e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-30869

STRATOS INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		36-4360035 (I.R.S. Employer Identification No.)

7444 West Wilson Avenue Chicago, Illinois 60706 (Address of Principal Executive Offices)		60706 (Zip Code)

(708) 867-9600
(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of February 24, 2006, there were 14,523,910 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

STRATOS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


	January 31,			April 30,
	2006			2005
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	13,776		$	13,276
Short-term investments		22,000			18,552
Accounts receivable, less allowance ($734 and $548)		11,984			12,926
Inventories
Finished products		2,614			2,341
Work in process		629			955
Materials		11,817			12,678

		15,060			15,974
Refundable income taxes		1,837			4,267
Prepaid expenses and other current assets		603			6,139

Total current assets		65,260			71,134

Other assets
Goodwill and other indefinite-lived assets		6,110			6,110
Intangible and other assets, net of amortization		12,424			13,462
Assets held for sale		2,864			2,936

		21,398			22,508

Property, plant and equipment		90,238			89,880
Less allowance for depreciation		72,585			68,542

		17,653			21,338


Total assets	$	104,311		$	114,980

Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	4,217		$	6,987
Other current liabilities		6,573			11,259
Current portion of long term-debt		—			815

Total current liabilities		10,790			19,061

Deferred income taxes		446			446
Series B redeemable preferred stock		5,000			5,000

Shareholders’ equity
Preferred stock, $0.01 par value: Authorized 5,000,000 shares; issued and outstanding 50,000 shares of Series B redeemable preferred stock at January 31, 2006 and April 30, 2005.		—			—
Common stock, $0.01 par value: Authorized 100,000,000 shares; issued and outstanding 14,562,641 and 14,559,348 shares at January 31, 2006 and April 30, 2005, respectively.		148			146
Cost of shares in treasury		(1,109	)		(259	)
Additional paid-in capital		321,162			320,410
Accumulated deficit		(228,968	)		(226,290	)
Unearned compensation		(3,378	)		(3,505	)
Accumulated other comprehensive income (loss)		220			(29	)


Total shareholders’ equity		88,075			90,473


Total liabilities and shareholders’ equity	$	104,311		$	114,980

See notes to condensed consolidated financial statements

STRATOS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)


	Three months ended						Nine months ended
	January 31,						January 31,
	2006			2005			2006			2005
Revenues:
Net sales	$	18,993		$	19,430		$	58,422		$	58,634
License fees and royalties		201			103			410			352

Total revenues		19,194			19,533			58,832			58,986

Cost of revenues		12,304			13,400			37,020			39,654

Gross profit		6,890			6,133			21,812			19,332

Operating expenses:
Research and development		2,299			2,382			6,142			7,210
Sales and marketing		2,389			2,443			7,471			7,861
General and administrative		3,921			6,301			11,787			17,643
Restructuring and other charges		359			4,275			842			4,275
Litigation settlements, net		(700	)		(63	)		(700	)		(4,090	)

Total operating expenses		8,268			15,338			25,542			32,899

Loss from operations		(1,378	)		(9,205	)		(3,730	)		(13,567	)
Investment income, net		340			173			887			302
Other income (expense)		16			467			397			307

Loss before income taxes		(1,022	)		(8,565	)		(2,446	)		(12,958	)
Income tax provision		41			—			32			—

Net loss		(981	)		(8,565	)		(2,414	)		(12,958	)

Preferred stock dividend requirements		(88	)		(88	)		(263	)		(263	)

Net loss attributable to common shareholders	$	(1,069	)	$	(8,653	)	$	(2,677	)	$	(13,221	)


Per share data, basic and diluted:
Net loss attributable to common shareholders	$	(0.08	)	$	(0.64	)	$	(0.19	)	$	(0.97	)


Weighted average number of common shares outstanding
Basic and diluted		13,876			13,559			13,901			13,670

See notes to condensed consolidated financial statements.

STRATOS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)


	Nine Months Ended
	January 31,
	2006			2005
Operating activities:
Net loss	$	(2,414	)	$	(12,958	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for depreciation		4,359			5,138
Provision for amortization of intangible assets		1,037			955
Provision for amortization of unearned compensation		702			491
Provision for losses on accounts receivable		186			—
Provision for obsolete and overstock inventory		602			—
(Gain) loss on sales of assets		(11	)		(47	)
Change in operating assets and liabilities:
Accounts receivable		756			768
Inventories		313			(477	)
Prepaid and other assets		7,967			863
Accounts payable and accrued expenses		(7,456	)		2,317

Net cash provided by (used in) operating activities		6,041			(2,950	)

Investing activities:
Purchases of property, plant and equipment		(696	)		(526	)
Purchases of short-term investments		(13,895	)		(6,747	)
Sales of short-term investments		10,447			18,788
Proceeds from sale of assets		47			214
Proceeds from sale of assets held for sale		58			1,453

Net cash (used in) provided by investing activities		(4,039	)		13,182

Financing activities:
Repayments on long-term borrowings		(815	)		(1,573	)
Dividends on preferred stock		(263	)		(263	)
Purchase of shares for treasury		(850	)		—
Net proceeds from exercise of stock options		177			119

Net cash used in financing activities		(1,751	)		(1,717	)

Effect of exchange rates on cash		249			(307	)


Net increase in cash and cash equivalents		500			8,208
Cash and cash equivalents at beginning of period		13,276			15,501

Cash and cash equivalents at end of period	$	13,776		$	23,709

See notes to condensed consolidated financial statements.

STRATOS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except 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 our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended January 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2006. 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, 2005 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

2. Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154 Accounting for Changes and Error Corrections. The pronouncement significantly changes the requirements for accounting and reporting a change in accounting principal. It replaces APB-20 and FAS-3 and applies to all voluntary changes in accounting principal as well as changes required by an accounting pronouncement when that pronouncement does not specify a transition method. The effective date of FAS 154 is for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We believe that we are in compliance with all accounting changes and there are no corrections of errors needed.

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

STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)

In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs, and spoilage, be charged to expense in the period they are incurred rather than capitalized as a component of inventory costs. SFAS No. 151 is effective for inventory costs incurred in fiscal periods beginning after June 15, 2005. The adoption of this standard may result in higher costs in periods where production levels are lower than normal ranges of production. Because actual future production levels are subject to many factors, including demand for our products, we cannot presently determine if the adoption of SFAS No. 151 will have a material impact on future results of operations.

3. Stock-Based Compensation

In the first quarter of fiscal 2004, we adopted Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation. The provisions of SFAS No. 148 did not have a material impact on our financial position or results of operations. We 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 are granted at market price and thus no compensation expense is recorded in our results of operations. Under SFAS No. 148, we are required to report quarterly and year to date pro forma net loss and loss per share as if we had accounted for stock options plans under the fair value method. The following table shows the pro forma net loss and loss per share as if we had recorded the fair value of stock options as


	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2006			2005			2006			2005

Net loss attributable to common shareholders, as reported	$	(1,069	)	$	(8,653	)	$	(2,677	)	$	(13,221	)
Add: Total stock based compensation recognized under intrinsic method for all awards		293			—			702			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(374	)		(104	)		(953	)		(587	)

Pro forma net loss attributable to common shareholders	$	(1,150	)	$	(8,757	)	$	(2,928	)	$	(13,808	)

Reported basic and diluted net loss per share attributable to common shareholders	$	(0.08	)	$	(0.64	)	$	(0.19	)	$	(0.97	)
Pro forma basic and diluted net loss per share attributable to common shareholders	$	(0.08	)	$	(0.65	)	$	(0.21	)	$	(1.01	)
Shares outstanding, basic and diluted		13,876			13,559			13,901			13,670

compensation expense:

No stock options were issued during the nine months ended January 31, 2006 and 2005.

STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)

4. Loss Per Share


	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2006			2005			2006			2005
Net loss attributable to common shareholders	$	(1,069	)	$	(8,653	)	$	(2,677	)	$	(13,221	)


Weighted average number of shares outstanding, basic and diluted		13,876			13,559			13,901			13,670


Basic and diluted loss per share	$	(0.08	)	$	(0.64	)	$	(0.19	)	$	(0.97	)

The effect of outstanding stock options and unvested restricted stock awards have not been considered in the determination of diluted weighted average shares outstanding because their effect would be antidilutive.

5. Intangible Assets

Amortizable intangible assets were comprised of the following:


	January 31, 2006							April 30, 2005
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated					Useful
Amortizable Intangible Assets	Amount		Amortization			Net		Amount		Amortization			Net		Lives
Customer relationships	$	10,800	$	(1,967	)	$	8,833	$	10,800	$	(1,296	)	$	9,504	12.50 years
Patents and related technology		4,466		(1,073	)	$	3,393		4,466		(951	)		3,515	14.25 years
Developed software		700		(502	)		198		700		(257	)		443	3.00 years

Total amortized intangible assets	$	15,966	$	(3,542	)	$	12,424	$	15,966	$	(2,504	)	$	13,462


	Fiscal Year
	2006			2007			2008			2009			2010			Thereafter

Amortization amount	$	(1,311	)	$	(1,311	)	$	(1,311	)	$	(1,194	)	$	(1,171	)	$	(7,164	)

Amortization for intangible assets was $0.3 million and $1.0 million for the three and nine months ended January 31, 2006.

STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)

6. Assets Held For Sale

Assets held for sale at January 31, 2006 are comprised of real property and machinery and equipment that are no longer in use. We are actively marketing those assets for sale, and we expect to sell those assets within a one-year period. We used independent appraisals or realtors’ letters of opinion of value to determine the estimated net realizable value of assets held for sale. During the nine-month period in fiscal 2006 and fiscal 2005 we received $0.1 million and $1.5 million respectively in cash for the sale of assets held for sale.

7. Restructuring Charges

During the current and prior fiscal years, we recorded restructuring charges related to the consolidation and elimination of various operating units. These charges included excess and obsolete inventory write downs, charges for goodwill and fixed asset impairment, personnel expenses, lease expenses for limited-use facilities, and legal costs related to the restructuring of operations.

Accruals relating to restructuring charges and the subsequent activities are summarized as follows:


	Balance		2006		Utilized through			Balance
	April 30, 2005		Charges		January 31, 2006			January 31, 2006

Employee costs	$	277	$	626	$	(532	)	$	371
Legal and Other		—		215		(215	)		—
Idle facility rental		1,799		—		(647	)		1,152

Total	$	2,076	$	841	$	(1,394	)	$	1,523

8. Income Taxes

Through January 31, 2006, we have recorded a valuation allowance of $79.7 million against deferred income tax assets primarily associated with tax loss carry forwards. Our significant operating losses experienced in recent years establishes a presumption that realization of these income tax benefits does not meet a “more likely than not” standard.

We have net operating loss carryforwards of approximately $176.6 million. We believe that our acquisition of Sterling Holding Company in November 2003 triggered Internal Revenue Code Section 382 limitations on the net operating loss that existed prior to the acquisition, which

STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)

was approximately $132.5 million. Of that amount, we believe the available utilization of the net operating loss is limited to approximately $2.0 million on an annual basis. The net operating loss carry forwards will expire between 2022 and 2026.

9. Long-Term Debt

During the quarter ended October 31, 2005, the remaining principal balance of the Company’s debt ($0.4 million) was paid in full. The debt had consisted 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.

10. Other Current Liabilities

Other current liabilities consist of accrued expenses, and are detailed as follows:


	January 31,		April 30,
	2006		2005

Employee costs	$	2,499	$	2,598
Rent for limited-use facilities		1,152		1,799
Other current liabilities		860		663
Commissions		780		1,037
Legal fees, litigation and claims		672		4,352
Real estate and other taxes		361		386
Inventory received, not vouchered		249		424

Total	$	6,573	$	11,259

11. Litigation

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

STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)

public during the time of Stratos’ IPO. The complaints generally allege, among other things, that the registration statement and prospectus from our June 26, 2000 initial public offering failed to disclose certain alleged actions by the underwriters for the offering. The complaints charge Stratos and several of our former 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, we agreed to a Memorandum and Understanding, which reflects a settlement of these class actions as between the purported class action plaintiffs, Stratos and the former officers and directors, and our liability insurers. Under the terms of the Memorandum of Understanding, our liability insurers will pay certain sums to the plaintiffs, with the amount dependent upon the plaintiffs’ recovery from the underwriters in the IPO class actions as a whole. The plaintiffs will dismiss with prejudice their claims against Stratos and our former officers and directors, and Stratos will assign to the plaintiffs certain claims that it may have against the underwriters. The plaintiffs filed with the court a motion for preliminary approval of the settlement, which, when granted, would lead to the mailing of class-wide notices of the settlement and a hearing date for approval of the settlement. The issuers, including Stratos, filed a statement joining in the plaintiffs’ motion for preliminary approval of the settlement. The underwriter defendants opposed the motion. On February 15, 2005, the Court issued its ruling granting the plaintiffs’ motion for preliminary approval of the settlement with the issuers, subject to certain changes to the bar order to be included as part of the settlement and to the notice to the class, and the Court recently approved the revisions made to the settlement and the notice pursuant to its prior order. The settlement still remains subject to final approval by the Court after notice of the settlement is sent to the class and the class members and other parties have an opportunity to have their objections, if any, to the settlement heard at the final fairness hearing, which the Court has scheduled for April 24, 2006.

In February 2002, we 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 Stratos alleging, among other things, that Stratos breached the acquisition agreement by refusing to allow Tsunami to operate as a separate subsidiary, firing the Tsunami executives that were necessary to operate the business, and thereby making it impossible for Tsunami to achieve the targets required to receive any earn-out payments. The complaint also alleged fraud and violations of federal securities laws in connection with the acquisition of Tsunami. Plaintiffs sought $38 million in damages or the rescission of the acquisition agreement. Stratos filed a counterclaim against Ms. Lego and several other shareholders and officers of Tsunami which alleged fraud, breach of contract and violations of federal securities laws. The counterclaim sought compensatory and punitive damages.

STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)

In April 2004, the Court entered an order in favor of Stratos to dismiss with prejudice 11 of 13 counts of the plaintiffs’ complaint. The damages sought for the plaintiffs’ two remaining claims (breach of contract and rescission) remained unchanged at $38 million. A trial of this action was held in December 2004 in the United States District Court, Northern District of California. On February 16, 2005, the Court entered judgment in Stratos’ favor on both of plaintiffs’ two remaining claims. The Court entered judgment against Stratos on its counterclaim against the plaintiffs. The plaintiffs filed a timely notice of appeal of the trial court’s judgment in Stratos’ favor on plaintiffs’ claims for breach of contract and rescission, and of the trial court’s earlier dismissal of plaintiffs’ other claims including federal securities fraud claims. Stratos did not appeal the trial court’s judgment in plaintiffs’ favor on Stratos’ counterclaims. In August 2005, the plaintiffs agreed to dismiss their appeal. A stipulation of dismissal was filed with the appellate court on August 31, 2005. The court granted the stipulation to dismiss the appeal with prejudice on September 7, 2005.

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

In August 2004, Federal Insurance Company, issuer of the Directors’ and Officers’ Insurance policy for Stratos, filed suit against Stratos and others in the United States District Court, Northern District of Illinois. The Complaint for Declaratory Judgment has been filed to deny coverage to Stratos, under our Director and Officer policy, for the Lego and Campbell lawsuits. The suit was filed in response to Stratos’ 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 did not seek damages from Stratos and Stratos disputes denial of the coverage. In June 2005 the court determined that Federal is not responsible for the claim for insurance coverage nor the reimbursement of the defense costs. The Company filed an appeal of the ruling. In November 2005, the lawsuit was settled in favor of the Company as disclosed in the Company’s results for the third quarter fiscal year 2006.

During the first quarter of fiscal 2006, Stratos settled two patent infringement suits with Picolight, Inc. The cases were pending in the U.S. District Court for the District of Delaware and were dismissed with prejudice on June 10, 2005.

During the first quarter of fiscal 2006, Stratos received a lump sum of $5.5 million from the settlement of litigation in fiscal 2003. The present value of this amount had been recorded as litigation settlements in the fiscal 2003 Consolidated Statement of Operations. In addition, Stratos paid $1.8 million in the first quarter of fiscal 2006 in settlement of two cases. This amount was recorded as litigation settlements in the fiscal 2005 Consolidated Statement of Operations.

STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)

12. Subsequent Events

On February 23, 2006 Stratos entered into a redemption agreement with Citicorp Venture Capital, LTD. to repurchase from CVC all of the 30,210 shares of Stratos Series B Preferred Stock held by CVC for a negotiated price of $128.11 per share, or $3,870,273.31 in the aggregate (inclusive of dividends accrued and unpaid through the closing date). Stratos and CVC closed the repurchase transaction pursuant to the terms of the Agreement on February 23, 2006. Prior to the repurchase, CVC held 60.4% of the issued and outstanding Series B Preferred Stock.

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

Overview

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

Our company has a rich history of optical, electrical, and mechanical packaging expertise and has had a continuing positive role in developing innovative products often involving miniaturization. We have an intellectual property portfolio of more than 100 patents. We are a market leader in several niches including specialty optical products such as small form factor transceivers, coax/optical media interface adapters, optical flex circuits, microwave flexible cables and cable assemblies, and radio frequency (“RF”) and microwave coax and triax interconnect products. We currently serve more than 1,000 active repeat customers.

Results of Operations

Three Months Ended January 31, 2006 and 2005

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated (in thousands, except percentages):


	Three Months Ended
	January 31,
	2006						2005						Change
	Dollars			%			Dollars			%			Dollars			%

Revenues:
Net sales	$	18,993			99.0	%	$	19,430			99.5	%	$	(437	)		(2.2	%)
License fees and royalties		201			1.0	%		103			0.5	%		98			95.1	%

Total revenues		19,194			100.0	%		19,533			100.0	%		(339	)		(1.7	%)

Costs of revenues		12,304			64.1	%		13,400			68.6	%		(1,096	)		(8.2	%)

Gross profit		6,890			35.9	%		6,133			31.4	%		757			12.3	%

Operating expenses:
Research and development		2,299			12.0	%		2,382			12.2	%		(83	)		(3.5	%)
Sales and marketing		2,389			12.4	%		2,443			12.5	%		(54	)		(2.2	%)
General and administrative		3,921			20.4	%		6,301			32.3	%		(2,380	)		(37.8	%)
Restructuring and other charges		359			1.9	%		4,275			21.9	%		(3,916	)
Litigation settlements, net		(700	)		-3.6	%		(63	)		(0.3	%)		(637	)		1011.1	%

Total operating expenses		8,268			43.1	%		15,338			78.5	%		(7,070	)		(46.1	%)


Loss from operations		(1,378	)		(7.2	%)		(9,205	)		(47.1	%)		7,827			(85.0	%)

Investment income, net		340			1.8	%		173			0.9	%		167			96.5	%
Other income (expense)		16			0.1	%		467			2.4	%		(451	)		(96.6	%)

Loss before income taxes		(1,022	)		(5.3	%)		(8,565	)		(43.8	%)		7,543			(88.1	%)
Provision for income taxes		41			0.2	%		—			0.0	%		41			0.0	%

Net loss	$	(981	)		(5.1	%)	$	(8,565	)		(43.8	%)	$	7,584			(88.5	%)

Net Sales: Net sales for the third quarter of fiscal 2006 decreased to $19.0 million from $19.4 million in the comparable period last year. The $0.4 million decrease in the third quarter was caused by a $0.7 million decrease in net sales to the data networking end market and a $1.4 million decrease to the storage/enterprise end market, partially offset by a $0.9 million increase in net sales to the military/government end market and a $0.8 million increase in net sales to telecom/metro end markets.

License Fees and Royalties: License fees increased to $0.2 million in the three months ended January 31, 2006 from $0.1 million in the comparable period last year. License fees consist of payments contingent upon sales volumes of licensed products.

Backlog: Our total sales order backlog increased to $12.7 million as of January 31, 2006 from $11.5 million as of April 30, 2005.

Cost of Revenues and Gross Margins: Cost of revenues decreased to $12.3 million in the three months ended January 31, 2006 from $13.4 million in the comparable period last year. Gross margin as a percentage of total revenues increased to 35.9% in the three months ended January 31, 2006 from 31.4% in the comparable period last year. The increase in sales of higher profit margin products and the reduction in fixed overhead and other manufacturing costs as a result of restructuring activities, both had a positive effect on the gross margin in the quarter

ended January 31, 2006. Sales of $0.1 million in inventory that was previously considered excess and fully reserved also contributed to the increase in gross margin in the third quarter of fiscal 2006.

Research and Development. Research and development expenses decreased to $2.3 million in the three months ended January 31, 2006 from $2.4 million in the comparable period last year. The $0.1 million decrease was due to a $0.4 million decrease in research and development salaries and fringe benefits offset in part by a $0.3 million increase in the material costs related to major product development.

Research and development is an ongoing activity in our business, and we anticipate continued investment in R&D programs in the future. We cannot be certain that those activities will result in future products to generate revenues.

Sales and Marketing. Sales and marketing expenses of $2.4 million in the three months ended January 31, 2006 were unchanged from the comparable period last year. Sales and marketing salaries and fringe benefits decreased by $0.1 million, offset by a $0.1 million increase in other selling expenses.

