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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q (Mark One) x
    
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended July 31, 2004 OR  o
    
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from  to Commission file number 0-30869 STRATOS INTERNATIONAL, INC.    Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    36-4360035
(I.R.S. Employer Identification No.)
 7444 West Wilson Avenue
Chicago, Illinois 60706
(Address of Principal Executive Offices)
    
    60706
(Zip Code)
 (708) 867-9600    Not Applicable 
 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. x o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  o x
 As of September 10, 2004, there were 14,157,907 shares of the registrants
common stock, par value $0.01 per share, outstanding.




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STRATOS INTERNATIONAL, INC. INDEX PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of April 30, 2004 and July 31, 2004
(unaudited)
    
    
    1Condensed Consolidated Statements of Operations (unaudited) for the
three months ended July 31, 2003 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months
ended July 31, 2003 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
July 31, 2004
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 4. Submission of Matters to Vote of Security Holders
    
    
    23Item 6. Exhibits
    
    
    23SIGNATURES
    
    
    25INDEX TO EXHIBITS
    
    
    26Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial OfficerCautioary Statements
  -i-




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PART I FINANCIAL INFORMATION
 
 Item 1. Financial Statements. STRATOS INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
 April 30,
    
    July2004
    
    31, 2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,501
    
    
    $
    18,094Short-term investments
    
    
    21,488
    
    
    
    19,296Accounts receivable, less allowance
    
    
    12,544
    
    
    
    13,359Inventories:Finished products
    
    
    2,831
    
    
    
    2,852Work in process
    
    
    1,042
    
    
    
    941Materials
    
    
    12,091
    
    
    
    12,80415,964
    
    
    
    16,597Recoverable income taxes
    
    
    4,176
    
    
    
    4,212Prepaid expenses
    
    
    1,326
    
    
    
    1,116Total current assets
    
    
    70,999
    
    
    
    72,674Other assets:Goodwill and other indefinite lived assets
    
    
    6,110
    
    
    
    6,110Intangible assets, net of amortization
    
    
    14,665
    
    
    
    14,347Assets held for sale
    
    
    4,441
    
    
    
    2,992Other
    
    
    5,879
    
    
    
    5,89231,095
    
    
    
    29,341Property, plant and equipment
    
    
    91,530
    
    
    
    90,962Less allowances for depreciation
    
    
    64,574
    
    
    
    65,27126,956
    
    
    
    25,691Total assets
    
    $
    129,050
    
    
    $
    127,706LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,422
    
    
    $
    7,203Other current liabilities
    
    
    7,373
    
    
    
    8,273Current portion of long-term debt
    
    
    2,230
    
    
    
    1,926Total current liabilities
    
    
    18,025
    
    
    
    17,402Long-term debt, less current portion
    
    
    801
    
    
    
    310Deferred income taxes
    
    
    445
    
    
    
    445Redeemable preferred stock
    
    
    5,000
    
    
    
    5,000Shareholders equity:Preferred stock  Series B
    
    
    
    
    
    
    Common stock
    
    
    143
    
    
    
    142Additional paid-in capital
    
    
    319,212
    
    
    
    318,606Accumulated deficit
    
    
    (210,633
    )
    
    
    (211,114
    )Unearned compensation
    
    
    (3,809
    )
    
    
    (2,951
    )Foreign currency translation adjustments
    
    
    114
    
    
    
    114Cost of shares in treasury
    
    
    (248
    )
    
    
    (248
    )Total shareholders equity
    
    
    104,779
    
    
    
    104,549Total liabilities and shareholders equity
    
    $
    129,050
    
    
    $
    127,706
 See notes to condensed consolidated financial statements. 1




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STRATOS INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 (in thousands, except per share amounts)
 Three Months EndedJuly 31,2003
    
    2004Revenue:Net sales
    
    $
    6,571
    
    
    $
    21,023License fees and royalties
    
    
    506
    
    
    
    2,783Total
    
    
    7,077
    
    
    
    23,806Costs and expenses:Costs of sales
    
    
    7,478
    
    
    
    13,814Research and development
    
    
    2,890
    
    
    
    2,406Sales and marketing
    
    
    1,519
    
    
    
    2,809General and administrative
    
    
    2,698
    
    
    
    5,234Total costs and expenses
    
    
    14,585
    
    
    
    24,263Loss from operations
    
    
    (7,508
    )
    
    
    (457
    )Investment income, net
    
    
    240
    
    
    
    64Loss before income taxes
    
    
    (7,268
    )
    
    
    (393
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    
    (7,268
    )
    
    
    (393
    )Preferred stock dividend requirements
    
    
    
    
    
    
    (87
    )Net loss attributable to common shareholders
    
    $
    (7,268
    )
    
    $
    (480
    )Net loss per share attributable to common shareholders,
basic and diluted:Net loss
    
    $
    (0.99
    )
    
    $
    (0.03
    )Preferred stock dividend requirements
    
    
    
    
    
    
    (0.01
    )Net loss per share attributable to common shareholders
    
    $
    (0.99
    )
    
    $
    (0.04
    )Weighted average number of common shares outstanding:Basic and diluted
    
    
    7,364
    
    
    
    13,534
 See notes to condensed consolidated financial statements. 2




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STRATOS INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
 Three Months EndedJuly 31,2003
    
    2004Operating activities:Net loss
    
    $
    (7,268
    )
    
    $
    (393
    )Adjustments to reconcile net loss to net cash used in operating activities:Provision for depreciation and amortization
    
    
    1,354
    
    
    
    1,804Gain on sale of assets held for sale
    
    
    (1,304
    )
    
    
    Change in operating assets and liabilities
    
    
    4,755
    
    
    
    (1,464
    )Net cash used in operating activities
    
    
    (2,463
    )
    
    
    (53
    )Investing activities:Purchases of property, plant and equipment
    
    
    (1,330
    )
    
    
    (209
    )Purchases of short-term investments
    
    
    (14,631
    )
    
    
    Sales of short-term investments
    
    
    3,929
    
    
    
    2,192Proceeds from sale of assets held for sale
    
    
    4,381
    
    
    
    1,450Net cash (used in) provided by investing activities
    
    
    (7,651
    )
    
    
    3,433Financing activities:Repayments on long-term borrowings
    
    
    (905
    )
    
    
    (795
    )Dividends on preferred stock
    
    
    
    
    
    
    (87
    )Net proceeds from exercise of stock options
    
    
    
    
    
    
    95Net cash used in financing activities
    
    
    (905
    )
    
    
    (787
    )Net (decrease) increase in cash and cash equivalents
    
    
    (11,019
    )
    
    
    2,593Cash and cash equivalents at beginning of period
    
    
    43,649
    
    
    
    15,501Cash and cash equivalents at end of period
    
    $
    32,630
    
    
    $
    18,094
 See notes to condensed consolidated financial statements. 3




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STRATOS INTERNATIONAL, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) July 31, 2004   1.
    
    Basis of Presentation The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with U.S. 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 U.S. generally accepted accounting
principles for complete financial statements. Certain items included in these
statements are based on managements estimates. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended July 31, 2004 are not necessarily indicative of the results
that may be expected for the fiscal year ending April 30, 2005. This unaudited
quarterly information should be read in conjunction with the audited
consolidated financial statements and related notes for the fiscal year ended
April 30, 2004 included in the Companys Annual Report on Form 10-K, as
amended, filed with the Securities and Exchange Commission. Comprehensive loss consists of net loss and foreign currency translation
adjustments and totaled $7,353 and $393, respectively, for the first quarters
of fiscal 2004 and 2005.  2.
    
