---

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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

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(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 2000
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

or

|/ / | 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

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STRATOS LIGHTWAVE, INC.(Exact name of Registrant as specified in its charter)

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Delaware(State or other jurisdiction of
incorporation or organization)

36-4360035(I.R.S. Employer Identification No.)


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

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

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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 / /

As
of December 12, 2000, there were 64,092,307 shares of the Registrant's common stock outstanding.

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## 

STRATOS LIGHTWAVE, INC.INDEX

|                  |         |                                                                                                                      |                                                                                      | Page
|----------------- | ------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ----
|PART I.           |         | FINANCIAL INFORMATION                                                                                                |                                                                                      | 3   
|                  | Item 1. |                                                                                                                      | Financial Statements                                                                 |     
|                  |         | Condensed Consolidated Balance Sheets as of April 30, 2000 and October 31, 2000 (unaudited)                          |                                                                                      | 3   
|                  |         | Condensed Consolidated Statements of Income (unaudited) for the three and six months ended October 31, 1999 and 2000 |                                                                                      | 4   
|                  |         | Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended October 31, 1999 and 2000       |                                                                                      | 5   
|                  |         | Notes to Condensed Consolidated Financial Statements (unaudited) October 31, 2000                                    |                                                                                      | 6   
|                  | Item 2. |                                                                                                                      | Management's Discussion and Analysis of Financial Condition and Results of Operation |     
|PART II.          |         | OTHER INFORMATION                                                                                                    |                                                                                      | 26  
|                  | Item 1. |                                                                                                                      | Legal Proceedings                                                                    |     
|                  | Item 2. |                                                                                                                      | Changes in Securities and Use of Proceeds                                            |     
|                  | Item 6. |                                                                                                                      | Exhibits and Reports on Form 8-K                                                     |     
|SIGNATURES        |         | 29                                                                                                                  
|INDEX TO EXHIBITS |         | 30                                                                                                                  

2

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## 

PART I  FINANCIAL INFORMATION

Item 1. Financial Statements.

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

|                                     |                                         | April 30,
2000             |                                            | October 31,
2000 |       
|------------------------------------ | --------------------------------------- | -------------------------- | ------------------------------------------ | ---------------- | ------
|
|ASSETS                               |                                        
|Current Assets:                      |                                         |                            |                                            |                  |       
|                                     | Cash and cash equivalents               |                            | $                                          | 537              |       
|                                     | Accounts receivable, less allowance     |                            |                                            | 12,127           |       
|Inventories:                         |                                         |                            |                                            |                  |       
|                                     | Finished products                       |                            |                                            | 764              |       
|                                     | Work in process                         |                            |                                            | 991              |       
|                                     | Materials                               |                            |                                            | 9,417            |       
|                                     |                                         |                            |                                            |                  |       
|                                     |                                         |                            | 11,172                                     |                  |       
|Current deferred income taxes        |                                         |                            | 1,166                                      |                  |       
|Prepaid expenses                     |                                         |                            | 201                                        |                  |       
|                                     |                                         |                            |                                            |                  |       
|                                     | Total current assets                    |                            |                                            | 25,203           |       
|                                     | Other assets:                           |                            |                                            |                  |       
|                                     | Goodwill, less accumulated amortization |                            |                                            | 10,563           |       
|                                     | Other                                   |                            |                                            | 436              |       
|                                     |                                         |                            |                                            |                  |       
|                                     |                                         |                            | 10,999                                     |                  |       
|Property, plant and equipment        |                                         |                            | 38,377                                     |                  |       
|                                     | Less allowances for depreciation        |                            |                                            | 13,442           |       
|                                     |                                         |                            |                                            |                  |       
|                                     |                                         |                            | 24,935                                     |                  |       
|                                     |                                         |                            |                                            |                  |       
|                                     |                                         |                            | Total assets                               |                  | $     
|                                     |                                         |                            |                                            |                  |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                        
|Current liabilities:                 |                                         |                            |                                            |                  |       
|                                     | Accounts payable                        |                            | $                                          | 4,389            |       
|                                     | Other current liabilities               |                            |                                            | 3,067            |       
|                                     |                                         |                            |                                            |                  |       
|                                     |                                         | Total current liabilities  |                                            |                  | 7,456 
|Deferred income taxes                |                                         |                            | 719                                        |                  |       
|Minority interest                    |                                         |                            |                                           |                  |       
|Stockholders' equity                 |                                         |                            |                                            |                  |       
|                                     | Preferred stock                         |                            |                                            |                 |       
|                                     | Common stock                            |                            |                                            | 540              |       
|                                     | Additional paid-in capital              |                            |                                            | 52,422           |       
|                                     | Retained earnings                       |                            |                                            |                 |       
|                                     | Foreign currency translation adjustment |                            |                                            |                 |       
|                                     |                                         |                            |                                            |                  |       
|                                     |                                         | Total stockholders' equity |                                            |                  | 52,962
|                                     |                                         |                            |                                            |                  |       
|                                     |                                         |                            | Total liabilities and stockholders' equity |                  | $     
|                                     |                                         |                            |                                            |                  |       

See notes to condensed consolidated financial statements.

3

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

|                                                      |                            | Three Months Ended
October 31, |      | Six Months Ended
October 31,
|----------------------------------------------------- | -------------------------- | ------------------------------ | ---- | ----------------------------
|
|Revenue:                                              |                            |                                |      |                             
|                                                      | Net sales                  |                                | $    | 16,023                      
|                                                      | License fees and royalties |                                |      | 323                         
|                                                      |                            |                                |      |                             
|                                                      |                            | Total                          |      |                             
|Costs and expenses:                                   |                            |                                |      |                             
|                                                      | Cost of sales              |                                |      | 11,325                      
|                                                      | Research and development   |                                |      | 1,399                       
|                                                      | Sales and marketing        |                                |      | 1,589                       
|                                                      | General and administrative |                                |      | 1,330                       
|                                                      |                            |                                |      |                             
|                                                      |                            | Total costs and expenses       |      |                             
|                                                      |                            |                                |      |                             
|Income from operations                                |                            |                                | 703  |                             
|Interest income, net                                  |                            |                                |     |                             
|                                                      |                            |                                |      |                             
|Income before income taxes                            |                            |                                | 703  |                             
|Provision for income taxes                            |                            |                                | 283  |                             
|                                                      |                            |                                |      |                             
|Net income                                            |                            | $                              | 420  |                             
|                                                      |                            |                                |      |                             
|Net income per share, basic and diluted               |                            | $                              | 0.01 |                             
|                                                      |                            |                                |      |                             
|Weighted average number of common shares outstanding: |                            |                                |      |                             
|                                                      | Basic                      |                                |      | 54,030                      
|                                                      | Diluted                    |                                |      | 54,030                      
|                                                      |                            |                                |      |                             

See
notes to condensed consolidated financial statements.

