** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

**x****     QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly periodended November 3, 2007**

 

**or**

** **

**o****      TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Commission File Number:001-33109**

 

**OPTIUM CORPORATION**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                    | ** ** | **59-3684497**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

## **200Precision Road, Horsham PA 19044**

(Address of principalexecutive offices) (Zip Code)

 

**(267) 803-3800**

(Registrant’s telephonenumber, including area code)

 

      Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

x Yes                                o No

 

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

 

| Large accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer  x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

                Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes  x No

 

             As of December 10,2007, the registrant had 25,441,299 shares of Common Stock, par value $.0001,outstanding. This number excludes 1,494,085 shares held by the registrant astreasury shares.

 

 

 

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**TABLE OF CONTENTS**

 

 
| **PART I**           | ** **                                                                                                                   |
|---------------------------|------------------------------------------------------------------------------------------------------------------------------|
| **Financial Information** | ** **                                                                                                                   |
| ** **                | ** **                                                                                                                   | **P**age |
| **ITEM 1.**               | **Financial Statements.**                                                                                                    | ** ** |
|                      |                                                                                                                         |
| 1.                        | Condensed Consolidated  Statements of Operations for the Three-Months ended November 3, 2007 and  October 28, 2006 | 2 |
|                      |                                                                                                                         |   |
| 2.                        | Condensed Consolidated  Balance Sheets as of November 3, 2007 and July 28, 2007                                    | 3 |
|                      |                                                                                                                         |   |
| 3.                        | Condensed Consolidated  Statements of Cash Flows for the Three-Months ended November 3, 2007 and  October 28, 2006 | 4 |
|                      |                                                                                                                         |   |
| 4.                        | Notes to  Condensed Consolidated Financial Statements                                                                        | 5 |
|                      |                                                                                                                         |
| **ITEM 2.**               | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.**                             | 21 |
|                      |                                                                                                                         |   |
| **ITEM 3.**               | **Quantitative  and Qualitative Disclosures about Market Risk.**                                                             | 26 |
|                      |                                                                                                                         |   |
| **ITEM  4.**              | **Controls  and Procedures.**                                                                                                | 26 |
|                      |                                                                                                                         |   |
| **PART II**          |                                                                                                                         |
| **Other Information**     |                                                                                                                         |
|                      |                                                                                                                         |   |
| **ITEM  1.**              | **Legal  Proceedings.**                                                                                                      | 27 |
|                      |                                                                                                                         |   |
| **ITEM 1A.**              | **Risk  Factors.**                                                                                                           | 27 |
|                      |                                                                                                                         |   |
| **ITEM 2.**               | **Unregistered  Sales of Equity Securities and Use of Proceeds.**                                                            | 39 |
|                      |                                                                                                                         |   |
| **ITEM 3.**               | **Defaults Upon  Senior Securities.**                                                                                        | 39 |
|                      |                                                                                                                         |   |
| **ITEM 4.**               | **Submission of  Matters to a Vote of Security Holders.**                                                                    | 39 |
|                      |                                                                                                                         |   |
| **ITEM 5.**               | **Other information.**                                                                                                       | 39 |
|                      |                                                                                                                         |   |
| **ITEM 6.**               | **Exhibits.**                                                                                                                | 39 |
|                      |                                                                                                                         |   |
| **SIGNATURES**            | 40                                                                                                                           |
|                           |                                                                                                                              |  |  |

 

 

ii

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**FORWARD-LOOKING STATEMENTS**

 

From time to time, theCompany makes forward-looking statements. Forward-looking statements includefinancial projections, statements of plans and objectives for futureoperations, statements of future economic performance, and statements ofassumptions relating thereto. When used in this document, the words “will,” “plan,”“believe,” “may,” “anticipate,” “ could,” “seek,” “estimate,” “expect,” “continue,”“intend,” and similar expressions, variations or the negatives of these termsare intended to identify forward-looking statements. Although managementbelieves that the expectations reflected in these forward-looking statementsare reasonable at the time they are made, no assurance can be made that theseexpectations will prove to be correct.

 

TheCompany may include forward-looking statements in its periodic reports to theSecurities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its annualreport to shareholders, in its proxy statements, in its press releases, inother written materials, and in statements made by employees to analysts,investors, representatives of the media, and others.

 

By their very nature,forward-looking statements are subject to uncertainties, both general andspecific, and risks exist that predictions, forecasts, projections and otherforward-looking statements will not be achieved.  Actual results may differ materially due to avariety of factors including, without limitation, those discussed under “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations;”Risk Factors;” and elsewhere in this report. Investors and others should carefully consider these factors and otheruncertainties and events, whether or not the statements are described asforward-looking.

 

Forward-lookingstatements made by the Company are intended to apply only at the time they aremade, unless explicitly stated to the contrary. Moreover, whether or not statedin connection with a forward-looking statement, the Company makes no commitmentto revise or update any forward-looking statements in order to reflect eventsor circumstances after the date any such statement is made. If the Company werein any particular instance to update or correct a forward-looking statement,investors and others should not conclude that the Company will make additionalupdates or corrections thereafter.

 

 

 

1

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**PART I**

**Financial Information**

 

**ITEM 1. Financial Statements**

 

**Optium Corporation**

**Condensed Consolidated Statements of Operations**

**(unaudited)**

*(in thousands, except per share data)*

 

| ** **                                          | ** ** | **Three months  ended** | ** ** | **Three months  ended** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **November 3,  2007**   | ** ** | **October 28,  2006**   | ** ** |
| Revenue                                             |       | $                       | 36,120     |                    | $          | 30,010 |   |
| Cost of revenue                                     |       | 26,451                  |       | 21,305                  |       |
| Gross profit                                        |       | 9,669                   |       | 8,705                   |       |
| Operating expenses:                                 |       |                    |       |                    |       |
| Research and product development                    |       | 5,037                   |       | 2,996                   |       |
| Selling, general and administrative                 |       | 6,351                   |       | 2,827                   |       |
| Total operating expenses                            |       | 11,388                  |       | 5,823                   |       |
| Income (loss) from  operations                      |       | (1,719                  | )          | 2,882                   |       |
| Interest and other income  (expense), net           |       | 706                     |       | 56                      |       |
| Income (loss) before  income tax expense            |       | (1,013                  | )          | 2,938                   |       |
| Income tax expense                                  |       | 66                      |       | 179                     |       |
| Net income (loss)                                   |       | $                       | (1,079     | )                       | $          | 2,759 |   |
|                                                |       |                    |       |                    |       |   |   |
| Basic net income (loss)  per share                  |       | $                       | (0.04      | )                       | $          | 0.96 |   |
| Basic weighted average  common shares outstanding   |       | 25,434                  |       | 2,864                   |       |
|                                                |       |                    |       |                    |       |
| Diluted net income (loss)  per share                |       | $                       | (0.04      | )                       | $          | 0.13 |   |
| Diluted weighted average  common shares outstanding |       | 25,434                  |       | 20,630                  |       |

 

*See accompanying notes to the financial statements.*

 

 