    Business Combinations In November 2003, the Company acquired Sterling Holding Company
(Sterling), a privately-held company based in Mesa, Arizona that designs and
manufactures Radio Frequency (RF) and microwave interconnect products via its
two operating units, Trompeter Electronics, Inc. and Semflex, Inc. The Company
completed this merger on November 6, 2003, following approval by both Company
and Sterling shareholders. At closing, Sterling became a wholly-owned
subsidiary of the Company, with Sterling shareholders receiving 6,082,000
shares of the Companys common stock, which represented approximately 82% of
the Companys total shares outstanding immediately prior to the consummation of
the merger. Of such amount, 608,189 shares were placed in escrow to provide
indemnification to the Company with respect to certain matters provided for in
the merger agreement. Company common shares issued in this transaction were
valued at $5.09 a share, the closing price on July 2, 2003, the day the merger
was announced. The Company also issued 50,000 shares of Series B redeemable
preferred stock with a face value of $5,000 and a contingent value of up to an
additional $6,250 based on certain events, including the future performance of
the Companys common share price. The total
purchase consideration was $38,755, consisting of common and preferred
shares of Company stock valued at $35,957 and $2,798 of acquisition related
costs. 4




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Sterling acquisition was accounted for using the purchase method of
accounting and the results of operations of Sterling have been included in the
Companys consolidated financial statements from the date of acquisition. The allocation of the purchase price to the net assets acquired was as
follows: 2003Assets acquired:Cash
    
    $
    10,918Accounts receivable
    
    
    5,312Inventories
    
    
    7,785Developed technology
    
    
    3,185Computer software
    
    
    700Company trade names
    
    
    2,700Customer relationships
    
    
    10,800Deferred income taxes
    
    
    7,572Property, plant and equipment
    
    
    8,489Other
    
    
    3,099Total assets
    
    
    60,560Liabilities assumed:Accounts payable
    
    
    1,430Accrued expenses
    
    
    3,673Dividend payable
    
    
    12,000Deferred income taxes
    
    
    8,112Total liabilities
    
    
    25,215Net assets acquired
    
    
    35,345Goodwill
    
    
    3,410Purchase price
    
    $
    38,755Cash paid, including transaction costs
    
    $
    2,798Stock consideration
    
    
    35,957Total purchase price
    
    $
    38,755
 Independent valuation specialists identified $17,385 of intangible assets
in the acquisition of Sterling. These intangible assets and their associated
useful lives are as follows (in thousands): Amount
    
    Useful LifePatents and related technology
    
    $
    3,185
    
    
    14.25 yearsDeveloped software
    
    
    700
    
    
    5.00 yearsTradenames
    
    
    2,700
    
    
    IndefiniteCustomer relationships
    
    
    10,800
    
    
    12.50 years$
    17,385
 5




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Had the acquisition been made as of May 1, 2003, unaudited pro forma sales
and operating results would have been as follows: Pro FormaStratos
    
    Sterling
    
    Adjustments
    
    ConsolidatedNet sales:Three months ended July 31, 2003
    
    $
    6,571
    
    
    $
    8,903
    
    
    $
    
    
    
    $
    15,474Net loss:Three months ended July 31, 2003
    
    
    (7,268
    )
    
    
    (1,787
    )
    
    
    (499
    )
    
    
    (9,554
    )Net loss per
share, basic and diluted:Three months ended July 31, 2003
    
    
    (0.99
    )
    
    
    (0.24
    )
    
    
    (0.07
    )
    
    
    (1.30
    )
 The pro forma adjustments represent additional depreciation of the step-up
in value of fixed assets and amortization of intangibles acquired. The pro forma results reported above are not necessarily indicative of
future results. Under current tax regulations, the goodwill related to the acquisition of
Sterling cannot be deducted for federal and state income tax purposes.  3.
    
    Restructuring Charges During prior fiscal years the Company recorded restructuring charges
related to the consolidation and elimination of various operating units. Accruals relating to restructuring charges and the subsequent activity are
summarized as follows: Balance
    
    2005
    
    Utilized through
    
    BalanceApril 30, 2004
    
    Charges
    
    July 31, 2004
    
    July 31, 2004Employee costs
    
    $
    240
    
    
    $
    
    
    
    $
    30
    
    
    $
    210Limited-use facility rental
    
    
    738
    
    
    
    
    
    
    
    236
    
    
    
    502$
    978
    
    
    $
    
    
    
    $
    266
    
    
    $
    712
  4.
    
    Income Taxes The Company has recorded a valuation allowance against deferred income tax
assets primarily associated with tax loss carry forwards based on the
significant operating losses experienced. As a result, valuation allowances of
$65.2 million were recorded through April 30, 2004, which eliminated the tax
benefit attributable to the losses incurred in fiscal years 2002,
2003 and 2004. We have continued to experience operating losses during
the three months 6




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ended July 31, 2004, and an additional valuation reserve of $133 was recorded,
which eliminated the tax benefit attributable to the net loss incurred in the
first three months of fiscal 2005. We have net operating loss carryforwards of approximately $159 million
that are available to offset taxable income in the future. The net operating
loss carry forwards will expire in 2022 through 2024.  5.
    
    Long-Term Debt Long-term debt consists of a note payable for the purchase of computer
software and hardware in connection with the implementation of a new
information technology system in fiscal 2002. At July 31, 2004, information
relating to this note is as follows: Current portion
    
    $
    1,926Long-term
    
    
    310$
    2,236Interest rate
    
    
    5.50
    %Payment terms
    
    MonthlyMaturity
    
    
    2006
 The note is supported by a letter of credit in the amount of $2,700 that
expires on August 1, 2005.  6.
    
    Loss Per Share Three Months EndedJuly 31,2003
    
    2004Numerator  net loss attributable to common shareholders
    
    $
    (7,268
    )
    
    $
    (480
    )Denominator:Denominator for basic and diluted loss per share 
weighted-average shares outstanding
    
    
    7,364
    
    
    
    13,534Basic and diluted loss per share
    
    $
    (0.99
    )
    
    $
    (0.04
    )
 The effect of outstanding stock options and unvested restricted stock awards
have not been considered in the determination of dilutive weighted average
shares outstanding because their effect would be antidilutive.  7.
    
    Sale of a Business Effective May 23, 2003, the Company sold the assets and business of its
wholly-owned subsidiary, Bandwith Semiconductor LLC, located in Hudson, New
Hampshire. The Company realized a net gain of approximately $1.2 million,
which is reflected as a reduction of general and 7




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) administrative expenses in the condensed consolidated statement of
operations for the three months ended July 31, 2003.  8.
    