4

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## 

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

|                      |                                                                                             | Six Months Ended
October 31,                |  
|--------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------- | -
|
|Operating activities: |                                                                                             |                                             |  
|                      | Net income                                                                                  |                                             | $
|                      | Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |                                             |  
|                      |                                                                                             | Provision for depreciation and amortization |  
|                      |                                                                                             | Change in operating assets and liabilities  |  
|                      |                                                                                             |                                             |  
|                      | Net cash provided by (used in) operating activities                                         |                                             |  
|Investing activities: |                                                                                             |                                             |  
|                      | Purchases of property, plant and equipment                                                  |                                             |  
|                      | Additional purchase price of prior period acquisition                                       |                                             |  
|                      | Other                                                                                       |                                             |  
|                      |                                                                                             |                                             |  
|                      | Net cash used in investing activities                                                       |                                             |  
|Financing activities: |                                                                                             |                                             |  
|                      | Net proceeds from initial public offering                                                   |                                             |  
|                      | Payment of note related to prior period acquisition                                         |                                             |  
|                      | Net cash transfers from (to) Methode Electronics, Inc.                                      |                                             |  
|                      |                                                                                             |                                             |  
|                      | Net cash provided by financing activities                                                   |                                             |  
|                      |                                                                                             |                                             |  
|                      | Net increase (decrease) in cash and cash equivalents                                        |                                             |  
|                      | Cash and cash equivalents at beginning of period                                            |                                             |  
|                      |                                                                                             |                                             |  
|                      | Cash and cash equivalents at end of period                                                  |                                             | $
|                      |                                                                                             |                                             |  

See
notes to condensed consolidated financial statements.

5

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STRATOS LIGHTWAVE, INC.       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)       October 31, 2000

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended October 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending April 30, 2001. This unaudited quarterly information should be read in conjunction with the audited combined financial
statements and related notes for the fiscal year ended April 30, 2000 included in the Company's Registration Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission.

As
of May 28, 2000, Methode Electronics, Inc. ("Methode") contributed and transferred to the Company all of the capital stock and equity interests held by Methode in
subsidiaries and other entities that
conducted a majority of its optical products business, pursuant to a master separation agreement. The capital stock and equity interests contributed and transferred to the Company were Bandwidth
Semiconductor, LLC, Methode Communications Modules, Inc. (now Stratos Lightwave-Florida, Inc.), Stratos Lightwave, LLC, Methode's sixty percent interest in MP Optical Communications, LLC
and Stratos Limited. Prior to its transfer of Stratos Lightwave, LLC to the Company, Methode transferred all of the assets and liabilities of its optoelectronics and fiber optic divisions, the
properties associated with its optoelectronics research center and Methode's corporate facilities occupied by these divisions to Stratos Lightwave, LLC.

During
the quarter ended July 31, 2000, the Company completed the sale of 10,062,500 shares of common stock in its initial public offering at a price of $21 per share. The net
proceeds from the offering, after deducting the underwriting discount and the estimated offering expenses to be paid by the Company, were approximately $195 million.

Methode
currently owns 54,029,807 shares of the Company's common stock, representing approximately 84.3% of the outstanding shares. Methode has announced its intention to distribute
at a later date, all of the shares of the Company's common stock owned by Methode to its stockholders, although Methode is under no obligation to complete this distribution. Methode has filed with the
Internal Revenue Service for a favorable letter ruling to the effect that the subsequent distribution of Methode's ownership will be a tax-free distribution for U.S. federal income tax
purposes.

Our
historical condensed consolidated financial statements have been carved out from the consolidated financial statements of Methode using the historical results of operations and
cash flows and historical basis of the assets and liabilities of our business. The historical consolidated financial statements also include allocations to us of Methode's corporate expenses,
including centralized accounting, treasury, information technology, human resources, sales and marketing, legal, real estate and other corporate services and infrastructure costs. We consider the
expense allocations to be reasonable reflections of the utilization of the services provided to us or the benefits received by us. The condensed consolidated financial statements subsequent to May 28,
2000 reflect the operations, cash flows and assets and liabilities of the Company on a stand-alone basis.

For
purposes of governing certain of the ongoing relationships between the Company and Methode after the separation and to provide for an orderly transition, the Company and Methode
have

6

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entered into various agreements to provide similar services as those described above. The agreements govern individual transitional services as requested by Methode or the Company, of the other party.
Such services are to be provided in accordance with the policies, procedures and practices in effect before the transfer date. The term of each agreement is one year (provision for extension exists)
unless earlier terminated.

The
Company's expenses under its transitional service arrangements with Methode do not differ significantly from the costs historically allocated to it by Methode for similar
arrangements and reflected in these condensed consolidated financial statements. The transitional services between Methode and the Company will generally be in effect for one year following the
spin-off.

The
allocation of Methode corporate expenses was discontinued on May 28, 2000. Subsequent to this date, the Company incurred these corporate expenses directly in its operations
or indirectly under its transitional services agreement with Methode. Charges to the Company from Methode for allocations in the three and six months ended October 31, 1999 and 2000 were
classified as follows:

Three Months Ended
October 31,

Six Months Ended
October 31,1999

2000

1999

2000(in thousands)

(in thousands)Cost of sales

$
277

$


$
509

$
106Research and development


211





391


5Sales and marketing


345





639


188General and administrative


1,152





2,131


376Total

$
1,985

$


$
3,670

$
675


In
addition, the Company incurred charges of approximately $131,000 and $280,000 in the three and six months ended October 31, 2000 under its transitional service agreements
with Methode.

Our
condensed consolidated financial statements may not necessarily be representative of results that would have been attained if the Company operated as a separate independent entity
for the periods presented.

Comprehensive
income consists of net income and foreign currency translation adjustments and totaled $703,000 and $3,883,000 for the second quarters of fiscal 2000 and 2001, and
$1,901,000 and $5,856,000 for the six months ended October 31, 1999 and 2000.

2.  Acquisitions

Effective February 23, 2000, the Company entered into an amendment to the Asset Purchase Agreement with Rockledge Microelectronics, Inc.
(formerly Polycore Technologies, Inc.) which provides that in the event the Company is part of an initial public offering of shares to be accomplished not later than November 15, 2000,
the sum of $2.957 million will become payable to the seller within 30 days following the initial public offering in full satisfaction of such additional contingent consideration. This
amount was paid in July 2000 and has been accounted for as additional purchase price.

7

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3.  Earnings Per Share

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

Three Months Ended
October 31,

Six Months Ended
October 31,1999

2000

1999

2000Numerator  net income

$
420

$
4,004

$
1,901

$
6,045Denominator:Denominator for basic earnings per share  weighted-average shares outstanding


54,030


64,092


54,030


60,828Dilutive potential common shares  employee stock options





1,002





684Denominator for diluted earnings per share  adjusted weighted-average shares and assumed conversions


54,030


65,094


54,030


61,512Basic and diluted earnings per share

$
0.01

$
0.06

$
0.04

$
0.10


8

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

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial
statements and related notes included elsewhere in this Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ substantially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Factors That May Affect Our Future
Results."

