acquisition~~and ~~was~~related ~~accounted~~costs ~~for~~in ~~using~~“sales ~~the~~and ~~purchase~~marketing” expenses. Shipping and handling fees in ~~method~~fiscal of2007, ~~accounting~~2006 and ~~the~~2005 ~~results~~were of$0.3 million, ~~operations~~$0.3 million, ~~have~~and ~~been~~$0.3 million, respectively. ~~included~~Product freight out costs in ~~our~~fiscal ~~consolidated~~2007, ~~financial~~2006, ~~statements~~and ~~from~~2005 ~~the~~were ~~date~~$0.6 million, $0.6 million, and $0.3 ofmillion, ~~acquisition~~respectively.

~~Under~~Research ~~the~~and ~~purchase~~development ~~method~~costs: ofCosts ~~accounting,~~associated ~~the~~with ~~total purchase price, as shown in~~ the ~~table~~development ~~below,~~of ~~was~~new ~~allocated~~products toare ~~the net~~charged ~~tangible~~to ~~and~~expense ~~intangible~~when ~~assets based on their estimated fair~~incurred. ~~values as of the date of the completion of the transaction:~~

Amount allocated to:		Amounts		Useful life
Assets acquired:
Cash		$	10,918
Accounts receivable			5,312
Inventories			7,785
Patents and related technology			3,185		14.25 years
Computer software			700		5.00 years
Company trade names			2,700		Indefinite
Customer relationships			10,800		12.50 years
Deferred income taxes			7,572
Property, plant and equipment			8,489
Other			3,099
	Total assets		60,560
Liabilities assumed:
Accounts payable			1,430
Accrued expenses			3,673
Dividend payable			12,000
Deferred income taxes			8,112
	Total liabilities		25,215
Net assets acquired			35,345
Goodwill			3,410		Indefinite
Purchase price		$	38,755
Cash paid, including transaction costs		$	2,798
Stock consideration			35,957
Total purchase price		$	38,755

Advertising: We expense all advertising costs as incurred. Advertising expenses in fiscal 2007, 2006, and 2005 were $0.4 million, $0.3 million, and $0.3 million, respectively.

49Stock-based compensation: In December 2004, the FASB issued SFAS No. 123(R), a revision to SFAS No. 123, Accounting for Stock-Based Compensation. This standard requires us to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost is recognized as compensation expense over the vesting period of the awards. Stratos adopted SFAS No. 123(R) at the beginning of fiscal 2007. We adopted the prospective method of transition under the statement. Under this method, we began recognizing compensation cost for equity based compensation for all new or modified grants after the date of adoption. In addition, we recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. SFAS No. 123(R) did not have a material effect on our financial statements for the period ended April 30, 2007.

~~STRATOS~~No ~~INTERNATIONAL~~stock options have been issued during the twelve months ended April 30, ~~INC~~2007, and 2006. ~~AND~~Unearned compensation ~~SUBSIDIARIES~~was reclassified to additional paid-in capital for the period ended April 30, 2007 in accordance with SFAS 123(R).

Income ~~NOTES~~taxes: TOWe ~~CONSOLIDATED~~file ~~FINANCIAL~~consolidated ~~STATEMENTS —~~U.S. Federal and state income tax returns as required. Deferred tax ~~(Continued)~~assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and their reported amounts, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We assess on an ongoing basis the need for valuation reserves against net deferred tax assets.

Cash and cash equivalents: Cash equivalents consist of time deposits and certificates of deposit ~~(all~~with ~~amounts~~original inmaturities ~~thousands,~~of ~~except~~three ~~share~~months or less and ~~per~~are ~~share~~carried at their approximate fair values. ~~data)~~

Short-term investments: Short-term investments represent short-term corporate debt that is ~~Had~~available ~~the~~for ~~acquisition~~sale ~~been~~to ~~made~~meet asworking ofcapital ~~the~~needs. ~~beginning~~Cost ofapproximated ~~fiscal~~estimated fair value at the ~~2003~~balance sheet date, ~~unaudited~~and ~~pro~~gross ~~forma~~unrealized ~~sales~~gains ~~and~~or ~~operating~~losses ~~results~~were ~~would~~not ~~have~~significant. Interest earned ~~been~~relating to these securities is reported as ~~follows:~~a component of investment income.

