##### 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 I
 For the quarterly period ended October 31, 2005
 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)
   
  
  þ o
  o þ
  o þ




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##### 



STRATOS INTERNATIONAL, INC.
 INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of October 31, 2005 (unaudited)
and April 30, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three months and
six months ended October 31, 2005 and 2004 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
six months ended October 31, 2005 and 2004 (unaudited)
    
    
    5Condensed Consolidated Statements of Comprehensive Loss for the three
months and six months ended October 31, 2005 and 2004 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
as of October 31, 2005 (unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    26Item 4. Submission of Matters to a Vote by Security Holders
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    39Certification of Principal Executive OfficerCertification of Principal Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer
  2




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##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 STRATOS INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
 October 31,
    
    April 30,2005
    
    2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    9,515
    
    
    $
    13,276Short-term investments
    
    
    24,500
    
    
    
    18,552Accounts
receivable, less allowance ($637 and $548)
    
    
    11,261
    
    
    
    12,926InventoriesFinished products
    
    
    3,175
    
    
    
    2,341Work in process
    
    
    761
    
    
    
    955Materials
    
    
    11,620
    
    
    
    12,67815,556
    
    
    
    15,974Refundable income taxes
    
    
    3,804
    
    
    
    4,267Prepaid expenses and other current assets
    
    
    955
    
    
    
    6,139Total current assets
    
    
    65,591
    
    
    
    71,134Other assetsGoodwill and other indefinite-lived assets
    
    
    6,110
    
    
    
    6,110Intangible and other assets, net of amortization
    
    
    12,760
    
    
    
    13,462Assets held for sale
    
    
    2,868
    
    
    
    2,93621,738
    
    
    
    22,508Property, plant and equipment
    
    
    90,099
    
    
    
    89,880Less allowance for depreciation
    
    
    71,078
    
    
    
    68,54219,021
    
    
    
    21,338Total assets
    
    $
    106,350
    
    
    $
    114,980Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable
    
    $
    4,579
    
    
    $
    6,987Other current liabilities
    
    
    6,647
    
    
    
    11,259Current portion of long term-debt
    
    
    
    
    
    
    815Total current liabilities
    
    
    11,226
    
    
    
    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 October 31, 2005 and April 30, 2005.
    
    
    
    
    
    
    Common stock, $0.01 par value: Authorized 100,000,000 shares; issued and outstanding
14,612,884, and 14,559,348 shares at October 31, 2005 and April 30, 2005, respectively
    
    
    146
    
    
    
    146Cost of shares in treasury
    
    
    (259
    )
    
    
    (259
    )Additional paid-in capital
    
    
    320,643
    
    
    
    320,410Accumulated deficit
    
    
    (227,899
    )
    
    
    (226,290
    )Unearned compensation
    
    
    (3,239
    )
    
    
    (3,505
    )Accumulated other comprehensive income (loss)
    
    
    286
    
    
    
    (29
    )Total shareholders equity
    
    
    89,678
    
    
    
    90,473Total liabilities and shareholders equity
    
    $
    106,350
    
    
    $
    114,980
  3




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STRATOS INTERNATIONAL, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(in thousands, except per share amounts)


Three months ended
    
    
    Six months endedOctober 31,
    
    
    October 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Net sales
    
    $
    18,949
    
    
    $
    18,181
    
    
    $
    39,429
    
    
    $
    39,204License fees and royalties
    
    
    65
    
    
    
    29
    
    
    
    209
    
    
    
    249Total revenues
    
    
    19,014
    
    
    
    18,210
    
    
    
    39,638
    
    
    
    39,453Cost of revenues
    
    
    12,262
    
    
    
    12,439
    
    
    
    24,715
    
    
    
    26,253Gross profit
    
    
    6,752
    
    
    
    5,771
    
    
    
    14,923
    
    
    
    13,200Operating expenses:Research and development
    
    
    1,839
    
    
    
    2,422
    
    
    
    3,843
    
    
    