Overview

We develop, manufacture and sell optical subsystems and components for high data rate networking, data storage and telecommunication applications. These
optical subsystems are designed for use in local area networks (LANs), storage area networks (SANs), metropolitan area networks (MANs), wide area networks (WANs) and central office networking in the
telecommunication markets. Our optical subsystems are compatible with the advanced transmission protocols used in these networks, including Gigabit Ethernet, Fast Ethernet, Fibre Channel, and
asynchronous transfer mode (ATM). We also design, manufacture and sell a full line of optical components and cable assemblies for use in enterprise, metropolitan area, wide area and telecommunication
networks.

Our
net sales are derived principally from the sale of optical subsystems and components to optical communication original equipment manufacturers (OEMs). Sales are generally
recognized upon product shipment. Our net sales have fluctuated from period to period based on 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. Historically, product obsolescence relating to customer cancellations, delays and rescheduling has not been material and therefore, we
do not currently maintain reserves for these matters. We determine reserves for rapid technological change on a product by product basis. While it is likely that obsolescence due to rapid
technological change will continue, the timing and amount of this obsolescence cannot be predicted with certainty.

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

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

Our
cost of sales consists of materials, salaries and related expenses for manufacturing personnel and manufacturing overhead. We purchase several key components used in the
manufacture of our products from a limited number of suppliers. We have periodically experienced shortages and delivery delays for these materials. In some circumstances, we maintain an inventory of
limited source components to decrease the risk of shortage. If we overestimate our requirements, we may have excess inventory of these components. Substantially all of our products are designed and
manufactured in our own facilities. Accordingly, a 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

9

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innovations and increases in manufacturing efficiencies. There can be no assurance that we will be able to reduce our manufacturing costs or introduce new products to offset anticipated decreases in
the average selling prices of our products.

Research
and development expenses consist primarily of salaries and related expenses for design engineers, scientists and other technical personnel, depreciation of test and
prototyping equipment, and tooling. Research and development expenses also consist of materials and overhead costs related to major product development projects. Historically, research and development
expenses have included allocations from Methode Electronics, Inc. ("Methode") of expenses for salaries and related expenses for research and development personnel. 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 and we intend to increase
investment in research and development programs in future periods for the purpose of enhancing or reducing the cost of current optical subsystems and components, and developing new optical subsystems
and components.

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. Historically, expenses have included allocations from Methode of expenses for the salaries
and related expenses for sales and marketing personnel. 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. General
and administrative
expenses also consist of the amortization of goodwill resulting from the excess of the purchase price over net assets of the acquired companies, which is amortized on a straight-line basis
over twenty-five years. Historically, expenses have included allocations from Methode for the salaries and related expenses for administrative, finance and human resources personnel,
professional fees, information technology, and other corporate expenses. In support of our continued growth and our operations as an independent public company, we expect to continue to make
significant expenditures for general and administrative services.

Basis of Presentation

Our historical combined financial statements for periods ending on or prior to April 30, 2000 have been carved out from the consolidated financial
statements of Methode using the historical results of operations and cash flows and historical basis of the assets and liabilities of our business. The historical combined financial statements also
include allocations to us of Methode's corporate expenses, including centralized accounting, treasury, information technology, human resources, sales and marketing, legal, real estate and other
corporate services and infrastructure costs. We consider the expense allocations to be reasonable reflections of the utilization of the services provided to us or the benefits received by us. The
condensed consolidated financial statements subsequent to May 28, 2000 reflect the operations, cash flows and assets and liabilities of the Company on a stand-alone basis.

Our
historical financial information for periods ending on or prior to April 30, 2000 is not indicative of our financial position, results of operation or cash flows in the
future, nor is it necessarily indicative of what our financial position, results of operations or cash flows would have been were we a separate, stand-alone entity for the periods presented. Our
combined financial information for periods ending on or prior to April 30, 2000 does not reflect additional expenses which we may incur as a result of being a stand-alone, public company.

10

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Results of Operations

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

Three Months Ended
October 31,

Six Months Ended
October 31,1999

2000

1999

2000Revenue:Net sales

100.0
%
100.0
%
100.0
%
100.0
%License fees and royalties

2.0

1.2

3.7

1.4Total

102.0
%
101.2
%
103.7
%
101.4
%Costs and expenses:Cost of sales

70.7

66.1

66.6

66.6Research and development

8.7

10.0

9.4

10.3Sales and marketing

9.9

6.7

9.7

7.0General and administrative

8.3

8.4

7.9

8.0Total costs and expenses

97.6

91.2

93.6

91.9Income from operations

4.4

10.0

10.1

9.5Interest income, net



7.7



5.9Income before income taxes

4.4

17.7

10.1

15.4Provision for income taxes

1.8

6.1

3.9

5.4Net income

2.6
%
11.6
%
6.2
%
10.0
%


Three and Six Months Ended October 31, 2000 and 1999

Net Sales.Net sales for the second quarter of fiscal 2001 increased to $34.5 million from $16.0 million
a year ago. Net sales for the six month period ended October 31, 2000 increased 97% over the same period a year ago to $60.4 million from $30.6 million. Of the
$18.5 million increase in the second quarter, $12.2 million is from an increase in net sales of optical subsystems and $6.3 million is from an increase in net sales of optical
components. Net sales of optical subsystems and optical components increased $19.3 million and $10.5 million, respectively, in the six months ended October 31, 2000 over the
comparable period last year.

The
increase in net sales during the three and six month periods ended October 31, 2000 of our optical subsystems was primarily due to an increase in sales of our embedded and
removable transceivers in a variety of wavelengths and form factors. The increase in sales of our optical components was primarily due to an increase in sales of our optical backplane connectors and
cable assemblies. Our total sales
order backlog increased 104% to $52 million as of October 31, 2000 from $25 million as of April 30, 2000. Of this $27 million increase in backlog, $20 million
was due to an increase in orders for our optical subsystems, and $7 million an increase in orders for our optical components.

License Fees and Royalties.License fees increased to $436,000 in the three months ended October 31, 2000 from
$323,000 in the three months ended October 31, 1999. License fees decreased to $845,000 in the six months ended October 31, 2000 from $1,123,000 in the comparable period last year.
License fees consist of both fixed schedule payments and contingent payments based on sales volumes of licensed products.

