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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




FORM 10-Q

(Mark One)

|  |  |                                                                                                                                        
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003

OR

|  |  |                                                                                                                                                        
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________

Commission file number 0-30869

STRATOS INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)




Delaware
    
    36-4360035(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)7444 West Wilson AvenueChicago, Illinois 60706
    
    60706(Address of Principal Executive Offices)
    
    (Zip Code)


(708) 867-9600
(Registrants Telephone Number, including area code)



Stratos Lightwave, Inc.




(Former name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes x No o

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

Yes x No o

As of December 11, 2003, there were 13,485,106 shares of the registrants common
stock, par value $0.01 per share, outstanding.





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TABLE OF CONTENTS



|                                                   |                                                                                                |                                                                  |  |  |  |  |  | 
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                      
|                                                   | Item 1. Financial Statements.                                                                 
|                                                   |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                                                   |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)     
|                                                   |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)     
|                                                   |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                                   | Item 3. Quantitative and Qualitative Disclosures About Market Risk.                           
|                                                   | Item 4. Controls and Procedures.                                                              
|PART II OTHER INFORMATION                         
|                                                   | Item 1. Legal Proceedings.                                                                    
|                                                   | Item 2. Changes in Securities and Use of Proceeds.                                            
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|                                                   | Item 6. Exhibits and Reports on Form 8-K.                                                     
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|EX-3.1 Restated Certificate of Incorporation      
|EX-4.2 Specimen Certificate - Series B Pref. Stock
|EX-31.1 Rule 13a-14(a)/15d-14(a) Certification    
|EX-31.2 Rule 13a-14(a)/15d-14(a) Certification    
|EX-32.1 Section 1350 Certification of CEO         
|EX-32.2 Section 1350 Certification of CFO         
|EX-99.1 Cautionary Statements                     



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STRATOS INTERNATIONAL, INC.

INDEX

PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of April 30, 2003 and October
31, 2003 (unaudited)
    
    
    1Condensed Consolidated Statements of Operations (unaudited) for the
three and six months ended October 31, 2002 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited) for the six
months ended October 31, 2002 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
October 31, 2003
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 2. Changes in Securities and Use of Proceeds
    
    
    20Item 4. Submission of Matters to Vote of Security Holders
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    22SIGNATURES
    
    
    23EXHIBITS INDEX
    
    
    24






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PART I
FINANCIAL INFORMATION







Item 1. Financial Statements.







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

April 30,
    
    October 31,2003
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    43,649
    
    
    $
    18,627Short-term investments
    
    
    17,879
    
    
    
    32,703Accounts receivable, less allowance
    
    
    7,701
    
    
    
    5,874Inventories:Finished products
    
    
    864
    
    
    
    793Work in process
    
    
    797
    
    
    
    102Materials
    
    
    6,133
    
    
    
    6,1667,794
    
    
    
    7,061Recoverable income taxes
    
    
    2,391
    
    
    
    2,391Prepaid expenses
    
    
    2,083
    
    
    
    1,061Total current assets
    
    
    81,497
    
    
    
    67,717Other assets:Deferred income taxes
    
    
    6,437
    
    
    
    6,437Assets held for sale
    
    
    3,484
    
    
    
    408Other
    
    
    6,942
    
    
    
    8,42516,863
    
    
    
    15,270Property, plant and equipment
    
    
    93,667
    
    
    
    95,111Less allowances for depreciation
    
    
    67,415
    
    
    
    69,62826,252
    
    
    
    25,483Total assets
    
    $
    124,612
    
    
    $
    108,470LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,063
    
    
    $
    5,522Other current liabilities
    
    
    5,006
    
    
    
    5,409Current portion of long-term debt
    
    
    6,331
    
    
    
    2,879Total current liabilities
    
    
    16,400
    
    
    
    13,810Long-term debt, less current portion
    
    
    298
    
    
    
    1,791Deferred income taxes
    
    
    6,519
    
    
    
    6,528Minority interest
    
    
    350
    
    
    
    245Stockholders equity:Preferred stock  Series B
    
    
    
    
    
    
    Common stock
    
    
    74
    
    
    
    74Additional paid-in capital
    
    
    284,254
    
    
    
    284,391Accumulated deficit
    
    
    (183,406
    )
    
    
    (198,194
    )Foreign currency translation adjustment
    
    
    154
    
    
    
    73Cost of common stock in treasury
    
    
    (31
    )
    
    
    (248
    )Total stockholders equity
    
    
    101,045
    
    
    
    86,096Total liabilities and stockholders equity
    
    $
    124,612
    
    
    $
    108,470


See notes to condensed consolidated financial statements.

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STRATOS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share amounts)

Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2002
    
    2003
    
    2002
    
    2003Revenue:Net sales
    
    $
    11,051
    
    
    $
    7,111
    
    
    $
    21,774
    
    
    $
    13,682License fees and royalties
    
    
    324
    
    
    
    113
    
    
    
    532
    
    
    
    619Total
    
    
    11,375
    
    
    
    7,224
    
    
    
    22,306
    
    
    
    14,301Costs and expenses:Costs of sales
    
    
    16,445
    
    
    
    8,020
    
    
    
    27,202
    
    
    
    15,498Research and development
    
    
    8,886
    
    
    
    1,807
    
    
    
    15,630
    
    
    
    4,697Sales and marketing
    
    
    2,074
    
    
    
    1,327
    
    
    
    4,294
    
    
    
    2,845General and administrative
    
    
    3,769
    
    
    
    3,775
    
    
    
    7,207
    
    
    
    6,473Total costs and expenses
    
    
    31,174
    
    
    
    14,929
    
    
    
    54,333
    
    
    