General and Administrative. General and administrative expenses decreased to $3.9 million in the three months ended January 31, 2006 from $6.3 million in the comparable period last year. The $2.4 million decrease was due to reductions of $1.7 million in legal and professional fees, $0.5 million in general expenses and $0.2 million in salaries, fringe benefits and bonuses.

Restructuring and Other Charges. During the three months ended January 31, 2006, we recorded $0.4 million in restructuring charges representing personnel severance expenses and other expenses related to the closing of a corporate office in Westlake Village, California. Restructuring charges in the comparable period last year were $4.3 million including $2.5 million for employee costs and $1.8 million for idle facility costs.

Litigation Settlements, net. The litigation settlements of $0.7 million in the three months ended January 31, 2006 represent a reimbursement from our insurance company of legal fees previously paid.

Investment income, net: Investment income, net of investment expense, increased to $0.3 million in the three months ended January 31, 2006 from $0.2 million in the comparable period last year. Investment income consists of earnings on the short-term investment of excess cash balances. The increase of this income in the three months ended January 31, 2006 reflects higher prevailing interest rates during the period.

Other income (expense): Other income of $0.4 million in the three months ended January 31, 2005 consists of $0.4 million relating to unrealized foreign exchange gains on inter-company loans recorded in our operations in the United Kingdom.

Income Taxes: The Company has recorded a valuation allowance of $79.7 million against deferred income tax assets primarily associated with tax loss carry forwards through January 31, 2006. 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.

Nine Months Ended January 31, 2006 and 2005

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated (in thousands, except percentages):


	Nine Months Ended
	January 31,
	2006						2005						Change
	Dollars			%			Dollars			%			Dollars			%

Revenues:
Net sales	$	58,422			99.3	%	$	58,634			99.4	%	$	(212	)		(0.4	%)
License fees and royalties		410			0.7	%		352			0.6	%		58			16.5	%

Total revenues		58,832			100.0	%		58,986			100.0	%		(154	)		(0.3	%)

Costs of revenues		37,020			62.9	%		39,654			67.2	%		(2,634	)		(6.6	%)

Gross profit		21,812			37.1	%		19,332			32.8	%		2,480			12.8	%

Operating expenses:
Research and development		6,142			10.4	%		7,210			12.2	%		(1,068	)		(14.8	%)
Sales and marketing		7,471			12.7	%		7,861			13.3	%		(390	)		(5.0	%)
General and administrative		11,787			20.0	%		17,643			29.9	%		(5,856	)		(33.2	%)
Restructuring and other charges		842			1.4	%		4,275			7.2	%		(3,433	)
Litigation settlements, net		(700	)		-1.2	%		(4,090	)		(6.9	%)		3,390			(82.9	%)

Total operating expenses		25,542			43.4	%		32,899			55.8	%		(7,357	)		(22.4	%)


Loss from operations		(3,730	)		(6.3	%)		(13,567	)		(23.0	%)		9,837			(72.5	%)

Investment income, net		887			1.5	%		302			0.5	%		585			193.7	%
Other income (expense)		397			0.7	%		307			0.5	%		90			29.3	%

Loss before income taxes		(2,446	)		(4.2	%)		(12,958	)		(22.0	%)		10,512			(81.1	%)
Provision for income taxes		32			0.1	%		—			0.0	%		32			0.0	%

Net loss	$	(2,414	)		(4.1	%)	$	(12,958	)		(22.0	%)	$	10,544			(81.4	%)

Net sales: Net sales for the nine months ended January 31, 2006 decreased to $58.4 million from $58.6 in the comparable period last year. The decrease in sales was due to a decrease of $2.8 million in net sales to the storage/enterprise end market and a decrease of $1.5 million in net sales to the telecom/metro end market, offset in part by a $3.2 million increase in net sales to the data networking end market and a $0.9 million increase in net sales to the military/governmental end market.

License Fees and Royalties. License fees remained constant at $0.4 million in the nine months ended January 31, 2006 in relation to the comparable period last year. License fees consist of payments contingent upon sales volumes of licensed products.

Backlog: Our total sales order backlog increased to $12.7 million as of January 31, 2006 from $11.5 million as of April 30, 2005.

Cost of Sales and Gross Margins. Gross profit increased to $21.8 million for the nine months ended January 31, 2006 from $19.3 million in the comparable period last year. Gross margin as a percent of total revenues increased to 37.1% in the nine months ended January 31, 2006 from 32.8% in the comparable period last year. Both the increase in sales of higher profit margin products and the reduction in fixed overhead and other manufacturing costs as a result of restructuring activities had a positive effect on the gross margin in the nine months ended January 31, 2006. Sales of $0.4 million in inventory that was previously considered excess and fully reserved also contributed to the increase in gross margin in the first nine months of fiscal 2006. An increase of $1.0 million in the provision for obsolete and slow moving inventory in the nine months ended January 31, 2006 over the prior year offset in part these increases in gross margins.

Research and Development. Research and development expenses decreased to $6.1 million in the nine months ended January 31, 2006 from $7.2 million in the comparable period last year. The $1.1 million decrease was due to a $1.0 million decrease in research and development salaries and fringe benefits and a $0.1 million decrease in the material costs related to major product development.

Sales and Marketing. Sales and marketing expenses decreased to $7.5 million in the nine months ended January 31, 2006 from $7.9 million in the comparable period last year. The $0.4 million decrease was due to a $0.4 million decrease in sales and marketing salaries and fringe benefits.

General and Administrative. General and administrative expenses decreased to $11.8 million in the nine months ended January 31, 2006 from $17.6 million in the comparable period last year. The $5.8 million decrease was due to a $3.7 million reduction in legal and professional fees, $1.3 million reduction in corporate salaries, fringe benefits and bonuses, and a reduction of $0.8 million in general expenses.

Restructuring and Other Charges. During the nine months ended January 31, 2006, we recorded $0.8 million in restructuring and other charges related to the consolidation and elimination of various activities, which represented personnel severance expenses and other expenses. Restructuring charges in the comparable period last year were $4.3 million including $2.5 million for employee costs and $1.8 million for idle facility costs.

Litigation settlements, net: Litigation settlements of $0.7 million in the nine months ended January 31, 2006 represent a reimbursement from our insurance company of legal fees previously paid. Litigation settlements of $4.1 million in the comparable period last year represent lump sum license payments received associated with the settlement of several patent infringement cases.

Investment Income, net. Investment income net of investment expense, increased to $0.9 million in the nine months ended January 31, 2006 from $0.3 million in the comparable period

last year. Investment income consists of earnings on the short-term investment of excess cash balances. The increase in the nine months ended January 31, 2006 reflects higher prevailing interest rates during the period and an increase in liquidity available for investment.

Other income (expense): Other income of $0.4 million in the nine months ended January 31, 2006 principally consists of $0.8 million relating to the resolution and reversal of prior period accruals, $0.3 million of other non-operating income offset partially by $0.7 million of unrealized foreign exchange losses on inter-company loans recorded in our operations in the United Kingdom. Other income of $0.3 million in the comparable period consists of $0.3 million relating to unrealized foreign exchange gains on inter-company loans recorded in our operations in the United Kingdom.