					Acquired			Pro Forma
		Stratos			Company			Adjustments			Consolidated
Net sales
	Year ended April 30, 2004	$	49,379		$	17,601		$	—		$	66,980
	Year ended April 30, 2003		37,236			38,704			—			75,940
Net loss
	Year ended April 30, 2004		(27,085	)		(5,825	)		(997	)		(33,907	)
	Year ended April 30, 2003		(120,291	)		2,297			(1,994	)		(119,988	)
Loss per share, basic and diluted
	Year ended April 30, 2004		(2.61	)		(0.56	)		(0.09	)		(3.26	)
	Year ended April 30, 2003		(16.44	)		0.31			(0.27	)		(16.40	)

Financial instruments: Our financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and long-term debt. The fair values of these financial instruments approximate their net carrying values at April 30, 2007 and 2006.

~~Pro~~Accounts ~~forma~~receivable: ~~adjustments~~Accounts ~~include~~receivable ~~additional~~represents ~~depreciation~~amounts ~~related~~due ~~to the~~from ~~step-up~~customers infor ~~value~~products shipped ofor ~~fixed~~services ~~assets~~performed. ~~and~~We ~~amortization~~make ~~of intangibles~~judgments ~~acquired.~~as ~~Pro~~to ~~forma~~the ~~results~~collectibility ~~are~~of ~~not~~accounts ~~necessarily~~receivable ~~indicative~~based ofon ~~future~~historical ~~results.~~trends ~~Under~~and ~~current~~future ~~tax~~expectations ~~regulations, goodwill~~and ~~related~~estimate toan ~~the~~allowance ~~acquisition~~for ofdoubtful ~~Sterling~~accounts. These isallowances ~~not deductible~~adjust ~~for~~gross ~~federal~~trade ~~and~~accounts ~~state~~receivable ~~income~~down ~~tax~~to ~~purposes~~net realizable value. Accounts receivable

50 ~~On April 30, 2004, we assigned our 60% interest in MP Optical Communications L.L.C. to its minority shareholder, and recorded a net gain of approximately $0.1 million.~~

EffectiveTable May 23, 2003, we sold the assets and business of our wholly-owned subsidiary Bandwidth Semiconductor L.L.C., located in Hudson, New Hampshire, realizing a net gain of approximately $1.3 million. Contents

Inbalances ~~accordance~~are ~~with~~determined ~~SFAS No. 2, “Accounting for Research and Development Costs,” as interpreted by FASB Interpretation No. 4, “Applicability of FASB Statement No. 2~~ to ~~Business~~be ~~Combinations~~delinquent ~~Accounted~~when ~~for by~~ the ~~Purchase~~ ~~Method,”~~amount ~~amounts assigned to purchased in-process research and development in a purchase business combination~~ is ~~charged~~ topast ~~expense~~due at the date of consummation of the purchase business combination. In connection with the acquisitions of Tsunami Optics, Inc. and Paracer, Inc., we recorded a $2.1 million charge to in-process research and development during the second quarter of fiscal 2003 based on ~~the~~payment ~~final purchase~~terms ~~price allocation associated~~ with ~~these fiscal 2002~~ ~~acquisitions~~the customer.

~~Note~~Inventories: 7Inventories are stated at the lower of cost (first-in, first-out basis) or market. Cost ~~Intangible~~includes ~~Assets~~material and conversion costs.

Property, plant and equipment: Properties are stated on the basis of cost. Depreciation and ~~Amortizable~~amortization ~~intangible~~are ~~assets~~provided ~~were~~on ~~comprised~~a straight-line basis over the estimated useful lives of the ~~following:~~assets. Accelerated methods are generally used for income tax purposes.