    Stock-Based Compensation The
Company accounts for stock-based compensation plans using the intrinsic
value method described in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,and related interpretations. All
stock options granted by the Company are granted at market price and thus no
compensation expense is recorded in the Companys results of operations. Under
SFAS No. 148, Accounting for Stock Based Compensation, the Company is required to report quarterly and year to date pro
forma net loss and loss per share as if the Company had accounted for its stock
option plans under the fair value method. The following table shows the
Companys pro forma net loss and loss per share as if the Company had recorded
the fair value of stock options as compensation expense. Three Months EndedJuly 31,(Dollars in thousands, except per share amounts)
    
    2003
    
    2004Reported net loss attributable to common shareholders
    
    $
    (7,268
    )
    
    $
    (480
    )Stock-based compensation net of tax
    
    
    (597
    )
    
    
    (270
    )Pro forma net loss
    
    
    (7,865
    )
    
    
    (750
    )Reported basic and diluted net loss per share
attributable to common shareholders
    
    
    (0.99
    )
    
    
    (0.04
    )Pro forma basic and diluted net loss per share
attributable to common shareholders
    
    
    (1.07
    )
    
    
    (0.06
    )
 No stock options were issued during the three months ended July 31, 2004. 8




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Item 2.
    Managements Discussion and Analysis of Financial Condition and
Results of Operations. You should read the following discussion together with our consolidated
financial statements and notes to those financial statements, which are
included in this report. This report contains forward-looking statements made
pursuant to the safe harbor provisions of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934,
as amended. The words anticipates, intends, expects, could, should,
plans, believes, estimates, or words or phrases of similar import
generally identify forward-looking statements. You are cautioned that
forward-looking statements are subject to risks, trends and uncertainties that
could cause actual results, performance or achievements to differ materially
from those expressed in any forward-looking statements. Important factors that
could cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by those statements include, but are not limited to the following: (i)
the continuation of the current economic climate and its effect on our
business; (ii) our ability to meet analyst and investor expectations; (iii) the
long-term growth of communications industry and its use of our technologies;
(iv) our ability to develop and market new products and technology and to make
enhancements to existing products and technology on a successful and timely
basis; (v) our and our customers ability to comply with evolving domestic and
international government regulations; (vi) expenditures associated with
redesigning products to comply with evolving industry standards or alternative
technologies that become the industry standard; (vii) our dependence on sales
to the military/aerospace industry; (viii) our ability to develop and manage
relationships with large customers that comprise, and will comprise, a
significant percentage of our net sales, respectively; (ix) the length of sales
cycles, which vary by product and customer, and the effect that this length has
on net sales and operating expenses; (x) the lack of long-term customer
contracts and its effect on customers ability to reduce, cancel and defer
orders on short notice without significant penalty; (xi) the effect on gross
margins of an inability to reduce manufacturing costs or increase sales of
higher margin products; (xii) the impact of competitive products; (xiii) our
reliance on a limited number of suppliers and the effect of underestimating or
overestimating the need for certain supplies; (xiv) our ability to attract and
retain qualified personnel; (xv) the effect of defects in our products; (xvi)
the effect of compliance with environmental laws and other legal requirements;
(xvii) the effect of economic, political and regulatory risks associated with
international operations, including acts of terrorism directed against the
United States or U.S. affiliated targets; (xviii) our ability to complete and
integrate acquisitions, strategic alliances and joint ventures; (xix) our
ability to secure and defend intellectual property rights and, when
appropriate, license required technology; (xx) adverse outcomes of pending,
threatened or future litigation, including suits related to intellectual
property matters; (xxi) volatile market prices for securities of
technology-related companies; (xxii) the effect of provisions in our
organizational documents and Delaware law that may delay or prevent the
acquisition of Stratos or may decrease the value of Stratos common stock;
(xxiii) our ability to integrate Stratos and Sterling; (xxiv) the continued
costs associated with the acquisition of Sterling; (xxv) impact on our earnings
of application of th
e purchase method of accounting in connection with the
Sterling merger; and (xxvi) our ability to realize benefits from consolidation
of Sterling into the Mesa, Arizona facility. Because forward-looking
statements are subject to assumptions and 9




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uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Shareholders are cautioned not to
place undue reliance on such statements, which speak only as of the date of
this document or the date of any document incorporated by reference. All
subsequent written and oral forward-looking statements concerning the matters
addressed in this document and attributable to the Company or any person acting
on the Companys behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. Except to the
extent required by applicable law or regulation, the Company undertakes no
obligation to release publicly any revisions or updates to such forward-looking
statements to reflect events or circumstances after the date of this document
or to reflect the occurrence of unanticipated events. See the cautionary statements included as Exhibit 99 to this quarterly report
for a more detailed discussion of the foregoing and other factors that could
cause actual results to differ materially from those included in the
forward-looking statements and that, among others, should be considered in
evaluating our outlook. Overview In November 2003, the Company acquired Sterling Holding Company
(Sterling), a privately-held company based in Mesa, Arizona that designs and
manufactures Radio Frequency (RF) and microwave interconnect products via its
two operating units, Trompeter Electronics, Inc. and Semflex, Inc. The Company
completed this acquisition on November 6, 2003, following approval by both
Company and Sterling shareholders. At closing, Sterling became a wholly-owned
subsidiary of the Company, with Sterling shareholders receiving 6,082,000
shares of the Companys common stock, which represented approximately 82% of
the Companys total shares outstanding immediately prior to the consummation of
the merger. Of such amount, 608,189 shares were placed in escrow to provide
indemnification to the Company with respect to certain matters provided for in
the merger agreement. Company common shares issued in this transaction were
valued at $5.09 a share, the closing price on July 2, 2003, the day the merger
was announced. The Company also issued 50,000 shares of Series B redeemable
preferred stock with a face value of $5.0 million and a contingent value of up
to an additional $6.25 million based on certain events, including the future
performance of the Companys share price. The total purchase consideration was
$38.8 million, consisting of common and preferred shares of Company stock
valued at $36.0 million and $2.8 million of acquisition related costs. In connection with the transaction, the Company expanded its Board of
Directors to nine members. The new board is comprised of four members of the
Companys Board at the time of the closing of the merger, four members from
Sterlings Board, and an additional director chosen by Sterling. On May 19, 2004, we announced that our Board of Directors had decided to
explore various strategic alternatives to maximize shareholder value, including
a possible sale of the Company. In connection with that decision, our Board of
Directors has formed a committee and has retained CIBC World Markets Corp. as
its exclusive financial advisor. There can be no assurance that a transaction
will result involving the Company. 10




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We develop, manufacture and sell optical, RF, and microwave components and
subsystems for various applications and multiple end markets. These subsystems
are designed for use in storage, data networking, metro and wide area telecom
networks, military, aerospace, video, government security, oil and gas, and
other industrial markets and applications. We plan to continue to diversify our
end markets and expand our product offerings through internal and, possibly,
external growth. Our products are compatible with the various standards used in
these applications, including Gigabit Ethernet, Fast Ethernet, Fibre Channel,
and synchronous optical network (SONET), and other standards dictated by the
application of our products. Our net sales are derived from the sale of optical components and
subsystems to original equipment manufacturers (OEMs) and local resellers,
and from the sale of RF and microwave components to telecom service providers,
OEMs, military and government users, and distributors and resellers. Our net
sales have fluctuated from period to period due to customer demand for our
products, the size and timing of customer orders, our ability to deliver in the
relevant period and any canceled, delayed or rescheduled orders in the relevant
period. We determine inventory reserves in light of the rapid technological
change experienced in our industry 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 many of our products generally decrease as the
products mature in response to factors such as increased competition, the
introduction of new products and increased unit volumes. We anticipate that
average selling prices of many of our products will continue to decline in
future periods, although the timing and degree of the declines cannot be
predicted with any certainty. We must continue to develop and introduce new
products that incorporate features that can be sold at higher average selling
prices on a timely basis. There can be no assurance that we will be able to
introduce new products to offset the anticipated decrease in the average
selling prices of our products. License fees and royalties represent payments received from licensees of
our patented technology, which is also used by us in our optical, RF and
microwave product lines. 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, which in most cases is greater than ten years. 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 11




