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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 1934For the quarterly period ended October 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number 0-30869 STRATOS INTERNATIONAL, INC.    Delaware
    
    36-4360035(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)
 7444 West Wilson Avenue
    
    60706Chicago, Illinois 60706(Address of Principal Executive Offices)
    
    (Zip Code)
 (708) 867-9600
(Registrants Telephone Number, Including Area Code)   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 Securities Exchange Act of 1934). o x
 As of December 14, 2004, there were 14,159,123 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 October 31, 2004 (unaudited)
    
    
    1Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended October 31, 2003 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended October 31, 2003 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited) October 31, 2004
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 4. Submission of Matters to Vote of Security Holders
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    30INDEX TO EXHIBITS
    
    
    31CertificationCertificationCertificationCertificationCertificationCertificationCautionary 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,
    
    October 31,2004
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,501
    
    
    $
    27,388Short-term investments
    
    
    21,488
    
    
    
    9,247Accounts receivable, less allowance
    
    
    12,544
    
    
    
    10,703Inventories:Finished products
    
    
    2,831
    
    
    
    2,852Work in process
    
    
    1,042
    
    
    
    902Materials
    
    
    12,091
    
    
    
    13,11715,964
    
    
    
    16,871Recoverable income taxes
    
    
    4,176
    
    
    
    4,212Prepaid expenses
    
    
    1,326
    
    
    
    1,235Total current assets
    
    
    70,999
    
    
    
    69,656Other assets:Goodwill and other indefinite lived assets
    
    
    6,110
    
    
    
    6,110Intangible assets, net of amortization
    
    
    14,665
    
    
    
    14,036Assets held for sale
    
    
    4,441
    
    
    
    2,988Other
    
    
    5,879
    
    
    
    6,04331,095
    
    
    
    29,177Property, plant and equipment
    
    
    91,530
    
    
    
    89,678Less allowances for depreciation
    
    
    64,574
    
    
    
    65,84826,956
    
    
    
    23,830Total assets
    
    $
    129,050
    
    
    $
    122,663LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,422
    
    
    $
    7,044Other current liabilities
    
    
    7,373
    
    
    
    8,153Current portion of long-term debt
    
    
    2,230
    
    
    
    1,766Total current liabilities
    
    
    18,025
    
    
    
    16,963Long-term debt, less current portion
    
    
    801
    
    
    
    Deferred income taxes
    
    
    445
    
    
    
    445Redeemable preferred stock
    
    
    5,000
    
    
    
    5,000Shareholders equity:Preferred stock  Series B
    
    
    
    
    
    
    Common stock
    
    
    143
    
    
    
    142Additional paid-in capital
    
    
    319,212
    
    
    
    318,629Accumulated deficit
    
    
    (210,633
    )
    
    
    (215,201
    )Unearned compensation
    
    
    (3,809
    )
    
    
    (2,796
    )Foreign currency translation adjustments
    
    
    114
    
    
    
    (271
    )Cost of shares in treasury
    
    
    (248
    )
    
    
    (248
    )Total shareholders equity
    
    
    104,779
    
    
    
    100,255Total liabilities and shareholders equity
    
    $
    129,050
    
    
    $
    122,663
 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 Ended
    
    Six Months EndedOctober 31,
    
    October 31,2003
    
    2004
    
    2003
    
    2004Revenue:Net sales
    
    $
    7,111
    
    
    $
    18,181
    
    
    $
    13,682
    
    
    $
    39,204License fees and royalties
    
    
    113
    
    
    
    1,493
    
    
    
    619
    
    
    
    4,276Total
    
    
    7,224
    
    
    
    19,674
    
    
    
    14,301
    
    
    
    43,480Costs and expenses:Costs of sales
    
    
    8,020
    
    
    
    12,439
    
    
    
    15,498
    
    
    
    26,253Research and development
    
    
    1,807
    
    
    
    2,422
    
    
    
    4,697
    
    
    
    4,828Sales and marketing
    
    
    1,327
    
    
    
    2,610
    
    
    
    2,845
    
    
    
    5,419General and administrative
    
    
    3,775
    
    
    
    6,267
    
    
    
    6,473
    
    
    
    11,501Total costs and expenses
    
    
    14,929
    
    
    
    23,738
    
    
    
    29,513
    
    
    
    48,001Loss from operations
    
    
    (7,705
    )
    
    
    (4,064
    )
    
    
    (15,212
    )
    
    
    (4,521
    )Investment income, net
    
    
    184
    
    
    
    65
    
    
    
    423
    
    
    
    129Loss before income taxes
    
    
    (7,521
    )
    