	April 30, 2005							April 30, 2004
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
Amortizable Intangible Assets	Amount		Amortization			Net		Amount		Amortization			Net		Useful Lives
Customer relationships	$	10,800	$	(1,296	)	$	9,504	$	10,800	$	(432	)	$	10,368		12.50 years
Patents and related technology		4,368		(951	)		3,417		4,039		(325	)		3,714		14.25 years
Developed software		700		(257	)		443		700		(117	)		583		5.00 years
Total amortized intangible assets	$	15,868	$	(2,504	)	$	13,364	$	15,539	$	(874	)	$	14,665

Assets held for sale: Assets held for sale represent property and equipment that is no longer in use and is actively marketed for sale. When we reclassify an asset to assets held for sale, we adjust the carrying value of the underlying asset to its fair value based on the estimated net realizable proceeds.

50Intangible assets: Purchased intangible assets are recorded at fair value. We use discounted cash flow models to value intangible assets, and employ the help of independent appraisers for the valuation of significant intangible assets upon acquisition. The discounted cash flow models require assumptions about the timing and amount of future net cash inflows, risk, the cost of capital and terminal values.

~~STRATOS~~Goodwill: ~~INTERNATIONAL~~We review goodwill for impairment on an annual basis, ~~INC~~or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ~~AND~~If ~~SUBSIDIARIES~~the carrying amount of a reporting unit exceeds its fair value, we further evaluate the amount of impairment loss.

Long-lived assets: We review long-lived assets for recoverability whenever events or changes in ~~NOTES~~circumstances TOindicate ~~CONSOLIDATED~~that ~~FINANCIAL~~their ~~STATEMENTS —~~carrying amount may not be recoverable. We consider market ~~(Continued)~~conditions, legal factors and expected cash flows, among other factors, to reach a conclusion about the recoverability of long-lived asset values. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. We measure an impairment loss as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

Impairment of Long-Lived Assets: We review the carrying value of our long-lived assets if the ~~(all~~facts ~~amounts~~and circumstances, such as significant declines in ~~thousands~~sales, ~~except~~earnings ~~share~~or ~~and~~cash ~~per~~flows ~~share~~or material ~~data)~~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.

~~The~~Recent ~~following~~Accounting ~~table~~Pronouncements: ~~shows~~In September 2006, the ~~estimated~~Financial ~~future~~Accounting ~~amortization~~Standards Board ~~expense~~(FASB) issued SFAS No. 157 “Fair Value Measurements”. The statement defines fair value, establishes a framework for ~~intangible~~measuring ~~assets:~~fair value and expands disclosures about fair value measurements. The statement applies under other accounting pronouncements that require or permit fair value measurements. The statement does not require any new fair value measurements and we do not

	Fiscal Year
	2006			2007			2008			2009			2010			Thereafter
Amortization amount	$	(1,276	)	$	(1,276	)	$	(1,276	)	$	(1,159	)	$	(1,136	)	$	(7,241	)

NoteTable 8.of GoodwillContents

~~Upon~~expect ~~adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” in fiscal 2003 we performed a transitional goodwill impairment evaluation during~~ the ~~second quarter~~application of ~~fiscal~~this ~~2003,~~standard ~~which~~to ~~resulted~~change inour ancurrent ~~impairment of goodwill of approximately $17~~practice.~~0 million~~ ~~as of May 1, 2002.~~ The ~~resulting~~statement ~~non-cash charge~~ is ~~reflected as a cumulative~~effective ~~effect~~for offinancial astatements ~~change~~issued ~~in accounting principle in the Consolidated Statement of Operations~~ for fiscal ~~year 2003. Subsequently we have performed our annual goodwill impairment review during the fourth quarters of fiscal~~ years ~~2005,~~beginning ~~2004,~~after ~~and 2003. The 2003 review indicated additional impairment and a non-cash charge of approximately $28.4~~November ~~million~~15, ~~for fiscal year 2003 was recorded~~2007. ~~Our goodwill impairment tests in 2005 and 2004~~ ~~resulted in no additional impairment charges.~~

~~Goodwill~~In ~~and~~June 2006, ~~other~~the ~~indefinite-lived~~Financial ~~assets~~Accounting atStandards ~~April~~Board (FASB) ~~30,~~issued Interpretation No. 48 ~~2005~~“Accounting ~~and~~for ~~2004~~Uncertainty ~~are~~in ~~comprised~~Income ofTaxes ~~goodwill~~— an interpretation of $3FASB Statement No.4 ~~million~~109 “Accounting for Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB 109 “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and ~~trade~~measurement ~~names~~attribute for the financial statement recognition and measurement of $2a tax position taken, or expected to be taken in a tax return.7 The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December ~~million~~31, ~~each~~2006, ~~related~~with toearly adoption ~~the~~permitted. ~~Sterling~~The adoption of FIN 48 will not have a material effect on our consolidated ~~acquisition~~financial position, results of operations or cash flow.