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overestimate our requirements, we may have excess inventory of these
components. The majority of our products are designed and manufactured in our
own facilities. In the future we may expand the volume of products
manufactured by third parties. In order to remain competitive, we must
continually reduce our manufacturing costs through design and engineering
innovations and increases in manufacturing efficiencies. There can be no
assurance that we will be able to reduce our manufacturing costs. Some of our critical components used in production of certain of our
products are purchased from a key supplier, which has been acquired by a
competitor of the Company. If this supplier increases prices, reduces
quantities available to us or ceases to supply us, our business and results of
operations may be significantly harmed. Research and development expenses consist primarily of salaries and
related expenses for design engineers, scientists and other technical
personnel, depreciation of test and prototyping equipment, and tooling.
Research and development expenses also consist of materials and operating
expenses related to major product development projects. We charge all research
and development expenses to operations as incurred. We believe that continued
investment in research and development is critical to our long-term business
success. We intend to continue to invest in research and development programs
in future periods in order to enhance performance or reduce the cost of current
optical, RF and microwave products, and develop new optical, RF, and microwave
products. There can be no assurance that these goals will be achieved or that
our levels of spending and project selection will be sufficient and effective. We market and sell our products domestically and internationally through
our direct sales force, local resellers and manufacturers representatives.
Specifically, we have established relationships with resellers and
manufacturers representatives in North America, Europe, South America, Asia
and various other countries. The Company sells through a team of representative distributors and direct
sales professionals across North America, Europe and Asia. The Companys sales
teams are organized into three groups including Stratos Lightwave (active and
passive components and subsystems), Trompeter (RF interconnect products) and
Semflex (microwave cable and cable assemblies). The Company maintains three
sales organizations to capture the strong brand identity each has developed in
its respective marketplace. The marketing group is responsible for developing marketing strategies and
programs that support the sale of the Companys products and enhance its
reputation in the industry. These strategies and programs include (i) ongoing
interaction with customers for the development of new products and technical
support, (ii) advertising and other promotional activities in industry trade
journals and publications targeting design engineers, (iii) participation in
major trade show events and conferences in the communications network industry
to promote the Companys broad lines of active and passive optical, and RF and
microwave components and subsystems, (iv) public relations covering new
products, applications and design wins, (v) market research to support R&D
investment and investor relations activity, (vi) corporate branding to create a
consistent message across the Stratos Lightwave, Trompeter and Semflex brands,
and (vii) interaction with our customers in industry associations and standards
committees to promote and 12




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further enhance active and passive interconnection technologies, and
increase the Companys visibility as an industry expert. We believe our ability to deliver value-added customer service and
technical support is essential to our business. Our sales force and design
engineers work closely with our customers through the design and manufacturing
process. We also provide extensive technical support to our customers after the
design and qualification process is complete. We intend to strengthen our
current customer relationships by continuing to deliver a high level of
value-added service and technical support and leveraging our reputation for
high quality products and service to establish relationships with new
customers. Sales and marketing expenses consist primarily of personnel costs,
including sales commissions, travel costs, outside marketing and consulting
services, and product marketing and promotion costs. We expect to continue to
make significant expenditures for sales and marketing services. General and administrative expenses consist primarily of personnel costs
for our administrative and financial groups, as well as legal, accounting,
information technology and other professional fees. We expect to continue to
make significant expenditures for general and administrative services. Critical Accounting Policies Accounts Receivable We sell products primarily to various OEMs and distributors. Sales to
these customers have varying degrees of collection risk associated with them.
Management assesses collection risk and the related allowance for doubtful
accounts based on the aging of accounts, historical experience and the
customers financial condition. Inventory Reserves It is our policy to reserve 100% of the value of inventory we specifically
identify and consider obsolete or excessive for fulfilling future sales
estimates. We define obsolete inventory as inventory that will no longer be
used in the manufacturing process or items that have potential quality
problems. Excess inventory is defined as inventory in excess of one to two
years projected usage depending upon the product. Excess inventory is
determined using our best estimate of future demand at the time, based upon
information then available to us. In general, our policy is to scrap inventory
determined to be obsolete shortly after the determination is made and to keep
excess inventory for a reasonable amount of time before it is discarded.
Occasionally, changed circumstances in the marketplace present us with an
opportunity to sell inventory that was previously determined to be excessive
and reserved for. If this occurs, we vigorously pursue such opportunities. 13




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Impairment of Long-Lived Assets We review the carrying value of our long-lived assets if the facts and
circumstances, such as significant declines in sales, earnings or cash flows or
material adverse changes in the business climate suggest that they may be
impaired. If this review indicates that long-lived assets will not be
recoverable, as determined based on the estimated undiscounted cash flows of
the long-lived asset, impairment is measured by comparing the carrying value of
the long-lived asset to fair value. Fair value is determined based on quoted
market values, discounted cash flows or appraisals. If an asset is considered
held for sale, we adjust the carrying value of the underlying assets to fair
value, as determined based on the estimated net realizable proceeds of the
assets. Revenue Recognition Revenue from product sales, net of trade discounts, is recognized when
title passes, which generally occurs upon shipment. We handle returns by
replacing, repairing or issuing credit for defective products when returned.
We establish a reserve for returns based on any known and anticipated returns
and accordingly adjust revenue, accounts receivable and inventories. Customer Returns It is our policy to establish a reserve for customer returns based on any
known returns and anticipated returns based on past experience and accordingly
adjust revenue, accounts receivable and inventories. Customer demand is a changing dynamic. Occasionally, we have and will
receive requests from customers to accept the return of merchandise for which
they had previously accepted delivery. Although we have no obligation to do
so, each such request is evaluated in light of contemplated future business
from that customer. We will continue to consider these requests in the future,
however, we are not able to predict the amount of any such returns. Because we do support several fully franchised distribution agreements,
which include provisions for inventory rotation, certain products covered under
these agreements are returned to us from time to time. Research and Development All expenses relative to the development of a new product, prior to its
introduction into production, are considered research and development expenses.
In addition, the costs of the engineering effort to do significant redesign to
enhance product performance that results essentially in a new product are also
considered to be research and development expenses. Because the true
manufacturability of our products is not obvious until a period of volume
production has occurred, initial production is considered a part of the
development process. During this phase, a portion of the scrap expense and
yield loss is considered development expense. A product continues to be
considered under development until it matures to the point 14




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where its production yields (volumes) are consistent with other mature
products and any related engineering effort is predominately dedicated to
customer applications and/or quality support. Results of Operations The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated: Three Months EndedJuly 31,2003
    
    2004Revenue:Net sales
    
    
    100.0
    %
    
    
    100.0
    %License fees and royalties
    
    
    7.70
    
    
    
    13.24Total
    
    
    107.70
    
    
    
    113.24Costs and expenses:Cost of sales
    
    
    113.80
    
    
    
    65.71Research and development
    
    
    43.98
    
    
    
    11.44Sales and marketing
    
    
    23.12
    
    
    
    13.36General and administrative
    
    
    41.06
    
    
    
    24.90Total costs and expenses
    
    
    221.96
    
    
    
    115.41Loss from operations
    
    
    (114.26
    )
    
    
    (2.17
    )Investment income, net
    
    
    3.65
    
    
    
    0.30Loss before income taxes
    
    
    (110.61
    )
    