2

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**Optium Corporation**

**Condensed Consolidated Balance Sheets**

*(in  thousands, except shareamounts)*

 
| ** **                                                                                                                                                                                 | ** ** | **November 3, 2007** | ** ** | **July 28, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **(unaudited)**           | ** ** | ** **             | ** ** |
| **Assets**                                                                                                                                                                                 |       |                      |       |                   |       |
| Current assets:                                                                                                                                                                            |       |                      |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                         | 29,790     |                   | $          | 25,359 |   |
| Short-term investments                                                                                                                                                                     |       | 21,780                    |       | 36,018                 |       |
| Accounts receivable, net of allowances of $56 and $46, respectively                                                                                                                        |       | 28,700                    |       | 21,853                 |       |
| Inventories                                                                                                                                                                                |       | 21,159                    |       | 20,684                 |       |
| Restricted cash                                                                                                                                                                            |       | 68                        |       | 68                     |       |
| Deferred tax asset                                                                                                                                                                         |       | 5,488                     |       | 4,976                  |       |
| Prepaid expenses and other current assets                                                                                                                                                  |       | 1,320                     |       | 1,039                  |       |
| Total current assets                                                                                                                                                                       |       | 108,305                   |       | 109,997                |       |
| Property and equipment,  net                                                                                                                                                               |       | 10,969                    |       | 9,124                  |       |
| Other assets                                                                                                                                                                               |       | 266                       |       | 170                    |       |
| Intangible assets, net                                                                                                                                                                     |       | 1,908                     |       | 2,006                  |       |
| Goodwill                                                                                                                                                                                   |       | 38,614                    |       | 37,923                 |       |
| Deferred tax asset                                                                                                                                                                         |       | 8,475                     |       | 8,881                  |       |
| Total assets                                                                                                                                                                               |       | $                         | 168,537    |                   | $          | 168,101 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                             |       |                      |       |                   |       |
| Current liabilities:                                                                                                                                                                       |       |                      |       |                   |       |
| Accounts payable                                                                                                                                                                           |       | $                         | 19,532     |                   | $          | 20,222 |   |
| Accrued expenses                                                                                                                                                                           |       | 4,554                     |       | 4,389                  |       |
| Accrued warranty                                                                                                                                                                           |       | 324                       |       | 359                    |       |
| Current portion of debt                                                                                                                                                                    |       | 42                        |       | 46                     |       |
| Total current liabilities                                                                                                                                                                  |       | 24,452                    |       | 25,016                 |       |
| Long-term debt, net of  current portion                                                                                                                                                    |       | 10                        |       | 17                     |       |
| Other long-term  liabilities                                                                                                                                                               |       | 318                       |       | 189                    |       |
| Total liabilities                                                                                                                                                                          |       | 24,780                    |       | 25,222                 |       |
| **Stockholders’ equity:**                                                                                                                                                             | ** ** | ** **                | ** ** | ** **             | ** ** |
| Common  stock, $0.0001 par value — 100,000,000 shares authorized, 26,931,848 and  26,924,963 shares issued, respectively; 25,437,763 and 25,430,878 shares  outstanding, respectively |       | 3                         |       | 3                      |       |
| Additional paid in capital                                                                                                                                                                 |       | 192,222                   |       | 191,118                |       |
| Deferred compensation                                                                                                                                                                      |       | (799                      | )          | (924                   | )          |
| Treasury stock, 1,494,085  shares of common stock — at cost                                                                                                                           |       | (2,762                    | )          | (2,762                 | )          |
| Accumulated deficit                                                                                                                                                                        |       | (47,570                   | )          | (46,395                | )          |
| Accumulated other  comprehensive income                                                                                                                                                    |       | 2,663                     |       | 1,839                  |       |
| Total stockholders’ equity                                                                                                                                                            |       | 143,757                   |       | 142,879                |       |
| Total liabilities and  stockholders’ equity                                                                                                                                           |       | $                         | 168,537    |                   | $          | 168,101 |   |

 

*See accompanying notes to the financial statements.*

 

 

3

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**Optium Corporation**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**

*(in thousands)*

* *

| ** **                                                                                | ** ** | **Three months  ended** | ** ** | **Three months  ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | **November 3,  2007**   | ** ** | **October 28,  2006**   | ** ** |
| **Cash flows from operating  activities**                                                 |       |                    |       |                    |       |
| Net income (loss)                                                                         |       | $                       | (1,079     | )                       | $          | 2,759 |   |
| Adjustments to reconcile net income (loss) to net cash (used in)  provided by operations: |       |                    |       |                    |       |
| Depreciation and amortization                                                             |       | 911                     |       | 626                     |       |
| Stock-based compensation                                                                  |       | 973                     |       | 192                     |       |
| Provision for doubtful accounts                                                           |       | 10                      |       | 30                      |       |
| Change in deferred taxes                                                                  |       | (58                     | )          | —                  |       |
| Changes in operating assets and liabilities:                                              |       |                    |       |                    |       |
| Accounts receivable                                                                       |       | (6,969                  | )          | 738                     |       |
| Inventories                                                                               |       | 9                       |       | (4,677                  | )          |
| Prepaid expenses and other current assets                                                 |       | (198                    | )          | 11                      |       |
| Other assets                                                                              |       | (53                     | )          | (610                    | )          |
| Accounts payable                                                                          |       | (760                    | )          | 2,623                   |       |
| Accrued expenses                                                                          |       | 188                     |       | 838                     |       |
| Other current liabilities                                                                 |       | —                  |       | (2,482                  | )          |
| Accrued warranty                                                                          |       | (36                     | )          | 118                     |       |
| Other long-term liabilities                                                               |       | (31                     | )          | 45                      |       |
| Net cash (used in)  provided by operating activities                                      |       | (7,093                  | )          | 211                     |       |
| **Cash flows from investing  activities**                                                 |       |                    |       |                    |       |
| Purchase of property and  equipment                                                       |       | (2,285                  | )          | (930                    | )          |
| Purchase of short-term  investments                                                       |       | (13,537                 | )          | —                  |       |
| Maturities and sales of short-term  investments                                           |       | 27,775                  |       | —                  |       |
| Net cash provided by (used  in) investing activities                                      |       | 11,953                  |       | (930                    | )          |
| **Cash flows from financing  activities**                                                 |       |                    |       |                    |       |
| Payments of line of credit                                                                |       | (10                     | )          | (77                     | )          |
| Deferred financing costs                                                                  |       | —                  |       | (1,101                  | )          |
| Proceeds from exercise of  employee stock options                                         |       | 6                       |       | 36                      |       |
| Net cash (used in)  financing activities                                                  |       | (4                      | )          | (1,142                  | )          |
| Effect of exchange rate  changes on cash and cash equivalents                             |       | (425                    | )          | (3                      | )          |
|                                                                                      |       |                    |       |                    |       |
| Net increase (decrease) in  cash and cash equivalents                                     |       | 4,431                   |       | (1,864                  | )          |
|                                                                                      |       |                    |       |                    |       |
| Cash and cash equivalents,  beginning of period                                           |       | 25,359                  |       | 10,377                  |       |
|                                                                                      |       |                    |       |                    |       |
| Cash and cash equivalents,  end of period                                                 |       | $                       | 29,790     |                    | $          | 8,513 |   |

 

*See accompanying notes to the financial statements.*

 

 

4

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**Optium Corporation**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

 

**1.  Organization and Operations**

 

                OptiumCorporation (the “Company”) was incorporated in the State of Delaware on September 8,2000. The Company is a leading designer and manufacturer of high-performanceoptical subsystems supporting core to the edge applications for use intelecommunications and cable TV network systems.  Since its founding in 2000, Optium hasdeveloped or acquired proprietary technology and products that enabletransmission and switching functionality for high-bandwidth, intelligentoptical networking applications. The Company supplies an extensive suite ofoptical subsystems, including 10Gb/s and 40Gb/s transceivers, cable TV andfiber to the home, or FTTH, transmitters, analog RF over fiber products, linecards, circuit packs and its technologically innovative wavelength selectiveswitch reconfigurable optical add/drop multiplexer products, or WSS ROADMs.   The Company’s optical subsystems are used in networksystems that deliver voice, video and other data services for consumers andenterprises that are delivered in the long haul, metropolitan and accesssegments, referred to as the core to the edge, of telecommunications and cableTV networks. The Company’s customers are network systems vendors whosecustomers include wireline and wireless telecommunications service providersand cable TV operators, collectively referred to as carriers.

 

On November 1, 2006, the Company closed its initial public offering of5.98 million shares of common stock, including the sale of an additional780,000 shares to cover underwriter over-allotments.  The Company’s common stock, quoted on theNASDAQ Global Market under the symbol “OPTM,” began trading on October 27,2006.  Cash proceeds to the Company, netof underwriter commissions of approximately $7.3 million and related offeringexpenses of approximately $4.1 million, totaled approximately $93.2 million(including approximately $1.9 million of offering expenses paid during fiscalyear 2006).  All preferred stockoutstanding at November 1, 2006 was converted to common stock upon thecompletion of the initial public offering.