~~Note~~In 9December 2004, the FASB issued SFAS No. 123(R), ~~Impairment~~a ofrevision ~~Long~~to SFAS No. 123, “Accounting for Stock-~~Lived~~Based ~~Assets~~Compensation”. This standard requires us to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. Stratos was required to adopt SFAS No. 123(R) at the beginning of fiscal 2007 and adopted the prospective method of transition under the statement. Under this method, we will begin recognizing compensation cost for equity based compensation for all new or modified grants after the date of adoption. In addition, we will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. Because, virtually all of Stratos’ outstanding options are vested, we have determined that the effect of the adoption of the statement on our consolidated financial statements is immaterial.

52 In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate our long-lived assets for impairment. This process requires us to consider whether any indicators of impairment are present and, if so, whether the sum of the estimated undiscounted future cash flows attributable to those assets is less than their carrying values. We recognize an impairment loss based on the excess of the carrying amounts of long-lived assets over their respective fair values, if any.

DuringTable the third and fourth quarters of fiscal year 2003, we gathered information to determine if indicators of impairment of our long-lived assets were present, and it became apparent that the sustained downturn in our business would result in insufficient cash flows to recover the carrying amounts of certain long-lived assets. We closed some of our business units and consolidated others, in order to manufacture our existing products under a more controlled environment. However, we did not discontinue any of our existing product lines. We evaluated the fair values of our long-lived assets at the level of the active and passive optical subsystems reporting units. We engaged an independent appraiser to compute the fair values of these asset groups based upon the expected future discounted cash flows to be generated by each unit. We reviewed the appraiser’s models to ensure that the value determined was not less than the known or perceived fair market values of the assets. Contents

Weof ~~concluded~~production. ~~that~~Because ~~these~~actual ~~computations~~future ~~indicated~~production ~~that~~levels ~~impairment existed~~are ~~within~~subject ~~each~~to ~~reporting~~many ~~unit~~factors, ~~since the estimated fair~~including ~~values~~demand offor ~~assets~~our ~~were less than their carrying values~~products, ~~and recorded~~we acannot ~~non-cash~~presently ~~charge~~determine ~~for~~if ~~impairment~~the ofadoption ~~long-lived assets~~ of ~~approximately~~SFAS ~~$37~~No.1 ~~million~~151 inwill ~~the~~have ~~fourth~~a material ~~quarter~~impact ~~of fiscal~~on ~~year~~future ~~2003.~~results ~~The~~of operations.

51NOTE 2. ACCOUNTS RECEIVABLE

~~STRATOS~~We ~~INTERNATIONAL,~~reduce ~~INC~~our accounts receivable balance to account for an allowance for doubtful accounts. ~~AND~~The table ~~SUBSIDIARIES~~below shows the activity in the allowance for doubtful accounts during each of the fiscal years ended April 30:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Allowance for doubtful accounts	2007			2006			2005

Beginning balance	$	575		$	548		$	358
Charged to expense		98			320			259
Write offs of amounts considered to be uncollectible, net of recoveries		(270	)		(293	)		(69	)

Ending balance	$	403		$	575		$	548

~~(all~~NOTE ~~amounts~~3. ~~in thousands, except share and per share~~INVENTORIES ~~data)~~

~~following~~We ~~table~~define ~~illustrates~~obsolete ~~the~~inventory ~~assets~~as weitems ~~evaluated,~~no ~~their~~longer ~~net~~useful in our manufacturing process or items that ~~book~~have ~~values~~potential quality problems, ~~fair~~and ~~market~~record a reserve of 100% of their values. We determine excess inventory using estimates for future demand. Details of our inventories and ~~resulting~~related ~~impairment~~reserves ~~charges~~for the fiscal years ended April 30, are as follows:

			April 30, 2003
Inventories		2007			2006
						Fair
Raw materials		$	13,722		$	11,100
			Net book			Market		Impairment
Work in progress			1,355			954
Asset description			value			Value		Charge
Finished goods			4,015			3,428
Tangible assets:
		$	19,092		$	15,482
	Machinery and equipment		$	26,940		$	6,377	$	20,563
	Furniture and fixtures			2,437			235		2,202
	Computers			1,753			138		1,615
	Buildings and building improvements			14,558			8,318		6,240
Total tangible assets				45,688			15,068		30,620
Intangible assets:
	Developed technology			5,854			1,304		4,550
	Trade names			1,200			308		892
	Patents			619			178		441
	Computer software			104			27		77
	Other			687			162		525
Total intangible assets				8,464			1,979		6,485
Total assets evaluated for impairment			$	54,152		$	17,047	$	37,105

We classified certain of these assets as “assets held-for-sale.”


Inventory reserves	2007			2006			2005

Beginning balance	$	6,737		$	6,735		$	9,083
Charged to expense		868			1,372			984
Write offs, net of recoveries		(2,705	)		(1,370	)		(3,332	)

Ending balance	$	4,900		$	6,737		$	6,735

~~Note~~The ~~10.~~write-off ~~Restructuring~~of ~~and~~obsolete ~~Other~~inventory ~~Charges~~reserves represents the disposal of related inventory or usage of product previously reserved for.

53 During each of our 2005, 2004 and 2003 fiscal years, we recorded restructuring and other charges related to the consolidation and elimination of various operating activities. Such charges included the write-down of excess and obsolete inventory, the write-down of the values of certain assets, personnel severance expenses, lease expenses for limited-use facilities, and legal costs related to the restructuring of operations.

OnTable January 25, 2005, we announced that we had concluded the process initiated in May 2004 to explore various strategic alternatives for the Company to maximize shareholder value, and that we had adopted broad companywide plans to enhance our strategic and operational direction. As part of the plans, we terminated 45 employees, primarily administrative personnel, to allow us to compete more effectively in our markets and to create a cost structure more in line with the current level of our business. As a result, we recorded $4.7 million in restructuring and other charges in fiscal year 2005, of which, $2.7 million related to personnel and severance costs and $2.0 million related to the lease obligation for a limited use facility that has been difficult to sublease through the end of its lease term in 2007. We completed the workforce reduction during our third quarter of fiscal 2005. Contents

InNOTE ~~fiscal years 2004 and 2003 we terminated 95 and 198 employees, respectively, as a result of restructuring of operations, including both production and administrative personnel~~4. WePREPAID ~~recorded~~EXPENSES ~~restructuring~~AND ~~expense~~OTHER ~~of $3.1 million~~CURRENT ~~in each of the two fiscal years. These~~ASSETS expenses related to personnel and severance costs, costs of the lease obligations of idle facilities, the write-down of the value of certain assets and legal and other costs related to the restructuring of operations.

52Prepaid expenses and other current assets at April 30, 2007 and 2006 consist primarily of cash payments for insurance policies and maintenance agreements applicable for a period up to one year.

~~STRATOS~~NOTE ~~INTERNATIONAL~~5. PROPERTY, ~~INC.~~PLANT AND ~~SUBSIDIARIES~~EQUIPMENT

~~NOTES~~Details TOof ~~CONSOLIDATED~~property, ~~FINANCIAL~~plant ~~STATEMENTS~~and equipment at April —30, 2007 and 2006, were as follows: ~~(Continued)~~

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


	2007			2006			Useful lives

Land	$	1,721		$	1,721		indefinite
Buildings and building improvements		11,625			11,533		5-35 years
Machinery and equipment		60,464			58,195		3-15 years
Furniture and office equipment		19,309			19,048		5-10 years