11

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Cost of Sales and Gross Margins.Cost of sales increased to $22.8 million in the three months ended
October 31, 2000 from $11.3 million in the three months ended October 31, 2000 and to $40.2 million for the six months ended October 31, 2000 compared to
$20.4 million in the comparable period last year. The increases were due primarily to increases in the production of both our optical subsystems and optical components. Gross profit as a
percentage of net sales, or gross margin, increased to 33.9% in the three months ended October 31, 2000 from 29.3% in the three months ended October 31, 1999. The increase of 4.6%
reflects the Company's ability to maintain or increase the average unit prices for its products. The gross margin percentage increased to 33.5% for the six months ended October 31, 2000 from
33.4% in the comparable period last year. Additional manufacturing expenses incurred related to our recently acquired Stratos Lightwave-Florida and Bandwidth Semiconductor subsidiaries adversely
affected the gross margin percentage 2.1% and 2.3% during the three and six months ended October 31, 2000, respectively.

Research and Development.Research and development expenses increased to $3.45 million in the three months ended
October 31, 2000 from $1.40 million in the three months ended October 31, 1999. This increase of $2.05 million was due primarily to $955,000 in material and overhead costs
related to major product development projects, $720,000 of additional personnel costs dedicated to research and development, $85,000 for legal costs related to intellectual property, and $290,000 for
new and expanded research and development facilities in Chicago, Illinois and Bedford, Massachusetts.

Research
and development expenses increased to $6.2 million in the six months ended October 31, 2000 from $2.9 million in the six months ended October 31,
1999. This increase of $3.3 million was due primarily to $1.4 million in material and overhead costs related to major product development projects, $1.2 million of additional
personnel costs dedicated to research and development, $175,000 for legal costs related to intellectual property, and $560,000 for new and expanded research and development facilities in Chicago,
Illinois and Bedford, Massachusetts.

Sales and Marketing.Sales and marketing expenses increased to $2.3 million in the three months ended
October 31, 2000 from $1.6 million in the three months ended October 31, 1999. This $700,000 increase was due both to an increase of $230,000 in sales and marketing salaries,
fringe benefits, bonuses and commissions, and $470,000 in field sales operating costs supporting our sales volume.

Sales
and marketing expenses increased to $4.2 million in the six months ended October 31, 2000 from $3.0 million in the comparable period last year. This
$1.2 million increase was due both to an increase of $400,000 in sales and marketing salaries, fringe benefits, bonuses and commissions, and $800,000 in field sales operating costs supporting
our sales volume.

General and Administrative.General and administrative expenses increased to $2.9 million in the three months
ended October 31, 2000 from $1.3 million in the three months ended October 31, 1999. This $1.6 million increase was primarily due to $1.1 million of additional costs
for expanded plant facilities and staff, and $500,000 of additional corporate management and legal costs.

General
and administrative expenses increased to $4.8 million in the six months ended October 31, 2000 from $2.4 million in the comparable period last year. This
$2.4 million increase was primarily due to $1.6 million of additional costs for expanded plant facilities and staff, and $800,000 of additional corporate management and legal costs.

Interest Income, Net.Interest income, net of interest expense, increased to $2.6 million in the three months
ended October 31, 2000 and $3.6 million in the six months ended October 31, 2000 from $0 interest income in each of the comparable periods last year. The increase in interest
income resulted from earnings on the short term investment of excess cash balances.

Income Taxes.The effective tax rate was 34.4% of the second quarter and 35.0% for the six month period of fiscal 2001
compared with 40.0% in the second quarter and 38.6% for the six month

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period of fiscal 2000. The decrease in the effective tax rate in fiscal 2001 is principally the result of interest income not taxable for federal income tax purposes. No separate tax returns have been
filed for our business because our operating results have been fully consolidated for tax purposes with the results of Methode.

Liquidity and Capital Resources

Net cash used in operating activities was $2.3 million for the six months ended October 31, 2000. Cash used in operating activities resulted
primarily from increases in accounts receivable and inventories offset in part by net income and increases in accounts payable and accrued expenses. Net cash provided by operating activities was
$120,000 for the six months ended October 31, 1999. Cash provided by operating activities resulted primarily from net income and the decrease in accounts receivable offset in part by the
increase in inventories and the decrease in accounts payable and accrued expenses.

Net
cash used in investing activities was $20.9 million in the six months ended October 31, 2000. Net cash used in investing activities during this period consisted
primarily of purchases of equipment and facilities. In addition, net cash used in investing activities includes a payment of $3.0 million to Rockledge Microelectronics, Inc. (formerly
Polycore Technologies, Inc.) for the additional purchase price in connection with our purchase of our Stratos Lightwave-Florida subsidiary. Net cash used in investing activities was
$6.1 million in the six months ended October 31, 1999, consisting primarily of purchases of equipment and facilities.

Net
cash provided by financing activities consisted primarily of net proceeds of $195.5 million, after related expenses, from our initial public offering, and
$1.5 million in advances from a subsidiary of Methode, offset in part by the repayment of $2.7 million of advances from a Methode subsidiary, and $333,000 for repayment of a note assumed
in connection with the acquisition of our Stratos Ltd. subsidiary. We sold 10,062,500 shares of common stock, including the underwriters' exercise of their over allocation option, at
$21 per share in our initial public offering. As of October 31, 2000, we had cash and cash equivalents of $171.3 million. Net cash provided by financing activities of
$5.8 million for the six months ended October 31, 1999 consisted of cash contributions from Methode.

Our
future capital requirements will depend on a number of factors, including our future net sales and the timing and rate of expansion of our business. We believe that our current
cash balances together with the cash flow expected to be generated from our future operations will be sufficient to meet our cash needs for working capital and capital expenditures for the next
12 months.

Factors That May Affect Our Future Results

Risks Relating to Our Business

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

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



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

Our success depends on the growth of communication networks and their use of optical communication technologies. If these events do not occur, the growth in our net sales is
not likely to continue and our business would likely be significantly harmed.

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

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

The
market for our products and technology is characterized by rapid technological change, new and improved product introductions, changes in customer requirements and evolving
industry standards. Our future success will depend to a substantial extent on our ability to develop, introduce and support new products and technology on a successful and timely basis. If we fail to
develop and deploy new products and technologies or enhancements of existing products on a successful and timely basis or we experience delays in the development, introduction or enhancement of our
products and technologies, our products will no longer be competitive and our net sales will decline.

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

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

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## 

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

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

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

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

Our
success will depend on our continued ability to develop and manage relationships with significant customers. For the six months ended October 31, 2000, our three largest
customers and their respective contract manufacturers accounted for 50% of our net sales, with Cisco, EMC together with its business partners JNI and McData, and Alcatel accounting for 20%, 19% and
11% of our net sales, respectively. For the 2000 fiscal year, our three largest customers and their respective contract manufacturers accounted for 44% of our net sales, with Cisco, Nortel and Alcatel
accounting for 26%, 10% and 8% of our net sales, respectively. We expect our dependence on sales to a small number of large customers to continue.