    4,828Sales and marketing
    
    
    2,536
    
    
    
    2,610
    
    
    
    5,083
    
    
    
    5,419General and administrative
    
    
    3,562
    
    
    
    6,197
    
    
    
    7,866
    
    
    
    11,377Restructuring and other charges
    
    
    483
    
    
    
    
    
    
    
    483
    
    
    
    Litigation settlements, net
    
    
    
    
    
    
    (1,463
    )
    
    
    
    
    
    
    (4,026
    )Total operating expenses
    
    
    8,420
    
    
    
    9,766
    
    
    
    17,275
    
    
    
    17,598Loss from operations
    
    
    (1,668
    )
    
    
    (3,995
    )
    
    
    (2,352
    )
    
    
    (4,398
    )Investment income, net
    
    
    295
    
    
    
    65
    
    
    
    547
    
    
    
    129Other income (expense)
    
    
    1,027
    
    
    
    (69
    )
    
    
    381
    
    
    
    (123
    )Loss before income taxes
    
    
    (346
    )
    
    
    (3,999
    )
    
    
    (1,424
    )
    
    
    (4,392
    )Income tax provision
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    Net loss
    
    
    (346
    )
    
    
    (3,999
    )
    
    
    (1,433
    )
    
    
    (4,392
    )Preferred stock dividend requirements
    
    
    (88
    )
    
    
    (88
    )
    
    
    (175
    )
    
    
    (175
    )Net loss attributable to common shareholders
    
    $
    (434
    )
    
    $
    (4,087
    )
    
    $
    (1,608
    )
    
    $
    (4,567
    )Per share data, basic and diluted:Net loss attributable to common shareholders
    
    $
    (0.03
    )
    
    $
    (0.30
    )
    
    $
    (0.12
    )
    
    $
    (0.34
    )Weighted average number of common shares outstandingBasic and diluted
    
    
    13,921
    
    
    
    13,549
    
    
    
    13,913
    
    
    
    13,542




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STRATOS INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in thousands)
 Six Months EndedOctober 31,2005
    
    
    2004Operating activities:Net loss
    
    $
    (1,433
    )
    
    $
    (4,392
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Provision for depreciation
    
    
    2,910
    
    
    
    2,959Provision for amortization of intangible assets
    
    
    692
    
    
    
    684Provision for amortization of unearned compensation
    
    
    409
    
    
    
    311Provision for losses on accounts receivable
    
    
    89
    
    
    
    Provison for obsolete and overstock inventory
    
    
    971
    
    
    
    140(Gain) loss on sales of assets
    
    
    (34
    )
    
    
    (22
    )Change in operating assets and liabilities:Accounts receivable
    
    
    1,577
    
    
    
    1,840Inventories
    
    
    (553
    )
    
    
    (1,048
    )Prepaid assets
    
    
    (273
    )
    
    
    (163
    )Other assets
    
    
    5,932
    
    
    
    Accounts payable and accrued expenses
    
    
    (7,022
    )
    
    
    (632
    )Net cash provided by (used in) operating activities
    
    
    3,265
    
    
    
    (323
    )Investing activities:Purchases of property, plant and equipment
    
    
    (585
    )
    
    
    (346
    )Purchases of short-term investments
    
    
    (12,895
    )
    
    
    (3,747
    )Sales of short-term investments
    
    
    6,947
    
    
    
    15,988Proceeds from sale of assets
    
    
    40
    
    
    
    186Proceeds from sale of assets held for sale
    
    
    53
    
    
    
    1,450Net cash (used in) provided by investing activities
    
    
    (6,440
    )
    
    
    13,531Financing activities:Repayments on long-term borrowings
    
    
    (815
    )
    
    
    (1,265
    )Dividends on preferred stock
    
    
    (175
    )
    
    
    (175
    )Net proceeds from exercise of stock options
    
    
    89
    
    
    
    119Net cash used in financing activities
    
    
    (901
    )
    
