**Exhibit 99****Risks Relating to Our Business****We have incurred significant net losses, primarily due to the current economic climate in thecommunications industry. Unless we are able to increase our sales or further reduce our costs, wewill continue to incur net losses.**The current economic climate in the communications industry has resulted in reduced capitalspending from its peak for networking products. Spending for networking products appears to havestabilized and may see a rebound, although it is not expected to return to peak levels for theforeseeable future. As a result, many of our customers continue to express uncertainty as to theirfuture requirements. We do not expect continued substantial growth in the markets we serve. Anydecline in demand for our customers’ products or a deterioration of general economic conditions inthe communications industry would likely result in reduction in demand for our products and ourbusiness, operating results and financial condition would suffer.Although we have implemented personnel reductions and other cost reduction programs, many of ourcosts are fixed in the near term. Consequently, we will need to generate higher revenues whilecontaining or reducing costs and operating expenses if we are to achieve profitability. If ourefforts to increase our revenues and contain our costs are not successful, we will continue toincur net losses.**Our success depends on the long-term growth of the communications industry and its use of ourtechnologies. If these events do not occur, our net sales may decline and our business would likelybe 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 allsubject to different drivers, which are changing and, as a result it is difficult to predict theirpotential size, price elasticity, or future growth rate. In addition, there is uncertainty as tothe extent to which communications technologies will be used throughout these markets. Our successin generating revenue in these markets will depend on the long-term growth of these markets andtheir use of communications technologies. If these markets do not grow, or if the use ofcommunications technologies in these markets does not expand, our net sales may decline and ourbusiness would likely be significantly harmed.The market for communications equipment is changing rapidly and is dominated by several largemanufacturers. Our future growth will depend, in part, upon (1) our ability to develop andintroduce new products for this market and (2) the growth of the communications equipment marketand (3) our ability to compete successfully in the communications industry. The growth in themarket 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
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We cannot predict the growth rate of the market for telecommunications equipment products andservices. The economic climate in the communications industry, changes and consolidation in theservice provider market and constraints on capital availability have had a material adverse effecton many of our service provider customers, causing some of these customers to go out of businessand 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 andtechnologies in order to remain competitive. If we fail to do so, our products will no longer becompetitive and our net sales will decline.**The markets for our products and technologies are characterized by technological change, new andimproved 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 andsupport new products and technologies on a successful and timely basis. If we fail to develop anddeploy new products and technologies or enhancements of existing products on a successful andtimely basis or we experience delays in the development, introduction or enhancement of ourproducts and technologies, our products will no longer be competitive and our net sales willdecline. The introduction of new and enhanced products may cause our customers to defer or cancelorders for existing products. In addition, a slowdown in demand for existing products ahead of anew product introduction could result in a write down in the value of inventories relating toexisting products.The development of new, technologically advanced products is a complex and uncertain processrequiring high levels of innovation and highly skilled engineering and development personnel, aswell as the accurate anticipation of technological and market trends. We may not be able toidentify, 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 maynot be able to respond effectively to product announcements by competitors, technological changesor emerging industry standards. Any failure to respond to technological change would significantlyharm our business.**Our products are incorporated into larger systems, which must comply with various domestic andinternational government regulations. If the performance of our products adversely affects ourcustomers’ ability to comply with these requirements, we may lose these customers and our net saleswill decline.**Our products are incorporated into larger systems, which must comply with various regulations andstandards established by different countries, which may vary considerably. If the performance ofour products contributes to our customers’ inability to comply with existing or evolving standardsestablished 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 ourmarkets, we may be required to make significant expenditures to redesign our products.**