    
    (3,999
    )
    
    
    (14,789
    )
    
    
    (4,392
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (7,521
    )
    
    
    (3,999
    )
    
    
    (14,789
    )
    
    
    (4,392
    )Preferred stock dividend requirements
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    (175
    )Net loss attributable to common shareholders
    
    $
    (7,521
    )
    
    $
    (4,087
    )
    
    $
    (14,789
    )
    
    $
    (4,567
    )Net loss per share attributable to common shareholders,
basic and diluted:Net loss
    
    $
    (1.02
    )
    
    $
    (0.30
    )
    
    $
    (2.00
    )
    
    $
    (0.33
    )Preferred stock dividend requirements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net loss per share attributable to common shareholders
    
    $
    (1.02
    )
    
    $
    (0.30
    )
    
    $
    (2.00
    )
    
    $
    (0.34
    )Weighted average number of common shares outstanding:Basic and diluted
    
    
    7,392
    
    
    
    13,549
    
    
    
    7,378
    
    
    
    13,542
 See notes to condensed consolidated financial statements. -2-




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STRATOS INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
 Six Months EndedOctober 31,2003
    
    2004Operating activities:Net loss
    
    $
    (14,789
    )
    
    $
    (4,392
    )Adjustments to reconcile net loss to net cash used in operating activities:Provision for depreciation and amortization
    
    
    2,584
    
    
    
    3,642Gain on sale of assets held for sale
    
    
    (1,305
    )
    
    
    Change in operating assets and liabilities
    
    
    2,784
    
    
    
    427Net cash used in operating activities
    
    
    (10,726
    )
    
    
    (323
    )Investing activities:Purchases of property, plant and equipment
    
    
    (1,815
    )
    
    
    (346
    )Purchases of short-term investments
    
    
    (28,503
    )
    
    
    (3,747
    )Sales of short-term investments
    
    
    13,679
    
    
    
    15,988Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    186Proceeds from sale of assets held for sale
    
    
    4,381
    
    
    
    1,450Net cash from (used in) investing activities
    
    
    (12,258
    )
    
    
    13,531Financing activities:Repayments on long-term borrowings
    
    
    (1,959
    )
    
    
    (1,265
    )Net proceeds from exercise of stock options
    
    
    138
    
    
    
    119Dividends on preferred stock
    
    
    
    
    
    
    (175
    )Treasury stock transactions
    
    
    (217
    )
    
    
    Net cash used in financing activities
    
    
    (2,038
    )
    
    
    (1,321
    )Net increase (decrease) in cash and cash equivalents
    
    
    (25,022
    )
    
    
    11,887Cash and cash equivalents at beginning of period
    
    
    43,649
    
    
    
    15,501Cash and cash equivalents at end of period
    
    $
    18,627
    
    
    $
    27,388
 See notes to condensed consolidated financial statements. -3-




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STRATOS INTERNATIONAL, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) October 31, 2004
(All amounts in thousands, except share and per share data)  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
and six month periods ended October 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 $7,517 and $4,384 for the second quarters of fiscal
2004 and 2005 and $14,870 and $4,777 for the six months ended October 31, 2003
and 2004.  2.
    
    Stock-Based Compensation In the first quarter of fiscal 2004, the Company adopted Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation.The provisions of SFAS No. 148 did not have a material impact on
the Companys financial position or results of operations. The Company will
continue to account for stock-based compensation plans using the intrinsic
value method described in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,and related interpretations. All
stock options granted by the Company are granted at market price and thus no
compensation expense is recorded in the Companys results of operations. Under
SFAS No. 148, the Company is required to report quarterly and year to date pro
forma net loss and loss per share as if the Company had accounted for its stock
options plans under the fair value method. The following table shows the
Companys pro forma net loss and loss per share as if the Company had recorded
the fair value of stock options as compensation expense. 4




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,(Dollars in thousands, except per
share amounts)
    
    2003
    
    2004
    
    2003
    
    2004Reported net loss attributable to common shareholders
    
    $
    (7,521
    )
    
    $
    (4,087
    )
    
    $
    (14,789
    )
    
    $
    (4,567
    )Stock-based compensation, net of tax
    
    
    (609
    )
    
    
    (213
    )
    
    
    (1,205
    )
    
    
    (483
    )Pro forma net loss
    
    
    (8,130
    )
    
    
    (4,300
    )
    
    
    (15,994
    )
    
    
    (5,050
    )Reported basic and diluted net loss per share
attributable to common shareholders
    
    
    (1.02
    )
    
    
    (0.30
    )
    
    
    (2.00
    )
    
    
    (0.34
    )Pro forma basic and diluted net loss per share
attributable to common shareholders
    
    
    (1.10
    )
    
    
    (0.32
    )
    
    
    (2.17
    )
    
    
    (0.37
    )
 No stock options were issued during the six months ended October 31, 2004.  3.
    