    
    (1,321
    )Effect of exchange rates on cash
    
    
    315
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    (3,761
    )
    
    
    11,887Cash and cash equivalents at beginning of period
    
    
    13,276
    
    
    
    15,501Cash and cash equivalents at end of period
    
    $
    9,515
    
    
    $
    27,388
 5




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STRATOS INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (Unaudited)
 (in thousands)
 Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2005
    
    2004
    
    2005
    
    2004Net loss
    
    $
    (346
    )
    
    $
    (3,999
    )
    
    $
    (1,433
    )
    
    $
    (4,392
    )Other comprehensive income (loss):Foreign currency
translation adjustments
    
    
    (89
    )
    
    
    
    
    
    
    315
    
    
    
    Comprehensive loss
    
    $
    (435
    )
    
    $
    (3,999
    )
    
    $
    (1,118
    )
    
    $
    (4,392
    )
  6




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1. Basis of Presentation
   2. Recent Accounting Pronouncements
 Accounting for
Stock-Based Compensation.
 Inventory Costs
 7




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##### Table of Contents



3. Stock-Based Compensation
 Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees,
 Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2005
    
    2004
    
    2005
    
    2004Net loss attributable to common shareholders, as reported
    
    $
    (434
    )
    
    $
    (4,087
    )
    
    $
    (1,608
    )
    
    $
    (4,567
    )Add: Total stock based compensation recognized under intrinsic
method for all awards
    
    
    206
    
    
    
    
    
    
    
    409
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (287
    )
    
    
    (213
    )
    
    
    (580
    )
    
    
    (483
    )Pro forma net loss attributable to common shareholders
    
    $
    (515
    )
    
    $
    (4,300
    )
    
    $
    (1,779
    )
    
    $
    (5,050
    )Reported basic and diluted net loss per share attributable to common
shareholders
    
    $
    (0.03
    )
    
    $
    (0.30
    )
    
    $
    (0.12
    )
    
    $
    (0.34
    )Pro forma basic and diluted net loss per share attributable to common
shareholders
    
    $
    (0.04
    )
    
    $
    (0.32
    )
    
    $
    (0.13
    )
    
    $
    (0.37
    )Shares outstanding, basic and diluted
    
    
    13,921
    
    
    
    13,549
    
    
    
    13,913
    
    
    
    13,542
  8




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##### Table of Contents



4. Loss Per Share
 Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss attributable to common shareholders
    
    $
    (434
    )
    
    $
    (4,087
    )
    
    $
    (1,608
    )
    
    $
    (4,567
    )Weighted average number of shares
outstanding, basic and diluted
    
    
    13,921
    
    
    
    13,549
    
    
    
    13,913
    
    
    
    13,542Basic and diluted loss per share
    
    $
    (0.03
    )
    
    $
    (0.30
    )
    
    $
    (0.12
    )
    
    $
    (0.34
    )
  5. Intangible Assets
  October 31, 2005
    
    
    April 30, 2005Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    UsefulAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    LivesAmortizable Intangible AssetsCustomer relationships
    
    $
    10,800
    
    
    $
    (1,728
    )
    
    $
    9,072
    
    
    $
    10,800
    
    
    $
    (1,296
    )
    
    $
    9,504
    
    
    12.50 yearsPatents and related technology
    
    
    4,466
    
    
    
    (1,011
    )
    
    $
    3,455
    
    
    
    4,466
    
    
    
    (951
    )
    
    
    3,515
    
    
    14.25 yearsDeveloped software
    
    
    700
    
    
    
    (467
    )
    
    
    233
    
    
    
    700
    
    
    
    (257
    )
    
    
    443
    
    
    3.00 yearsTotal amortized intangible assets
    
    $
    15,966
    
    
    $
    (3,206
    )
    
    $
    12,760
    
    
    $
    15,966
    
    
    $
    (2,504
    )
    
    $
    13,462
 Fiscal Year2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    ThereafterAmortization
amount
    
    $
    (1,311
    )
    
    $
    (1,311
    )
    