 

**2.  Summary of Significant Accounting Policies**

 

***Principles ofconsolidation***

 

                Theconsolidated financial statements include Optium Corporation and its whollyowned subsidiaries, Optium Australia Pty Limited, Optium Israel Limited,and Kailight Photonics Inc. All intercompany accounts and transactions havebeen eliminated in the consolidation.

 

***Fiscal year***

 

                Optium operates on a 52 or 53 weekfiscal year, which ends on the Saturday closestto July 31.Fiscal year 2008 consists of 53 weeks. Each quarter consists of 13 or 14weeks; the first quarter of fiscal year 2008 consisted of 14 weeks.

 

***Use of estimatesand adjustments***

 

                Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of income and loss during thereporting period. Actual results could differ from those estimates. In theopinion of management, all adjustments (consisting solely of normal recurringadjustments) necessary for a fair presentation of the financial statements forthe interim periods presented  have beenincluded.

 

***Cash and cashequivalents***

 

                TheCompany considers all highly liquid securities purchased with originalmaturities of 90 days or less to be cash equivalents.  Money market accounts that are classified ascash equivalents are stated at cost, which approximates market value  Other short-term investments that mature inless than ninety days and are classified as cash equivalents are reported atfair value, with resulting unrealized gains or losses reported as aseparate component of stockholders’ equity.

 

 

5

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                Atboth November 3, 2007 and July 28, 2007, the Company had restrictedcash relating to an operating lease in the form of a certificate of deposit for$68,000, which is renewed on a monthly basis. The term of the certificate ofdeposit extends from the commencement date of the lease (May 1, 2001)through at least ninety (90) days after the expiration of the lease term (April 30,2008). There was a release of $180,000 of restricted cash made during fiscalyear 2007, which the Company has not collected as of November 3, 2007.

 

***Foreign currencytranslation***

 

                Thefinancial statements for the Company’s foreign subsidiary, Optium Australia,are measured using the local currency (the Australian dollar) as the functionalcurrency. Foreign assets and liabilities in the consolidated balance sheetshave been translated at the rate of exchange as of the balance sheet date.Revenues and expenses are translated at the average exchange rate for themonth. Translation adjustments do not impact the results of operations and arereported as a separate component of stockholders’ equity. Foreign currencytransaction gains and losses are included in the results of operations.

 

***Accountsreceivable***

 

                TheCompany carries its accounts receivable at the amount that it considers to becollectible and does not require collateral from its customers. Accordingly, anallowance account is established through a charge against operations in anamount deemed adequate to absorb the uncollectible portion of such receivables.The allowance is determined through management review of outstanding amountsper customer. At November 3, 2007 and July 28, 2007, an allowance of$56,200 and $46,440 respectively, based on management’s best estimate, wasavailable to absorb any uncollectible balances.

 

***Inventories***

 

                Inventoriesare valued at the lower of cost or market value. Cost is determined on afirst-in, first-out method. The Company makes inventory commitments andpurchase decisions based upon sales forecasts. To mitigate potential componentsupply constraints, the Company builds inventory levels for certain items withlong supply lead times. The Company assesses the valuation of its inventory ona periodic basis and writes down the value for estimated excess and obsoleteinventory based on estimates of future demand. The Company defines obsoleteinventory as inventory that will no longer be used in its manufacturingprocesses. Excess inventory is defined as inventory in excess of projectedusage and is determined using management’s best estimate of future demand,based upon information then available to the Company.

 

***Property andequipment***

 

                Propertyand equipment are stated at cost net of accumulated depreciation. Expendituresfor maintenance and repairs are charged to expense as incurred, whereas majorbetterments are capitalized as additions to property and equipment. The Companyprovides for depreciation and amortization using the straight-line method andcharges amounts to operations to allocate the cost of the assets over theirestimated useful lives. Useful lives of the Company’s asset categories are:machinery and equipment of five years, computer equipment and software ofthree years; and furniture and office equipment of seven years. Thecosts of leasehold improvements on leased office and warehouse space are capitalizedand amortized using the straight-line method over the shorter of the life ofthe applicable lease or the useful life of the improvement.

 

                Assetsheld under capital leases are recorded at the lower of the fair market value ofthe asset or the present value of future minimum lease payments and areamortized using the straight-line method over the primary term of the relevantcapital lease. The Company had no capital lease obligations as of November 3,2007 and July 28, 2007.

 

***Intangible assets***

 

***               ***Intangible assets consist of intellectual property and are stated atcost less accumulated amortization. Intangible assets are amortized using thestraight-line method over their estimated useful life, which is five years.Useful lives and related amortization expense are based on management’sestimate of the period that the assets will generate revenues or otherwise beused by the Company. If assets are considered impaired, the impairmentrecognized is the amount by which the carrying value of the assets exceeds thefair value of the assets.

 

 

6

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***Valuation ofgoodwill***

 

                Underthe Statements of Financial Accounting Standards, or SFAS, No. 142, *Goodwill and Other Intangible Assets*, goodwill is subject toannual impairment testing criteria. The Company’s policy is to compare thecarrying value of a business unit’s net assets to the estimated fair value ofthe business unit, using a sales multiple approach to project the business unit’sfair value. The fair value is based on management’s estimate of future revenuesto be generated by the business component. Such estimated future revenuesconsider factors such as future operating income and historical trends. TheCompany tests for impairment on an annual basis or on an interim basis ifcircumstances change that would indicate the possibility of impairment. Theimpairment review requires an analysis of future projections and assumptionsabout the Company’s operating performance. If such a review indicates that theassets are impaired, a charge to operations would be recorded for the amount ofthe impairment, and the corresponding impaired assets would be reduced incarrying value. The Company did not identify an asset impairment related to thecarrying value of goodwill as of November 3, 2007.

 

***Impairment oflong-lived assets***

 

                SFASNo. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, or SFAS 144, established accounting standards forthe impairment of long-lived assets and certain identifiable intangiblesrelated to those assets to be held and used, and for long-lived assets andcertain identifiable intangibles to be disposed of. Long-lived assets consistprimarily of property and equipment. In accordance with SFAS 144, theCompany continually evaluates whether events or circumstances have occurred toindicate that the estimated remaining useful life of its long-lived assets maywarrant revision or the carrying value might be impaired. The carrying value oflong-lived assets is considered impaired when the total projected undiscountedcash flows from such assets are less than carrying value. The Companydetermined that no event or circumstance occurred which would have warranted arevision to carrying value of its long-lived assets as of November 3,2007.

 

***Fair value of financialinstruments***

 

                Financialinstruments consist of cash and cash equivalents, restricted cash, accountsreceivable, accounts payable and notes payable. The carrying amounts of theCompany’s financial instruments approximate their fair values.

 

***Short-terminvestments***

 

TheCompany considers all short-term investments as available-for-sale and recordsall short-term investments at fair value, with resulting unrealized gains orlosses reported as a separate component of stockholders’ equity. Those investmentswith an original maturity of less than ninety days are classified as cashequivalents, while those with an original maturity of greater than ninety daysare classified as short-term investments on the Company’s balance sheet.