    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. These shares were released from escrow and distributed
after the end of the second quarter. 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. The primary reasons for the acquisition included Stratos desire to expand
the size of its business, Stratos belief that Sterlings electronic
interconnect operations would be a positive addition to Stratos existing
product lines, and Stratos goal of acquiring profitable operations.
Sterlings historical operating results, future operating forecasts and the
fair value of Sterlings assets less liabilities assumed, contributed to the
determination of the purchase price and the recognition of goodwill. 5




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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: Assets 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
 6




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Goodwill and other indefinite lived assets at October 31, 2004 and April
30, 2004 are comprised of goodwill of $3,410 and tradenames of $2,700 related
to the Sterling acquisition. Had the acquisition been made as of May 1, 2003, unaudited pro forma sales
and operating results are estimated to have been as follows: Pro formaStratos
    
    Sterling
    
    Adjustments
    
    ConsolidatedNet sales:Six months ended October 31, 2003
    
    $
    13,682
    
    
    $
    17,364
    
    
    $
    
    
    
    $
    31,046Net loss:Six months ended October 31, 2003
    
    
    (14,789
    )
    
    
    (4,579
    )
    
    
    (997
    )
    
    
    (20,365
    )Net loss per share, basic and diluted:Six months ended October 31, 2003
    
    
    (2.00
    )
    
    
    (0.63
    )
    
    
    (0.13
    )
    
    
    (2.76
    )
 The pro forma adjustments represent additional depreciation related to 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.  4.
    
    Intangible Assets Amortizable intangible assets were comprised of the following: October 31, 2004
    
    April 30, 2004Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    AccumulatedAmortizable Intangible
Assets
    
    Amount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    Net(in thousands)Customer relationships
    
    $
    10,800
    
    
    $
    864
    
    
    $
    9,936
    
    
    $
    10,800
    
    
    $
    432
    
    
    $
    10,368Patents and related technology
    
    
    4,085
    
    
    
    452
    
    
    
    3,633
    
    
    
    4,039
    
    
    
    325
    
    
    
    3,714Developed software
    
    
    700
    
    
    
    233
    
    
    
    467
    
    
    
    700
    
    
    
    117
    
    
    
    583Total amortized intangible
assets
    
    $
    15,585
    
    
    $
    1,549
    
    
    $
    14,036
    
    
    $
    15,539
    
    
    $
    874
    
    
    $
    14,665
 Amortization for intangible assets was $355 and $684 for the three and six
months ended October 31, 2004. Annual expense for intangible assets subject to
amortization is expected to approximate $1,500 for each of the next five years.  5.
    
    Restructuring Charges During prior fiscal years the Company recorded restructuring charges
related to the consolidation and elimination of various operating units. These
charges included excess and obsolete inventory, goodwill and fixed asset
impairment, personnel, rentals for limited use 7




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) facilities and legal costs related to the restructuring of operations.
The Company terminated 95 employees in fiscal 2004 during the restructuring of
operations, including both production and administrative personnel. Accruals relating to restructuring charges and the subsequent activity are
summarized as follows: Balance
    
    2005
    
    Utilized through
    
    BalanceApril 30, 2004
    
    Charges
    
    October 31, 2004
    
    October 31, 2004Employee costs
    
    $
    240
    
    
    $
    
    
    
    $
    101
    
    
    $
    139Limited-use facility rental
    
    
    738
    
    
    
    
    
    
    
    535
    
    
    
    203$
    978
    
    
    $
    
    
    
    $
    636
    
    
    $
    342
  6.
    
    Income Taxes The Company has recorded a valuation allowance of $65,200 against deferred
income tax assets primarily associated with tax loss carry forwards through
April 30, 2004 because the significant operating losses experienced in recent
years establishes a presumption that realization of these income tax benefits
does not meet a more likely than not standard. We have continued to
experience operating losses during the six months ended October 31, 2004, and
an additional valuation reserve of $1,600 was recorded, which eliminated the
tax benefit attributable to the net loss incurred in the first six months of
fiscal 2005. We have net operating loss carryforwards of approximately $165,000 that
are available to offset taxable income in the future. The net operating loss
carry forwards will expire in 2022 through 2025.  7.
    
    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 October 31, 2004, the
remaining principal payments totaling $1,766 are considered current because
such payments are due within one year of the balance sheet date. The note is supported by a letter of credit in the amount of $2,700 that
expires on August 1, 2005.  8.
    