    $
    (1,311
    )
    
    $
    (1,194
    )
    
    $
    (1,171
    )
    
    $
    (7,536
    )
  9




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6. Assets Held For Sale
  7. Restructuring Charges
   Balance
    
    2006
    
    Utilized through
    
    BalanceApril 30, 2005
    
    Charges
    
    October 31, 2005
    
    October 31, 2005Employee costs
    
    $
    277
    
    
    $
    483
    
    
    $
    (175
    )
    
    $
    585Idle facility rental
    
    
    1,799
    
    
    
    
    
    
    
    (442
    )
    
    
    1,357Total
    
    $
    2,076
    
    
    $
    483
    
    
    $
    (617
    )
    
    $
    1,942
 8. Income Taxes
   10




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9. Long-Term Debt
  10. Other Current Liabilities
  October 31,
    
    April 30,2005
    
    2005Other Current LiabilitiesEmployee costs
    
    $
    2,531
    
    
    $
    2,598Rent for limited-use facilities
    
    
    1,357
    
    
    
    1,799Legal fees, litigation and claims
    
    
    716
    
    
    
    4,352Other Current Liabilities
    
    
    836
    
    
    
    663Commissions
    
    
    639
    
    
    
    1,037Real estate and other taxes
    
    
    296
    
    
    
    386Inventory received, not vouchered
    
    
    272
    
    
    
    424Total
    
    $
    6,647
    
    
    $
    11,259
 11. Litigation
   11




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12




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13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
   Results of Operations
 Three Months Ended October 31, 2005 and 2004
  14




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Three Months EndedOctober 31,2005
    
    2004
    
    ChangeDollars
    
    %
    
    Dollars
    
    %
    
    Dollars
    
    %Revenues:Net sales
    
    $
    18,949
    
    
    
    99.7
    %
    
    $
    18,181
    
    
    
    99.8
    %
    
    $
    768
    
    
    
    4.2
    %License fees and royalties
    
    
    65
    
    
    
    0.3
    %
    
    
    29
    
    
    
    0.2
    %
    
    
    36
    
    
    
    124.1
    %Total revenues
    
    
    19,014
    
    
    
    100.0
    %
    
    
    18,210
    
    
    
    100.0
    %
    
    
    804
    
    
    
    4.4
    %Costs of revenues
    
    
    12,262
    
    
    
    64.5
    %
    
    
    12,439
    
    
    
    68.3
    %
    
    
    (177
    )
    
    
    (1.4
    %)Gross profit
    
    
    6,752
    
    
    
    35.5
    %
    
    
    5,771
    
    
    
    31.7
    %
    
    
    981
    
    
    
    17.0
    %Operating expenses:Research and development
    
    
    1,839
    
    
    
    9.7
    %
    
    
    2,422
    
    
    
    13.3
    %
    
    
    (583
    )
    
    
    (24.1
    %)Sales and marketing
    
    
    2,536
    
    
    
    13.3
    %
    
    
    2,610
    
    
    
    14.3
    %
    
    
    (74
    )
    
    
    (2.8
    %)General and administrative
    
    
    3,562
    
    
    
    18.7
    %
    
    
    6,197
    
    
    
    34.0
    %
    
    
    (2,635
    )
    
    
    (42.5
    %)Restructuring and other charges
    
    
    483
    
    
    
    2.5
    %
    
    
    
    
    
    
    0.0
    %
    
    
    483Litigation settlements, net
    
    
    
    
    
    
    0.0
    %
    
    
    (1,463
    )
    
    
    (8.0
    %)
    
    
    1,463
    
    
    
    (100.0
    %)Total operating expenses
    
    
    8,420
    
    
    
    44.3
    %
    
    
    9,766
    
    
    
    53.6
    %
    
    
    (1,346
    )
    
    
    (13.8
    %)Loss from operations
    
    
    (1,668
    )
    
    
    (8.8
    %)
    
    
    (3,995
    )
    