 

***Stock-basedcompensation***

 

**               **Effective July 30,2006, the Company adopted SFAS  No. 123R,*Share-Based Payment,* or SFAS123R, which requires companies to recognize in their statement of operationsall share-based payments, including grants of stock options and restrictedstock units, based on the grant date fair value. The Company adopted SFAS 123Rusing the prospective transition method. Stock-based compensation is measuredat the grant date, based on the fair value of the award, and expensed over therequisite service period. The application of SFAS 123R involves significantamounts of judgment in the determination of inputs into the Black-Scholes modelwhich the Company uses to determine the value of stock options. Inherent inthis model are assumptions related to expected stock price volatility, optionlife, risk free interest rate and dividend yield. While the risk free interestrate and dividend yield are less subjective assumptions, typically based onfactual data derived from public sources, the expected stock-price volatility andoption life assumptions require a greater level of judgment which make themcritical accounting estimates. The fair value of each stock option grant duringthe first quarter of fiscal year 2008 was estimated on the date of the grantusing the Black-Scholes option-pricing model with the following assumptions:

 

| ** **                       | ** ** | **Three months ended  November 3, 2007** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| Average risk-free interest  rate |       | 4.32                                          | %          |
| Expected dividend yield          |       | 0                                             | %          |
| Expected life                    |       | 5  years                                      |       |
| Expected volatility              |       | 80                                            | %          |
| Forfeiture rate                  |       | 10.2                                          | %          |

 

 

7

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Risk-freeinterest rate: The Company uses the risk free interest rate of a U.S. Treasurynote with a similar term on the date of the grant.

 

Expecteddividend yield: The Company uses a 0% expected dividend yield as the Companyhas not paid and does not anticipate paying dividends in the near future.

 

Expectedlife: The Company’s expected life is based on the period the options areexpected to remain outstanding based on the vesting periods and expectations offuture employee actions.

 

Expectedvolatility: The Company estimated the expected volatility of the stock pricebased on an analysis of other volatility factors exhibited in the marketbecause of the limited history of the Company’s stock.

 

Forfeiturerate: The Company estimates forfeitures based on historical experience andfactors of known historical or future projected work force reduction actions toanticipate the projected forfeiture rates.

 

                Restricted stock units, or RSUs,have a fair value based on the closing price of the Company’s stock on the dateof grant. The RSUs granted during the three months ended November 3, 2007had a weighted average fair value of $9.66. Thesestock units will vest quarterly over a two year period beginning January 1,2008, and the total stock-based compensation associated with the RSUs will beexpensed over the requisite service period. A forfeiture rate of 5.1% was used tocalculate the stock-based compensation related to the restricted stock unitsgranted during the three months ended November 3, 2007.

 

***Revenuerecognition***

 

                TheCompany derives revenue from the manufacture and sale of optical subsystemproducts for use in high-performance network systems. Our revenue recognitionpolicy follows SEC Staff Accounting Bulletin No. 104, “RevenueRecognition.” Specifically, the Company recognizes product revenue when thefollowing requirements have been met:

 

·    *Evidence of an arrangement.*  Persuasive evidence exists of an arrangementwith a customer, typically consisting of a purchase order which detailsquantity, fixed schedule of delivery and agreed upon terms.

 

·    *Delivery and acceptance.*  Product has been shipped via third partycarrier, accepted and title has transferred to the customer, under terms agreedto by the customer. The only rights of return are under our warranty policy.

 

·    *Fixed or determinable fee.*  The amount of revenue to which we areentitled is fixed or determinable at the time of shipment. We assess whetherthe fee is fixed or determinable based on the payment terms associated with thetransaction and whether the sales price is subject to refund or adjustment.

 

·    *Collection is deemed probable.*  Collectability is reasonably assured andthere are no uncertainties with respect to customer acceptance. We assess collectabilitybased primarily on the creditworthiness of the customer as determined by creditchecks and analysis, as well as the customer’s payment history.

 

The Company is requiredto determine whether delivery has occurred, whether items will be returned orwhether the Company will be paid under normal terms. The Company specifiesdelivery terms and assesses each shipment against those terms and onlyrecognizes revenue when certain that the delivery terms have been met. To theextent that one or more of the conditions are not present, the Company delaysrecognition of revenue until all conditions are present.   Standard terms offered to customers arepayment due 30 days from the date of invoice. For certain customers, theCompany has negotiated payment terms different than 30 days to conform tosuch customer’s standard payment terms and/or such customer’s credit standing.

 

The Company may offerevaluation units to our current and potential customers, at no charge, forpurposes of expanding our customer base and product portfolio. Such units areexpensed when shipped and are recognized as part of selling, general andadministrative expense in the accompanying statement of operations

 

 

8

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***Productdevelopment costs***

 

                Thecosts of the development of hardware products are expensed as incurred.

 

***Shipping andhandling costs***

 

                Shippingand handling costs related to products sold are included in cost of revenue.

 

***Income taxes***

 

                TheCompany accounts for income taxes in accordance with the provisions ofSFAS No. 109, *Accounting for IncomeTaxes*, or SFAS 109. SFAS 109 requires the Company to account for income taxes using abalance sheet approach, requiring the recognition of deferred income tax assetsand liabilities for the expected future tax consequences of events having beenrecognized in the Company’s financial statements or tax returns. The Company adopted Financial AccountingStandards Board, or FASB,  InterpretationNo. 48 *Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement 109, Accounting for Income Taxe*s,or FIN 48, on July 29, 2007. Under the new provisions, the Company willnot recognize a tax benefit for an uncertain income tax positions unless it is “morelikely than not” that position is sustainable. Deferred income taxeshave been provided for the differences between the financial reporting carryingvalues and the income tax reporting basis of the Company’s assets andliabilities. These temporary differences consist of differences between thetiming of the deduction of certain amounts between income tax and financialstatement reporting purposes.

 

***Comprehensiveincome (loss)***

 

                SFASNo. 130, *Reporting Comprehensive Income*,requires disclosure of all components of comprehensive income (loss) on anannual and interim basis. Comprehensive income (loss) is defined as the changein equity of a business enterprise during a period from transactions and otherevents and circumstances from non-owner sources. Components of othercomprehensive income (loss) that the Company currently reports are gains andlosses from foreign currency translations and unrealized gains and losses fromshort-term investments, as follows (in thousands):

 

| ** **                                                        | ** ** | **Three months ended**     | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                        | ** ** | **November 3,  2007** | ** ** | **October 28,  2006** | ** ** |
| ** **                                                        | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Net income (loss)                                                 |       | $                          | (1,079     | ) | $ | 2,759 |   |
| Other comprehensive  income:                                      |       |                       |       |   |   |
| Unrealized gain (loss) on  investments                            |       | 7                          |       | — |   |
| Net change in cumulative  foreign currency translation adjustment |       | 793                        |       | 30 |   |
| Comprehensive income  (loss)                                      |       | $                          | (279       | ) | $ | 2,789 |   |

 

***Net income(loss) per share***

 

                TheCompany computes net income (loss) per share in accordance with SFAS No. 128,*Earnings per Share*, or SFAS 128.Under the provisions of SFAS 128, basic net income (loss) per share iscomputed by dividing the net income applicable to common stockholders for theperiod by the weighted average number of shares of common stock outstanding. Inaccordance with SFAS 128, incremental potential common shares from theconversion of preferred stock and the exercise of stock options and warrantsare included in the calculation of diluted net income (loss) per share exceptwhen the effect would be anti-dilutive. On October 10, 2006, the Company’s1-for-12 reverse stock split of the Company’s issued common stock becameeffective, and all share data has been retroactively adjusted to reflect thisreverse stock split.

 

The calculations for basic and diluted net income(loss) per share were as follows (in thousands, except per share data):

 

 

9

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| ** **                                           | ** ** | **Three months ended**     | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **November 3,  2007** | ** ** | **October  28,  2006** | ** ** |
| **Numerator:**                                       | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Net income (loss)                                    |       | $                          | (1,079     | ) | $ | 2,759 |   |
|                                                 |       |                       |       |   |   |
| **Denominator:**                                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Weighted average common  shares outstanding          |       | 25,434                     |       | 2,864 |   |
| Effect of dilutive shares                            |       |                       |       |   |   |
| Stock options                                        |       | —                     |       | 1,240 |   |
| Series A and C warrants                         |       | —                     |       | 82 |   |
| Conversion of preferred shares into common stock     |       | —                     |       | 16,444 |   |
| Adjusted weighted-average  common shares outstanding |       | 25,434                     |       | 20,630 |   |
|                                                 |       |                       |       |   |   |
| Basic net income (loss)  per share                   |       | $                          | (0.04      | ) | $ | 0.96 |   |
| Diluted net income (loss)  per share                 |       | $                          | (0.04      | ) | $ | 0.13 |   |

 

                Forthe three months ended November 3, 2007, options, unvested restrictedstock units and warrants to purchase 2,776,597 shares of common stock have beenexcluded from the calculation, as their impact would have been anti-dilutive.