    29,513Loss from operations
    
    
    (19,799
    )
    
    
    (7,705
    )
    
    
    (32,027
    )
    
    
    (15,212
    )Investment income
    
    
    264
    
    
    
    184
    
    
    
    638
    
    
    
    423Loss before income taxes
    
    
    (19,535
    )
    
    
    (7,521
    )
    
    
    (31,389
    )
    
    
    (14,789
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss before cumulative effect of a change in accounting
principle
    
    
    (19,535
    )
    
    
    (7,521
    )
    
    
    (31,389
    )
    
    
    (14,789
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (16,982
    )
    
    
    Net loss
    
    $
    (19,535
    )
    
    $
    (7,521
    )
    
    $
    (48,371
    )
    
    $
    (14,789
    )Net loss per share, basic and diluted:Before cumulative effect of a change in accounting
principle
    
    $
    (2.67
    )
    
    $
    (1.02
    )
    
    $
    (4.30
    )
    
    $
    (2.00
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (2.33
    )
    
    
    Net loss
    
    $
    (2.67
    )
    
    $
    (1.02
    )
    
    $
    (6.63
    )
    
    $
    (2.00
    )Weighted average number of common shares outstanding:Basic
    
    
    7,311
    
    
    
    7,392
    
    
    
    7,311
    
    
    
    7,378Diluted
    
    
    7,311
    
    
    
    7,392
    
    
    
    7,311
    
    
    
    7,378


See notes to condensed consolidated financial statements.

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STRATOS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

Six Months EndedOctober 31,2002
    
    2003Operating activities:Net loss
    
    $
    (48,371
    )
    
    $
    (14,789
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Provision for depreciation and amortization
    
    
    7,316
    
    
    
    2,584Provision for impairment of goodwill and other assets
    
    
    19,051
    
    
    
    Gain on sale of assets held for sale
    
    
    
    
    
    
    (1,305
    )Change in operating assets and liabilities
    
    
    6,717
    
    
    
    2,784Net cash used in operating activities
    
    
    (15,287
    )
    
    
    (10,726
    )Investing activities:Purchases of property, plant and equipment
    
    
    (2,430
    )
    
    
    (1,815
    )Purchases of short-term investments
    
    
    (18,300
    )
    
    
    (28,503
    )Sales of short-term investments
    
    
    19,200
    
    
    
    13,679Acquisition
    
    
    (189
    )
    
    
    Proceeds from sale of assets held for sale
    
    
    1,209
    
    
    
    4,381Net cash used in investing activities
    
    
    (510
    )
    
    
    (12,258
    )Financing activities:Repayment of borrowings
    
    
    (4,467
    )
    
    
    (1,959
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    138Treasury stock transactions
    
    
    
    
    
    
    (217
    )Net cash used in financing activities
    
    
    (4,467
    )
    
    
    (2,038
    )Net decrease in cash and cash equivalents
    
    
    (20,264
    )
    
    
    (25,022
    )Cash and cash equivalents at beginning of period
    
    
    61,020
    
    
    
    43,649Cash and cash equivalents at end of period
    
    $
    40,756
    
    
    $
    18,627


See notes to condensed consolidated financial statements.

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STRATOS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

October 31, 2003

1. Basis of Presentation

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

Comprehensive loss consists of net loss and foreign currency translation
adjustments and totaled $19,036,000 and $7,517,000 for the second quarters of
fiscal 2003 and 2004 and $47,807,000 and $14,870,000 for the six months ended
October 31, 2002 and 2003.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities,effective for exit or disposal
activities initiated after December 31, 2002. The Companys current
restructuring plan, initiated in fiscal 2003, was not accounted for under SFAS
No. 146. The Company accrued a pre-tax charge of approximately $2.5 million in
the first six months of fiscal 2003 when Company management approved the
current restructuring plan. If the Company had accounted for this
restructuring plan under SFAS No. 146, $1.1 million of the $2.5 million charge
would have been recognized as incurred and not accrued at October 31, 2002.

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

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.This statement amends and
clarifies financial

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

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

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

2. Goodwill and Other Intangible Assets

In June 2001, the FASB issued SFAS No. 141, Business Combinations,and SFAS No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Intangible
assets with finite lives will continue to be amortized over their useful lives.

Financial Accounting Standards No. 141, Business Combinations

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

Purchased in-process research and development represents the value
assigned in a purchase business combination to research and development
projects of the acquired business that were commenced but not yet completed at
the date of acquisition, for which technological feasibility has not been
established and which have no alternative future use in research and
development activities or otherwise. In accordance with SFAS No. 2, Accounting
for Research and Development Costs,as interpreted by FASB Interpretation No.
4, amounts assigned to purchased in-process research and development meeting
the above criteria must be charged to expense at the date of consummation of
the purchase business combination. In connection with the Tsunami and Paracer
acquisitions, the Company recorded a $2,070,000 charge for in-process research
and development during the second quarter of fiscal 2003.

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

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

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

Significant negative industry and economic trends affecting the Companys
current and future operations, and therefore future cash flows, contributed to
the transitional impairment test resulting in an impairment of goodwill related
to the active optical subsystems reporting unit of approximately $17.0 million.
This non-cash charge is reflected as a cumulative effect of a change in
accounting principle in the Statement of Operations for the six months ended
October 31, 2002. Going forward any additional impairment of goodwill will be
recorded in the period the goodwill is determined to be impaired.

3. Restructuring Charges

The Company recorded restructuring charges of approximately $2.5 million
relating to employee severance costs in the first six months of fiscal 2003.