    
    (1.87
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    
    (110.61
    )%
    
    
    (1.87
    )%
 Three Months Ended July 31, 2004 and 2003 Net Sales.Net sales for the three month period ended July 31, 2004
increased 220% over the same period a year ago to $21.0 million from $6.6
million. This $14.4 million increase represents a $3.9 million increase in the
net sales in the military/governmental end market, $4.5 million increase in the
data networking end market, $2.5 million increase in the telecom/metro end
market, $195,000 increase in the storage end market and $3.3 million in other
end markets. Included in the amounts above is $10.5 million in sales from
product lines acquired in the merger with Sterling. Excluding the sales attributable to the product lines acquired from
Sterling, sales increased $3.9 million in the three months ended July 31, 2004
over the comparable period last year. The increase in sales was due to an
increase throughout our end markets reflecting an increase in customer demand
for our products. Our total sales order backlog decreased to $12.3 million as
of July 31, 2004 from $13.0 million as of April 30, 2004. Although we have
realized a slight decrease in our backlog since the end of fiscal 2004, we
continue to experience an increase in backlog in all our end markets over the
comparable period in fiscal 2004. 15




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License Fees and Royalties. License fees increased to $2.8 million in the
three months ended July 31, 2004 from $506,000 in the three months ended July
31, 2003. This increase is primarily attributable to a $2.5 million lump sum
license payment associated with the settlement of a patent infringement case.
License fees consist of both fixed schedule payments and contingent payments
based on sales volumes of licensed products. Cost of Sales and Gross Margins. Cost of sales increased to $13.8 million
in the three months ended July 31, 2004 from $7.5 million in the three months
ended July 31, 2003. Gross profit as a percentage of net sales, or gross
margin, improved to 34.3% in the three months ended July 31, 2004 from negative
(13.8)% in the three months ended July 31, 2003. Approximately, 16.3
percentage points of the 48.1% increase was due to the decrease in prime costs
and manufacturing costs, 20.8 percentage points from the product lines acquired
in the merger with Sterling, 13.8 percentage points was due to the reduction in
the charges for obsolete and slow moving inventory and 3.4 percentage points
from the reduction of the cost of severance pay relating to restructuring of
operations. These factors were offset by 6.2 percentage points for the
reduction in sales of inventory previously considered excess and fully
reserved. Cost of sales was charged approximately $115,000 and $938,000 in the three
months ended July 31, 2004 and 2003, respectively, for obsolete and excess
inventory. Research and Development. Research and development expenses decreased to
$2.4 million in the three months ended July 31, 2004 from $2.9 million in the
three months ended July 31, 2003. The decrease of $500,000 was due primarily
to a $400,000 decrease in costs of personnel dedicated to research and
development and $100,000 decrease in material and overhead costs related to
major product development. The above amounts include $122,000 of research and
development expenses attributable to the product lines acquired from Sterling. Sales and Marketing. Sales and marketing expenses increased to $2.8
million in the three months ended July 31, 2004 from $1.5 million for the three
months ended July 31, 2003. This $1.3 million increase was due to increases of
$1.0 million in sales and marketing salaries, fringe benefits, bonuses and
commissions, and $300,000 in field sales operating costs supporting our sales.
The above amounts include $1.4 million of sales and marketing expenses
attributable to the product lines acquired from Sterling. General and Administrative. General and administrative expenses increased
to $5.2 million in the three months ended July 31, 2004 from $2.7 million in
the comparable period last year. This $2.5 million increase was due to
$500,000 in legal fees for the settlement of litigation as described in License
Fees and Royalties above, $600,000 increase in corporate salaries, fringe
benefits and bonuses and a $1.4 million increase in general expenses. The
amounts above include $1.2 million of general and administrative expenses
attributable to the product lines acquired from Sterling. We operate in markets that have experienced a severe economic downturn
during the past several years and, as a result, many of our customers may, from
time to time, stretch their payment terms. Days sales in accounts receivable
remained consistent at 57 days at July 31, 2004 when compared to April 30,
2004. 16




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Investment Income, Net. Investment income, net of investment expense,
decreased to $64,000 in the three months ended July 31, 2004 from $240,000 in
the three months ended July 31, 2003. Investment income consists of earnings
on the short-term investment of excess cash balances. Decreases in the three
months ended July 31, 2004 reflect the reduction of excess cash balances as
well as lower interest rates during this period. Income Taxes. The Company has recorded a valuation allowance against
deferred income tax assets primarily associated with tax loss carry forwards
based on the significant operating losses experienced. As a result, valuation
allowances of $65.2 million were recorded at April 30, 2004, which eliminated
the tax benefit attributable to the losses incurred in fiscal years 2002, 2003
and 2004. We have continued to experience operating losses during the three
months ended July 31, 2004, and an additional valuation allowance of $133,000
was recorded, which eliminated the tax benefit attributable to the net loss
incurred in the first three months of fiscal 2005. We have net operating loss carry forwards of approximately $159.0 million
that are available to offset taxable income in the future. The net operating
loss carry forwards will expire in 2022 through 2024. Liquidity and Capital Resources Net cash used in operating activities totaled $53,000 for the three months
ended July 31, 2004. The use of cash in operating activities resulted
primarily from a net loss, the decrease of accounts payable and accrued
expenses, increase in accounts receivable and inventories, offset in part by
decreases in prepaid expenses. Net cash provided by investing activities totaled $3.4 million in the
three months ended July 31, 2004, including $1.4 million of proceeds from the
sale of assets held for sale and a $2.2 million increase in short-term
investments, offset by $200,000 for the purchase of equipment and facilities. Net cash used in financing activities was $800,000 in the three months
ended July 31, 2004, including a $800.000 repayment on borrowings and $87,000
of dividends on preferred stock, offset by $95,000 of proceeds from exercise of
stock options. As of July 31, 2004, our principal source of liquidity was approximately
$37.4 million in cash, cash equivalents and short-term investments. Our future capital requirements will depend on a number of factors,
including our ability to generate increased sales and our ability to manage
operating expenses. The continued diversification of our end markets and
expansion of our product offerings through internal and, possibly, external
growth could materially change our level of cash and cash equivalents. This
diversification may require the Company to seek equity or debt financing. Our
only cash commitments are (i) the repayment of long-term debt of approximately
$2.2 million and (ii) the payment of cumulative cash dividends on the Series B
Preferred Stock on terms specified in the Certificate of Designation for such
stock. We also are obligated to redeem all shares of Series B 17




