##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  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
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) 
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-30869
 STRATOS INTERNATIONAL, INC.
  
 Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    36-4360035
(I.R.S. Employer Identification No.)7444 West Wilson Avenue
Chicago, Illinois 60706
(Address of Principal Executive
Offices)
    
    60706
(Zip Code)
 
 
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
  o o þ
  o þ




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
 INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of January 31, 2006 (unaudited)
and April 30, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three months and
nine months ended January 31, 2006 and 2005 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
nine months ended January 31, 2006 and 2005 (unaudited)
    
    
    5Condensed Consolidated Statements of Comprehensive Loss for the three
months and nine months ended January 31, 2006 and 2005 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
as of January 31, 2006 (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    26Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    38CertificationCertificationCertificationCertification
 2




---



##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 STRATOS INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 January 31,
    
    
    April 30,2006
    
    
    2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    13,776
    
    
    $
    13,276Short-term investments
    
    
    22,000
    
    
    
    18,552Accounts
receivable, less allowance ($734 and $548)
    
    
    11,984
    
    
    
    12,926InventoriesFinished products
    
    
    2,614
    
    
    
    2,341Work in process
    
    
    629
    
    
    
    955Materials
    
    
    11,817
    
    
    
    12,67815,060
    
    
    
    15,974Refundable income taxes
    
    
    1,837
    
    
    
    4,267Prepaid expenses and other current assets
    
    
    603
    
    
    
    6,139Total current assets
    
    
    65,260
    
    
    
    71,134Other assetsGoodwill and other indefinite-lived assets
    
    
    6,110
    
    
    
    6,110Intangible and other assets, net of amortization
    
    
    12,424
    
    
    
    13,462Assets held for sale
    
    
    2,864
    
    
    
    2,93621,398
    
    
    
    22,508Property, plant and equipment
    
    
    90,238
    
    
    
    89,880Less allowance for depreciation
    
    
    72,585
    
    
    
    68,54217,653
    
    
    
    21,338Total assets
    
    $
    104,311
    
    
    $
    114,980Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable
    
    $
    4,217
    
    
    $
    6,987Other current liabilities
    
    
    6,573
    
    
    
    11,259Current portion of long term-debt
    
    
    
    
    
    
    815Total current liabilities
    
    
    10,790
    
    
    
    19,061Deferred income taxes
    
    
    446
    
    
    
    446Series B redeemable preferred stock
    
    
    5,000
    
    
    
    5,000Shareholders equityPreferred 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
    
    
    
    146Cost of shares in treasury
    
    
    (1,109
    )
    
    
    (259
    )Additional paid-in capital
    
    
    321,162
    
    
    
    320,410Accumulated deficit
    
    
    (228,968
    )
    
    
    (226,290
    )Unearned compensation
    
    
    (3,378
    )
    
    
    (3,505
    )Accumulated other comprehensive income (loss)
    
    
    220
    
    
    
    (29
    )Total shareholders equity
    
    
    88,075
    
    
    
    90,473Total liabilities and shareholders equity
    
    $
    104,311
    
    
    $
    114,980
  3




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
 Three months ended
    
    
    Nine months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Net sales
    
    $
    18,993
    
    
    $
    19,430
    
    
    $
    58,422
    
    
    $
    58,634License fees and royalties
    
    
    201
    
    
    
    103
    
    
    
    410
    
    
    
    352Total revenues
    
    
    19,194
    
    
    
    19,533
    
    
    
    58,832
    
    
    
    58,986Cost of revenues
    
    
    12,304
    
    
    
    13,400
    
    
    
    37,020
    
    
    
    39,654Gross profit
    
    
    6,890
    
    
    
    6,133
    
    
    
    21,812
    
    
    
    19,332Operating expenses:Research and development
    
    
    2,299
    
    
    
    2,382
    
    
    
    6,142
    
    
    
    7,210Sales and marketing
    
    
    2,389
    
    
    
    2,443
    
    
    
    7,471
    
    
    
    7,861General and administrative
    
    
    3,921
    
    
    
    6,301
    
    
    
    11,787
    
    
    
    17,643Restructuring and other charges
    
    
    359
    
    
    
    4,275
    
    
    
    842
    
    
    
    4,275Litigation settlements, net
    
    
    (700
    )
    
    
    (63
    )
    
    
    (700
    )
    
    
    (4,090
    )Total operating expenses
    
    
    8,268
    
    
    
    15,338
    
    
    