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Typically, our products comprise only a part of an entire networking system and must comply withevolving industry standards in order to gain market acceptance. In many cases, we introduce aproduct before an industry standard has become widely accepted and we depend on the companies thatprovide other components to support industry standards as they evolve. Because industry standardsdo not exist in some cases at the time we are developing new products, we may develop products thatdo not comply with the eventual industry standard. If this occurs, we would need to redesign ourproducts to comply with adopted industry standards. In addition, if alternative technologies wereadopted as an industry standard within our target markets, we would have to dedicate significanttime and resources to redesign our products to meet this new industry standard. If we are requiredto redesign our products, we may incur significant expenses and losses due to lack of customerdemand, unusable purchased components for these products and the diversion of our engineers fromfuture product development efforts. If we are not successful in redesigning our products ordeveloping new products to meet new standards or any other standard that may emerge, our net saleswill decline.**We are also dependent on sales to the military/aerospace industry, including U.S. and foreigngovernment entities.**Approximately 36% of our sales for the quarter ended July 31, 2005 came from direct and indirectsales to the military/aerospace industry, which is heavily dependent on sales to U.S. and foreigngovernment entities, either directly through contracts with such entities or indirectly throughdistributors and to prime contractors or subcontractors who are building systems or subsystems forthem. A significant decline in U.S. and foreign government expenditures could have a materialadverse effect on our sales.**Our sales cycle runs from our customers’ initial design to production for commercial sale. Thiscycle is long and unpredictable and may cause our net sales to decline or our operating expenses toincrease.**Because of the length of our sales cycles, our ability to accurately predict the timing of oursales is limited. As a result, if sales forecasts from specific customers are not realized, we maybe unable to compensate for the sales shortfall and our net sales may decline. The period of timebetween our initial contact with a customer and the receipt of a purchase order may span over ayear or more, and varies by product and customer. During this time, customers may perform, orrequire 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 abilityto interoperate with other subsystems and components, product performance and reliability. We mayincur substantial sales and marketing expenses and expend significant management effort while ourpotential customers are qualifying our products. Even after incurring these costs, we ultimatelymay 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 operatingexpenses will increase.**Our customers may cease purchasing our products at any time and may cancel or defer purchases onshort 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 madepursuant to individual purchase orders, often with short lead times, that may be canceled or
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deferred by customers on short notice without significant penalty. Our customers base their ordersfor our products on the forecasted sales and manufacturing schedules for their own products. Ourcustomers have in the past significantly accelerated, canceled or delayed orders for our productsin response to unanticipated changes in the manufacturing schedules for their own products, andwill likely do so again in the future.**If we do not decrease our manufacturing costs or increase sales of higher margin products as theaverage 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 toincreased competition, the introduction of new products and increased unit volumes. Most of ourproducts are designed and manufactured in our own facilities. Accordingly, a significant portionof our cost of sales is fixed over the near term. In order to remain competitive, we mustcontinually reduce our manufacturing costs through design and engineering changes and increases inmanufacturing efficiencies. We must also continue to develop and introduce on a timely basis newproducts that incorporate features that can be sold at higher average selling prices. Ourinability to reduce manufacturing costs or introduce new products with higher average sellingprices will cause our gross margins to decline, which would significantly harm our operatingresults.**The market for our products is highly competitive, which may result in lost sales or lower grossmargins.**The market for our products is highly competitive. For optoelectronics, we compete primarily withAgilent Technologies, Inc., Finisar Corporation, JDS Uniphase Corporation and OpticalCommunications 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 wecompete 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 microwaveproducts business, we compete with Huber+Suhner, WL Gore Associates, Inc. and a large number ofsmaller companies.Many of these companies have substantially greater financial, technical, marketing and distributionresources and brand name recognition than we have. As a result, these competitors are able todevote greater resources than we can to the development, promotion, sale and support of theirproducts. In addition, several of our competitors have large market capitalizations or cashreserves and are much better positioned than we are to acquire other companies in order to gain newtechnologies or products. Many of our competitors have much greater name recognition, moreextensive customer bases, better-developed distribution channels and broader product offerings thanwe do. These companies may leverage their customer bases and broader product offerings and adoptaggressive pricing policies to gain market share. In addition, companies with diversified productofferings can better sustain an economic downturn.We anticipate that more companies, including some of our customers, may enter the markets for ourproducts. 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 customersare attempting to integrate their operations by producing their own