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Preferred Stock in accordance with the terms of the Certificate of
Designation for such stock no later than 60 days following the occurrence of
certain events relating to the Companys achievement of $250 million in annual
revenue or $500 million in market capitalization. In addition, if a change of
control of the Company occurs, the Series B Preferred Stock becomes redeemable
for an aggregate of $5 million, subject to upward adjustment under certain
circumstances relating to market price of the Companys Common Stock. We
believe that our current cash balances will be sufficient to meet our cash
needs for working capital, capital expenditures, the Series B Preferred Stock
dividend and repayments of long-term debt for the next 12 months. The
settlement of, or an adverse result in, current and future litigation may,
however, significantly affect our cash position and capital requirements. To
the extent that the Company needs to or deems it advisable to seek equity or
debt financing in connection with any of the foregoing, no assurance can be
given that such financing will be available, or that it will be available on
favorable terms. We operate in markets that have experienced a severe economic downturn
during the past several years. These conditions may continue in fiscal 2005,
during which we may experience significant decreases in net sales and incur net
losses, offset to a certain extent by the acquisition of Sterling. We expect
the difficult industry conditions to continue for at least the next 6 to 12
months and they may continue for a longer period. Any continued or further
decline in demand for our customers products or in general economic conditions
would likely result in further reduction in demand for our products and our
business, operating results and financial condition would suffer. Further, in order to propel overall industry growth and to encourage
interoperability of supplier components, subsystems, systems and networks,
various industry standards have evolved and are evolving which provide
customers the opportunity to choose between vendors who have form, fit and
function compatible products that are essentially interchangeable as second or
third sources. As customers manage their supply chains more efficiently,
pricing pressure increases on vendors, such as the Company, reducing gross
margins for similar products. In response to these conditions, we have implemented personnel reductions,
shut down certain facilities, disposed of certain assets and put in place other
cost reduction programs; however, since many of our costs are fixed in the near
term, we expect to continue to incur significant manufacturing, research and
development, sales and marketing and administrative expenses. Consequently, we
will need to generate higher revenues while containing costs and operating
expenses if we are to return to profitability. If our efforts to increase our
revenues and contain our costs are not successful, we will continue to incur
net losses. We are also examining and pursuing opportunities for improving gross
margins and cash flow. The merger with Sterling combined two companies with
brands that are well-respected by segments of the telecommunications, military,
video and broadcast customer base that seek solutions to difficult problems at
the electrical side of the high-performance, high-bandwidth interface which are
solved by products offered by Stratos. We believe that these products, when 18




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combined with superior customer service, provide the potential for
improving gross margins and cash flows. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is subject to certain market risks, including foreign currency
and interest rates. Although our Stratos U.K. subsidiary enters into
transactions in currencies other than its functional currency, foreign currency
exposures arising from these transactions are not material to us. The primary
foreign currency exposure arises from the translation of our net equity
investment in our foreign subsidiary to U.S. dollars. We generally view our
investment in our foreign subsidiary with a functional currency other than the
U.S. dollar as long-term. The primary currency to which we are exposed is the
pound sterling. The Company does not have exposure to interest rate risk related to its
debt obligation because the interest rate is fixed. The Companys market risk
is the potential loss of income from the reduction in interest rates from the
renewal of short-term investments. The Company has experienced such reductions
in these rates during fiscal year 2004 and the first three months of fiscal
2005. 
 Item 4. Controls and Procedures. As of the end of the period covered by this report, our management,
including our Chief Executive Officer and Chief Financial Officer, carried out
an evaluation of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15a-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our filings with the SEC. There has been no change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the period covered by this quarterly report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. While the Company has not been late
in filing any reports required to be filed with the SEC, during the period
covered by this report, management of the Company took steps to review and
revise its financial statement closing process in order to ensure that
procedures currently being performed are adequate for the timely and accurate
preparation of SEC reports. 19




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PART II
OTHER INFORMATION 
 Item 1. Legal Proceedings. From time to time, the Company becomes involved in various lawsuits and
legal proceedings that arise in the normal course of business. The Company
believes that the resolution of these lawsuits and legal proceedings will not
have a significant effect on the Companys business, financial condition or
results of operations. The Company and certain of its directors and executive officers have been
named as defendants in purported class action lawsuits filed in the United
States District Court, Southern District of New York. The first of these
lawsuits, filed on July 25, 2001, is captioned Kucera v. Stratos Lightwave,
Inc. et.al. No. 01 CV 6821. Three other similar lawsuits have also been filed
against the Company and certain of its directors and executive officers. The
complaints also name as defendants the underwriters for the Companys initial
public offering. The complaints are substantially identical to numerous other
complaints filed against other companies that went public over the last several
years. The complaints generally allege, among other things, that the
registration statement and prospectus from the Companys June 26, 2000 initial
public offering failed to disclose certain alleged actions by the underwriters
for the offering. The complaints charge the Company and two or three of its
directors and executive officers with violations of Sections 11 and 15 of the
Securities Act of 1933, as amended, and/or Section 10(b) and Section 20(a) to
the Security Exchange Act of 1934, as amended. The complaints also allege
claims solely against the underwriting defendants under Section 12(a)(2) of the
Securities Act of 1933, as amended. In 2003, the Company agreed to a Memorandum of Understanding, which
reflects a settlement of these class actions as between the purported class
action plaintiffs, the Company and the defendant officers and directors, and
the Companys liability insurer. Under the terms of the Memorandum of
Understanding, the Companys liability insurers will pay certain sums to the
plaintiffs, with the amount dependent upon the plaintiffs recovery from the
underwriters in the IPO class actions as a whole. The plaintiffs will dismiss
with prejudice their claims against the Company and its officers and directors,
and the Company will assign to the plaintiffs certain claims that it may have
against the underwriters. The plaintiffs have filed with the court a motion for
preliminary approval of the settlement, which, if granted, will lead to the
mailing of class-wide notices of the settlement and a hearing date for approval
of the settlement. In February 2002, the Company acquired Tsunami Optics, Inc. The
acquisition agreement contemplated a potential earn-out payment of up to $18
million in common stock if certain financial targets were achieved following
the acquisition. In June 2002, Catherine Lego, as representative of the former
Tsunami shareholders, filed a lawsuit against the Company alleging, among other
things, that the Company breached the acquisition agreement by refusing to
allow Tsunami to operate as a separate subsidiary, firing the Tsunami
executives that it believed were necessary to operate the business and thereby
making it impossible for Tsunami to achieve the targets required to receive any
earnout payments. The complaint also alleged fraud and violations 20




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of federal securities laws in connection with the acquisition of Tsunami.
Plaintiffs are seeking $38 million in damages or the rescission of the
acquisition agreement. The Company filed a counterclaim against
Ms. Lego and
several other shareholders and officers of Tsunami which alleges fraud, breach
of contract and violations of federal securities laws. The counterclaim seeks
compensatory and punitive damages. In April 2004, the Court entered an order in favor of the Company to
dismiss with prejudice 11 of 13 counts of the plaintiffs complaint. The
alleged damages sought for the plaintiffs two remaining claims (breach of
contract and rescission) remain unchanged at $38 million. The Company believes
that the plaintiffs remaining claims are without merit and intends to
vigorously defend against these claims. The court denied the plaintiffs motion
to dismiss the Companys counterclaims of fraud and violations of federal
securities law and granted the plaintiffs motion to dismiss the allegation of
breach of contract. This action is currently set for trial on November 16,
2004. In August 2002, James Campbell, the former CEO of Tsunami, filed a lawsuit
against the Company alleging wrongful termination in breach of his employment
contract, fraud and age discrimination. Campbells claims were subsequently
amended to include intentional infliction of emotional distress. Campbell
seeks unspecified damages, punitive damages and attorneys fees. The Company
believes that this lawsuit is without merit and intends to vigorously defend
against these claims. An August 2004 trial date was originally set but was
vacated, and a new trial date has not been set. In March 2003, Alcatel USA, seeking unspecified damages and alleging
breach of contract, breach of warranty, negligent misrepresentation, fraud and
conspiracy in connection with Alcatels purchase of certain goods from the
defendants over a period spanning 2000 and 2001. The Company asserted certain
counterclaims against Alcatel relating to the same type of goods at issue in
Alcatels complaint. In April 2004, Alcatel and the Company executed a written
settlement agreement resolving all disputes. Pursuant to the terms of the
written settlement agreement, the parties executed mutual releases and the case
was dismissed with prejudice on August 13, 2004. We are a plaintiff in a lawsuit relating to our intellectual property
rights. The defendant in this lawsuit is Picolight, Inc. (District of
Delaware). In this action, the Company alleges that optoelectronic products
sold by the defendant infringe numerous of the Companys patents. We are
seeking monetary damages and injunctive relief. The defendant in this lawsuit
has asserted an affirmative defense and filed counterclaims and contends that
the patents are invalid, unenforceable and/or not infringed by the products
sold by the defendant. Picolight has asserted an antitrust counterclaim based
on the alleged unenforceability of our patents. If successful, the defendant is
seeking attorneys fees and costs in connection with the lawsuit. We intend to
pursue this lawsuit and defend against the counterclaims vigorously. On
November 24, 2003, a jury returned a verdict finding that Picolight infringed
six of the Companys patents. The case is currently in the inequitable conduct
phase and we are awaiting the judges ruling. The third phase on validity is
dependent on the outcome of the inequitable conduct phase, and would be
followed by the damages phase. 21