    25,542
    
    
    
    32,899Loss from operations
    
    
    (1,378
    )
    
    
    (9,205
    )
    
    
    (3,730
    )
    
    
    (13,567
    )Investment income, net
    
    
    340
    
    
    
    173
    
    
    
    887
    
    
    
    302Other income (expense)
    
    
    16
    
    
    
    467
    
    
    
    397
    
    
    
    307Loss 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 outstandingBasic and diluted
    
    
    13,876
    
    
    
    13,559
    
    
    
    13,901
    
    
    
    13,670
  4




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 Nine Months EndedJanuary 31,2006
    
    
    2005Operating 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
    
    
    
    5,138Provision for amortization of intangible assets
    
    
    1,037
    
    
    
    955Provision for amortization of unearned compensation
    
    
    702
    
    
    
    491Provision 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
    
    
    
    768Inventories
    
    
    313
    
    
    
    (477
    )Prepaid and other assets
    
    
    7,967
    
    
    
    863Accounts payable and accrued expenses
    
    
    (7,456
    )
    
    
    2,317Net 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
    
    
    
    18,788Proceeds from sale of assets
    
    
    47
    
    
    
    214Proceeds from sale of assets held for sale
    
    
    58
    
    
    
    1,453Net cash (used in) provided by investing activities
    
    
    (4,039
    )
    
    
    13,182Financing 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
    
    
    
    119Net 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
    
    
    
    8,208Cash and cash equivalents at beginning of period
    
    
    13,276
    
    
    
    15,501Cash and cash equivalents at end of period
    
    $
    13,776
    
    
    $
    23,709
  5




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
 Three Months Ended
    
    Nine Months EndedJanuary 31,
    
    January 31,2006
    
    2005
    
    2006
    
    2005Net loss
    
    $
    (981
    )
    
    $
    (8,565
    )
    
    $
    (2,414
    )
    
    $
    (12,958
    )Other comprehensive income (loss):Foreign currency
translation adjustments
    
    
    (66
    )
    
    
    184
    
    
    
    249
    
    
    
    (201
    )Comprehensive loss
    
    $
    (1,047
    )
    
    $
    (8,381
    )
    
    $
    (2,165
    )
    
    $
    (13,159
    )
  6




---



##### Table of Contents



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
   2. Recent Accounting Pronouncements
 Accounting for Changes and Error Corrections.
 Accounting for
Stock-Based Compensation.
 7




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)
 Inventory Costs
 3. Stock-Based Compensation
 Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees,
 Three Months Ended
    
    
    Nine Months EndedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net 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
   8




---



##### Table of Contents



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 EndedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net 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
    
    
    
    13,670Basic and diluted loss per share
    
    $
    (0.08
    )
    
    $
    (0.64
    )
    
    $
    (0.19
    )
    
    $
    (0.97
    )
  5. Intangible Assets
  January 31, 2006
    
    
    April 30, 2005Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    UsefulAmortizable Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    LivesCustomer relationships
    
    $
    10,800
    
    
    $
    (1,967
    )
    
    $
    8,833
    
    
    $
    10,800
    
    
    $
    (1,296
    )
    
    $
    9,504
    
    
    12.50 yearsPatents and related technology
    
    
    4,466
    
    
    
    (1,073
    )
    
    $
    3,393
    
    
    
    4,466
    
    
    
    (951
    )
    
    
    3,515
    
    
    14.25 yearsDeveloped software
    
    
    700
    
    
    
    (502
    )
    
    
    198
    
    
    
    700
    
    
    
    (257
    )
    
    
    443
    
    
    3.00 yearsTotal amortized intangible assets
    
    $
    15,966
    
    
    $
    (3,542
    )
    
    $
    12,424
    
    
    $
    15,966
    
    
    $
    (2,504
    )
    
    $
    13,462
 Fiscal Year2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterAmortization amount
    
    $
    (1,311
    )
    
    $
    (1,311
    )
    
    $
    (1,311
    )
    
    $
    (1,194
    )
    
    $
    (1,171
    )
    
    $
    (7,164
    )
  9




---



##### Table of Contents



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
  7. Restructuring Charges
   Balance
    
    2006
    
    Utilized through
    
    BalanceApril 30, 2005
    
    Charges
    
    January 31, 2006
    
    January 31, 2006Employee costs
    
    $
    277
    
    
    $
    626
    
    
    $
    (532
    )
    
    $
    371Legal and Other
    
    
    
    
    