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subsystems or components or acquiring one or more of our competitors, which may eliminate the needto purchase our products. Furthermore, larger companies in other related industries are developingand acquiring technologies and applying their significant resources, including their distributionchannels and brand name recognition, in an effort to capture significant market share. While thistrend has not historically impacted our competitive position, it may result in future decreases inour net sales.Further, we manufacture many of our products in the United States and the United Kingdom. Ourmanufacturing 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 governmentsubsidies. If our current or potential future customers decide to purchase products from theselower-cost competitors, we could suffer a significant decline in our sales, which could have amaterial adverse effect on our business, operating results and financial condition.**We depend on suppliers for several key components. If we underestimate or overestimate ourrequirements for these components, our business could be significantly harmed.**We purchase several key components that are incorporated into our products from a limited number ofsuppliers. We have experienced shortages and delays in obtaining key components in the past andexpect to experience shortages and delays in the future. These shortages and delays have typicallyoccurred when demand within the industry has increased rapidly and exceeded the capacity ofsuppliers of key components in the short term. Delays and shortages also often occur in the earlystages of a product’s life cycle. The length of shortages and delays in the past has varied fromseveral 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 akey supplier, which has been acquired by one of our competitors. If this supplier increasesprices, reduces quantities available to us or ceases to supply us, our business and results ofoperations may be significantly harmed.The inability to obtain sufficient quantities of these components that meet our qualityrequirements may interrupt and delay the manufacturing of our products or result in thecancellation of orders for our products. In addition, our suppliers could discontinue themanufacture or supply of these components at any time. We may not be able to identify andintegrate alternative sources of supply in a timely fashion, or at all. Any transition toalternative suppliers may result in delays in shipment and increased expenses and may limit ourability to deliver products to our customers. Furthermore, if we are unable to identify analternative source of supply, we may have to redesign or modify our products, which may causedelays in shipments, increased design and manufacturing costs and increased prices for ourproducts.We make forecasts for our component requirements based on anticipated product orders. Althoughfrom time to time we enter into long-term agreements for the purchase of key components, ourpurchases of key components are generally made on a purchase order basis. We may also maintain aninventory of limited source components to limit the potential impact of a component shortage. Wemay not accurately predict the demand for our products and the lead-time required to obtain keycomponents. If we overestimate our requirements, we may have
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excess inventory, which may become obsolete and would increase our costs. If we underestimate ourrequirements, we may have inadequate inventory, which could interrupt our manufacturing and delaydelivery of our products to our customers. Either of these occurrences would significantly harmour business.**Our success depends on our ability to hire and retain qualified personnel, and if we are unable todo 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 qualifiedtechnical personnel in each of these areas. Competition for personnel in all of these areas isintense and we may not be able to hire or retain sufficient personnel to achieve our goals orsupport the anticipated growth in our business. The market for the highly-trained personnel werequire is very competitive, due to the limited number of people available with the necessarytechnical skills and understanding of our products and technology. If we fail to hire and retainqualified personnel, our product development efforts and customer relations will suffer.**Our products may contain defects, which may cause us to incur significant costs, divert ourattention 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 newversions are released. Our customers integrate our subsystems and components into systems andproducts that they develop themselves or acquire from other vendors. As a result, when problemsoccur in equipment or systems into which our products have been incorporated, it may be difficultto identify the source of the problem. We may be subject to liability claims for damages relatedto 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 inconnection with a product defect will depend on the nature of the defect, and whether we or one ofour component suppliers was the source of the defect. Moreover, the occurrence of defects, whethercaused by our products or technology or the products of another vendor, may result in significantcustomer relations problems and injury to our reputation and may impair the market acceptance ofour products and technologies.**We are subject to environmental laws and other legal requirements that have the potential tosubject 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 andsafety laws and other legal requirements, including those relating to the storage, use, dischargeand disposal of toxic, volatile or otherwise hazardous substances used in our manufacturingprocesses. These legal requirements may impose on us the need for additional capital expendituresor other requirements. If we fail to obtain required permits or otherwise fail to operate withinthese or future legal requirements, we may be required to pay substantial penalties, suspend ouroperations or make costly changes to our manufacturing processes or facilities. Although we believethat we are in compliance and have complied with all applicable legal requirements, we may also berequired to incur additional costs to comply with current or future legal requirements.**Economic, political and regulatory risks associated with international operations may limit oursales and increase our costs of doing business abroad.**