 

***Segmentinformation***

 

                SFASNo. 131, *Disclosures about Segments of an Enterpriseand Related Information*, or SFAS 131, establishes standards forreporting information regarding operating segments in annual financialstatements and requires selected information of those segments to be presentedin interim financial reports issued to stockholders. Operating segments areidentified as components of an enterprise about which separate financialinformation is available for evaluation by the chief operating decision-maker,or decision-making group, in making decisions on how to allocate resources andassess performance. The Company views its operations and manages its businessas one operating segment.

 

***Reclassifications***

 

***               ***Certain prior year amounts have been reclassified to conform to thecurrent financial statement presentation.

 

***Recentaccounting pronouncements***

 

                InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurement,*or SFAS 157. SFAS 157 establishes a common definition to provide enhanced guidancewhen using fair value to measure assets and liabilities, establishes aframework for measuring fair value, and expands disclosures about such fairvalue measurements. SFAS 157 is effective for fiscal years beginning after November 15,2007. The Company is currently determining the impact of implementing SFAS 157,which will be effective for the fiscal year 2009.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBNo.115,*or SFAS 159*.* SFAS 159 is effective for financial statementsissued for fiscal years beginning after November 15, 2007. This Statementpermits entities to choose to measure many financial instruments and certainother items at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions.The Company is currently determining the impact of implementing SFAS159, which will be effective for the fiscal year 2009.

 

In December 2007,the FASB issued SFAS No. 141R, *Business Combinations,*or SFAS 141R. SFAS 141R is effective for financial statements issued for fiscalyears beginning after December 15, 2008. SFAS 141R establishes principles and requirements for how the acquirershall recognize and measure in its financial statements the identifiable assetsacquired, liabilities assumed, any noncontrolling interest in the acquiree andgoodwill acquired in the business combination. The Company is currentlydetermining the impact of implementing SFAS 141R, which will be effective forthe fiscal year 2010.

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — an Amendment of Accounting Research Bulletin, or ARB No. 51*,or SFAS 160.  SFAS 160 is effective forfinancial statements 

 

 

10

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issued for fiscal years beginning after December 15,2008.  SFAS 160 establishes and expandsaccounting and reporting standards for the noncontrolling interest in asubsidiary. The Company is currently determining the impact of implementingSFAS 160, which will be effective for the fiscal year 2010.

 

**3.  Inventories**

 

                Netinventoriesconsist of the following at (inthousands):

 

| ** **      | ** ** | **November 3,  2007** | ** ** | **July 28,  2007** | ** ** |
|-----------------|------------|-----------------------|------------|-------------------------|------------|
| Raw materials   |       | $                     | 15,633     |                    | $          | 14,545 |   |
| Work in process |       | 2,398                 |       | 1,011                   |       |
| Finished goods  |       | 3,128                 |       | 5,128                   |       |
|            |       | $                     | 21,159     |                    | $          | 20,684 |   |

 

**4.  Investments**

 

**               **The following is a summary of the Company’s available-for-saleinvestments as of November 3, 2007 and July 28, 2007 (in thousands):

 
| **Investment Type**              | ** ** | **Amortized  cost** | ** ** | **Gross  unrealized  gain** | ** ** | **Gross unrealized  loss** | ** ** | **Market  value** | ** ** |
|----------------------------------|------------|---------------------|------------|-----------------------------|------------|----------------------------|------------|-------------------|------------|
| **As of November 3, 2007**  | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **        | ** ** |
| ** **                       | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **        | ** ** |
| Corporate                        |       | $                   | 30,009     |                        | $          | 2                          |       | $                 | —     |   | $ | 30,011 |   |
| Government-sponsored  enterprise |       | 13,992              |       | 5                           |       | —                     |       | 13,997            |       |
| Municipal                        |       | 1,825               |       | —                      |       | —                     |       | 1,825             |       |
| Total                            |       | $                   | 45,826     |                        | $          | 7                          |       | $                 | —     |   | $ | 45,833 |   |
|                             |       |                |       |                        |       |                       |       |              |       |
| Reported as:                     |       |                |       |                        |       |                       |       |              |       |
| Cash equivalents                 |       | $                   | 24,053     |                        | $          | —                     |       | $                 | —     |   | $ | 24,053 |   |
| Short-term investments           |       | 21,773              |       | 7                           |       | —                     |       | 21,780            |       |
| Total                            |       | $                   | 45,826     |                        | $          | 7                          |       | $                 | —     |   | $ | 45,833 |   |
|                             |       |                |       |                        |       |                       |       |              |       |
| **As of July 28, 2007**     | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **        | ** ** |
| Corporate                        |       | $                   | 22,526     |                        | $          | —                     |       | $                 | —     |   | $ | 22,526 |   |
| Government-sponsored  enterprise |       | 23,221              |       | —                      |       | (3                         | )          | 23,218            |       |
| Municipal                        |       | 8,825               |       | —                      |       | —                     |       | 8,825             |       |
| Total                            |       | $                   | 54,572     |                        | $          | —                     |       | $                 | (3         | ) | $ | 54,569 |   |
|                             |       |                |       |                        |       |                       |       |              |       |
| Reported as:                     |       |                |       |                        |       |                       |       |              |       |
| Cash equivalents                 |       | $                   | 18,551     |                        | $          | —                     |       | $                 | —     |   | $ | 18,551 |   |
| Short-term investments           |       | 36,021              |       | —                      |       | (3                         | )          | 36,018            |       |
| Total                            |       | $                   | 54,572     |                        | $          | —                     |       | $                 | (3         | ) | $ | 54,569 |   |

 

                TheCompany accounts for its investments pursuant to SFAS 115, *Accountingfor Certain Investments in Debt and Equity Securities,*or SFAS 115*.*All of the Company’s investments are classified as available-for-sale securities andreported at fair value, with unrealized gains and losses excluded from earningsand reported as a separate component of stockholders’ equity. Gains and lossesare not recorded in earnings until realized. The Company monitors itsinvestments for other than temporary impairment, which results from thecarrying value of the investments exceeding the fair value. If other thantemporary impairment is identified, the cost basis of the security is writtendown to fair value and the amount of the write-down is recorded as a realized lossthrough earnings. In evaluating unrealized losses for other than temporaryimpairment, the Company considers a number of factors including the durationand significance of the loss. The Company has the ability and intent to holdthose investments with unrealized losses until a recovery of fair value. As of November 3,2007, the Company held no securities with an unrealized loss position for morethan twelve months and no realized losses were recorded.

 

 

11

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                All investmentsmature in less than one year; those that mature in less than ninety day areclassified as cash equivalents.

 

**5.  Acquisitions**

 

*Kailight Photonics Inc.*

 

On May 15, 2007,the Company acquired Kailight Photonics, Inc. (“Kailight”), a technologyleader in 40Gb/s optical transmission products, for approximately $35,860,000,including $711,300 of transaction costs associated with the acquisition andsubject to certain working capital adjustments. Approximately $3,350,000 of thepurchase price is being held in escrow pending the outcome of certain mattersoutlined in the purchase agreement, for which the Company is indemnified.  In addition, the Company may also be requiredto pay up to $5,000,000 in additional future payments based on the achievementof certain performance milestones. Any such payment will be recorded asadditional purchase price in the period it is probable such payment is earned.Pursuant to the merger agreement, outstanding Kailight stock options wereconverted into Optium stock options. Of the total options granted to Kailightemployees and consultants, 9,652 options with an exercise price of $0.11 werefully vested and assigned a fair value of $148,776 using the Black-Scholesoption pricing model and were accordingly recorded as purchase price.