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

Balance
    
    2004
    
    Payments through
    
    Balance October 31,April 30, 2003
    
    Charges
    
    October 31, 2003
    
    2003Employee costs
    
    $
    400,000
    
    
    
    
    
    
    $
    138,000
    
    
    $
    262,000


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The Company terminated 161 employees in the six months ended October 31,
2002 for the restructuring of its operations, including both production and
administrative personnel.

4. Income Taxes

During fiscal 2002, a valuation allowance was recorded to offset the
carrying value of deferred tax assets primarily associated with tax loss carry
forwards based on the significant operating losses experienced. As a result,
valuation allowances of $55.2 million were recorded through April 30, 2003,
which eliminated the tax benefit attributable to the losses incurred in fiscal
years 2002 and 2003. We have continued to experience similar reductions in
business levels during the six months ended October 31, 2003, and an additional
valuation reserve of $7.5 million was recorded, which eliminated the tax
benefit attributable to the net loss incurred in the first six months of fiscal
2004.

We have net operating loss carry forwards of approximately $132.5 million
that are available to offset taxable income in the future. The net operating
loss carry forwards will expire in 2022 through 2024.

5. Long-Term Debt

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

Information TechnologyEquipmentNote 1
    
    Note 2
    
    Financing
    
    TotalCurrent portion
    
    $
    1,842,000
    
    
    $
    886,000
    
    
    $
    151,000
    
    
    $
    2,879,000Long-term
    
    
    1,791,000
    
    
    
    
    
    
    
    
    
    
    
    1,791,000$
    3,633,000
    
    
    $
    886,000
    
    
    $
    151,000
    
    
    $
    4,670,000Interest rate
    
    
    5.50
    %
    
    
    3.52
    %
    
    
    13.72
    %Payment terms
    
    Monthly
    
    Quarterly
    
    MonthlyMaturity
    
    
    2006
    
    
    
    2004
    
    
    
    2005


6. Loss Per Share

Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2002
    
    2003
    
    2002
    
    2003Numerator  net loss
    
    $
    (19,535
    )
    
    $
    (7,521
    )
    
    $
    (48,371
    )
    
    $
    (14,789
    )Denominator:Denominator for basic and
diluted loss per share -
weighted-average shares
outstanding
    
    
    7,311
    
    
    
    7,392
    
    
    
    7,311
    
    
    
    7,378Basic and diluted loss per share
    
    $
    (2.67
    )
    
    $
    (1.02
    )
    
    $
    (6.63
    )
    
    $
    (2.00
    )


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7. Sale of a Business

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

8. Merger

Pursuant to a merger agreement dated as of July 2, 2003, the Company
agreed to acquire Sterling Holding Company (Sterling), a privately-held company
based in Mesa, Arizona that designs and manufactures RF and Microwave
interconnect products via its two operating units, Trompeter Electronics, Inc.
and Semflex, Inc. On November 6, 2003, pursuant to the terms of the agreement,
Sterling became a wholly-owned subsidiary of the Company. Sterling
shareholders received approximately 6.1 million shares of the Companys common
stock and 50,000 shares of the Companys Series B preferred stock. The
preferred stock has a face value of $5.0 million and a contingent value of up
to an additional $6.25 million based on certain events, including the future
performance of the Companys share price.

The closing of the transaction on November 6, 2003 followed approval by
both the Companys and Sterlings shareholders. The Companys common stock
issued in this transaction, had a value of $30,957,380 at the close of business
on July 2, 2003. Sterlings sales and loss before income taxes were $13.7
million and $3.5 million respectively, during the Companys first five months
of fiscal 2004. Sterlings operations were adversely affected during this
period, by $1.4 million of costs for this transaction and $1.5 million of costs
to relocate its California manufacturing operation to Mesa, Arizona.

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

9. Stock-Based Compensation

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

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Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,(Dollars in thousands, except per share amounts)
    
    2002
    
    2003
    
    2002
    
    2003Reported net loss
    
    $
    (19,535
    )
    
    $
    (7,521
    )
    
    $
    (48,371
    )
    
    $
    (14,789
    )Stock-based compensation net of tax
    
    
    (517
    )
    
    
    (609
    )
    
    
    (5,661
    )
    
    
    (1,205
    )Pro forma net loss
    
    
    (20,052
    )
    
    
    (8,130
    )
    
    
    (54,032
    )
    
    
    (15,994
    )Reported basic and diluted net loss per share
    
    
    (2.67
    )
    
    
    (1.02
    )
    
    
    (6.63
    )
    
    
    (2.00
    )Pro forma basic and diluted net loss per share
    
    
    (2.74
    )
    
    
    (1.10
    )
    
    
    (7.39
    )
    
    
    (2.17
    )








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

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

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securities of technology-related companies; (xxii) the effect of provisions in
our organizational documents that may delay or prevent the acquisition of
Stratos or may decrease the value of Stratos common stock; (xxiii) our ability
to integrate Stratos and Sterling; (xxiv) the continued costs associated with
previously acquired businesses that are not profitable; (xxv) impact on our
earnings of application of the purchase method of accounting in connection with
the Sterling merger; and (xxvi) our ability to realize benefits from
consolidation of Sterling into the Mesa, Arizona facility. Because
forward-looking statements are subject to assumptions and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Shareholders are cautioned not to place undue
reliance on such statements, which speak only as of the date of this document
or the date of any document incorporated by reference. All subsequent written
and oral forward-looking statements concerning the Sterling merger or other
matters addressed in this document and attributable to Stratos or any person
acting on either the companys behalf are expressly qualified in their entirety
by the cautionary statements contained or referred to in this section. Except
to the extent required by applicable law or regulation, Stratos undertakes no
obligation to release publicly any revisions or updates to such forward-looking
statements to reflect events or circumstances after the date of this document
or to reflect the occurrence of unanticipated events.