Income Taxes. The Company has recorded a valuation allowance of $79.8 million against deferred income tax assets primarily associated with tax loss carry forwards through January 31, 2006. 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.

Liquidity and Capital Resources

Net cash provided by operating activities totaled $6.0 million for the nine months ended January 31, 2006. The net cash provided by operating activities primarily resulted from the receipt of $5.5 million from the settlement of litigation recorded as litigation settlements in fiscal 2003, partially offset by the payment of $1.8 million in settlement of two cases which were recorded as litigation settlements in fiscal 2005. In addition, the net cash provided by operations was adversely affected by the decrease in accounts payable and accrued expenses offset partially by positive earnings before depreciation and amortization and the decrease in the levels of accounts receivable and inventory. Net cash used in operating activities totaled $3.0 million for the nine months ended January 31, 2005. The use of cash in operating activities resulted primarily from a net loss and the increase of inventory, offset in part by the increase in accounts payable and accrued expenses and a decrease in accounts receivable and prepaid 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 57 days at January 31, 2006 compared to 58 days at April 30, 2005.

Net cash used in investing activities totaled $4.0 million in the nine months ended January 31, 2006, including a $3.4 million net increase in short-term investments and $0.7 million for the purchase of equipment. Net cash from investing activities totaled $13.2 million in the nine months ended January 31, 2005, including a $12.0 million decrease in short-term investments, $0.2 million in proceeds from the sale of fixed assets and $1.5 million of proceeds from the sale of assets held for sale, offset by $0.5 million for the purchase of equipment and facilities.

Net cash used in financing activities was $1.8 million in the nine months ended January 31, 2006. This amount consisted of a $0.8 million repayment of borrowings, $0.9 million

purchase of shares for the treasury and $0.3 million of dividend payments on preferred stock, offset in part by $0.2 million of proceeds from stock option exercises. In the nine months ended January 31, 2005, net cash used in financing activities was $1.7 million, including a $1.6 million repayment on borrowings and $0.3 million of dividend payments on preferred stock, offset in part by $0.1 million of proceeds from stock option exercises.

As of January 31, 2006, our principal source of liquidity was approximately $35.8 million in cash, cash equivalents and short-term investments.

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 or reducing costs and operating expenses if we are to achieve and maintain profitability. If our efforts to increase our revenues and contain or reduce our costs are not successful, we will continue to incur net losses. We are also examining and pursuing opportunities for improving gross margins and cash flows. The merger with Sterling combined two companies 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 our products. We believe that these products, when combined with superior customer service, provide the potential for improving gross margins and cash flows.

Accordingly, we are examining the requirements of our customers and the broader potential customer base where our core competencies could provide value to customers in an enduring and profitable way with new products. We are also focused on improving customer service through better execution of delivery, support and cycle time, particularly for specialty products to those customers who value and will pay for this service. We believe we are moving forward to create a customer-responsive organization that executes as demanded to supply innovative high quality products that are useful to our customers’ needs. There is no assurance that these efforts will be successful.

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 us to seek equity or debt financing. Our only cash commitment is the payment of cumulative cash dividends on the Series B Preferred Stock in the amount of approximately $0.4 million annually. Also, we are obligated to redeem all shares of Series B Preferred Stock in accordance with the terms of the Certificate of Designation for such stock no later than 60 days following the occurrence of certain events relating to the achievement of $250 million in annual revenue or $500 million in market capitalization. In addition, in the event of a change of control, the Series B Preferred Stock becomes redeemable for an aggregate of $5.0 million, subject to upward adjustment under certain circumstances relating to market price of our Common Stock. On February 23, 2006 we repurchased 30,210 shares of the Series B Preferred Stock for a negotiated price of $128.11 per share, or $3,870,273.31 in the aggregate (inclusive of

dividends accrued and unpaid through the closing date), which represented 60.4% of the issued and outstanding Series B Preferred Stock prior to the repurchase.

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

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, or capital resources. We have no exposures to off-balance sheet arrangements; no special purpose entities; and no activities that include non-exchange-traded contracts accounted for at fair value.

Critical Accounting Policies

The preparation of this Quarterly Report requires management’s judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Our significant accounting policies are described in our Form 10-K for the year ended April 30, 2005. There have been no significant changes to those accounting policies subsequent to that filing.

Forward-looking statements

You should read the discussions in this report together with our consolidated financial statements and notes to those financial statements, which are included in this report. This report contains forward-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 in the communications industry and its effect on our business; (ii) the long-term growth of the communications, aerospace, and military industries; (iii) our ability to adapt to changing technologies; (iv) our ability to develop and market new products and technology and to make enhancements to existing products and technology on a successful and timely basis; (v) our and our customers’ ability to comply with evolving domestic and international government regulations; (vi) expenditures associated with redesigning products to comply with evolving industry standards or alternative technologies that become the industry standard; (vii) our dependence on sales to the communications and military/aerospace industries; (viii) our ability

to develop and manage relationships with large customers that comprise, and will comprise, a significant percentage of our net sales; (ix) the length of sales cycles, which vary by product and customer, and the effect that this length has on net sales and operating expenses; (x) the lack of long-term customer contracts and its effect on customers’ ability to reduce, cancel and defer orders on short notice without significant penalty; (xi) the effect on gross margins of an inability to reduce manufacturing costs or increase sales of higher margin products; (xii) the impact of competitive products and competitive pricing pressure; (xiii) our reliance on a limited number of suppliers and the effect of underestimating or overestimating the need for certain supplies; (xiv) our ability to attract and retain qualified personnel; (xv) the effect of defects in our products; (xvi) the effect of compliance with environmental laws and other legal requirements; (xvii) the effect of economic, political and regulatory risks associated with international operations, including acts of terrorism directed against the United States or U.S. affiliated targets; (xviii) our ability to complete and integrate acquisitions, strategic alliances and joint ventures, including our ability to complete the integration of Stratos and Sterling Holding Company; (xix) our ability to secure and defend intellectual property rights and, when appropriate, license required technology; (xx) adverse outcomes of pending, threatened or future litigation, including suits related to intellectual property matters; (xxi) volatile market prices for securities of technology-related companies; (xxii) the effect of provisions in our organizational documents and Delaware law that may delay or prevent the acquisition of Stratos or may decrease the value of Stratos common stock; and (xxiii) our ability to meet management, analyst and investor expectations. Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Shareholders are cautioned not to place undue reliance on such statements, which speak only as of the date of this document or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements concerning the matters addressed in this document and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, we undertake no obligation to release publicly any revisions or updates to such forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

Please read the risk factors included in Item 1A of Part II of 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 financial outlook.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to certain market risks, including foreign currency fluctuations and interest rates. Although our Stratos U.K. subsidiary enters into transactions in currencies other than its functional currency, the Pound Sterling, foreign currency exposures arising from these transactions are not material to us. The primary foreign currency exposure arises from the translation of our net equity investment in our foreign subsidiary to U.S. Dollars. We generally view our investment in our foreign subsidiary as long-term. The primary currency to which we are exposed is the Pound Sterling.

Item 4. Controls and Procedures.