 

The transaction wasaccounted for as a purchase in accordance with SFAS 141. As a result, theassets acquired and liabilities assumed were accounted for at fair value on theacquisition date, and the results of operations of Kailight are included in theCompany’s consolidated results of operations from the acquisition date.Management is responsible for the valuation of net assets acquired, includingin-process research and development, and considered a number of factors,including valuations and appraisals, when estimating the fair market values andestimated useful lives of the acquired assets and liabilities. The Companybelieves the acquisition provides synergies with existing product lines andexpands on our current transceiver capabilities, resulting in an excesspurchase price over the fair value of identifiable assets. The excess purchaseprice of $26,072,000 has been recorded as goodwill. The purchase priceallocation is not finalized as we have not yet determined fair market valuesfor certain net assets acquired which may affect the closing balance sheet. Wedo not believe that any adjustments to the fair values will materially modifythe preliminary purchase price allocation.

 

                TheKailight purchase price was preliminarily allocated as follows (in thousands):

 
| Net assets acquired                           |   | $      | (212)  |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Acquired in-process  research and development |   | 10,000 |   |
| Goodwill                                      |   | 26,072 |   |
| Total purchase price                          |   | $      | 35,860 |   |

 

                Thefollowing table summarizes the components of the assets acquired at fair value(in thousands):

 
| Cash                           |   | $      | 489    |   |
|--------------------------------|--------|--------|--------|--------|
| Net fixed assets               |   | 597    |   |
| Accounts receivable and  other |   | 262    |   |
| Less liabilities assumed       |   | (1,560 | )      |
| Net assets acquired            |   | $      | (212   | )      |

 

                Kailight’sdevelopmental project that had not reached technological feasibility and had nofuture alternative use was classified as acquired in-process research anddevelopment and expensed at the acquisition date. Efforts required to developacquired in-process research and development into commercially viable productsinclude the planning, designing, prototyping, verification and testingactivities that are necessary to establish that the products can be produced tomeet their design specifications, including functions, features and technicalperformance requirements. The $10,000,000 of acquired in-process research anddevelopment was expensed during fiscal year 2007 through the consolidatedstatement of operations as a separate component of operating expenses at theacquisition date.

 

The acquired in-processresearch and development expense of $10,000,000 relates to the acquired 40Gb/sproject and was determined using the income approach assuming cash flows overten years and using risk adjusted discount rates ranging from 20% to 30% forthe four defined segments of the 40Gb/s project. The discount rates were basedon fundamental data for a group of market participants, as well as venturecapital studies. The ten year life is based on the life expectancy of theproducts 

 

 

12

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in the market place with an assumed growth rate ofup to 314% diminishing to 10% and no assumed terminal value. These products areexpected to be available for shipment in fiscal year 2008.

 

*Pro forma financial information*

 

The following unaudited pro forma financial information representsthe Company’s consolidated results from operations for the period indicated, asif the acquisition of Kailight had occurred at the beginning of the periodpresented. Unaudited pro forma information is presented for illustrativepurposes only and is not necessarily indicative of the results of operationsthat would have actually been reported had the acquisition occurred at thebeginning of the periods presented, nor is it necessarily indicative of futureresults of operations. These pro forma results are based upon the respectivehistorical financial statements of the respective companies, and do notincorporate, nor do they assume any benefits from cost savings or synergies ofoperations of the combined Company. Unaudited pro forma results of operationsare presented after giving effect to certain adjustments, including adjustmentsto reflect increased intangible asset amortization, decreased interest incomeon the cash used to finance the acquisitions, and increased income taxes at arate consistent with the Company’s effective tax rate in each period.

 

*Pro forma results*

* *

| ** **                                     | ** **   | **Three months ended**                        | ** **   |
|------------------------------------------------|--------------|-----------------------------------------------|--------------|
| ** **                                     | ** **   | **October 28,  2006**                    | ** **   |
| ** **                                     | *** *** | ***(in  thousands, except  per share data)*** | *** *** |
| Pro forma revenues                             |         | $                                             | 30,044       |   |
| Pro forma net income                           |         | 776                                           |         |
| Pro forma net income per  share — basic   |         | 0.27                                          |         |
| Pro forma net income per  share — diluted |         | 0.04                                          |         |
| Reported net income                            |         | 2,759                                         |         |
| Reported net income per  share — basic    |         | 0.96                                          |         |
| Reported net income per  share — diluted  |         | 0.13                                          |         |
|                                                |              |                                               |              |  |

 

*Microdisplay asset*s

 

On July 10, 2007, the Company acquired certain intellectualproperty assets of Microdisplay Corporation related to the design andmanufacture of liquid crystal on silicon (LCoS) wafers used in its WSS ROADMproduct line. The aggregate purchase price of the transaction was approximately$2.0 million, including the assumption of certain liabilities. The purchase ofthese assets has been recorded as completed technology and classified as anintangible asset on the balance sheet as of the acquisition date. The acquiredintangible assets will be amortized over a five year useful life. Theamortization expense related to the Microdisplayassets is included in our condensed consolidated statements of operations inthe selling, general and administrative expense line item for the three monthsended November 3, 2007.

 

             The acquisition of theLCoS integrated circuit technology was intended to strengthen the Company’sposition in the ROADM product market, as the Company continues to integrateadditional features into its WSS ROADM products and target new applications andmarket segments.  The rightsto the LCoS integrated circuit technology used in the Company’s WSS ROADMs areexpected to drive cost efficiencies including improved flexibility to add moreunique software-defined features.

 

The results of the aboveacquisitions are included in the accompanying condensed consolidated financialstatements as of their respective dates of acquisition.

 

**6.  Stockholders’ Equity**

 

*Commonstock*

 

                TheCompany has authorized under its Certificate of Incorporation, as amended October 10,2006, the issuance of 100,000,000 shares of common stock, of which 729,361 weredesignated Series 2 nonvoting common stock. The Series 2 

 

 

13

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nonvoting common stock automatically convertedinto voting common stock upon the closing of the Company’s initial publicoffering when the conversion of all shares of preferred stock occurred.

 

                OnOctober 9, 2006, the Company’s Board of Directors approved a 1-for-12reverse stock split of the Company’s issued common stock, subject tostockholder approval. On October 10, 2006, the Company’s stockholdersapproved the reverse stock split. The reverse stock split became effective on October 10,2006, upon the filing by the Company of an amendment to the Certification ofIncorporation with the Delaware Secretary of State giving effect to the reversestock split. Common share and common share-equivalents have been restated toreflect the reverse stock split for all periods presented.

 

*Stockincentive plan*

 

                Effective July 30,2006, the Company adopted SFAS 123R, which requires companies to recognize intheir statement of operations all share-based payments, including grants ofstock options, based on the grant date fair value. The Company adopted SFAS123R using the prospective-transition method. Stock-based compensation ismeasured at the grant date, based on the fair value of the award, and expensedover the requisite service period. The application of SFAS 123R involvessignificant amounts of judgment in the determination of inputs into theBlack-Scholes model, which the Company uses to determine the value of stockoptions. Inherent in this model are assumptions related to expected stock pricevolatility, option life, risk free interest rate and dividend yield. While therisk free interest rate and dividend yield are less subjective assumptions,typically based on factual data derived from public sources, the expectedstock-price volatility and option life assumptions require a greater level ofjudgment which make them critical accounting estimates. The fair value of eachstock option grant was estimated on the date of the grant using theBlack-Scholes option-pricing model and the assumptions disclosed in the Summaryof Significant Accounting Policies in Note 2.

 

                Prior tothe adoption of SFAS 123R, the Company accounted for its stock-basedcompensation granted to employees in accordance with the provisions of the AccountingPrinciples Board, or APB, Opinion No. 25, *Accountingfor Stock Issued to Employees*, or APB 25.  Under APB 25, compensationexpense is based on the difference, if any, on the date of the grant, betweenthe fair value of the Company’s stock and the exercise price of the option. TheCompany recorded stock-based compensation to the extent that the exercise pricewas less than the fair value of the Company’s stock on the date of grant.