See the cautionary statements included as Exhibit 99.1 to this quarterly report
for a more detailed discussion of the foregoing and other factors that could
cause actual results to differ materially from those included in the
forward-looking statements and that, among others, should be considered in
evaluating our outlook.

Overview

Pursuant to a merger agreement dated as of July 2, 2003, the Company
agreed to acquire Sterling Holding Company, a privately-held company based in
Mesa, Arizona that designs and manufactures RF and Microwave interconnect
products via its two operating units, Trompeter Electronics, Inc. and Semflex,
Inc. On November 6, 2003, pursuant to the terms of the agreement, Sterling
became a wholly-owned subsidiary of the Company. Sterling shareholders
received approximately 6.1 million shares of the Companys common stock and
50,000 shares of the Companys Series B preferred stock. The preferred stock
has a face value of $5.0 million and a contingent value of up to an additional
$6.25 million based on certain events, including the future performance of the
Companys share price.

The closing of transaction on November 6, 2003 followed approval by both
the Companys and Sterlings shareholders. The Companys common stock issued
in this transaction had a value of $30,957,380 at the close of business on July 2, 2003. Sterlings sales
and loss before income taxes were $13.7 million and $3.5 million respectively,
during the Companys first five months of fiscal 2004. Sterlings results for
the same period reflected $1.4 million of costs for this transaction and $1.5
million of costs to relocate its California manufacturing operation to Mesa,
Arizona.

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

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Except to the extent expressly stated, discussion references to Stratos in
the following discussion do not reflect the acquisition of Sterling, which
occurred after October 31, 2003.

We develop, manufacture and sell optical subsystems for various
applications and multiple end markets. These subsystems are designed for use
in storage, data networking, metro and wide area telecom networks, military and
government applications, and other industrial markets and applications. We
plan to continue to diversify our end markets and expand our product offerings
through internal and external growth. Our optical subsystems are compatible
with the advanced transmission protocols used in these networks, including
Gigabit Ethernet, Fast Ethernet, Fibre Channel, and synchronous optical network
(SONET).

Our net sales are derived principally from the sale of optical subsystems
to original equipment manufacturers (OEMs). Our net sales have fluctuated from
period to period based on customer demand for our products, the size and timing
of customer orders, particularly from our largest customers, and based on any
canceled, delayed or rescheduled orders in the relevant period. We determine
reserves for rapid technological change on a product by product basis. While
it is likely that obsolescence due to rapid technological change will continue,
the timing and amount of this obsolescence cannot be predicted with certainty.
There can be no assurance that we will be able to introduce new products to
offset anticipated decrease in the average selling prices of our products.

The average unit prices of our products generally decrease as the products
mature in response to factors such as increased competition, the introduction
of new products and increased unit volumes. We anticipate that average selling
prices will continue to decline in future periods, although the timing and
degree of the declines cannot be predicted with any certainty. We must
continue to develop and introduce on a timely basis new products that
incorporate features that can be sold at higher average selling prices.

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

Our cost of sales consists of materials, salaries and related expenses for
manufacturing personnel and manufacturing overhead. We purchase several key
components used in the manufacture of our products from a limited number of
suppliers. We have periodically experienced shortages and delivery delays for
these materials. In some circumstances, we maintain an inventory of limited
source components to decrease the risk of shortage. If we overestimate our
requirements, we may have excess inventory of these components. Substantially
all of our products are designed and manufactured in our own facilities. In
the future we may expand the volume of products manufactured by third parties.
In order to remain competitive, we must continually reduce our manufacturing
costs through design and

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engineering innovations and increases in manufacturing efficiencies.
There can be no assurance that we will be able to reduce our manufacturing
costs.

Research and development expenses consist primarily of salaries and
related expenses for design engineers, scientists and other technical
personnel, depreciation of test and prototyping equipment, and tooling.
Research and development expenses also consist of materials and operating
expenses related to major product development projects. We charge all research
and development expenses to operations as incurred. We believe that continued
investment in research and development is critical to our long-term business
success. We intend to continue to invest in research and development programs
in future periods for the purpose of enhancing or reducing the cost of current
optical subsystems, and developing new optical subsystems.

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

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

Critical Accounting Policies

Accounts Receivable

We sell products primarily to various original equipment manufacturers and
distributors. Sales to these customers have varying degrees of collection risk
associated with them. Judgment is required in assessing the realization of
these receivables based on aging, historical experience and customers
financial condition.

Inventory Reserves

It is our policy to reserve 100% of the value of inventory we specifically
identify and consider obsolete or excessive to 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 years
projected usage. Excess inventory is determined using our best estimate of
future demand at the time, based upon information then available to us. In
general, our policy is to scrap inventory determined to be obsolete shortly
after the determination is made and to keep excess inventory for a reasonable
amount of time before it is discarded. Occasionally, changed circumstances in
the marketplace present us with an opportunity to sell inventory that was
previously determined to be excessive and reserved for. If this occurs, we
vigorously pursue such opportunities.

Impairment of Long-Lived Assets

We review the carrying value of our long-lived assets if the facts and
circumstances, such as significant declines in sales, earnings or cash flows or
material adverse changes in the business climate suggest that they may be
impaired. If this review indicates that long-lived

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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.

Revenue Recognition

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

Customer Returns

It is our policy to establish a reserve for customer returns based on any
known returns and anticipated returns based on past experience. Occasionally,
we will receive requests from customers to accept the return of merchandise for
which they had previously accepted delivery. Although we have no obligation to
do so, each such request is evaluated in light of the contemplated of future
business from the customer. We will continue to consider these requests in the
future, however, we are not able to predict that we will enter into any
additional such agreements in the future, and, if so, the amount of any
returns.