    
    (21.9
    %)
    
    
    2,327
    
    
    
    (58.2
    %)Investment income, net
    
    
    295
    
    
    
    1.6
    %
    
    
    65
    
    
    
    0.4
    %
    
    
    230
    
    
    
    353.8
    %Other income (expense)
    
    
    1,027
    
    
    
    5.4
    %
    
    
    (69
    )
    
    
    (0.4
    %)
    
    
    1,096
    
    
    
    (1588.4
    %)Loss before income taxes
    
    
    (346
    )
    
    
    (1.8
    %)
    
    
    (3,999
    )
    
    
    (22.0
    %)
    
    
    3,653
    
    
    
    (91.3
    %)Provision for income taxes
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Net loss
    
    $
    (346
    )
    
    
    (1.8
    %)
    
    $
    (3,999
    )
    
    
    (22.0
    %)
    
    $
    3,653
    
    
    
    (91.3
    %)
 Net Sales:
 License Fees and Royalties:
 Backlog:
 Cost of Revenues and Gross Margins:
 15




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Research and Development.
  Sales and Marketing
 General and Administrative.
 Restructuring and Other Charges ,
 Litigation settlements, net:
 Investment income, net:
 Other
income (expense):
 16




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##### Table of Contents



Income Taxes:
 Six Months Ended October 31, 2005 and 2004
 Six Months EndedOctober 31,2005
    
    2004
    
    ChangeDollars
    
    %
    
    Dollars
    
    %
    
    Dollars
    
    %Revenues:Net sales
    
    $
    39,429
    
    
    
    99.5
    %
    
    $
    39,204
    
    
    
    99.4
    %
    
    $
    225
    
    
    
    0.6
    %License fees and royalties
    
    
    209
    
    
    
    0.5
    %
    
    
    249
    
    
    
    0.6
    %
    
    
    (40
    )
    
    
    (16.1
    %)Total revenues
    
    
    39,638
    
    
    
    100.0
    %
    
    
    39,453
    
    
    
    100.0
    %
    
    
    185
    
    
    
    0.5
    %Costs of revenues
    
    
    24,715
    
    
    
    62.4
    %
    
    
    26,253
    
    
    
    66.5
    %
    
    
    (1,538
    )
    
    
    (5.9
    %)Gross profit
    
    
    14,923
    
    
    
    37.6
    %
    
    
    13,200
    
    
    
    33.5
    %
    
    
    1,723
    
    
    
    13.1
    %Operating expenses:Research and development
    
    
    3,843
    
    
    
    9.7
    %
    
    
    4,828
    
    
    
    12.2
    %
    
    
    (985
    )
    
    
    (20.4
    %)Sales and marketing
    
    
    5,083
    
    
    
    12.8
    %
    
    
    5,419
    
    
    
    13.7
    %
    
    
    (336
    )
    
    
    (6.2
    %)General and administrative
    
    
    7,866
    
    
    
    19.8
    %
    
    
    11,377
    
    
    
    28.8
    %
    
    
    (3,511
    )
    
    
    (30.9
    %)Restructuring and other charges
    
    
    483
    
    
    
    1.2
    %
    
    
    
    
    
    
    0.0
    %
    
    
    483Litigation settlements, net
    
    
    
    
    
    
    0.0
    %
    
    
    (4,026
    )
    
    
    (10.2
    %)
    
    
    4,026
    
    
    
    (100.0
    %)Total operating expenses
    
    
    17,275
    
    
    
    43.6
    %
    
    
    17,598
    
    
    
    44.6
    %
    
    
    (323
    )
    
    
    (1.8
    %)Loss from operations
    
    
    (2,352
    )
    
    
    (5.9
    %)
    
    
    (4,398
    )
    
    
    (11.1
    %)
    
    
    2,046
    
    
    
    (46.5
    %)Investment income, net
    
    
    547
    
    
    
    1.4
    %
    
    
    129
    
    
    
    0.3
    %
    
    
    418
    
    
    