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

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

We
cannot predict the timing of our sales accurately because of the length of our sales cycles. As a result, if sales forecasts from specific customers are not realized, we may be
unable to compensate for the sales shortfall and our net sales may decline. The period of time between our initial contact with a customer and the receipt of a purchase order may span up to a year or
more, and varies by product

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and customer. During this time, customers may perform, or require us to perform, extensive evaluation and qualification testing of our products. Generally, they consider a wide range of issues before
committing to purchase our products, including ability to interoperate with other subsystems and components, product performance and reliability. We may incur substantial sales and marketing expenses
and expend significant management effort while our potential customers are qualifying our products. Even after incurring these costs, we ultimately may not sell any or only small amounts of our
products to these potential customers. Consequently, if new sales do not result from our efforts to qualify our products, our operating expenses will increase.

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

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

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

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

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

The
markets for optical subsystems and components are highly competitive and are expected to intensify in the future. For optical subsystems, we compete primarily with Agilent
Technologies, Inc., Finisar Corporation, Infineon Technologies Corp., International Business Machines Corporation and Optical Communications Products, Inc. For optical components, we
compete primarily with Infineon Technologies Corp, Lucent Technologies Inc., Molex, Inc. and Tyco International, Ltd. and numerous other smaller companies. Many of these companies
have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. We expect that more companies, including some of our customers, will
enter the markets for our products. We may not be able to compete successfully against either current or future competitors. Our competitors continue to introduce improved products with lower prices,
and we will have to do the same to remain competitive. In addition, some of our current and potential customers are attempting to integrate their operations by producing their own optical subsystems
or components or acquiring one or more of our competitors which may eliminate the need to purchase our products. Furthermore, larger companies in other related industries are developing and acquiring
technologies and applying their significant resources, including their distribution channels and brand name recognition, in an effort to capture significant

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market share. While this trend has not historically impacted our competitive position, it may result in future decreases in our net sales.

We depend on suppliers for several key components and if these suppliers are unable to meet our needs, we may experience delays in shipments and increased
costs.

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

Although
we enter into long-term agreements for the purchase of key components from time to time, our purchases of key components are generally made on a purchase order
basis. We may also maintain an inventory of limited source components to limit the potential impact of a component shortage.

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

If we are unable to manage our growth effectively, we will incur additional operating expenses and our operating results will suffer.

We
have significantly expanded our operations over the last several years and expect to continue to increase the scope of our operations in the future. This growth has placed, and
will continue to place, a strain on our management systems and operational resources. As demand for our products grows, we will need to expand our design and manufacturing capabilities, as well as our
sales, marketing and technical support. We will also need to improve our financial and managerial controls, reporting systems and procedures. The technical complexities of our products and the rapidly
evolving markets we serve will require a high level of management effectiveness in managing the expansion of our operations. Our key management personnel have limited experience in managing this type
of growth. If we are unable to manage our growth effectively, we will incur additional expenses which will cause our operating results to suffer.

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

Our
products require sophisticated manufacturing, research and development, marketing and sales, and technical support. Our success depends on our ability to attract, train and retain
qualified technical personnel in each of these areas. We intend to increase the number of our employees who perform these functions. Competition for personnel in all of these areas is intense and we
may not be able to hire 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.

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If we fail to hire and retain qualified personnel, our product development efforts and customer relations will suffer.

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

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

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

Our
properties and business operations are subject to a wide variety of federal, state, and local environmental, health and safety laws and other legal requirements, including those
relating to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous substances used in our manufacturing processes. We cannot assure you that these legal requirements will
not impose on us the need for additional capital expenditures or other requirements. If we fail to obtain required permits or otherwise fail to operate within these or future legal requirements, we
may be required to pay substantial penalties, suspend our operations or make costly changes to our manufacturing processes or facilities. Although we believe that we are in compliance and have
complied with all applicable legal requirements, we may also be required to incur additional costs to comply with current or future legal requirements.

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

A
portion of our sales are generated from customers located outside the United States, principally in Europe. We also operate manufacturing facilities in China and the United Kingdom.
Sales to customers located outside of the United States, excluding sales to Methode and its affiliates, were approximately 15.0% of our net sales during the six months ended October 31, 2000
and approximately 15.2% of our net sales in fiscal 2000. Our international operations are subject to a number of risks and uncertainties, including:



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

Future acquisitions we undertake could harm our business by diverting our resources and increasing our costs.

We
expect to actively pursue opportunities to buy other businesses or technologies that would complement our current products, expand our markets or enhance our technical
capabilities, or that may otherwise offer growth opportunities. Any future acquisitions may result in the use of significant amounts of cash, the incurrence of debt, and amortization expenses related
to goodwill and other
intangible assets. Our experience in acquiring other businesses and technologies is limited. Acquisitions involve numerous risks, including:



Our recent acquisitions have not generated significant sales, and if these businesses do not become profitable our operating results could be seriously
harmed.

In
April 1999, Methode acquired Polycore Technologies, Inc., which we operate as our Stratos Lightwave-Florida subsidiary. In December 1999, Methode acquired the
optoelectronics business of Spire Corporation, which we operate as our Bandwidth Semiconductor subsidiary. The integration of these businesses into our company is not complete. Since their acquisition
by us, these businesses have focused on the introduction of new products and the expansion of their manufacturing capabilities and have not generated significant revenues. In addition, these
businesses have required significant amounts of capital to support their development activities, and we expect to continue to invest substantial amounts of capital in these businesses for up to two
years after our initial public offering. If these businesses do not become profitable, our operating results could be seriously harmed.

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

We
rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our
proprietary rights. Although we have numerous issued patents and pending patent applications, we cannot assure you that any patents will issue as a result of our pending patent applications or, if
issued, that any patent claim allowed will be sufficiently broad to protect our technology. In addition, we cannot assure you that any existing or future patents will not be challenged, invalidated or
circumvented, or that any right granted thereunder would provide us with meaningful protection of our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology. We may be unable to detect the unauthorized use of our intellectual property or to take appropriate steps to enforce our
intellectual property rights. Policing unauthorized use of our products and technology is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. Further, enforcing our intellectual property rights could result in the expenditure of significant financial and managerial resources and the success of
these efforts cannot be predicted with certainty. Litigation may be necessary in the future to enforce our intellectual property rights. This litigation could be costly and its

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outcome cannot be predicted with certainty. Our inability to adequately protect against unauthorized use of our intellectual property would significantly impair its value and our competitive position.

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

Methode
and Stratos are plaintiffs in three lawsuits relating to our intellectual property rights. The first lawsuit was filed by Methode in April 1999 and is against Agilent
Technologies, Inc., Finisar Corporation and Hewlett-Packard Company, Inc. The second lawsuit was filed by Methode in October 1999 and is against Infineon Technologies Corp. and
Optical Communications Products, Inc. In these actions, Methode alleges that optoelectronic products sold by the defendants infringe upon between two and five Methode patents. The defendants in
these lawsuits have filed various affirmative defenses. In addition, Finisar has filed counterclaims. The third lawsuit was filed by Methode and Stratos in September 2000 against
Hewlett-Packard Company, Inc., Agilent Technologies, Inc. and Finisar Corporation in the United States District Court for the Northern District of California. This suit alleges patent
infringement by the defendants concerning a newly reissued patent that is related to the patents in the first suit discussed above.