    Assets Held For Sale Assets held for sale at October 31, 2004 represents real property and
machinery and equipment that is no longer in use and is being actively marketed
for sale. Management expects to complete these sales transactions within a
one-year period. The Company recorded a charge 8




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) of $619 in fiscal 2004 to adjust the carrying value of assets held for
sale to their estimated net realizable value. The Company used independent
appraisals or realtors letters of opinion of value to determine the estimated
net realizable value of assets held for sale.  9.
    
    Loss Per Share Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2003
    
    2004
    
    2003
    
    2004Numerator  net loss
attributable to common
shareholders
    
    $
    (7,521
    )
    
    $
    (4,087
    )
    
    $
    (14,789
    )
    
    $
    (4,567
    )Denominator:Denominator for basic and
diluted loss per share 
weighted-average shares
outstanding
    
    
    7,392
    
    
    
    13,549
    
    
    
    7,378
    
    
    
    13,542Basic and diluted loss per share
    
    $
    (1.02
    )
    
    $
    (0.30
    )
    
    $
    (2.00
    )
    
    $
    (0.34
    )
 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.  10.
    
    Sale of a Business Effective May 23, 2003, the Company sold the assets and business of its
wholly-owned subsidiary, Bandwith Semiconductor LLC, located in Hudson, New
Hampshire. The Company realized a net gain of approximately $1,200, which is
reflected as a reduction of general and administrative expenses in the
condensed consolidated statement of operations for the six months ended October
31, 2003.  11.
    
    Litigation 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 during the time of
the Companys IPO. 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. 9




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. The issuers filed a statement joining in the plaintiffs
motion for preliminary approval of the settlement. The underwriter defendants
have opposed the motion, and the court has not ruled on it. 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 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 also 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. Trial of this action commenced on December
1, 2004, and is expected to conclude in December 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. 10




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STRATOS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In March 2003, Alcatel USA filed suit against the Company and others,
seeking unspecified damages and alleging breach of contract, breach of
warranty, negligent misrepresentation, fraud and conspiracy in connection with
Alcatels purchase of certain goods from the defendants over a period spanning
2000 and 2001. 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. The Company is a plaintiff in a lawsuit relating to its intellectual
property rights against 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 and is seeking monetary damages and
injunctive relief. The defendant 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 the Companys
patents. If successful, the defendant is seeking attorneys fees and costs in
connection with the lawsuit. The Company intends 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. During the second quarter of fiscal year 2005 the Company settled a patent
infringement case and as a result of this settlement the Company received
approximately $1.4 million, which was recorded as license fees and royalties in
the consolidated statement of operations. 11




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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 the 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; and (xxv) impact on our
earnings of application of the purchase method of accounting in connection w
ith
the Sterling merger. Because forward-looking statements are subject to
assumptions and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Shareholders are
cautioned not to place undue reliance on such statements, which speak only as
of the date of this document or the date of any document incorporated by 12




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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. 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. These shares
were released from escrow and distributed after the end of the second quarter.
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 was 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. On November 5, 2004, the Company announced that James W. McGinley resigned
effective that date, as President and Chief Executive Officer and director of
the Company. In addition, the Company announced that Brian J. Jackman had
resigned as a director of the Company effective the same date. As a result,
the Board currently has seven members. 13




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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 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 14




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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 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 further enhance active and passive interconnection
technologies, and increase the Companys visibility as an industry expert. 15




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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. 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 16




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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, is recognized when a customer order is
established, the price is determined, title passes (which occurs upon shipment)
and collectibility is reasonably assured. On rare occasions, we may ship
products to a customer FOB destination and transfer of ownership occurs at the
customers place of business. Our product sales do not include any obligations
for installation, training or other post shipment obligations. We do not issue
any guarantees or provide warranties for our products. 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. Research and Development All expenses relative to the development of a new product, prior to its
introduction into production, are considered research and development expenses.
In addition, the costs of the engineering effort to do significant redesign to
enhance product performance that results essentially in a new product are also
considered to be research and development expenses. Because the true
manufacturability of our products is not obvious until a period of volume
production has occurred, initial production is considered a part of the
development process. During this phase, a portion of the scrap expense and
yield loss is considered development expense. A product continues to be
considered under development until it matures to the point where its production
yields (volumes) are consistent with other mature products and any related
engineering effort is predominately dedicated to customer applications and/or
quality support. 17




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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 Ended October 31,
    
    Change2004
    
    2003
    
    $
    
    %(dollars in millions)Revenue:Net sales
    
    $
    18,181
    
    
    
    100.0
    %
    
    $
    7,111
    
    
    