Research and Development

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

Results of Operations

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

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Six Months EndedOctober 31,2002
    
    2003Revenue:Net sales
    
    
    100.0
    %
    
    
    100.0
    %License fees and royalties
    
    
    2.4
    
    
    
    4.5Total
    
    
    102.4
    
    
    
    104.5Costs and expenses:Cost of sales
    
    
    124.9
    
    
    
    113.3Research and development
    
    
    71.8
    
    
    
    34.3Sales and marketing
    
    
    19.7
    
    
    
    20.8General and administrative
    
    
    33.1
    
    
    
    47.3Total costs and expenses
    
    
    249.5
    
    
    
    215.7Loss from operations
    
    
    (147.1
    )
    
    
    (111.2
    )Investment income, net
    
    
    2.9
    
    
    
    3.1Loss before income taxes
    
    
    (144.2
    )
    
    
    (108.1
    )Provision for income taxes
    
    
    
    
    
    
    Loss before cumulative effect of a change in accounting principle
    
    
    (144.2
    )
    
    
    (108.1
    )Cumulative effect of a change in accounting principle
    
    
    (78.0
    )
    
    
    Net loss
    
    
    (222.2
    )%
    
    
    (108.1
    )%


Three and Six Months Ended October 31, 2003 and 2002

Net Sales.Net sales for the second quarter of fiscal 2004 decreased to
$7.1 million from $11.1 million a year ago. Net sales for the six month period
ended October 31, 2003 decreased 37% over the same period a year ago to $13.7
million from $21.8 million. Of the $4.0 million decrease in the second
quarter, $2.7 million resulted from a decrease in the net sales into the
storage end market, $1.1 million resulted from a decrease into the
telecom/metro end market and $500,000 resulted from a decrease in the net sales
into the data networking end market. These decreases were offset in part by a
$200,000 increase in the net sales into the military/governmental end market
and a $100,000 increase in the net sales into the other end markets.

Net sales decreased $8.1 million in the six months ended October 31, 2003
over the comparable period last year. The decrease represents a $5.2 million
decrease in the net sales into the storage end market, a $1.6 million decrease
in the net sales into the data networking end market and a $1.7 million
decrease in the net sales into the telecom/metro end market. These decreases
were offset in part by a $200,000 increase in the net sales into the
military/governmental end market and a $200,000 increase in net sales into
other end markets.

The decrease in sales was primarily due to lower customer demand due to
the current economic climate and reduced capital spending for optical
networking equipment. Sales were also negatively impacted by declines in
average unit prices for our products resulting from pricing pressure and
changes in product mix. Our total sales order backlog increased to $7.0
million as of October 31, 2003 from $5.0 million as of April 30, 2003. This
increase reflects a

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significant increase in the backlog in our military/governmental end
market offset partially by decreases reflecting lower customer demand for our
products, customer push-outs and cancellation of orders, due in part to delays
in the launch of new product programs by our customers in other end markets we
service.

License Fees and Royalties. License fees decreased to $113,000 in the
three months ended October 31, 2003 from $324,000 in the three months ended
October 31, 2002. This decrease is primarily attributable to generally lower
sales of optical subsystems among licensees, consistent with general economic
conditions in the optical networking marketing. License fees increased to
$619,000 in the six months ended October 31, 2003 from $532,000 in the six
months ended October 31, 2002. The increase relates to the receipt of higher
royalties from two licensees in the first six months of fiscal 2004. License
fees consist of both fixed schedule payments and contingent payments based on
sales volumes of licensed products.

Cost of Sales and Gross Margins. Cost of sales decreased to $8.0 million
in the three months ended October 31, 2003 from $16.4 million in the three
months ended October 31, 2002 and decreased to $15.5 million for the six months
ended October 31, 2003 compared to $27.2 million in the six months ended
October 31, 2002. Gross margin as a percentage of net sales or gross margin,
improved to negative (12.8)% in the three months ended October 31, 2003 from
negative (48.8)% in the three months ended October 31, 2002. Approximately,
36.3 percentage points of the 36.0 percentage point increase was due to the
reduction in the charges for obsolete and slow moving inventory, 1.0 percentage
point for the sale of inventory previously considered excess and fully
reserved, offset by a 1.3 percentage point increase as a result of the decline
in sales and the decline in the average selling price for our products due
primarily to pricing pressures and product mix.

The gross margin improved to negative (13.3)% for the six months ended
October 31, 2003 from negative (24.9)% in the comparable period last year.
Approximately 13.8 percentage points of the 11.6 percentage point increase was
due to the reduction in the charges for obsolete and slow moving inventory and
3.4 percentage points for the sale of inventory previously considered excess
and fully reserved, offset by a 3.3 percentage point increase as a result of
the decline in sales and the decline in the average selling price for our
products due primarily to pricing pressures and product mix and a 2.3
percentage point increase for employee severance pay relating to restructuring
of operations.

Cost of sales was charged approximately $1.5 million and $5.3 million in
the six months ended October 31, 2003 and 2002 for obsolete and excess
inventory.

Research and Development. Research and development expenses decreased to
$1.8 million in the three months ended October 31, 2003 from $8.9 million in
the three months ended October 31, 2002. The decrease of $7.1 million was due
primarily to the recording of a $2.1 million charge to write off the costs of
the acquisitions of Tsunami Optics, Inc. and Paracer, Inc. that was allocated
to intangible in-process research and development, in accordance with SFAS No.
141 in the three months ended October 31, 2002, a $1.6 million decrease in
costs of research and development facilities, a $1.7 million decrease in costs
of personnel dedicated to research and development and $1.7 million decrease in
material and overhead cost related to major product development.