As
part of our separation from Methode, the Methode patents which are the subject of these lawsuits and Methode's rights in these lawsuits have been contributed to us and we have
agreed to indemnify Methode against all costs, expenses and liabilities associated with these lawsuits. These lawsuits are in
the preliminary stage, and we cannot predict their outcome with certainty. We use the technologies covered by the patents that are the subject of this litigation in the manufacture of optical
subsystems which represented approximately 58% of our net sales in the 2000 fiscal year. If one or more of these patents were found to be invalid or unenforceable, we would lose the ability to prevent
others from using the technologies covered by the invalidated patents. This could result insignificant decreases in our sales and gross margins for our products that use these technologies. In
addition, we would lose the future royalty payments from our current licensees of these patents. We could also be required to pay significant monetary damages to one or more of the defendants or be
required to reimburse them for their legal fees. Accordingly, if one or more of these patents were found to be invalid or unenforceable, our business would be significantly harmed.

We are subject to a pending lawsuit for patent infringement. If we are unsuccessful in defending this lawsuit, we could be required to pay significant monetary damages and may
be enjoined from manufacturing and selling some of our products.

In
November 2000, Agilent Technologies, Inc. filed a lawsuit against Methode and us in the United States District Court, District of Delaware alleging that our
optoelectronics transceivers infringe four Agilent patents. Agilent is seeking unspecified damages, treble damages, attorney's fees and injunctive relief. For the six months ended October 31,
2000, sales of our optoelectronic transceivers accounted for approximately 66% of our total sales.

We
believe that we have valid defenses against Agilent's claims in this lawsuit and intend to defend this lawsuit vigorously. However, the outcome of this lawsuit is uncertain. As
this lawsuit progresses, we may be required to incur significant legal fees and expenses. In addition, our defense of this lawsuit is expected to divert the efforts and attention of some of our key
management and technical personnel. As a result, our defense of this lawsuit, regardless of the eventual outcome, will likely be costly and time consuming. If Agilent's patents are found to be valid
and enforceable and our products are found to infringe, we may be liable for significant monetary damages and could be enjoined from selling those of our products found to infringe upon Agilent's
patents unless we are able to obtain a license from Agilent. A license from Agilent to use its patented technology, if available, may require us to make royalty payments, which would increase our cost
of sales and reduce our gross profit. If we are required to pay significant monetary damages, are enjoined from selling any of our products or are required to

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make substantial royalty payments to Agilent pursuant to a license agreement, our business would be significantly harmed.

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

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



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

Risks Relating to Our Separation from Methode Electronics

We have never operated as a stand-alone company and our future success will depend on our ability to implement the systems and controls necessary to support our business.

Our
business was contributed and transferred to us by Methode as of May 28, 2000. Prior to that date, Methode conducted our business through various divisions and subsidiaries
and has historically
provided us with operational, financial and other support. As a stand-alone company, we must develop and implement the financial, management, information and reporting systems and controls necessary
to support our business. Furthermore, we will need to continually improve our systems and controls as the size of our company increases. Although Methode has agreed to provide us with various interim
services, these arrangements will generally terminate within one year of the proposed spin-off. After the expiration of these arrangements, we may not be able to replace these interim
services on terms, including cost, as favorable as those we will receive from Methode. We also cannot give any assurance that we will be able to develop the necessary systems, resources and controls
to support our business.

Our historical financial information may not be representative of our results as a separate company.

Our
historical financial information for periods ending on or prior to April 30, 2000 may not reflect what our results of operation, financial position and cash flows would
have been had we been a stand-alone company for the periods presented. Methode did not account for us as, and we were not operated as, a stand-alone company during these periods. In addition, our
historical financial information is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future. We have not made adjustments to reflect many
significant changes that will occur in our cost structure, funding and operations as a result of our separation from Methode, including changes in our management structure and employee benefit plans
and the increased costs associated with being a public, stand-alone company.

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Methode will control the outcome of stockholder voting as long as it owns a majority of our common stock and may exercise its voting power in a manner adverse to
you.

Methode
currently owns approximately 84.3% of our outstanding shares of common stock. As long as Methode owns a majority of our outstanding common stock, it will continue to be able
to elect our entire board of directors and generally be able to determine the outcome of all corporate actions requiring stockholder approval. As a result, Methode will be in a position to continue to
control all matters affecting our company, including:



Methode's
ability to control our company may result in the market price of our common stock trading at a price lower than the price at which it would trade if Methode did not own a
controlling interest in our company.

Methode
has indicated that it currently intends to divest its remaining equity interest in our company six to twelve months after our initial public offering in June 2000, although it
is not obligated to do so. We cannot give any assurance that Methode will complete the divestiture of its equity interest in our company in this time frame or at all. There are no restrictions on
Methode's ability to sell a controlling interest in our company to a third party.

Two of our directors may have conflicts of interest because they are also directors of Methode or own significant amounts of Methode's stock.

Two
members of our board of directors are also directors of Methode. These directors will have obligations to both companies and may have conflicts of interest with respect to matters
potentially or actually involving or affecting us, such as acquisitions and other corporate opportunities that may be suitable for both Methode and us. In addition, after our initial public offering
and the proposed spin-off, these directors will continue to own significant amounts of Methode's stock and options on Methode's stock they acquired as directors or employees of Methode.
This ownership could create, or
appear to create, potential conflicts of interest when these directors are faced with decisions that could have different implications for Methode and us.

Our charter contains provisions which generally permit Methode to engage in business activities similar to our business without our participation and limit Methode's duty to
advise us of corporate opportunities, which may result in our loss of corporate opportunities which could benefit us.

Our
restated certificate of incorporation provides that Methode and its officers, directors, agents, stockholders and affiliates will have the right, except as otherwise agreed by
Methode and us, to engage or invest in any business activity, including business activities similar to our business, and we will not have the right to participate with Methode in these business
opportunities. Our restated certificate of incorporation also contains provisions which limit the duty of Methode and its directors, officers and employees to advise us of business and investment
opportunities which may be of interest to our company. These provisions may result in our loss of business and investment opportunities which could benefit us.

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Methode and its affiliates have agreed not to engage anywhere in the world in the manufacture or sale, other than to its current customers as of the contribution date, of specified
optoelectronic products and processes, or the manufacture of standard fiber optic connector products and/or accessories. These non-compete restrictions will terminate one year after the
spin-off date.

We may have potential business conflicts of interest with Methode with respect to our past and ongoing relationships, the resolution of which may not be as favorable to us as
if we were dealing with an unaffiliated party.