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##### Table of Contents



During the first quarter of fiscal year 2005 the Company settled a patent
infringement case and as a result of this settlement the Company received
approximately $2.5 million, which was recorded as license fees and royalties in
the consolidated statement of operations. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. (b) The Companys registration statement on Form S-1 filed under the
Securities Act of 1933, Commission File No. 333-34864, was declared effective
by the Commission on June 26, 2000. As adjusted for the 1-for-10 reverse stock
split in October, 2002, a total of 1,006,250 shares of our common stock were
registered pursuant to this registration statement. The managing underwriters
for the offering were Lehman Brothers, CIBC World Markets, U.S. Bancorp Piper
Jaffray, Robert W. Baird & Co., Tucker Anthony Cleary Gull, and Fidelity
Capital Markets, a division of National Financial Services Corporation. The Company sold these shares at an initial public offering price of
$210.00 per share. The aggregate underwriting discount paid in connection with
the offering was $14,791,875. The net proceeds from the offering, after deducting the underwriting
discount and the estimated offering expenses to be paid by the Company, were
approximately $195 million. Uses of proceeds to date include $134.5 million
for general corporate purposes and the purchase of equipment and facilities,
payments of $17.1 million in connection with various acquisitions, repayment of
$2.7 million of advances from a Methode Electronics Inc. (Methode)
subsidiary, and $333,000 for repayment of a note assumed in connection with the
acquisition of our Stratos Ltd. subsidiary. The remainder of the proceeds will
be used for general corporate purposes, including working capital, capital
expenditures, and research and development. Pending these uses, the remaining
net proceeds have been invested in short-term interest bearing, investment
grade marketable securities. Other than the repayment of advances from a Methode subsidiary described
above and the payment of the additional purchase price 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 director or officer of the Company or
any of their associates, to any persons owning 10 percent or more of our common
stock, or to any affiliate of the Company. 22




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Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders during the
three month period ended July 31, 2004. 
 Item 6. Exhibits. ExhibitNumber
    
    Description of Document2.1
    
    Agreement and Plan of Merger, dated as of July 2, 2003, as amended as of August 19, 2003
and October 31, 2003, among Stratos Lightwave, Inc., Sleeping Bear Merger Corp. and
Sterling Holding Company (12)3.1
    
    Restated Certificate of Incorporation of Registrant (13)3.2
    
    Bylaws of Registrant (1)3.3
    
    Certificate of Designation of Series A Junior Participating Preferred Stock, included as
Exhibit A to Exhibit 4.33.4
    
    Certificate of Designation for Series B Preferred Stock (11)4.1
    
    Specimen certificate representing the common stock (1)4.2
    
    Specimen Certificate representing the Series B Preferred Stock (13)4.3
    
    Rights Agreement, dated as of March 23, 2001, between Stratos International, Inc. and
Mellon Investor Services LLC (2)4.4
    
    First Amendment, dated as of July 2, 2003, to Rights Agreement, dated as of March 23,
2001, between Stratos Lightwave, Inc. and Mellon Investor Services LLC, as Rights Agent.
(10)4.5
    
    Registration Rights Agreement, dated as of July 2, 2003, among Stratos Lightwave, Inc.,
Citicorp Venture Capital Ltd., the William N. and Carol A. Stout
Trust dated November 24, 1998 and
the William N. and Carol A. Stout Charitable Remainder Unit Trust (11)4.6
    
    Standstill Agreement, dated as of July 2, 2003, between Stratos Lightwave, Inc. and
Citicorp Venture Capital Ltd. (11)10.1
    
    Form of Indemnity Agreement between Registrant and Registrants directors and officers (1)10.2
    
    Stratos Lightwave, Inc. 2000 Stock Plan, as amended and restated (3)10.3
    
    Agreement and Plan of Reorganization, dated January 22, 2002, by and among the
Registrant, Tundra Acquisition Corp. and Tsunami Optics, Inc. (4)10.4
    
    Stratos Lightwave, Inc. 2002 Stock Plan for Acquired Companies (5)10.5
    
    Agreement and Plan of Reorganization, dated March 18, 2002, by and among the Registrant, Polar Acquisition Corp. and Paracer, Inc. (6)10.6
    
    Management Retention Agreement between the Registrant and James McGinley (7)10.7
    
    Management Retention Agreement between the Registrant and David Slack (7)10.8
    
    Management Retention Agreement between the Registrant and Richard Durrant (7)10.9
    
    Stratos Lightwave, Inc. Severance Plan (7)10.10
    
    Agreement and Plan of Merger, dated as of July 2, 2003, as amended as of August 19, 2003
and October 31, 2003, among Stratos Lightwave, Inc., Sleeping Bear Merger Corp. and
Sterling Holding Company (11)10.11
    
    Amendment to Management Retention Agreement between the Registrant and James McGinley (8)10.12
    
    Amendment to Management Retention Agreement between the Registrant and David Slack (8)10.13
    
    Amendment to Management Retention Agreement between the Registrant and Richard Durrant (8)10.14
    
    Amendment to Stratos Lightwave, Inc. Severance Plan (8)10.15
    
    Stratos Lightwave, Inc. 2003 Stock Plan (10)10.16
    
    Stratos Lightwave, Inc. 2003 Employee Stock Purchase Plan (10)10.17
    
    Employment, Confidentiality and Noncompete Agreement, dated as of November 3, 1997, by
and
 23




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##### Table of Contents



ExhibitNumber
    
    Description of Documentbetween Trompeter Electronics, Inc. and Joe Norwood (13)10.18
    
    Salary Continuation Agreement, dated as of October 18, 2000, by and between Trompeter
Electronics, Inc. and Joe Norwood (13)10.19
    
    Amendment to Salary Continuation Agreement, dated as of July 26, 2004, by and between
Trompeter Electronics, Inc. and Joe Norwood (13)10.20
    
    Salary Continuation Agreement, dated as of August 10, 2004, by and between Trompeter
Electronics, Inc. and Joe Norwood (13)10.21
    
    Amendment to Management Retention Agreement between the Registrant and James McGinley (13)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer*31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer*32.1
    
    Section 1350 Certification of Chief Executive Officer*32.2
    
    Section 1350 Certification of Chief Financial Officer*99
    
    Cautionary Statements*
   (1)
    