    100.0
    %
    
    $
    11,070
    
    
    
    155.7
    %License fees and royalties
    
    
    1,493
    
    
    
    8.2
    
    
    
    113
    
    
    
    1.6
    
    
    
    1,380
    
    
    
    1,221.2Total revenue
    
    
    19,674
    
    
    
    108.2
    
    
    
    7,224
    
    
    
    101.6
    
    
    
    12,450
    
    
    
    172.3Costs and expenses:Cost of sales
    
    
    12,439
    
    
    
    68.4
    
    
    
    8,020
    
    
    
    112.8
    
    
    
    4,419
    
    
    
    55.1Research and development
    
    
    2,422
    
    
    
    13.3
    
    
    
    1,807
    
    
    
    25.4
    
    
    
    615
    
    
    
    34.0Sales and marketing
    
    
    2,610
    
    
    
    14.4
    
    
    
    1,327
    
    
    
    18.7
    
    
    
    1,283
    
    
    
    96.7General and administrative
    
    
    6,267
    
    
    
    34.5
    
    
    
    3,775
    
    
    
    53.1
    
    
    
    2,492
    
    
    
    66.0Total costs and expenses
    
    
    23,738
    
    
    
    130.6
    
    
    
    14,929
    
    
    
    210.0
    
    
    
    8,809
    
    
    
    59.0Loss from operations
    
    
    (4,064
    )
    
    
    (22.4
    )
    
    
    (7,705
    )
    
    
    (108.4
    )
    
    
    3,641
    
    
    
    47.3Investment income, net
    
    
    65
    
    
    
    0.4
    
    
    
    184
    
    
    
    2.6
    
    
    
    (119
    )
    
    
    (64.7
    )Loss before income taxes
    
    
    (3,999
    )
    
    
    (22.0
    )
    
    
    (7,521
    )
    
    
    (105.8
    )
    
    
    3,522
    
    
    
    46.8Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (3,999
    )
    
    
    (22.0
    )%
    
    $
    (7,521
    )
    
    
    (105.8
    )%
    
    $
    3,522
    
    
    
    46.8
    %
 Three Months Ended October 31, 2004 and 2003 Net Sales.Net sales for the second quarter of fiscal 2005 increased to
$18.2 million from $7.1 million a year ago. Of the $11.1 million increase in
the second quarter, $6.0 million was from an increase in net sales to the
military/governmental end market, $2.2 million from an increase to the
telecom/metro end market, and $3.7 million is from an increase in net sales
to other end markets. These increases were offset in part by an $800,000
decrease in net sales in the data networking end market. Included in the
amounts above is $10.6 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 $488,000 (6.9%) in the three months ended October 31,
2004 over the comparable period last year. The increase in sales was due to an
increase in customer demand for our products in most of our end markets. On November 5, 2004 the Company announced that revenues for the three
months ended October 31, 2004 would be lower than expected, due to anticipated
returns of a specific product sold to one major customer. As a result of
certain quality problems experienced with the product, the Company decided to
accept the returns and rework the parts and the quality issue 18




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has been resolved to the customers satisfaction. Returns of $1.5 million
related to this matter were recorded in the three months ended October 31,
2004. However, the customer has identified additional source(s) for this
product and competition will likely create downward pricing pressure. License Fees and Royalties. License fees increased to $1.5 million in the
three months ended October 31, 2004 from $113,000 in the three months ended
October 31, 2003. This increase is primarily attributable to $1.4 million
of license fee income 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 $12.4 million
in the three months ended October 31, 2004 from $8.0 million in the three
months ended October 31, 2003. Gross margin as a percentage of net sales
improved to 31.6% in the three months ended October 31, 2004 from negative
12.8% in the three months ended October 31, 2003. Approximately, 13.6
percentage points of the 44.4% increase was due to the decrease in prime costs
and manufacturing costs, 22.6 percentage points was due to product lines
acquired in the merger with Sterling, and 9.2 percentage points was due to the
reduction in the charges for obsolete and slow moving inventory that were
recognized in the second quarter of fiscal 2004. These factors were offset by
1.0 percentage point for the reduction in sales of inventory previously
considered excess and fully reserved. Research and Development. Research and development expenses increased to
$2.4 million in the three months ended October 31, 2004 from $1.8 million in
the three months ended October 31, 2003. The increase of $600,000 was due
primarily to a $400,000 increase in costs of personnel dedicated to research
and development and $200,000 increase in material and overhead cost related to
major product development. The above amounts include $165,000 of research and
development expenses attributable to the product lines acquired from Sterling. Sales and Marketing. Sales and marketing expenses increased to $2.6
million in the three months ended October 31, 2004 from $1.3 million for the
three months ended October 31, 2003. This $1.3 million increase was due to
increases of $1.4 million in sales and marketing salaries, fringe benefits,
bonuses and commissions, offset by a decrease of $100,000 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 $6.3 million in the three months ended October 31, 2004 from $3.8 million in
the comparable period last year. This increase of $2.5 million resulted from
an increase of $600,000 in corporate salaries, fringe benefits and bonuses and
a $1.9 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. Investment Income, Net. Investment income, net of investment expense,
decreased to $65,000 in the three months ended October 31, 2004 from $184,000
in the three months ended October 31, 2003. Investment income consists of
earnings on the short-term investment of excess cash balances. The decrease of
this income in the three months ended October 31, 2004 19