    324.0
    %Other income (expense)
    
    
    381
    
    
    
    1.0
    %
    
    
    (123
    )
    
    
    (0.3
    %)
    
    
    504
    
    
    
    (409.8
    %)Loss before income taxes
    
    
    (1,424
    )
    
    
    (3.6
    %)
    
    
    (4,392
    )
    
    
    (11.1
    %)
    
    
    2,968
    
    
    
    (67.6
    %)Provision for income taxes
    
    
    (9
    )
    
    
    (0.0
    %)
    
    
    
    
    
    
    0.0
    %
    
    
    (9
    )
    
    
    0.0
    %Net loss
    
    $
    (1,433
    )
    
    
    (3.6
    %)
    
    $
    (4,392
    )
    
    
    (11.1
    %)
    
    $
    2,959
    
    
    
    (67.4
    %)
 Net sales
 17




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License Fees and Royalties.
 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.
 18




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Other
income:
 Income Taxes.
 Liquidity and Capital Resources
      19




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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 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
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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 cautionary statements included as Exhibit 99 Risks relating to our business
to this quarterly report for a more detailed discussion of the foregoing and other factors that
could cause actual results to differ materially from those included in the forward-looking
statements and that, among others, should be considered in evaluating our financial outlook.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  22




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Item 4. Controls and Procedures.
   23




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PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings.
    24




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25




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##### 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 communications industry 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




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##### 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
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##### Table of Contents



adversely affects our customers ability to comply with these requirements, 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.
  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




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##### 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




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##### 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




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##### 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




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##### 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
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##### Table of Contents




    
    Amortization expenses related to intangible assets
  
    
    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




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##### 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




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##### Table of Contents



Item 4. Submission of Matters to Vote of Security Holders
     Votes For
    
    
    Authority withheldReginald W. Barrett
    
    
    11,323,484
    
    
    
    1,763,952Kenne P. Bristol
    
    
    12,270,650
    
    
    
    816,786Phillip A. Harris
    
    
    12,286,109
    
    
    
    801,327David Y. Howe
    
    
    10,218,549
    
    
    
    2,868,887Charles Daniel Nelsen
    
    
    12,285,250
    
    
    
    802,186Edward J. OConnell
    
    
    11,325,551
    
    
    
    1,761,885Newell V. Starks
    
    
    11,155,371
    
    
    
    1,932,065
  For:
    
    
    13,037,758
    
    
    Against:
    
    
    43,585Abstain:
    
    
    6,093
    
    
    Broker Non-Votes:
    
    
    N/A
  For:
    
    
    13,039,985
    
    
    Against:
    
    
    41,234Abstain:
    
    
    6,217
    
    
    Broker Non-Votes:
    
    
    N/A
  For:
    
    
    5,082,902
    
    
    Against:
    
    
    3,343,228Abstain:
    
    
    9,941
    
    
    Broker Non-Votes:
    
    
    4,651,365
 
 Item 6. Exhibits.
  35




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##### Table of Contents



Number
    
    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)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)
 36




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##### Table of Contents



Number
    
    Description of Document10.3
    
    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)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)
 37




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##### Table of Contents



Number
    
    Description of Document10.17
    
    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 ** (incorporated by reference to Exhibit 10.19 on Form
10-Q filed on September 13, 2005)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 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 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 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 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
registrants Current Report on Form 8-K, filed September 21, 2005)10.28
    
    Amendment to Restricted Stock Agreements between the Registrant and
Newell V. Starks, dated as of December 6, 2005** (incorporated by
reference to Exhibit 99.4 to 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.**
    
    Management contract or compensatory plan or arrangement.
    
    Furnished herewith. 38




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##### Table of Contents



SIGNATURES
  Date:  December 13, 2005
    Stratos International, Inc.By:
    /s/ Barry HollingsworthBarry HollingsworthChief Financial Officer By:
    /s/                         Phillip A. HarrisPhillip A. HarrisPresident and Chief Executive Officer 39