As of the end of the period covered by this report on Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet, and management believes that they meet, reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, subject to the limitations noted above, our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in our filings with the SEC.

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended January 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

Stratos and certain of our former 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 Stratos and certain of our former directors and executive officers. The complaints also name as defendants the underwriters for Stratos’ initial public offering. The complaints are substantially identical to numerous other complaints filed against other companies that went public during the time of Stratos’ IPO. The complaints generally allege, among other things, that the registration statement and prospectus from our June 26, 2000 initial public offering failed to disclose certain alleged actions by the underwriters for the offering. The complaints charge Stratos and several of our former 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.

Item 1A. Risk Factors

The following is a restated description of the risk factors associated with our business previously disclosed in our most recent Annual Report on Form 10-K, which includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in our most recent Annual Report on Form 10-K.

Risks Relating to Our Business

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

The current economic climate in the communications industry has resulted in reduced capital spending from its peak for networking products. Spending for networking products appears to have stabilized and may see a rebound, although it is not expected to return to peak levels for the foreseeable future. As a result, many of our customers continue to express uncertainty as to their future requirements. We do not expect continued substantial growth in the markets we serve. Any decline in demand for our customers’ products or a deterioration of general economic conditions in the communications industry would likely result in reduction in demand for our products and our business, operating results and financial condition would suffer.

Although we have implemented personnel reductions and other cost reduction programs, many of our costs are fixed in the near term. Consequently, we will need to generate higher revenues while containing or reducing costs and operating expenses if we are to achieve profitability. If our efforts to increase our revenues and contain our costs are not successful, we will continue to incur net losses.

Our success depends on the long-term growth of the military, telecom/enterprise and broadcast industries and its use of our technologies. If these events do not occur, our net sales may decline and our business would likely be significantly harmed.

Our subsystems and components are used primarily in military, video broadcast, industrial, enterprise, metropolitan area, wide area and telecommunication networks. These markets are all subject to different drivers, which are changing and, as a result it is difficult to predict their potential size, price elasticity, or future growth rate. In addition, there is uncertainty as to the extent to which communications technologies will be used throughout these markets. Our success in generating revenue in these markets will depend on the long-term growth of these markets and their use of communications technologies. If these markets do not grow, or if the use of communications technologies in these markets does not expand, our net sales may decline and our business would likely be significantly harmed.

The market for communications equipment is changing rapidly and is dominated by several large manufacturers. Our future growth will depend, in part, upon (1) our ability to develop and introduce new products for this market and (2) the growth of the communications equipment market and (3) our ability to compete successfully in the communications industry. The growth

in the market for communications equipment products and services is dependent on a number of factors, including without limitation:

	•		The amount of capital expenditures by network providers

	•		Regulatory and legal developments

	•		Changes to capital expenditure rates by network providers

	•		The addition of new customers to the market

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

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

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

The markets for our products and technologies are characterized by technological change, new and improved product introductions, changes in customer requirements and evolving industry standards. Our future success will depend to a substantial extent on our ability to develop, introduce and support new products and technologies on a successful and timely basis. If we fail to develop and deploy new products and technologies or enhancements of existing products on a successful and timely basis or we experience delays in the development, introduction or enhancement of our products and technologies, our products will no longer be competitive and our net sales will decline. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. In addition, a slowdown in demand for existing products ahead of a new product introduction could result in a write down in the value of inventories relating to existing products.

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

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

Our products are incorporated into larger systems, which must comply with various regulations and standards established by different countries, which may vary considerably. If the performance of our products contributes to our customers’ inability to comply with existing or

evolving standards established by regulatory authorities or to obtain timely domestic or foreign regulatory approvals, we may lose these customers and our net sales will decline.

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

Typically, our products comprise only a part of an entire networking system and must comply with evolving industry standards in order to gain market acceptance. In many cases, we introduce a product before an industry standard has become widely accepted and we depend on the companies that provide other components to support industry standards as they evolve. Because industry standards do not exist in some cases at the time we are developing new products, we may develop products that do not comply with the eventual industry standard. If this occurs, we would need to redesign our products to comply with adopted industry standards. In addition, if alternative technologies were adopted as an industry standard within our target markets, we would have to dedicate significant time and resources to redesign our products to meet this new industry standard. If we are required to redesign our products, we may incur significant expenses and losses due to lack of customer demand, unusable purchased components for these products and the diversion of our engineers from future product development efforts. If we are not successful in redesigning our products or developing new products to meet new standards or any other standard that may emerge, our net sales will decline.

We are also dependent on sales to the military/aerospace industry, including U.S. and foreign government entities.

Approximately 37.9% of our sales for the nine months ended January 31, 2006 came from direct and indirect sales to the military/aerospace industry, which is heavily dependent on sales to U.S. and foreign government entities, either directly through contracts with such entities or indirectly through distributors and to prime contractors or subcontractors who are building systems or subsystems for them. Sales to our largest customer, General Dynamics accounted for 10.7% of our total revenue in the third quarter ended January 31, 2006 and 9.1% for the nine months ended January 31, 2006. A significant decline in U.S. and foreign government expenditures could have a material adverse effect on our sales.

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

Because of the length of our sales cycles, our ability to accurately predict the timing of our sales is limited. As a result, if sales forecasts from specific customers are not realized, we may be unable to compensate for the sales shortfall and our net sales may decline. The period of time between our initial contact with a customer and the receipt of a purchase order may span over a year or more, and varies by product and customer. During this time, customers may perform, or require us to perform extensive evaluation and qualification testing of our products. Generally, they consider a wide range of issues before committing to purchase our products, including ability to interoperate with other subsystems and components, product performance and reliability. We may incur substantial sales and marketing expenses and expend significant management effort while our potential customers are qualifying our products. Even after incurring these costs, we ultimately may not sell any or may only sell small amounts of our

products to these potential customers. Consequently, if new sales do not result from our efforts to qualify our products, our operating expenses will increase.

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

We generally do not have long-term supply contracts with our customers. Sales are typically made pursuant to individual purchase orders, often with short lead times, that may be canceled or deferred by customers on short notice without significant penalty. Our customers base their orders for our products on the forecasted sales and manufacturing schedules for their own products. Our customers have in the past significantly accelerated, canceled or delayed orders for our products in response to unanticipated changes in the manufacturing schedules for their own products, and will likely do so again in the future.

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

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

The market for our products is highly competitive, which may result in lost sales or lower gross margins.

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

Many of these companies have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. As a result, these competitors are able to devote greater resources than we can to the development, promotion, sale and support of their products. In addition, several of our competitors have large market capitalizations or cash reserves and are much better positioned than we are to acquire other companies in order to gain new technologies or products. Many of our competitors have much greater name recognition, more extensive customer bases, better-developed distribution channels and broader product offerings than we do. These companies may leverage their customer bases and broader

product offerings and adopt aggressive pricing policies to gain market share. In addition, companies with diversified product offerings can better sustain an economic downturn.

We anticipate that more companies, including some of our customers, may enter the markets for our products. We may not be able to compete successfully against either current or future competitors. Competitive pressures, combined with weakening demand, may result in further price reductions, lower margins and loss of market share. In addition, some of our current and potential customers are attempting to integrate their operations by producing their own subsystems or components or acquiring one or more of our competitors, which may eliminate the need to purchase our products. Furthermore, larger companies in other related industries are developing and acquiring technologies and applying their significant resources, including their distribution channels and brand name recognition, in an effort to capture significant market share. While this trend has not historically impacted our competitive position, it may result in future decreases in our net sales.