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reflect less cash being invested on a short-term basis as well as lower
prevailing interest rates during the period. Income Taxes. The Company has recorded a valuation allowance of $65.4
million against deferred income tax assets primarily associated with tax loss
carry forwards through July 31, 2004 because the significant operating losses
experienced in recent years establishes a presumption that realization of these
income tax benefits does not meet a more likely than not standard. We have
continued to experience operating losses during the three months ended October
31, 2004, and an additional valuation allowance of $1.4 million was recorded,
which eliminated the tax benefit attributable to the net loss incurred in the
second quarter of fiscal 2005. Six Months Ended October 31, 2004 and 2003 Six Months Ended October 31,
    
    Change2004
    
    2003
    
    $
    
    %(dollars in millions)Revenue:Net sales
    
    $
    39,204
    
    
    
    100.0
    %
    
    $
    13,682
    
    
    
    100.0
    %
    
    $
    25,522
    
    
    
    186.5
    %License fees and royalties
    
    
    4,276
    
    
    
    10.9
    
    
    
    619
    
    
    
    4.5
    
    
    
    3,657
    
    
    
    590.8Total revenue
    
    
    43,480
    
    
    
    110.9
    
    
    
    14,301
    
    
    
    104.5
    
    
    
    29,179
    
    
    
    204.0Costs and expenses:Cost of sales
    
    
    26,253
    
    
    
    67.0
    
    
    
    15,498
    
    
    
    113.3
    
    
    
    10,755
    
    
    
    69.4Research and development
    
    
    4,828
    
    
    
    12.3
    
    
    
    4,697
    
    
    
    34.3
    
    
    
    131
    
    
    
    2.8Sales and marketing
    
    
    5,419
    
    
    
    13.8
    
    
    
    2,845
    
    
    
    20.8
    
    
    
    2,574
    
    
    
    90.5General and administrative
    
    
    11,501
    
    
    
    29.3
    
    
    
    6,473
    
    
    
    47.3
    
    
    
    5,028
    
    
    
    77.7Total costs and expenses
    
    
    48,001
    
    
    
    122.4
    
    
    
    29,513
    
    
    
    215.7
    
    
    
    18,488
    
    
    
    62.6Loss from operations
    
    
    (4,521
    )
    
    
    (11.5
    )
    
    
    (15,212
    )
    
    
    (111.2
    )
    
    
    10,691
    
    
    
    70.3Investment income, net
    
    
    129
    
    
    
    0.3
    
    
    
    423
    
    
    
    3.1
    
    
    
    (294
    )
    
    
    69.5Loss before income taxes
    
    
    (4,392
    )
    
    
    (11.2
    )
    
    
    (14,789
    )
    
    
    (108.1
    )
    
    
    10,397
    
    
    
    70.3Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (4,392
    )
    
    
    (11.2
    )%
    
    $
    (14,789
    )
    
    
    (108.1
    )%
    
    $
    10,397
    
    
    
    70.3
    %
 Net sales for the six month period ended October 31, 2004 increased $25.5
million over the same period a year ago to $39.2 million from $13.7 million.
The increase represents a $9.8 million increase in net sales to the
military/governmental end market, a $4.8 million increase in the net sales to
the telecom/metro end market, a $3.8 million increase in net sales to the data
networking end market, a $100,000 increase in the net sales into the storage
end market, and $7 million is from an increase in net sales to other end markets.
Included in the amounts above is $21.1 million in net sales from product lines
acquired in the merger with Sterling. Excluding the sales attributable to the product lines acquired from
Sterling, sales increased $4.4 million (32.1%) in the six months ended October
31, 2004 over the comparable period last year. The increase in sales was due
to an increase in customer demand for our products throughout our end markets.
Our total sales order backlog decreased to $12.3 million as of October 31, 2004
from $13.0 million as of April 30, 2004. Although we realized a slight 20