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Research and development expenses decreased to $4.7 million in the six
months ended October 31, 2003 from $15.6 million in the six months ended
October 31, 2002. During the six months ended October 31, 2002, the Company
incurred a $2.1 million charge for the write off of intangible assets as
described above. In addition, the decrease of $10.9 million was the result of
a $2.7 million decrease in costs of research and development facilities, $3.2
million decrease in personnel costs dedicated to research and development and
$2.9 million decrease in material and overhead cost related to major product
development.

Sales and Marketing. Sales and marketing expenses decreased to $1.3
million in the three months ended October 31, 2003 from $2.1 million for the
three months ended October 31, 2002. This $800,000 decrease was due to
decreases of $500,000 in sales and marketing salaries, fringe benefits, bonuses
and commissions, and $300,000 in field sales operating costs supporting our
sales.

Sales and marketing expenses decreased to $2.8 million in the six months
ended October 31, 2003 from $4.3 million in the comparable period last year.
This $1.5 million decrease was due to a $900,000 decrease in sales and
marketing salaries, fringe benefits, bonuses and commissions and a $600,000
decrease in field sales operating costs supporting our sales volume.

General and Administrative. General and administrative expenses remained
constant at $3.7 million in the three months ended October 31, 2003 when
compared to the comparable period last year. Salaries, fringe benefits and
bonuses decreased $500,000, offset by an increase of $500,000 in general
operating and legal expenses.

General and administrative expenses decreased to $6.5 million in the six
months ended October 31, 2003 from $7.2 million in the comparable period last
year. This $700,000 decrease was due to a reduction of $1.1 million in
salaries, fringe benefits and bonuses and the $1.2 million gain on the sale of
Bandwidth Semiconductor LLC, offset by an increase of $1,600,000 in general
operating and legal expenses.

We operate in markets that are currently experiencing a severe economic
downturn that began late in the third quarter of fiscal 2001 and escalated
during the first quarter of fiscal 2002 and, as a result, many of our customers
began to stretch their payment terms. Days sales in accounts receivable
increased to 77 days at October 31, 2003 compared to 50 days at April 30, 2003.

Investment Income, Net. Investment income, net of investment expense,
decreased to $184,000 in the three months ended October 31, 2003 from $264,000
in the three months ended October 31, 2002 and decreased to $423,000 in the six
months ended October 31, 2003 from $638,000 in the comparable period last year.
Investment income consists of earnings on the short-term investment of excess
cash balances, and the decreases of this income in the three and six months
ended October 31, 2003 reflect the reduction of excess cash balances as well as
lower interest rates throughout the market place during these periods.

Income Taxes. During fiscal 2002, a valuation allowance was recorded to offset the carrying value of deferred tax assets primarily associated with tax
loss carry forwards based on the significant operating losses experiences. As a result, valuation allowances of $55.2 million were recorded
through April 30, 2003, which eliminated the tax benefit attributable to the losses incurred in fiscal years 2002
and 2003. We have continued to experience similar reductions in business levels during the six months ended October 31, 2003, and an additional valuation reserve of $7.5 million was recorded,
which eliminated the tax benefit attributable to the net loss incurred in the first six months of fiscal 2004.

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We have net operating loss carryfowards of approximately $132.5 million
that are available to offset taxable income in the future. The net operating
loss carry forwards will expire in 2022 through 2024.

Cumulative Effect of a Change in Accounting Principle.Effective May 1,
2002, the Company has adopted the provisions of SFAS No. 142, and performed a
transitional goodwill impairment test as of that date. As a result, it was
determined that the goodwill of our active optical subsystems reporting unit
had been impaired and recorded a one-time noncash charge of approximately $17.0
million. This charge was recorded as of May 1, 2002 and is reflected as a
cumulative effect of a change in accounting principle in the Statement of
Operations. See Note 2 to the Consolidated Financial Statements located
elsewhere in this filing for further discussion of this item.

Liquidity and Capital Resources

Net cash used in operating activities totaled $10.7 million for the six
months ended October 31, 2003. The use of cash in operating activities
resulted primarily from a net loss offset in part by decreases in accounts
receivable and inventories and increases in accounts payable and accrued
expenses. Net cash used in operating activities totaled $15.3 million for the
six months ended October 31, 2002. The use of cash in operating activities
resulted primarily from a net loss and decrease in accounts payable and accrued
expenses offset in part by decreases in accounts receivable and inventories.

Net cash used in investing activities totaled $12.3 million in the six
months ended October 31, 2003, including $1.8 million for the purchase of
equipment and facilities, a $14.8 million increase in short-term investments,
partially offset by $4.3 million of proceeds from the sale of assets held for
sale. Net cash used in investing activities totaled $500,000 in the six months
ended October 31, 2002, including $2.4 million for the purchase of equipment
and facilities, a $900,000 decrease in short-term investments, and $200,000
purchase price of Tsunami Optics, Inc. and Paracer, Inc. partially offset by
$1.2 million of proceeds from the sale of assets held for sale.

Net cash used in financing activities was $2.0 million in the six months
ended October 31, 2003, including $2.0 million repayment on borrowings and
$200,000 in treasury stock transactions offset in part by $200,000 of proceeds
from exercise of stock options. Net cash used in financing activities was $4.5
million in the six months ended October 31, 2002, which represents repayments
on borrowings.

As of October 31, 2003, our principal source of liquidity was
approximately $51.3 million in cash, cash equivalents and short-term
investments. Our future capital requirements will depend on a number of
factors, including our ability to generate increased sales and our

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ability to manage operating expenses. The continued diversification of
our end markets and expansion of our product offerings through internal and
external growth could materially change our level of cash and cash equivalents.
Our only cash commitment is the repayment of long-term debt of approximately
$4.7 million. We believe that our current cash balances will be sufficient to
meet our cash needs for working capital, capital expenditures and repayments of
long-term debt for the next 12 months.







Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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







Item 4. Controls and Procedures.

As of the end of the period covered by this report, our management,
including our Chief Executive Officer and Chief Financial Officer, carried out
an evaluation of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15a-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our filings with the SEC.

There has been no change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the period covered by this quarterly report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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PART II
OTHER INFORMATION







Item 1. Legal Proceedings.

From time to time, we become involved in various lawsuits and legal
proceedings that arise in the normal course of business. Litigation is subject
to inherent uncertainties and an adverse result in a lawsuit may harm our
business, financial condition or results of operation. Our management believes
that the resolution of these lawsuits and legal proceedings will not have a
significant effect on the Companys business, financial condition or results of
operation.

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

The Company recently agreed to a Memorandum of Understanding, which
reflects a settlement of these class actions as between the purported class
action plaintiffs, the Company and the defendant officers and directors, and
the Companys liability insurer. Under the terms of the Memorandum of
Understanding, the Companys liability insurers will pay certain sums to the
plaintiffs, with the amount dependent upon the plaintiffs recovery from the
underwriters in the IPO class actions as a whole. The plaintiffs will dismiss
with prejudice their claims against the Company and its officers and directors,
and the Company will assign to the plaintiffs certain claims that it may have
against the underwriters.

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

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are seeking $38 million in damages or, in the alternative, rescission of
the acquisition agreement. The Company has filed a counterclaim which alleges,
among other things, claims for fraud, breach of contract and violations of
federal securities laws against Lego and several other shareholders and
officers of Tsunami in connection with the acquisition of Tsunami. The
counterclaim seeks compensatory and punitive damages. The Company believes
that the plaintiffs claims in this lawsuit are without merit and intends to
vigorously defend against these claims.

In August 2002, James Campbell filed a lawsuit against the Company and
Tsunami alleging breach of an alleged employment contract, fraud, violation of
the implied covenant of good faith and fair dealing, age discrimination and
wrongful termination in violation of public policy. Campbell seeks unspecified
damages, punitive damages and attorneys fees. The Company believes that this
lawsuit is without merit and intends to vigorously defend against these claims.

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







Item 2. Changes in Securities and Use of Proceeds.

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

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

The net proceeds from the offering, after deducting the underwriting
discount and the estimated offering expenses to be paid by Stratos, were
approximately $195 million. Uses of proceeds to date include $122.6 million
for general corporate purposes and the purchase of equipment and facilities,
payments of $17.1 million in connection with various acquisitions, repayment of
$2.7 million of advances from a Methode subsidiary, and $333,000 for repayment

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of a note assumed in connection with the acquisition of our Stratos Ltd.
subsidiary. The remainder of the proceeds will be used for general corporate
purposes, including working capital, capital expenditures, and research and
development. Pending these uses, the remaining net proceeds have been invested
in short-term interest bearing, investment grade marketable securities.

Other than the repayment of advances from a Methode subsidiary described
above and the payment of the additional purchase price in connection with our
Stratos Lightwave-Florida acquisition which was paid to two of our officers
(and the payment of salaries and expense reimbursements to employees in the
ordinary course of business), none of the net proceeds of the offering have
been paid, directly or indirectly, to any Stratos director or officer or any of
their associates, to any persons owing 10 percent or more of our common stock,
or to any Stratos affiliate.







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

Our annual meeting of shareholders was held November 6, 2003. At this meeting,
the Company solicited the vote of shareholders on the proposals set forth below
and received for each proposal the votes indicated below:



|(i) |  | To adopt and approve the Agreement and Plan of Merger, dated as of July
2, 2003, among Stratos Lightwave, Inc., Sleeping Bear Merger Corp., a
direct wholly owned subsidiary of Stratos, and Sterling Holding Company,
as amended as of August 19, 2003 and October 31, 2003 (the Merger
Agreement), and the transactions contemplated thereby. The shareholders
elected to adopt the proposal. The votes cast for and against the
proposal were 3,909,816 votes for, 81,843 votes against and 11,673
abstentions.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(ii) |  | To elect two Class III directors, Brian J. Jackman and James W. McGinley,
to hold office for three-year terms expiring at the 2006 annual meeting
(or until either directors successor is elected and qualified). Such
nominees were elected to serve as directors of the Company. The votes
cast for and against such nominees were as follows: (1) Brian J. Jackman,
5,870,027 votes for and 620,763 votes against, and (2) James W. McGinley,
4,828,403 votes for and 1,662,387 votes against. Charles Daniel Nelsen
and Edward J. OConnell continued as directors of the Company after the
meeting.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iii) |  | To adopt an amendment to the restated certificate of incorporation, as
amended, to change the corporate name of the Company to Stratos
International, Inc. The shareholders elected to adopt the amendment. The
votes cast for and against the amendment were 6,440,908 votes for, 42,973
votes against, and 6,909 abstentions.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iv) |  | To adopt the Stratos Lightwave, Inc. 2003 Stock Plan to permit the grant
of stock options, restricted stock and stock appreciation rights. The
shareholders elected to adopt the plan. The votes cast for and against
the plan were 3,369,856 votes for, 577,661 votes against and 55,815
abstentions.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(v) |  | To adopt the Stratos Lightwave, Inc. 2003 Employee Stock Purchase Plan to
allow eligible employees to be able to purchase shares of the Companys
common stock at a discount from the then current market price, without
commissions or other charges. The
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | shareholders elected to adopt the plan. The votes cast
for and against the plan were 3,771,078 votes for, 173,787
votes against and 58,467 abstentions.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------







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



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



| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------

On August 27, 2003, we filed a current report on Form 8-K to file, under
Item 5 of that form, our press release announcing the filing of a registration
statement on Form S-4 relating to the merger with Sterling Holding Company.