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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 tocustomers located outside of the United States were approximately 31.4% of our net sales during thequarter ending July 31, 2005 and approximately 24.2% of our net sales during the three months endedJuly 31, 2004. 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 duringthe 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 foreigncountries  **•** Acts of terrorism directed against the United States or U.S. affiliated targetsThese, and other factors could adversely impact our international sales or increase our costs ofdoing business abroad or impair our ability to expand into international markets, and thereforecould significantly harm our business.**We may pursue additional acquisitions. If we are unable to successfully integrate any businessesor technologies that we acquire in the future or are unable to realize the intended benefits of anyfuture acquisitions, our business will be harmed.**As part of our strategy, we may pursue opportunities to buy other businesses or technologies thatwould complement our current products, expand our markets or enhance our technical capabilities, orthat may otherwise offer growth opportunities. Our experience in acquiring other businesses andtechnologies 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 assetsAcquisitions 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
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If we are unable to successfully integrate other businesses or technologies that we may acquire inthe future or are unable to realize the intended benefits of any future acquisitions, our businesswill be harmed.**Our inability to protect our intellectual property rights would significantly impair their valueand our competitive position.**We rely on a combination of patent, copyright, trademark and trade secret laws, as well asconfidentiality agreements and licensing arrangements, to establish and protect our proprietaryrights. Although we have numerous issued patents and pending patent applications, we cannot besure 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 orcircumvented, or that any right granted thereunder would provide us with meaningful protection ofour technology. Despite our efforts to protect our proprietary rights, unauthorized parties mayattempt to copy or otherwise obtain and use our products or technology. We may be unable to detectthe unauthorized use of our intellectual property or to take appropriate steps to enforce ourintellectual property rights. Policing unauthorized use of our products and technology isdifficult. In addition, the laws of some foreign countries do not protect our proprietary rightsto the same extent, as do the laws of the United States. Further, enforcing our intellectualproperty rights could result in the expenditure of significant financial and managerial resourcesand the success of these efforts cannot be predicted with certainty. Litigation has been necessaryand may continue to be necessary in the future to enforce our intellectual property rights. Suchlitigation could be costly and its outcome cannot be predicted with certainty. Our inability toadequately protect against unauthorized use of our intellectual property would significantly impairits value and our competitive position.**Various litigation matters, in which we are defendants, could result in significant monetarydamages 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 courseof business. Our Annual Reports on Form 10-K and quarterly reports on Form 10-Q describe certainmatters, 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 andother intellectual property rights. From time to time, third parties may assert patent, copyrightand other intellectual property rights to technologies used in our business. In addition, ourrights to use our name or other trademarks are subject to challenge by others. Any claims, with orwithout merit, could be time-consuming, result in costly litigation, and divert the efforts of ourtechnical and management personnel. If we are unsuccessful in defending ourselves against suchclaims, we could be subject to significant monetary damages and may be required to do one or moreof the following: (1) stop using the challenged technology or selling our products that use orincorporate such technology, (2) attempt to obtain a license to sell or use the relevanttechnology, which license may not be available on reasonable terms or at all, (3) attempt tolicense a substitute technology on reasonable terms or (4) redesign the applicable products toavoid infringement.
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In the event a claim against us were successful and we could not obtain a license to the relevanttechnology on acceptable terms or license a substitute technology or redesign our products to avoidinfringement, 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 yearsand our stock price could fluctuate significantly.**Our common stock has been publicly traded only since June 27, 2000. The market price of our commonstock 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 impactparticipants in the communications industry  **•** Earnings and other announcements by, and changes in market evaluations of, participantsin the communications industry  **•** Changes in financial estimates and recommendations by securities analysts following ourstock  **•** Announcements or implementation by us or our competitors of technical innovations or newproducts, 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 orprevent an acquisition of our company, which could decrease the value of the shares of our commonstock.**Our restated certificate of incorporation and bylaws and Delaware law contain provisions that couldmake it more difficult for a third party to acquire us without the consent of our board ofdirectors. These provisions include the authority of our board of directors has the right to issuepreferred stock without shareholder approval, which could be used to dilute the stock ownership ofa potential hostile acquirer. Delaware law also imposes some restrictions on mergers and businesscombinations between us and any holder of 15% or more of our outstanding common stock. Theseprovisions 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 fromunfair or coercive takeover tactics.
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