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decrease in our backlog since the end of fiscal 2004, we experienced an
increase in backlog in all our end markets over the comparable period in fiscal
2004. License Fees and Royalties. License fees increased to $4.3 million in the
six months ended October 31, 2004 from $619,000 in the six months ended October
31, 2003. This increase is primarily attributable to
$3.9 million of license fee income associated with the settlement of two patent
infringement cases. License fees consist of both fixed schedule payments and
contingent payments based on sales volumes of licensed products. Cost of Sales and Gross Margins. The gross margin increased to 33% for the
six months ended October 31, 2004 from negative 13.3% in the comparable period
last year. Approximately 15.8 percentage points of the 46.3% increase was due
to the decrease in prime costs and manufacturing costs, 21.6 percentage points
was due to product lines acquired in the merger with Sterling, 10.4 percentage
points was due to the reduction in the charges for obsolete and slow moving
inventory and 2.8 percentage points was due to reduction of the cost of
severance pay relating to restructuring of operations. These factors were
offset by 4.3 percentage points for the sale of inventory previously considered
excess and fully reserved. Cost of sales was increased approximately $140,000 and $1.5 million in the
six months ended October 31, 2004 and 2003, respectively, for obsolete and
excess inventory. Research and Development. Research and development expenses increased to
$4.8 million in the six months ended October 31, 2004 from $4.7 million in the
six months ended October 31, 2003. The increase of $100,000 was the result of
increases in personnel costs dedicated to research and development and in
material and overhead costs related to major product development. The above
amounts include $287,000 of research and development expenses attributable to
the product lines acquired from Sterling. Sales and Marketing. Sales and marketing expenses increased to $5.4
million in the six months ended October 31, 2004 from $2.8 million in the
comparable period last year. This $2.6 million increase was due to an increase
in sales and marketing salaries, fringe benefits, bonuses and commissions. The
above amounts include $2.8 million of sales and marketing expenses attributable
to the product lines acquired from Sterling. General and Administrative. General and administrative expenses increased
to $11.5 million in the six months ended October 31, 2004 from $6.5 million in
the comparable period last year. This $5 million increase was due to $500,000
in legal fees for the settlement of litigation as described in License Fees and
Royalties above, $1.2 million increase in salaries, fringe benefits and bonuses
and a $3.3 million increase in general expenses. The amounts above include
$2.3 million of general and administrative expenses attributable to the product
lines acquired from Sterling. Investment Income, Net. Investment income, net of investment expense,
decreased to $129,000 in the six months ended October 31, 2004 from $423,000 in
the comparable period last year. Investment income consists of earnings on the
short-term investment of excess cash balances, and the decreases of this income
in the six months ended October 31, 2004 reflect the reduction of excess cash
balances as well as lower prevailing interest rates during the period. 21




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Income Taxes. The Company has recorded a valuation allowance of $65.2
million against deferred income tax assets primarily associated with tax loss
carry forwards through April 30, 2004 because the significant operating losses
experienced in recent years establishes a presumption that realization of these
income tax benefits does not meet a more likely than not standard. We have
continued to experience operating losses during the six months ended October
31, 2004, and an additional valuation allowance of $1,600 was recorded, which
eliminated the tax benefit attributable to the net loss incurred in the first
six months of fiscal 2005. We have net operating loss carry forwards of approximately $165 million
that are available to offset taxable income in the future. The net operating
loss carry forwards will expire in 2022 through 2025. Liquidity and Capital Resources Net cash used in operating activities totaled $323,000 for the six months
ended October 31, 2004. The use of cash in operating activities resulted
primarily from a net loss, the decrease of accounts payable and accrued
expenses, and an increase in inventory, offset in part by a decrease in
accounts receivable. Net cash used in operating activities totaled $10.7
million for the six months ended October 31, 2003. The use of
cash in operating activities resulted primarily from a net loss
offset in part by decreases in accounts receivable and inventories
and increases in accounts payable and accrued expenses. 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
was 53 days at October 31, 2004 compared to 57 days at April 30, 2004. Net cash from investing activities totaled $13.5 million in the six months
ended October 31, 2004, including a $12.2 million decrease in short-term
investments, $200,000 in proceeds from the sale of fixed assets and $1.4
million of proceeds from the sale of assets held for sale, offset by $350,000
for the purchase of equipment and facilities. Net cash used in investing
activities totaled $12.3 million in the six months ended October 31, 2003,
including $1.8 million for the purchase of equipment and facilities, a $14.8
million increase in short-term investments, partially offset by $4.3 million of
proceeds from the sale of assets held for sale. Net cash used in financing activities was $1.3 million in the six months
ended October 31, 2004, including a $1.25 million repayment on borrowings and
$175,000 of dividends on preferred stock, offset in part by $120,000 of
proceeds from exercise of stock options. Net cash used in financing activities
was $2.0 million in the six months ended October 31, 2003, including a $2.0
million repayment on borrowings and $200,000 in treasury stock transactions,
offset in part by $200,000 of proceeds from exercise of stock options. As of October 31, 2004, our principal source of liquidity was
approximately $36.6 million in cash, cash equivalents and short-term
investments. Sterling provided $4.1 million of net positive cash flow during the six
months ended October 31, 2004. 22