Property, plant and equipment at cost		93,119			90,497

Less accumulated depreciation		(81,595	)		(74,060	)

Property, plant and equipment, net	$	11,524		$	16,437

54 ~~Charges relating to the restructuring, subsequent activities, and the remaining balances are summarized as follows:~~

	Employee			Legal			Asset			Limited-use
Restructuring	costs			and other			write-downs			facility rent			Total
Balance at April 30, 2002	$	850		$	1,210		$	—		$	—		$	2,060
2003 charges		2,800			100			200			—			3,100
Utilized in 2003		(3,250	)		(1,310	)		(200	)		—			(4,760	)
Balance at April 30, 2003		400			—			—			—			400
2004 charges		1,026			392			910			738			3,066
Utilized in 2004		(1,186	)		(392	)		(910	)		—			(2,488	)
Balance at April 30, 2004		240			—			—			738			978
2005 charges		2,724			—			—			1,955			4,679
Utilized in 2005		(2,687	)		—			—			(894	)		(3,581	)
Balance at April 30, 2005	$	277		$	—		$	—		$	1,799		$	2,076

NOTE ~~Expenses for asset write-downs are non-cash charges, and are offset against the carrying values of the respective assets~~6. ~~The majority~~INTANGIBLE ~~of severance was paid as of the end of fiscal year~~ASSETS ~~2005, and the limited-use facility rental expense will be paid in monthly installments through the end of the lease term in 2007.~~

~~Note~~Amortizable ~~11.~~intangible ~~Accrued~~assets ~~Expenses~~were comprised of the following:

Accrued expenses are detailed as follows:


	April 30, 2007							April 30, 2006
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated					Useful
Amortizable Intangible Assets	Amount		Amortization			Net		Amount		Amortization			Net		Lives
Customer relationships	$	10,800	$	(3,024	)	$	7,776	$	10,800	$	(2,159	)	$	8,641	12.50 years
Patents and related technology		4,368		(1,578	)	$	2,790		4,368		(1,295	)		3,073	14.25 years
Developed software		700		(700	)		—		700		(582	)		118	3.00 years

Total amortized intangible assets	$	15,868	$	(5,302	)	$	10,566	$	15,868	$	(4,036	)	$	11,832

	As of April 30,
Other Current Liabilities	2005		2004
Employee costs	$	2,598	$	2,674
Rent for limited-use facilities		1,799		738
Legal fees, litigation and claims		4,352		1,909
Commissions		1,037		605
Inventory received, not vouchered		424		305
Real estate and other taxes		386		361
Other		663		781
Total	$	11,259	$	7,373

The following table shows the estimated future amortization expense for intangible assets:

Note 12. Long-term Debt


	Fiscal Year
	2008			2009			2010			2011			2012			Thereafter

Amortization amount	$	(1,148	)	$	(1,148	)	$	(1,148	)	$	(1,148	)	$	(1,148	)	$	(4,826	)

NOTE At April 30, 2005, the current portion of long-term debt consists of a note payable for the purchase of computer software and hardware in connection with the implementation of a new information technology system in fiscal year 20027. AtGOODWILL April 30, 2005, the remaining principal payments totaling $0.8 million are considered current because such payments are due within one year of the balance sheet date. The note is supported by a letter of credit in the amount of $2.7 million that expires on August 1, 2005.

~~Cash~~We ~~payments~~performed ~~and~~our ~~interest~~annual ~~expense~~goodwill impairment review in accordance with SFAS No. 142 during the fourth quarters of fiscal years ~~2005~~2007, ~~2004~~2006, and ~~2003~~2005. ~~for~~Our ~~interest~~goodwill onimpairment ~~debt~~tests ~~amount~~resulted toin ~~$0.1 million,~~no ~~$0.2 million~~additional ~~and~~impairment $0charges.~~6 million respectively.~~

53Goodwill was adjusted to $3.0 million from $3.4 million at April 30, 2006 as the result of releasing a portion of our deferred income tax valuation allowance. Other indefinite lived assets and trade names were $2.7 million. Goodwill and other indefinite-lived assets at April 30, 2005 are comprised of goodwill of $3.4 million and trade names of $2.7 million, each related to the Sterling acquisition.