    
    215
    
    
    
    (215
    )
    
    
    Idle facility rental
    
    
    1,799
    
    
    
    
    
    
    
    (647
    )
    
    
    1,152Total
    
    $
    2,076
    
    
    $
    841
    
    
    $
    (1,394
    )
    
    $
    1,523
 8. Income Taxes
   10




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)
  9. Long-Term Debt
  10. Other Current Liabilities
  January 31,
    
    April 30,2006
    
    2005Employee costs
    
    $
    2,499
    
    
    $
    2,598Rent for limited-use facilities
    
    
    1,152
    
    
    
    1,799Other current liabilities
    
    
    860
    
    
    
    663Commissions
    
    
    780
    
    
    
    1,037Legal fees, litigation and claims
    
    
    672
    
    
    
    4,352Real estate and other taxes
    
    
    361
    
    
    
    386Inventory received, not vouchered
    
    
    249
    
    
    
    424Total
    
    $
    6,573
    
    
    $
    11,259
 11. Litigation
   11




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)
    12




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)
      13




---



##### Table of Contents



STRATOS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2006
(all amounts in thousands, except per share data)
 12. Subsequent Events
  14




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
   Results of Operations
 Three Months Ended January 31, 2006 and 2005
  15




---



##### Table of Contents



Three Months EndedJanuary 31,2006
    
    
    2005
    
    
    ChangeDollars
    
    
    %
    
    
    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:
 License Fees and Royalties:
 Backlog:
 Cost of Revenues and Gross Margins:
 16




---



##### Table of Contents



Research and Development.
  Sales and Marketing
 General and Administrative.
 Restructuring and Other Charges
 Litigation Settlements, net.
 Investment income, net:
 Other income (expense):
 Income Taxes:
 17




---



##### Table of Contents



Nine Months Ended January 31, 2006 and 2005
  Nine Months EndedJanuary 31,2006
    
    
    2005
    
    
    ChangeDollars
    
    
    %
    
    
    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
 License Fees and Royalties.
 Backlog:
 18




---



##### Table of Contents



Cost of Sales and Gross Margins.
 Research and Development.
  Sales and Marketing.
 General and Administrative.
 Restructuring and Other Charges ,
 Litigation settlements, net:
 Investment Income, net.
 19




---



##### Table of Contents



Other income (expense):
 Income Taxes.
 Liquidity and Capital Resources
     20




---



##### Table of Contents



21




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Critical Accounting Policies
   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
 22




---



##### Table of Contents



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.
 23




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
   24




---



##### Table of Contents



PART II OTHER INFORMATION
 
 Item 1. Legal Proceedings.
    25




---



##### Table of Contents



Item 1A. Risk Factors
  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.
   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.
   26




---



##### Table of Contents




    
    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 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.
   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.
  27




---



##### Table of Contents



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.
  We are also dependent on sales to the military/aerospace industry, including U.S. and foreign
government entities.
  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.
  28




---



##### Table of Contents



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.
  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 market for our products is highly competitive, which may result in lost sales or lower gross
margins.
   29




---



##### Table of Contents



We depend on suppliers for several key components. If we underestimate or overestimate our
requirements for these components, our business could be significantly harmed.
    30




---



##### Table of Contents



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 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.
  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.
  31




---



##### Table of Contents



Economic, political and regulatory risks associated with international operations may limit our
sales and increase our costs of doing business abroad.
  
    
    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
  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.
  
    
    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
  32




---



##### Table of Contents




    
    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
  Our inability to protect our intellectual property rights would significantly impair their 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.
   33




---



##### Table of Contents



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.
  
    
    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.
  34




---



##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description of Document2.1
    
    Agreement and Plan of Merger, dated as of July 2, 2003, as amended as of
August 19, 2003 and October 31, 2003, among Stratos Lightwave, Inc., Sleeping Bear
Merger Corp. and Sterling Holding Company (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)
 35




---



##### Table of Contents



ExhibitNumber
    
    Description of Document10.2
    
    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)
 36




---



##### Table of Contents



ExhibitNumber
    
    Description of Document10.16
    
    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 Compensation10.19
    
    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. 37




---



##### Table of Contents



SIGNATURES
  Date: March 14, 2006
    Stratos International, Inc.By:
    /s/ Phillip A. HarrisPhillip A. HarrisPresident and Chief Executive OfficerBy:
    /s/ Barry HollingsworthBarry HollingsworthChief Financial Officer 38