    Incorporated by reference to the Registrants Registration
Statement on Form S-1 effective June 26, 2000.(2)
    
    Incorporated by reference to the Registrants Form 8-K dated March
22, 2001.(3)
    
    Incorporated by reference to the Registrants Annual Report on
Form 10-K for the year ended April 30, 2001.(4)
    
    Incorporated by reference to the Registrants Form 8-K dated
February 4, 2002.(5)
    
    Incorporated by reference to the Registrants Registration
Statement on Form S-8 dated January 31, 2002.(6)
    
    Incorporated by reference to the Registrants Form 8-K dated March
28, 2002.(7)
    
    Incorporated by reference to the Registrants Quarterly Report
on Form 10-Q for the quarter ended October 31, 2002.(8)
    
    Incorporated by reference to the Registrants Annual Report on
Form 10-K for the fiscal year ended April 30, 2003.(9)
    
    Incorporated by reference to the Registrants Form 8-A/A filed
August 7, 2003.(10)
    
    Incorporated by reference to the Registrants Form S-4/A effective
September 29, 2003.(11)
    
    Incorporated by reference to the Registrants Form 8-K dated
November 6, 2003.(12)
    
    Incorporated by reference to the Quarterly Report on Form 10-Q for
the quarter ended October 31, 2003.(13)
    
    Incorporated by reference to the Registrants Form 10-K/A filed
August 30, 2004.  *
    
    Filed or furnished herewith 24




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##### Table of Contents



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. Date: September 14, 2004
    
    STRATOS INTERNATIONAL, INC.By:
    
    /s/ James W. McGinleyJames W. McGinleyPresident and Chief Executive OfficerBy:
    
    /s/ David A. SlackDavid A. SlackExecutive Vice President  Finance
and Chief Financial Officer
 25




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description of Document2.1
    
    Agreement and Plan of Merger, dated as of July 2, 2003, as amended as of August 19, 2003
and October 31, 2003, among Stratos Lightwave, Inc., Sleeping Bear Merger Corp. and
Sterling Holding Company (12)3.1
    
    Restated Certificate of Incorporation of Registrant (13)3.2
    
    Bylaws of Registrant (1)3.3
    
    Certificate of Designation of Series A Junior Participating Preferred Stock, included as
Exhibit A to Exhibit 4.33.4
    
    Certificate of Designation for Series B Preferred Stock (11)4.1
    
    Specimen certificate representing the common stock (1)4.2
    
    Specimen Certificate representing the Series B Preferred Stock (13)4.3
    
    Rights Agreement, dated as of March 23, 2001, between Stratos International, Inc. and
Mellon Investor Services LLC (2)4.4
    
    First Amendment, dated as of July 2, 2003, to Rights Agreement, dated as of March 23,
2001, between Stratos Lightwave, Inc. and Mellon Investor Services LLC, as Rights Agent.
(10)4.5
    
    Registration Rights Agreement, dated as of July 2, 2003, among Stratos Lightwave, Inc.,
Citicorp Venture Capital Ltd., the William N. and Carol A. Stout
Trust dated November 24, 1998 and
the William N. and Carol A. Stout Charitable Remainder Unit Trust (11)4.6
    
    Standstill Agreement, dated as of July 2, 2003, between Stratos Lightwave, Inc. and
Citicorp Venture Capital Ltd. (11)10.1
    
    Form of Indemnity Agreement between Registrant and Registrants directors and officers (1)10.2
    
    Stratos Lightwave, Inc. 2000 Stock Plan, as amended and restated (3)10.3
    
    Agreement and Plan of Reorganization, dated January 22, 2002, by and among the
Registrant, Tundra Acquisition Corp. and Tsunami Optics, Inc. (4)10.4
    
    Stratos Lightwave, Inc. 2002 Stock Plan for Acquired Companies (5)10.5
    
    Agreement and Plan of
Reorganization, dated March 18, 2002,  by and among the
Registrant, Polar Acquisition Corp. and Paracer, Inc. (6)10.6
    
    Management Retention Agreement between the Registrant and James McGinley (7)10.7
    
    Management Retention Agreement between the Registrant and David Slack (7)10.8
    
    Management Retention Agreement between the Registrant and Richard Durrant (7)10.9
    
    Stratos Lightwave, Inc. Severance Plan (7)10.10
    
    Agreement and Plan of Merger, dated as of July 2, 2003, as amended as of August 19, 2003
and October 31, 2003, among Stratos Lightwave, Inc., Sleeping Bear Merger Corp. and
Sterling Holding Company (11)10.11
    
    Amendment to Management Retention Agreement between the Registrant and James McGinley (8)10.12
    
    Amendment to Management Retention Agreement between the Registrant and David Slack (8)10.13
    
    Amendment to Management Retention Agreement between the Registrant and Richard Durrant (8)10.14
    
    Amendment to Stratos Lightwave, Inc. Severance Plan (8)10.15
    
    Stratos Lightwave, Inc. 2003 Stock Plan (10)10.16
    
    Stratos Lightwave, Inc. 2003 Employee Stock Purchase Plan (10)10.17
    
    Employment, Confidentiality and Noncompete Agreement, dated as of November 3, 1997, by
and between Trompeter Electronics, Inc. and Joe Norwood (13)10.18
    
    Salary Continuation Agreement, dated as of October 18, 2000, by and between Trompeter
Electronics, Inc. and Joe Norwood (13)10.19
    
    Amendment to Salary Continuation Agreement, dated as of July 26, 2004, by and between
Trompeter Electronics, Inc. and Joe Norwood (13)10.20
    
    Salary Continuation Agreement, dated as of August 10, 2004, by and between Trompeter
Electronics, Inc. and Joe Norwood (13)10.21
    
    Amendment to Management Retention Agreement between the Registrant and James McGinley (13)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer*31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer*
 26




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##### Table of Contents



ExhibitNumber
    
    Description of Document32.1
    
    Section 1350 Certification of Chief Executive Officer*32.2
    
    Section 1350 Certification of Chief Financial Officer*99
    
    Cautionary Statements*
   (1)
    
    Incorporated by reference to the Registrants Registration
Statement on Form S-1 effective June 26, 2000.(2)
    
    Incorporated by reference to the Registrants Form 8-K dated March
22, 2001.(3)
    
    Incorporated by reference to the Registrants Annual Report on
Form 10-K for the year ended April 30, 2001.(4)
    
    Incorporated by reference to the Registrants Form 8-K dated
February 4, 2002.(5)
    
    Incorporated by reference to the Registrants Registration
Statement on Form S-8 dated January 31, 2002.(6)
    
    Incorporated by reference to the Registrants Form 8-K dated March
28, 2002.(7)
    
    Incorporated by reference to the Registrants Quarterly Report
on Form 10-Q for the quarter ended October 31, 2002.(8)
    
    Incorporated by reference to the Registrants Annual Report on
Form 10-K for the fiscal year ended April 30, 2003.(9)
    
    Incorporated by reference to the Registrants Form 8-A/A filed
August 7, 2003.(10)
    
    Incorporated by reference to the Registrants Form S-4/A effective
September 29, 2003.(11)
    
    Incorporated by reference to the Registrants Form 8-K dated
November 6, 2003.(12)
    
    Incorporated by reference to the Registrants Quarterly Report on
Form 10-Q for the quarter ended October 31, 2003.(13)
    
    Incorporated by reference to the Registrants Form 10-K/A filed
August 30, 2004.  *
    
    Filed or furnished herewith. 27