NOTE ~~STRATOS~~8. ~~INTERNATIONAL,~~IMPAIRMENT ~~INC.~~OF ~~AND~~LONG-LIVED ~~SUBSIDIARIES~~ASSETS

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” ~~NOTES~~we TOevaluate ~~CONSOLIDATED~~our ~~FINANCIAL~~long-lived ~~STATEMENTS~~assets for impairment. This process requires us to consider whether any indicators of impairment are present and, if so, whether the sum of the estimated undiscounted future cash flows attributable to those assets is less than their carrying values. We recognize an impairment loss based on the excess of the carrying amounts of long-lived assets over their respective fair values, if any. There was no impairment of assets for the years ended April —30, ~~(Continued)~~2007, 2006 and 2005.

NOTE ~~(all~~9. ~~amounts~~RESTRUCTURING inAND ~~thousands,~~OTHER ~~except share and per share~~CHARGES ~~data)~~

We recorded restructuring and other charges related to the consolidation and elimination of various ~~Note 13~~operating activities in each of our fiscal years 2006 and 2005. ~~Redeemable~~ The charges included the ~~Series B~~write-down ~~Preferred~~of ~~Stock~~the values of certain assets, personnel severance expenses, lease expenses for limited-use facilities and legal costs related to the restructuring of operations. The restructurings allowed us to compete more effectively in our markets and created a cost structure more in line with the current level of our business.

55 The number of authorized shares of preferred stock is 5,000,000 of which 50,000 shares are designated as Series B preferred stock. The Series B preferred stock has a par value of $0.01 per share and a stated value and a liquidation preference of $100.00 per share, plus accrued and unpaid dividends. With respect to dividend rights and rights on liquidation, dissolution and winding up, the Series B Preferred Stock ranks senior to all classes of our stock, except those classes of preferred stock expressly designated as ranking senior or on parity with the Series B Preferred Stock. As of April 30, 2005 and 2004 we had 50,000 shares of Series B Preferred Stock issued and outstanding.

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

NoIn ~~later than 60~~September ~~days~~2005 ~~following~~we ~~the~~began ~~occurrence~~moving ofadministrative ~~certain events~~functions ~~relating~~from toour ~~Stratos’~~Westlake ~~achievement~~Village, ofCalifornia ~~$250 million~~location into ~~annual~~our ~~revenue~~facilities ~~or $500 million~~ in ~~market~~ ~~capitalization~~Mesa, ~~the~~Arizona. ~~Company~~We ~~must~~incurred ~~redeem~~charges ~~all shares~~ of ~~Series B~~ ~~Preferred Stock at a redemption price initially equal to~~ $~~100 per share, plus an amount equal to all accrued and unpaid dividends thereon to and including the date of redemption~~0. The initial redemption price is subject to adjustment as follows. If, on the last day immediately preceding the redemption event, the “market price” (as defined in the certificate of designation relating to the Series8 ~~B Preferred~~million ~~Stock)~~for ~~of the Company’s common stock is~~employee ~~(1) $7.00 or less per share~~costs, ~~there~~legal ~~will be no adjustment to the initial redemption price; (2) greater than $7.00~~ and ~~less~~ ~~than~~other ~~$12~~costs.00 ~~per~~The ~~share,~~moves ~~the~~were ~~initial~~completed ~~redemption price will be increased~~ by ~~$25 per share for every whole dollar by which the market price exceeds $7.00 per share and (3)~~December ~~$12.00 or more per share~~15, ~~the~~2005. ~~initial~~We ~~redemption~~also ~~price will be increased by~~incurred $~~125 per share~~0.2 million ~~If, however, the optional special dividend has been declared, the redemption price for each share~~ of ~~the Series B~~severance ~~Preferred~~expenses ~~Stock~~at ~~will~~other belocations ~~reduced~~in byfiscal ~~$100 per share after taking into account the above adjustments~~2006.