Further, we manufacture many of our products in the United States and the United Kingdom. Our manufacturing costs are higher than the manufacturing costs of some of our competitors, particularly those located in foreign countries that benefit from lower-priced labor and government subsidies. If our current or potential future customers decide to purchase products from these lower-cost competitors, we could suffer a significant decline in our sales, which could have a material adverse effect on our business, operating results and financial condition.

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

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

Some of our critical components used in production of certain of our products are purchased from a key supplier, which has been acquired by one of our competitors. 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.

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

of supply, we may have to redesign or modify our products, which may cause delays in shipments, increased design and manufacturing costs and increased prices for our products.

We make forecasts for our component requirements based on anticipated product orders. Although from time to time we enter into long-term agreements for the purchase of key components, our purchases of key components are generally made on a purchase order basis. We may also maintain an inventory of limited source components to limit the potential impact of a component shortage. We may not accurately predict the demand for our products and the lead-time required to obtain key components. If we overestimate our requirements, we may have excess inventory, which may become obsolete and would increase our costs. If we underestimate our requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Either of these occurrences would significantly harm our business.

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

Our products require sophisticated manufacturing, research and development, marketing and sales, and technical support. Our success depends on our ability to attract, train and retain qualified technical personnel in each of these areas. Competition for personnel in all of these areas is intense and we may not be able to hire or retain sufficient personnel to achieve our goals or support the anticipated growth in our business. The market for the highly-trained personnel we require is very competitive, due to the limited number of people available with the necessary technical skills and understanding of our products and technology. If we fail to hire and retain qualified personnel, our product development efforts and customer relations will suffer.

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

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

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

Our properties and business operations are subject to a wide variety of environmental, health and safety laws and other legal requirements, including those relating to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous substances used in our manufacturing processes. These legal requirements may impose on us the need for additional capital

expenditures or other requirements. If we fail to obtain required permits or otherwise fail to operate within these or future legal requirements, we may be required to pay substantial penalties, suspend our operations or make costly changes to our manufacturing processes or facilities. Although we believe that we are in compliance and have complied with all applicable legal requirements, we may also be required to incur additional costs to comply with current or future legal requirements.

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

A significant portion of our sales is generated from customers located outside the United States, principally in Europe. We also operate a manufacturing facility in the United Kingdom. Sales to customers located outside of the United States were approximately 32.6% of our net sales during the nine months ending January 31, 2006 and approximately 26.6% of our net sales during the nine months ended January 31, 2005. Our international operations are subject to a number of risks and uncertainties, including:

	•		Difficulties in managing operations in different locations

	•		Changes in foreign currency rates

	•		Longer accounts receivable collection cycles

	•		Difficulties associated with enforcing agreements through foreign legal systems

	•		Seasonal reductions in business activities in some parts of the world, such as during the summer months in Europe

	•		Trade protection measures and import and export licensing requirements

	•		Changes in a specific country’s or region’s political or economic conditions

	•		Potentially adverse tax consequences

	•		The potential difficulty in enforcing intellectual property rights in some foreign countries

	•		Acts of terrorism directed against the United States or U.S. affiliated targets

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

We may pursue additional acquisitions. If we are unable to successfully integrate any businesses or technologies that we acquire in the future or are unable to realize the intended benefits of any future acquisitions, our business will be harmed.

As part of our strategy, we may pursue opportunities to buy other businesses or technologies that would complement our current products, expand our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities. Our experience in acquiring other businesses and technologies is limited. Acquisitions could result in a number of financial consequences, including:

	•		Use of significant amounts of cash

	•		The incurrence of debt and contingent liabilities

	•		Potentially dilutive issuances of equity securities

	•		Large one-time write-offs

	•		Amortization expenses related to intangible assets

Acquisitions also involve numerous operational risks, including:

	•		Difficulties in integrating operations, products, technologies and personnel

	•		Unanticipated costs or write-offs associated with the acquisition

	•		Diversion of management’s attention from other business concerns

	•		Diversion of capital and other resources from our existing businesses

	•		Potential loss of key employees of purchased organizations

If we are unable to successfully integrate other businesses or technologies that we may acquire in the future or are unable to realize the intended benefits of any future acquisitions, our business will be harmed.

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

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

Various litigation matters, in which we are defendants, could result in significant monetary damages and expenses or restrictions on our ability to sell our products.

We are involved in various litigation matters that arise from time to time in the ordinary course of business. Our Annual Reports on Form 10-K and quarterly reports on Form 10-Q describe certain matters, in which we are defendants. See discussion under Part I, Item 3: “Legal Proceedings” above.

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

more of the following: (1) stop using the challenged technology or selling our products that use or incorporate such technology, (2) attempt to obtain a license to sell or use the relevant technology, which license may not be available on reasonable terms or at all, (3) attempt to license a substitute technology on reasonable terms or (4) redesign the applicable products to avoid infringement.

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

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

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

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

	•		Economic and stock market conditions generally and specifically as they may impact participants in the communications industry

	•		Earnings and other announcements by, and changes in market evaluations of, participants in the communications industry

	•		Changes in financial estimates and recommendations by securities analysts following our stock

	•		Announcements or implementation by us or our competitors of technical innovations or new products, and

	•		Strategic moves by us or our competitors, such as acquisitions

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

Our restated certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include the authority of our board of directors has the right to issue preferred stock without shareholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes some restrictions on mergers and business combinations between us and any holder of 15% or more of our outstanding common stock. These provisions apply even if the offer may be considered beneficial by some shareholders. In addition, we have adopted a stockholder rights plan designed to protect Stratos and its shareholders from unfair or coercive takeover tactics.

Item 6. Exhibits.


Exhibit
Number		Description of Document
2.1		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 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed November 12, 2003)

3.1		Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 on Form 10-K filed July 29, 2005)

3.2		Bylaws of Registrant (incorporated by reference to Exhibit 3.2 on Form 10-K filed July 29, 2005)

3.3		Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 on Form 10-K filed July 29, 2005)

3.4		Certificate of Designation for Series B Preferred Stock (incorporated by reference to Exhibit 3.14 on Form 10-K filed July 29, 2005)

4.1		Specimen certificate representing the common stock (incorporated by reference to Exhibit 4.1 to registrant’s Amendment No. 2 to Form S-1, filed June 22, 2000)

4.2		Specimen Certificate representing the Series B Preferred Stock (incorporated by reference to Exhibit 4.2 to registrant’s Quarterly Report on Form 10-Q filed December 15, 2003)

4.3		Rights Agreement, dated as of March 23, 2001, between Stratos International, Inc. and Mellon Investor Services LLC (incorporated by reference to Exhibit 99.2 to registrant’s Current Report on Form 8-K, filed March 28, 2001)

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 (incorporated by reference to Exhibit 1.2 to registrant’s Form 8-A/A, filed August 7, 2003)