We
currently have and, after the proposed spin-off, will continue to have, various interim and ongoing agreements with Methode. As a result, conflicts of interest may
arise between Methode and us in a number of areas relating to our past and ongoing relationships, including:



We
cannot assure you that we will be able to resolve any conflicts we may have with Methode or, if we are able to do so, that the resolution will be as favorable as if we were dealing
with an unaffiliated party. The agreements we have entered into with Methode may be amended by mutual agreement of the parties. While we are controlled by Methode, it may be able to require us to
agree to amendments to these agreements that may be less favorable to us than the current terms of these agreements.

We have agreed to contractual limitations under our separation agreements with Methode which could limit the conduct of our business and our ability to pursue our business
objectives.

We
have agreed to contractual limitations under our separation agreements with Methode which place restrictions on our ability to conduct our business. Under our tax sharing and
indemnification agreement with Methode, we have agreed to limit our ability to complete acquisitions and divestitures and issue capital stock. The purpose of these provisions is to preserve Methode's
ability to distribute its shares in our company to its stockholders on a tax-free basis. These restrictions in the tax sharing and indemnification agreement generally expire two years
after Methode completes its proposed spin-off of its equity interest in us.

Under
our initial public offering and distribution agreement with Methode, we have agreed not to take any action which would limit Methode's ability to sell our shares or its rights
as a stockholder of our company in a manner which is not applicable to our stockholders generally. In addition, we have agreed not to issue, prior to the proposed spin-off, any shares of
common stock or rights, warrants or options to acquire our stock, if such issuance would result in Methode owning less than 80.5% of our common stock. These restrictions in the initial public offering
and distribution agreement will be binding on us as long as Methode owns at least 50% of our outstanding common stock or until Methode notifies us that it no longer intends to proceed with the
proposed spin-off.

Under
our master separation agreement with Methode, we and our affiliates have agreed not to engage in:



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Any
of these restrictions could materially limit the way in which we conduct our business and our ability to pursue our business objectives.

If the proposed spin-off is not tax-free, we could be liable to Methode for the resulting taxes, which would significantly harm our
business.

Methode
has indicated that it intends to divest its remaining equity interest in us by means of a tax-free spin-off. We have agreed to indemnify Methode in the
event the spin-off is not tax-free to Methode for reasons including actions taken by or with respect to us or our failure to take various actions, all as set forth in our tax
sharing agreement with Methode. We may not be able to control some of the events that could trigger this liability. In particular, any acquisition of us by a third party within two years of the
spin-off could result in the spin-off becoming a taxable transaction and give rise to our obligation to indemnify Methode for any resulting tax or other liability. If we were
to become obligated to indemnify Methode for this liability, our financial condition and business would be significantly harmed.

Our separation from Methode may result in our loss of the right to use some licensed intellectual property rights used in our business, which may result in loss of sales or an
increase in our costs.

We
benefit from various license agreements for intellectual property rights related to our business which were entered into by Methode prior to the contribution and transfer of our
business to us. Under the general assignment and assumption agreement between Methode and our Stratos Lightwave, LLC subsidiary, Methode has agreed to use its commercially reasonable efforts to obtain
any necessary consents or approvals in connection with the transfer of these licenses to us. If Methode is unable to obtain these consents and transfer these licenses to us, we would be required to
discontinue using the licensed technology, attempt to obtain a similar license which may not be available on reasonable terms or at all, or redesign our products, which may result in loss of sales or
an increase in our costs.

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

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

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



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

Sales of substantial amounts of our common stock in the open market could cause our stock price to decline.

Methode
currently owns 54,029,807 shares of our common stock, representing approximately 84.3% of our outstanding shares of common stock. Methode has indicated that it currently
intends to divest its remaining equity interest in our company six to twelve months after our initial public offering, although it is not obligated to do so. If Methode distributes these shares to its
stockholders through the proposed spin-off, they would be eligible for immediate resale in the public market, other than shares held by our affiliates. We are unable to predict whether
significant amounts of our common stock will be sold in the open market in anticipation of, or following, this spin-off. Methode has the sole discretion to determine the timing, structure
and the terms of the spin-off, all of which may affect the trading levels of our common stock. In addition, if Methode does not proceed with the spin-off, it will have the
right to require us to register its shares of our common stock under the U.S. federal securities laws for sale into the public market. Any sales of substantial amounts of our common stock in the open
market, or the perception that these sales might occur, whether as a result of the spin-off or otherwise, could cause the market price for our common stock to decline.

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

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

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PART II  OTHER INFORMATION

Item 1. Legal Proceedings.

Pending Litigation

Methode and Stratos are plaintiffs in three lawsuits relating to our intellectual property rights. The first lawsuit was filed by Methode in April 1999
in the United States District Court for the Northern District of Illinois and is against Agilent Technologies, Inc., Finisar Corporation and Hewlett-Packard Company, Inc. In
August 1999, the lawsuit was transferred to the United States District Court for the Northern District of California. The second lawsuit was filed by Methode in October 1999 in the
United States District Court for the Northern District of California and is against Infineon Technologies Corp. and Optical Communications Products, Inc. In these actions, Methode alleges that
optoelectronic products sold by the defendants infringe upon two or more of five Methode patents. Methode also alleges that Finisar breached its obligations under a license and supply agreement with
Methode by failing to provide it with information regarding new technology related to the products licensed under the agreement. Methode seeks monetary damages and injunctive relief. The defendants in
these lawsuits have filed various affirmative defenses and contend that the Methode patents are invalid, unenforceable and/or not infringed by the products sold by the defendants and, if successful,
are seeking attorneys' fees and costs in connection with the lawsuit. In addition, Finisar has filed counterclaims asserting that one of its founders is the primary inventor of the technology that is
the
subject of all five patents, that Methode improperly obtained the patents based on Finisar's disclosure of the technology to Methode and that Finisar is the rightful owner or co-owner of
the patents. Finisar and Infineon have alleged that Methode failed to disclose certain information to the Patent and Trademark Office (PTO) that, if known to the PTO, would have prevented the issuance
of one of the patents and that Methode engaged in inequitable conduct before the PTO. Infineon's inequitable conduct claim has been dismissed by the court. Finisar has also alleged breach of contract,
conversion, trespass, unfair competition and unjust enrichment and seeks unspecified compensatory damages, restitution and the correction of inventorship with respect to the five Methode patents. On
May 4, 2000, the Court granted Methode's motion to dismiss with prejudice Finisar's counterclaims for conversion, trespass, unfair competition and unjust enrichment on the grounds that these
claims are preempted by federal patent laws.

The
third lawsuit was filed by Methode and Stratos in September 2000 against Hewlett-Packard Company, Inc., Agilent Technologies, Inc. and Finisar Corporation in
the United States District Court for the Northern District of California. This suit alleges patent infringement by the defendants concerning a newly reissued patent that is related to the patents in
the first suit discussed above.