 

Additionally, in theprior period, the Company disclosed the information required underSFAS 123, *Accounting for Stock-Based Compensation*,or SFAS 123, using the minimum value method. Stock issued to non-employees isaccounted for under the provisions of the Emerging Issues Task Force, or EITF,consensus in issue No. 96-18, *Accounting for EquityInstruments that are Issued to Other than Employees for Acquiring, or inConjunction with, Selling Goods or Services*, or EITF 96-18.  In accordance with SFAS 123R, options that were valuedusing the minimum value method under SFAS 123, for purposes of pro formadisclosure, must be transitioned to SFAS 123R using the prospective transitionmethod. Under the prospective transition method, options granted prior tofiscal 2007 will continue to be accounted for under the same accountingprinciples (recognition and measurement) originally applied to those awards,which for the Company was APB 25. Accordingly, the adoption of SFAS 123R didnot result in any compensation cost being recognized for the options grantedprior to the adoption of SFAS 123R.

 

Under SFAS 123,non-employee stock-based compensation is accounted for based on the fair value ofthe consideration received or equity instruments issued, whichever is morereadily determinable. However, SFAS 123 does not address the measurement dateand recognition period. EITF 96-18 states a consensus that the measurement dateshould be the earlier of the date at which a commitment for performance by thecounterparty is reached or the date at which the counterparty’s performance iscomplete.

 

                Underthe pro forma disclosure previously required under SFAS 123, the compensationcost for the Company’s stock-based compensation plans had been determined basedupon the fair value of the options at the grant date. Consistent with themethodology prescribed under SFAS 123, the Company would have recordedapproximately  $102,600 and $106,400 asstock based compensation in selling, general and administrative expenses forthe three months ended November 3, 2007 and October 28, 2006,respectively, related to the grants issued prior to the adoption of SFAS 123R,as presented below (in thousands):

 

 

 

14

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| ** **                                                                                | ** ** | **Three months ended**    | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                | ** ** | **November 3, 2007** | ** ** | **October  28, 2006** | ** ** |
|                                                                                      |       |                      |       |   |   |
| Net income (loss), as  reported                                                           |       | $                         | (1,079     | ) | $ | 2,759 |   |
| Add: Stock-based  compensation under APB 25                                          |       | 85                        |       | 139 |   |
| Add: Stock-based  compensation under SFAS 123R                                            |       | 639                       |       | 45 |   |
| Less: Stock-based compensation expense determined under fair value  method for all awards |       | (709                      | )          | (147 | ) |
| Net income (loss), pro  forma                                                             |       | $                         | (1,064     | ) | $ | 2,796 |   |
| Net income (loss) per  share:                                                             |       |                      |       |   |   |
| Reported net income (loss)  per share - basic                                             |       | $                         | (0.04      | ) | $ | 0.96 |   |
| Reported net income (loss)  per share - diluted                                           |       | (0.04                     | )          | 0.13 |   |
| Pro forma net income  (loss) per share - basic                                            |       | (0.04                     | )          | 0.98 |   |
| Pro forma net income  (loss) per share - diluted                                          |       | (0.04                     | )          | 0.14 |   |

 

                Duringthe three months ended November 3, 2007, 121,175 stock options with aweighted average grant date fair value of $6.14 per option and 335,000 unvestedrestricted stock units with a grant date fair value of $9.66 were granted underthe Company’s 2006 Stock Option and Incentive Plan. The compensation expensecharged against earnings for SFAS 123R stock-based compensation for the firstthree months of fiscal year 2008 was approximately $939,600. The pre-tax impactof stock-based compensation expense was $0.03 per basic and diluted share inthe three months ended November 3, 2007. As of November 3, 2007,there was approximately $6,706,200 in unrecognized compensation expense relatedto non-vested stock option agreements. This unrecognized expense is expected tobe recognized as compensation expense over the weighted-average vesting periodof four years.

 

                Infiscal year 2000, the Company adopted the 2000 Optium Corporation StockIncentive Plan, as amended (the “2000 Plan”), under which 3,457,073 shares ofcommon stock were reserved for issuance. As of November 3, 2007, no sharesare available for future grants under the 2000 Plan. Under the terms of the2000 Plan, the Company could grant nonqualified or incentive stock options,restricted stock, restricted stock units or make awards of stock appreciationrights to directors, officers, employees, and consultants of the Company.Option grants under the 2000 Plan generally vest over four years and expire tenyears from the date of grant. All options and shares cancelled or forfeitedafter October 10, 2006 (the effective date of the 2006 Plan as definedbelow) under the 2000 Plan are added back to the balance of shares reserved forissuance under the 2006 Plan.

 

                Stockoption transactions under the 2000 Plan for the three months ended November 3,2007 are summarized as follows:

 
| ** **                                        | ** ** | **Number of  options** | ** ** | **Range of  exercise prices** | ** **     | **Weighted average  exercise price** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|-------------------------------|----------------|--------------------------------------|------------|
| Balance — July 28,  2007                |       | 1,694,314              |       | $                             | 0.48  - $17.50 |                                 | $          | 4.95 |   |
| Granted                                           |       | —                 |       | —                        |           | —                               |       |
| Forfeited                                         |       | (1,910                 | )          | 2.40  - $14.04                |           | 5.89                                 |       |
| Exercised                                         |       | (6,885                 | )          | 0.48  - $9.24                 |           | 0.96                                 |       |
| Outstanding — November 3,  2007         |       | 1,685,519              |       | $                             | 0.48  - $17.50 |                                 | $          | 4.96 |   |
| Options exercisable — November 3,  2007 |       | 1,045,992              |       | $                             | 0.48  - $17.50 |                                 | $          | 3.32 |   |

 

                Duringthe three months ended November 3, 2007 certain employees exercisedoptions to purchase 6,885 shares of the Company’s common stock for proceeds of$6,683. These option exercises had an intrinsic value of approximately $57,600.

 

                Theweighted average remaining life of the options as of November 3, 2007 is7.45 years.

 

During the first quarterof fiscal year 2007, the Company adopted the 2006 Optium Corporation StockOption and Incentive Plan, as amended (the “2006 Plan”), under which 283,333shares of common stock were reserved for issuance. The 2006 Plan provisionsprovide for an automatic increase at the beginning of every quarter of eachfiscal year in the number of shares reserved and available for issuance underthe plan by a number equal to 0.75% of the then outstanding number of shares ofcommon stock. The 283,333 shares reserved does not include the additional190,059, 190,146, 190,732, and 190,783 shares reserved as of the first day ofthe Company’s fiscal year 2007 third and fourth quarters and fiscal year 2008first and second 

 

15

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quarters, respectively.  In addition, the number of shares reservedfor issuance under the 2006 Plan are automatically increased by the number ofshares and options cancelled or forfeited under the 2000 Plan after October 10,2006. Cancellations or forfeits under the 2006 Plan are also added back toincrease the total number of shares available for issuance under the 2006 Plan,with the exception of those shares granted in connection with the Kailightacquisition.   During the three monthsended November 3, 2007, 4,377 cancelled or forfeited shares were added tothe number of shares reserved for issuance under the 2006 Plan pursuant tothese provisions. Under the terms of the 2006 Plan, the Company may grantnonqualified or incentive stock options, restricted stock, restricted stockunits or make awards of stock appreciation rights to directors, officers,employees, and consultants of the Company. The exercise price for option grantsshall be determined by the Board of Directors on the date of grant, but in noevent shall the exercise price of incentive stock options be less than 100% ofthe fair market value of the common stock (110% for any incentive stock optiongranted to a person owning more than 10% of the total combined voting power ofall classes of stock as determined by the Board of Directors on the date ofgrant). Option grants under the 2006 Plan generally vest over four years andexpire ten years from the date of grant. As of November 3, 2007, 723,860options for the purchase of common stock have been granted under the 2006 Plan.All options cancelled or forfeited under the 2006 Plan are added back to thebalance of shares reserved for issuance under the Plan.