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 11/24/98 and the William N. and Carol A. Stout Charitable Remainder Unit Trust (incorporated by reference to Exhibit 4.4 to Amendment No. 1 to Form S-4, filed September 29, 2003)

4.6		Standstill Agreement, dated as of July 2, 2003, between Stratos Lightwave, Inc. and Citicorp Venture Capital Ltd. (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Form S-4, filed September 29, 2003)

10.1		Form of Indemnity Agreement between Registrant and Registrant’s directors and officers (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to Form S-1, filed June 5, 2000)


Exhibit
Number		Description of Document
10.2		Stratos Lightwave, Inc. 2000 Stock Plan, as amended and restated (incorporated by reference to Exhibit 10.9 to registrant’s Annual Report on Form 10-K, filed July 26, 2001)

10.3		Agreement and Plan of Reorganization, dated January 22, 2002, by and among the Registrant, Tundra Acquisition Corp. and Tsunami Optics, Inc. (incorporated by reference to Exhibit 2.1 to registrant’s Current Report on Form 8-K, filed February 15, 2002)

10.4		Stratos Lightwave, Inc. 2002 Stock Plan for Acquired Companies (incorporated by reference to Exhibit 99.1 to registrant’s Form S-8, filed January 31, 2002)

10.5		Agreement and Plan of Reorganization, dated March 18, 2002, by and among the Registrant, Polar Acquisition Corp. and Paracer, Inc. (incorporated by reference to Exhibit 99.1 to registrant’s Current Report on Form 8-K, filed April 12, 2002)

10.6		Management Retention Agreement between the Registrant and Richard Durrant (incorporated by reference to Exhibit 10.14 to registrant’s Quarterly Report on Form 10-Q, filed December 16, 2002)

10.7		Stratos Lightwave, Inc. Severance Plan (incorporated by reference to Exhibit 10.15 to registrant’s Quarterly Report on Form 10-Q, filed December 16, 2002)

10.8		Amendment to Management Retention Agreement between the Registrant and Richard Durrant (incorporated by reference to Exhibit 10.15 to registrant’s Annual Report on Form 10-K, filed July 29, 2003)

10.9		Amendment to Stratos Lightwave, Inc. Severance Plan (incorporated by reference to Exhibit 10.16 to registrant’s Annual Report on Form 10-K, filed July 29, 2003)

10.10		Stratos Lightwave, Inc. 2003 Stock Plan (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to Form S-4, filed September 29, 2003)

10.11		Stratos Lightwave, Inc. 2003 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to Form S-4, filed September 29, 2003)

10.12		Employment, Confidentiality and Noncompete Agreement, dated as of November 3, 1997, by and between Trompeter Electronics, Inc. and Joe Norwood (incorporated by reference to Exhibit 10.17 on Form 10-K/A filed on August 30, 2004)

10.13		Salary Continuation Agreement, dated as of October 18, 2000, by and between Trompeter Electronics, Inc. and Joe Norwood (incorporated by reference to Exhibit 10.18 on Form 10-K/A filed on August 30, 2004)

10.14		Amendment to Salary Continuation Agreement, dated as of July 26, 2004, by and between Trompeter Electronics, Inc. and Joe Norwood (incorporated by reference to Exhibit 10.19 on Form 10-K/A filed on August 30, 2004)

10.15		Salary Continuation Agreement, dated as of August 10, 2004, by and between Trompeter Electronics, Inc. and Joe Norwood (incorporated by reference to Exhibit 10.20 on Form 10-K/A filed on August 30, 2004)


Exhibit
Number		Description of Document
10.16		Form of the Option Agreement of the Stratos Lightwave, Inc. 2003 Stock Plan (incorporated by reference to Exhibit 10.22 on Form 10-K filed on July 29, 2005)

10.17		Summary Schedule of Non-Management Director Fees (Incorporated by reference to Exhibit 10.24 on Form 10-K filed on July 29, 2005)

10.18		Summary Schedule of Officer Compensation

10.19		Management Retention Agreement between the Registrant and Phillip A. Harris, dated February 1, 2005 (incorporated by reference to Exhibit 10.1 on Form 8-K filed on February 1, 2005)

10.20		Agreement dated May 3, 2004 concerning expense reimbursement between the Registrant and Richard C.E. Durrant (incorporated by reference to Exhibit 10.2 on Form 8-K filed on February 1, 2005)

10.21		Form of the 2006 Annual Incentive Bonus Plan (incorporated by reference to Exhibit 99.6 to registrant’s Current Report on Form 8-K, filed September 21, 2005)

10.22		Form of the Restricted Stock Agreement for Directors of the Stratos Lightwave, Inc. 2003 Stock Plan (incorporated by reference to Exhibit 99.1 on form 8-K, filed on December 6, 2005).

10.23		Form of the Restricted Stock Agreement for Employees of the Stratos Lightwave, Inc. 2003 Stock Plan (incorporated by reference to Exhibit 99.2 to registrant’s Current Report on form 8-K, filed on September 21, 2005).

10.24		Restricted Stock Agreement between the Registrant and Phillip A. Harris, dated December 15, 2004, as amended and restated as of September 14, 2005 (incorporated by reference to Exhibit 99.4 to the registrant’s Current Report on Form 8-K, filed September 21, 2005).

10.25		Amendment to Restricted Stock Agreement between the Registrant and Phillip A. Harris, dated as of December 6, 2005 (incorporated by reference to Exhibit 99.3 to registrant’s Current Report on Form 8-K, filed December 8, 2005).

10.26		Restricted Stock Agreement between the Registrant and Newell V. Starks, dated April 29, 2004, as amended and restated as of September 14, 2005 (incorporated by reference to Exhibit 99.5 to the registrant’s Current Report on Form 8-K, filed September 21, 2005).

10.27		Restricted Stock Agreement between the Registrant and Newell V. Starks, dated March 9, 2005 (incorporated by reference to Exhibit 99.3 to the registrant’s Current Report on Form 8-K, filed September 21, 2005).

10.28		Restricted Stock Agreement between the Registrant and Newell V. Starks, dated December 6, 2005 (incorporated by reference to Exhibit 99.4 to the registrant’s Current Report on Form 8-K, filed December 8, 2005).

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer*

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer*

32.1		Section 1350 Certification of Chief Executive Officer†

32.2		Section 1350 Certification of Chief Financial Officer†


*		Filed herewith.

†		Furnished herewith.


Date: March 14, 2006	Stratos International, Inc.
	By:	/s/ Phillip A. Harris
		Phillip A. Harris
		President and Chief Executive Officer
	By:	/s/ Barry Hollingsworth
		Barry Hollingsworth
		Chief Financial Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets as of January 31, 2006 (unaudited) and April 30, 2005		3
Condensed Consolidated Statements of Operations for the three months and nine months ended January 31, 2006 and 2005 (unaudited)		4
Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2006 and 2005 (unaudited)		5
Condensed Consolidated Statements of Comprehensive Loss for the three months and nine months ended January 31, 2006 and 2005 (unaudited)		6
Notes to Condensed Consolidated Financial Statements as of January 31, 2006 (unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		24

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		25
Item 1A. Risk Factors		26
Item 6. Exhibits		35

SIGNATURES		38
Certification
Certification
Certification
Certification