InWe ~~addition,~~recorded at$4.7 million ~~any~~in ~~time~~restructuring ~~following~~and ~~the~~other ~~fifth~~charges ~~anniversary~~in offiscal ~~the issuance~~year ~~of the Series B Preferred Stock~~2005, ~~the~~of ~~Company~~which, at$2.7 ~~its~~million ~~option,~~related ~~is entitled~~ to ~~redeem~~personnel ~~any~~and orseverance ~~all~~costs ~~shares~~for ~~of Series B~~the ~~Preferred~~elimination ~~Stock, at a redemption price~~ of ~~$125~~45 ~~per~~primarily administrative ~~share,~~positions ~~plus an amount equal to all unaccrued~~ and ~~unpaid dividends~~$2.0 million ~~thereon~~related to ~~and including~~ the ~~date~~lease ofobligation ~~redemption,~~for ~~minus $100~~a ~~per~~limited ~~share~~use iffacility. We completed the ~~optional~~workforce ~~special~~reduction ~~dividend~~during ~~has~~our ~~been declared~~third ~~prior~~quarter toof ~~such~~fiscal ~~redemption~~2005.

~~Each~~Charges ~~holder~~relating ~~of Series B Preferred Stock is entitled~~ to ~~one vote for each share held on~~ the ~~record~~restructuring, ~~date~~subsequent ~~for~~activities ~~determining the shareholders entitled to vote with respect to all matters presented to the Company’s shareholders for their action~~ and, ~~except as otherwise provided,~~ the ~~holders~~remaining ofbalances ~~Series B~~are ~~Preferred~~summarized ~~Stock and any other outstanding series of stock will vote together with the holders of shares of common stock~~ as afollows: ~~single class.~~


							Limited-use
Restructuring	Employee costs			Legal and other			facility rent			Total

Balance at April 30, 2004	$	240		$	—		$	738		$	978
2005 charges		2,724			—			1,955			4,679
Utilized in 2005		(2,687	)		—			(894	)		(3,581	)

Balance at April 30, 2005		277			—			1,799			2,076
2006 charges		627			396			—			1,023
Utilized in 2006		(584	)		(396	)		(853	)		(1,833	)

Balance at April 30, 2006		320			—			946			1,266
2007 charges		—			—			—			—
Utilized in 2007		(220	)		—			(753	)		(973	)

Balance at April 30, 2007	$	100		$	—		$	193		$	293

~~STRATOS~~Expenses ~~INTERNATIONAL~~for asset write-downs are non-cash charges, ~~INC~~and are offset against the carrying values of the respective assets. ~~AND~~The ~~SUBSIDIARIES~~limited-use facility rental expense will be paid in monthly installments through the end of the lease term in 2007.

56 ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

(allTable amountsof in thousands, except share and per share data) Contents

NOTE In general, the vote of at least 75% of the outstanding Series B Preferred Stock, voting separately as a class, is required to (1) amend any terms of the Series B Preferred or (2) approve any merger, reorganization, consolidation or similar transaction or any reclassification of outstanding securities that would have a material adverse effect on the dividend, liquidation or redemption rights of the Series B Preferred10. ~~However,~~ACCRUED ~~the vote of at least 90% of~~EXPENSES the outstanding Series B Preferred is required to amend any terms of the Series B Preferred that govern dividends or payments to be made upon a liquidation, dissolution or winding-up of the Company. Furthermore, no separate vote is required if any of the foregoing is in connection with a “change in ownership” of the Company. For purposes of the certificate of designation relating to the Series B Preferred Stock, change in ownership means (1) any sale or transfer of all or substantially all of the Company’s assets in any transaction or series of transactions, and (2) any merger, reorganization or consolidation to which the Company is a party, unless after giving effect to such merger, reorganization or consolidation the holders of the Company’s outstanding capital stock immediately prior to such merger, reorganization or consolidation will continue to own the Company’s outstanding capital stock possessing the voting power to elect a majority of the Company’s board of directors.

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

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


	As of April 30,
Other Current Liabilities	2007		2006

Employee costs	$	2,887	$	2,514
Professional fees, litigation and claims		1,468		977
Commissions and Royalties		1,068		801
Inventory received, not vouchered		312		70
Other		247

Filing Compare · STRATOS INTERNATIONAL INC