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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
$1.8 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 ($350,000 annually). We also are obligated to redeem all shares of
Series B Preferred Stock in accordance with the terms of the Certificate of
Designation for such stock no later than 60 days following the occurrence of
certain events relating to the 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. The severe economic downturn in our markets during the past several years
may continue in the remainder of fiscal 2005, during which we may experience
significant decreases in net sales and incur net losses, offset to a certain
extent by net profits generated by 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. 23




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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
combined with superior customer service, provide the potential for improving
gross margins and cash flows. Off-Balance Sheet Arrangements We are not party to any transactions, arrangements and other relationships
with unconsolidated entities or other persons that are reasonably likely to
have a current or future material effect on our financial condition, results of
operations, liquidity, capital expenditures or capital resources. 
 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 six 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 Financial Officer and the two other Executive Vice Presidents,
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 Financial Officer and the two other Executive Vice Presidents
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. 24




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##### Table of Contents



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 during the time of
the Companys IPO. 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. The issuers filed a statement joining in the plaintiffs
motion for preliminary approval of the settlement. The underwriter defendants
have opposed the motion, and the court has not ruled on it. 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 25




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targets required to receive any earnout payments. The complaint also
alleged fraud and violations 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 also 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. Trial of this action commenced on December
1, 2004, and is expected to conclude in December 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 August 2004, Federal Insurance Company, issuer of the Directors and
Officers Insurance policy for the company, filed suit against the Company and
others in the United States District Court, Northern District of Illinois. The
Complaint for Declaratory Judgment has been filed to deny coverage to the
Company, under its Director and Officer policy, for the Lego and Campbell
lawsuits. The suit was filed in response to the Companys submission of a
claim for insurance coverage for the Lego and Campbell lawsuits and the tender
of defense costs to the insurer for reimbursement. Federal does not seek
damages from the Company and the Company disputes denial of the coverage. This
action is scheduled for trial in June 2005. In March 2003, Alcatel USA filed suit against the Company and others,
seeking unspecified damages and alleging breach of contract, breach of
warranty, negligent misrepresentation, fraud and conspiracy in connection with
Alcatels purchase of certain goods from the defendants over a period spanning
2000 and 2001. 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. The Company is a plaintiff in a lawsuit relating to its intellectual
property rights against 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 and is seeking monetary damages and
injunctive relief. The defendant has asserted an affirmative defense and 26




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##### Table of Contents



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 the Companys patents. If successful, the defendant is
seeking attorneys fees and costs in connection with the lawsuit. The Company
intends 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. During the second quarter of fiscal year 2005 the Company settled a patent
infringement case and as a result of this settlement the Company received
approximately $1.4 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 $135.2 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. 27




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##### Table of Contents



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 October 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 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,
 28




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##### Table of Contents



ExhibitNumber
    
    Description of DocumentInc. 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 Financial Officer*31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Executive Officer*31.3
    
    Rule 13a-14(a)/15d-14(a) Certification of Executive Officer*32.1
    
    Section 1350 Certification of Chief Financial Officer*32.2
    
    Section 1350 Certification of Executive Officer*32.3
    
    Section 1350 Certification of Executive 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 29




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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: December 14, 2004
    
    Stratos International, Inc.By:
    
    /s/ David A. SlackDavid A. SlackExecutive Vice President  Finance andChief Financial OfficerBy:
    
    /s/ Joe D. NorwoodJoe D. NorwoodExecutive Vice PresidentBy:
    
    /s/ Richard C.E. DurrantRichard C.E. DurrantExecutive Vice President
 30




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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
24,19/98 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 Financial Officer*31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Executive Officer*31.3
    
    Rule 13a-14(a)/15d-14(a) Certification of Executive Officer*32.1
    
    Section 1350 Certification of Chief Financial Officer*
 31




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##### Table of Contents



ExhibitNumber
    
    Description of Document32.2
    
    Section 1350 Certification of Executive Officer*32.3
    
    Section 1350 Certification of Executive 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. 32