As
part of our separation from Methode, the six Methode patents which are the subject of these lawsuits and Methode's rights in this litigation have been contributed to us and we have
agreed to indemnify Methode against all costs, expenses and liabilities associated with these lawsuits. We intend to pursue these lawsuits and defend against these counterclaims vigorously. These
lawsuits are in the preliminary stage, and we cannot predict their outcome with certainty. Patent litigation is particularly complex and can extend for a protracted time, which can substantially
increase the cost of such litigation. We use the technologies covered by the patents that are the subject of this litigation in the manufacture of optical subsystems which represented approximately
58% of our net sales in the 2000 fiscal year. If one or more of these patents were found to be invalid or unenforceable, we would lose the ability to prevent others from using the technologies covered
by the invalidated patents. This could result in significant decreases in our sales and gross margins for our products that use these technologies. In addition, we would lose the future royalty
payments from our current licensees of these patents. We could also be required to pay significant monetary damages to one or more of the

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defendants and/or be required to reimburse them for their legal fees. Accordingly, if one or more of these patents were found to be invalid or unenforceable, our business would be significantly
harmed.

In
November 2000, Agilent Technologies, Inc. filed a lawsuit against Methode and us in the United States District Court, District of Delaware alleging that our
optoelectronics transceivers infringe four Agilent patents. Agilent is seeking unspecified damages, treble damages, attorney's fees and injunctive
relief. For the six months ended October 31, 2000, sales of our optoelectronic transceivers accounted for approximately 66% of our total sales.

We
believe that we have valid defenses against Agilent's claims in this lawsuit and intend to defend this lawsuit vigorously. However, the outcome of this lawsuit is uncertain. As
this lawsuit progresses, we may be required to incur significant legal fees and expenses. In addition, our defense of this lawsuit is expected to divert the efforts and attention of some of our key
management and technical personnel. As a result, our defense of this lawsuit, regardless of the eventual outcome, will likely be costly and time consuming. If Agilent's patents are found to be valid
and enforceable and our products are found to infringe, we may be liable for significant monetary damages and could be enjoined from selling those of our products found to infringe upon Agilent's
patents unless we are able to obtain a license from Agilent. A license from Agilent to use its patented technology, if available, may require us to make royalty payments, which would increase our cost
of sales and reduce our gross profit. If we are required to pay significant monetary damages, are enjoined from selling any of our products or are required to make substantial royalty payments to
Agilent pursuant to a license agreement, our business would be significantly harmed.

Settled Litigation

In August 2000, Methode and Stratos filed a lawsuit against Tyco International Ltd. and certain of its affiliates in the United States District
Court for the Northern District of Illinois, Eastern Division. Methode and Stratos alleged that optoelectronic products sold by the defendants infringed upon five patents. Methode and Stratos also
alleged trademark infringement and unfair competition by Tyco International Ltd. On November 1, 2000, the parties executed a settlement agreement and an agreement to cross-license the
related technology. This lawsuit was dismissed on November 27, 2000.

Item 2.  Changes in Securities and Use of Proceeds.

Pursuant to a Master Separation Agreement dated as of May 28, 2000, Stratos Lightwave issued 54,028,807 shares of common stock to Methode
Electronics, Inc. Stratos Lightwave believes that this issuance was exempt under Section 4(2) of the Securities Act of 1933 as a transaction not involving any public offering. No
underwriters were involved in connection with this transaction.

Stratos
Lightwave's registration statement on Form S-1 filed under the Securities Act of 1933, Commission File No. 333-34864, was declared
effective by the Commission on June 26, 2000. A total of
10,062,500 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.

The
offering commenced on June 26, 2000 and has been completed. All 10,062,500 registered shares, including 1,312,500 shares sold upon exercise of the underwriters' over
allotment option, were sold by Stratos Lightwave at an initial public offering price of $21.00 per share. The aggregate underwriting discount paid in connection with the offering was $14,791,875.
Stratos Lightwave estimates that other expenses of the offering total $2.5 million, of which $1.0 million will be paid by Methode pursuant to the Initial Public Offering and Distribution
Agreement between Methode and Stratos Lightwave.

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The net proceeds from the offering, after deducting the underwriting discount and the estimated offering expenses to be paid by Stratos Lightwave, were approximately
$195 million. Uses of proceeds to date include $17.8 million for general corporate purposes, the purchase of equipment and facilities, a payment of $3.0 million to Rockledge
Microelectronics, Inc. (formerly Polycore Technologies, Inc.) for additional purchase price in connection with our purchase of our Stratos Lightwave-Florida subsidiary, repayment of
$2.7 million of advances from a Methode subsidiary, and $333,000 for repayment of a note assumed in connection with the acquisition of our Stratos Ltd. subsidiary. The remainder of the
proceeds will be used for general corporate purposes, including working capital, capital expenditures, research and development, and payments to Methode Electronics for transition services. Pending
these uses, the remaining net proceeds have been invested in short-term interest bearing, investment grade marketable securities.

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

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



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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.

|                  |  | STRATOS LIGHTWAVE, INC.
|----------------- |  | -----------------------
|December 14, 2000 |  | By:                    
|December 14, 2000 |  | By:                    

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## 

EXHIBIT INDEX

|Exhibit
Number |  | Description of Document                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------------------------------
|1.1            |  | Form of Underwriting Agreement (1)                                                                          
|3.1            |  | Certificate of Incorporation of Registrant (1)                                                              
|3.2            |  | Restatement Certificate of Incorporation of Registrant (1)                                                  
|3.3            |  | Bylaws of Registrant (1)                                                                                    
|4.1            |  | Specimen certificate representing the common stock (1)                                                      
|10.1           |  | Master Separation Agreement between Methode Electronics, Inc. and Registrant (1)                            
|10.2           |  | Initial Public Offering and Distribution Agreement between Methode Electronics, Inc. and Registrant (2)     
|10.3           |  | Tax Sharing and Indemnification Agreement between Methode Electronics, Inc. and Registrant (2)              
|10.4           |  | Master Transitional Services Agreement between Methode Electronics, Inc. and Registrant (1)                 
|10.5           |  | Employee Matters Agreement between Methode Electronics, Inc. and Registrant (1)                             
|10.6           |  | Registration Rights Agreement between Methode Electronics, Inc. and Registrant (2)                          
|10.7           |  | General Assignment and Assumption Agreement between Methode Electronics, Inc. and Stratos Lightwave, LLC (1)
|10.8           |  | Form of Indemnity Agreement between Registrant and Registrant's directors and officers (1)                  
|10.9           |  | Stratos Lightwave, Inc. 2000 Stock Plan, as amended (2)                                                     
|10.10          |  | Promissory Note of the Registrant payable to Methode Development Company (1)                                
|27.1           |  | Financial Data Schedule                                                                                     

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