On September 2, 2003, we filed a current report on Form 8-K to furnish,
under Item 12 of that form, our press release containing earnings information
for our first quarter ended July 31, 2003.

On November 12, 2003, we filed a current report on Form 8-K to: (i)
furnish, under Item 2 of that form, the Agreement and Plan of Merger, dated as
of July 2, 2003, as amended, among Stratos Lightwave, Inc., Sleeping Bear
Merger Corp., a wholly owned subsidiary of Stratos, and Sterling Holding
Company and (ii) furnish, under Item 7 of that form, a press release announcing
that our shareholders had approved a proposal to adopt the merger agreement and
that, following such approval, the merger had been completed.

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SIGNATURES

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

Dated: December 15, 2003
    
    Stratos International, Inc.By:
    
    /s/ James W. McGinleyJames W. McGinleyPresident and Chief Executive OfficerBy:
    
    /s/ David A. SlackDavid A. SlackSenior Vice President  Finance and
Chief Financial Officer


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EXHIBIT INDEX

ExhibitNumber
    
    Description of Document2.1
    
    Agreement and Plan of Merger, dated as of July 2, 2003, as amended as of August 19, 2003 and October 31, 2003, among Stratos
Lightwave, Inc., Sleeping Bear Merger Corp. and Sterling Holding Company (12)3.1
    
    Restated Certificate of Incorporation of Registrant*3.2
    
    Bylaws of Registrant (1)3.3
    
    Certificate of Designation of Series A Junior Participating Preferred Stock, included as Exhibit A
to Exhibit 4.33.4
    
    Certificate of Designation for Series B Preferred Stock (11)4.1
    
    Specimen certificate representing the common stock (1)4.2
    
    Specimen Certificate representing the Series B Preferred Stock*4.3
    
    Rights Agreement, dated as of March 23, 2001, between Stratos International, Inc. and Mellon
Investor Services LLC (2)4.4
    
    First Amendment, dated as of July 2, 2003, to Rights Agreement, dated as of March 23, 2001, between
Stratos Lightwave, Inc. and Mellon Investor Services LLC, as Rights Agent. (10)10.1
    
    Form of Indemnity Agreement between Registrant and Registrants directors and officers (1)10.2
    
    Stratos Lightwave, Inc. 2000 Stock Plan, as amended and restated (3)10.3
    
    Agreement and Plan of Reorganization, dated January 22, 2002, by and among the Registrant, Tundra
Acquisition Corp. and Tsunami Optics, Inc. (4)10.4
    
    Stratos Lightwave, Inc. 2002 Stock Plan for Acquired Companies (5)10.5
    
    Agreement and Plan of Reorganization, dated March 18, 2002, by and among the Registrant, Polar
Acquisition Corp. and Paracer, Inc. (6)10.6
    
    Management Retention Agreement between the Registrant and James McGinley (7)10.7
    
    Management Retention Agreement between the Registrant and David Slack (7)10.8
    
    Management Retention Agreement between the Registrant and Robert Scharf (7)10.9
    
    Management Retention Agreement between the Registrant and Richard Durrant (7)10.10
    
    Stratos Lightwave, Inc. Severance Plan (7)10.11
    
    Agreement and Plan of Merger, dated as of July 2, 2003, as amended as of August 19, 2003 and October 31, 2003, among Stratos
Lightwave, Inc., Sleeping Bear Merger Corp. and Sterling Holding Company (12)10.12
    
    Amendment to Management Retention Agreement between the Registrant and James McGinley (9)10.13
    
    Amendment to Management Retention Agreement between the Registrant and David Slack (9)10.14
    
    Amendment to Management Retention Agreement between the Registrant and Robert Scharf (9)10.15
    
    Amendment to Management Retention Agreement between the Registrant and Richard Durrant (9)10.16
    
    Amendment to Stratos Lightwave, Inc. Severance Plan (9)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer*31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer*32.1
    
    Section 1350 Certification of Chief Executive Officer*


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ExhibitNumber
    
    Description of Document32.2
    
    Section 1350 Certification of Chief Financial Officer*99.1
    
    Cautionary Statements*




---

|(1)  |  | Incorporated by reference to the Registrants Registration
Statement on Form S-1 effective June 26, 2000.          
|---- |  | -------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Incorporated by reference to the Registrants Form 8-K dated March
22, 2001.                                       
|    
|(3)  |  | Incorporated by reference to the Registrants Annual Report on
Form 10-K for the year ended April 30, 2001.        
|    
|(4)  |  | Incorporated by reference to the Registrants Form 8-K dated
February 4, 2002.                                     
|    
|(5)  |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 dated January 31, 2002.           
|    
|(6)  |  | Incorporated by reference to the Registrants Form 8-K dated March
28, 2002.                                       
|    
|(7)  |  | Incorporated by reference to the Registrants Quarterly Report on
Form 10-Q for the quarter ended October 31, 2002.
|    
|(8)  |  | Incorporated by reference to the Registrants Form 8-K dated July
2, 2003.                                         
|    
|(9)  |  | Incorporated by reference to the Registrants Annual Report on
Form 10-K for the fiscal year ended April 30, 2003. 
|    
|(10) |  | Incorporated by reference to the Registrants Form 8-A/A filed
August 7, 2003.                                     
|    
|(11) |  | Incorporated by reference to the Registrants Form S-4/A effective
September 29, 2003.                             
|    
|(12) |  | Incorporated by reference to the Registrants Form 8-K dated
November 6, 2003.                                     
|    
|*    |  | Filed herewith                                                                                                     

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