 

                Stockoption transactions under the 2006 Plan for the three months ended November 3,2007 are summarized as follows:

 
| ** **                                        | ** ** | **Number of  options** | ** ** | **Range of  exercise prices** | ** **        | **Weighted average  exercise price** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|-------------------------------|-------------------|--------------------------------------|------------|
| Balance — July 28,  2007                |       | 582,575                |       | $                             | 0.11  - $1,110.24 |                                 | $          | 19.20 |   |
| Granted                                           |       | 121,175                |       | $                             | 7.36  - $11.13    |                                 | $          | 9.19 |   |
| Forfeited                                         |       | (12,651                | )          | $                             | 9.66  - $328.63   |                                 | $          | 21.76 |   |
| Exercised                                         |       | —                 |       | —                        |              | —                               |       |
| Outstanding —  November 3, 2007         |       | 691,099                |       | $                             | 0.11  - $1,110.24 |                                 | $          | 17.40 |   |
| Options exercisable —  November 3, 2007 |       | 9,858                  |       | $                             | 0.11  - $1,110.24 |                                 | $          | 14.98 |   |

 

Pursuant to the terms ofthe Kailight Photonics, Inc. acquisition agreement, the Company assumedstock options outstanding with Kailight employees and consultants.  The Company assumed 9,652 fully vestedKailight options with an exercise price of $0.11. Additionally, the Companyassumed 222, 145, and 40 options with exercise prices of $328.63, $657.26, and$1,110.24, respectively, all of which were fully vested. The stock compensationexpense related to the fully vested options with an exercise price of $0.11 wasrecorded as additional purchase price.

 

As of November 3,2007, 1,052,479, 34,796, and 691,099 shares were authorized, available forissuance and subject to outstanding awards, respectively under the 2006 Plan.The weighted average remaining life of the options as of November 3, 2007is 9.48 years. The detail of all options exercisable under the 2000 Plan andthe 2006 Plan as of November 3, 2007 is as follows:

 

| **Number of  options** | ** ** | **Range of  exercise prices** | ** **          | **Weighted average  exercise price** | ** ** | **Weighted average  remaining life** | ** ** |
|------------------------|------------|-------------------------------|---------------------|--------------------------------------|------------|--------------------------------------|------------|
| 598,788                |       | $                             | 0.11  - $0.96       |                                 | $          | 0.58                                 |       | 5.97 |   |
| 94,878                 |       | $                             | 1.08  - $3.96       |                                 | $          | 1.58                                 |       | 7.44 |   |
| 180,031                |       | $                             | 5.25  - $5.76       |                                 | $          | 5.51                                 |       | 8.35 |   |
| 181,947                |       | $                             | 9.24  - $17.50      |                                 | $          | 10.87                                |       | 8.58 |   |
| 206                    |       | $                             | 328.63  - $1,100.24 |                                 | $          | 711.72                               |       | 9.50 |   |

 

                Thetotal intrinsic value of the fully vested and exercisable options above, hadthey been exercised on November 3, 2007, was approximately $8,490,400.

 

                Therestricted stock unit transactions under the 2006 Plan for the three monthsended November 3, 2007 are summarized as follows:

 

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| ** **                                 | ** ** | **Number of  restricted stock  units** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| Balance — July 28,  2007         |       | —                                 |       |
| Granted                                    |       | 335,000                                |       |
| Forfeited                                  |       | —                                 |       |
| Vested                                     |       | —                                 |       |
| Unvested balance at  November 3, 2007 |       | 335,000                                |       |

 

                Theper stock unit weighted average fair value of the restricted stock unitsgranted under the 2006 Plan for the three months ended November 3, 2007was $9.66, which was based on the closing stock price of the Company on thedate of grant. These stock units will vest quarterly over a two year periodbeginning January 1, 2008. As of November 3, 2007, there wasapproximately $2,903,300 in unrecognized compensation expense related tonon-vested restricted stock units. This unrecognized expense is expected to berecognized as compensation expense over the weighted-average vesting period oftwo years. All forfeitures or cancellations of restricted stock units are addedback to the balance of shares reserved for issuance under the 2006 Plan.

 

*Deferredcompensation*

 

                TheCompany’s Board of Directors has determined the fair value of all stock optiongrants on the date of the grants. In April 2006, as a result of improvedoperating performance, the execution of a letter of intent to acquire EnganaPty Limited, or Engana, external market factors affecting the Company’s marketsector, as well as feedback from investment bankers indicating that the Companywas now a viable initial public offering candidate, the Board of Directorsretrospectively determined the fair value of the Company’s common stock for allstock options granted during the three fiscal quarters beginning May 1,2005 and ending January 28, 2006. As a result of the Company’sretrospective determinations of fair value of the common stock for prior optiongrant dates of June 23, 2005, September 21, 2005 and November 7,2005, the Company recorded an aggregate of approximately $125,000 of deferredstock-based compensation on the balance sheet for the stock options granted onthose dates. The amount of deferred stock-based compensation for each stockoption grant on these dates was calculated based on the difference between theretrospectively determined fair value per share of the common stock at the dateof the grant and the exercise price of the option. The Company will amortizethis deferred stock-based compensation expense over the vesting period of theapplicable stock option grants, subject to adjustment for any stock optionswhich are cancelled or accelerated.

 

                InJune 2006, based on the Company’s retrospective determinations of fairvalue of its common stock, the Company offered to the recipients of stockoption grants on June 23, 2005, September 21, 2005 and November 7,2005, the ability to amend the terms of their stock options to increase theirper share exercise price from $0.96 to $1.08 in the case of June 23, 2005grants, from $1.20 to $2.40 in the case of the September 21, 2005 grantsand from $1.20 to $3.96 in the case of the November 7, 2005 grants. All ofsuch stock option recipients have chosen to amend their stock options to ahigher exercise price in order to avoid potential adverse personal income taxconsequences. There was no additional consideration offered to the employees inexchange for amending their stock options.

 

                Inrelation to these amended stock options, the Company recorded deferredstock-based compensation of approximately $1.5 million in the balance sheet inaddition to the approximately $125,000 in deferred stock-based compensationreferenced above. The amount of additional deferred stock-based compensationfor each amended stock option was calculated based upon the difference betweenthe amended exercise price of $1.08 per share, $2.40 per share or $3.96 pershare, as applicable, and $10.92 per share, the valuation by the Board ofDirectors of the per share fair value of our common stock as of the date ofamendment of the stock options. The Company will amortize this additional deferredstock-based compensation expense over the vesting period of the applicablestock option grants, subject to adjustment for any stock options which arecancelled or accelerated. During the three months ended November 3, 2007,total stock-based compensation expense related to amortization of the deferredcompensation balance was approximately $125,140.

 

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**7.  Accrued Expenses**

 

                Accruedexpenses consist of the following at (in thousands):

 

| ** **                | ** ** | **November 3, 2007** | ** ** | **July 28, 2007** | ** ** |
|---------------------------|------------|---------------------------|------------|------------------------|------------|
| Fees and expenses payable |       | $                         | 1,672      |                   | $          | 1,531 |   |
| Compensation and benefits |       | 1,825                     |       | 1,789                  |       |
| Professional services     |       | 1,000                     |       | 1,012                  |       |
| Security deposit          |       | 57                        |       | 57                     |       |
| Accrued expenses          |       | $                         | 4,554      |                   | $          | 4,389 |   |

 

**8.  Accrued Warranty Costs**

 

The Company provides awarranty on all products. Warranty expenses are charged to operations andincluded in the cost of revenue in the accompanying statements of operations.The Company accrues warranty for expected warranty claims based on historicalreturn figures and accrues those costs at the time revenue is recorded.

 

**               **A summary of the accrued installation and warranty costs is as follows(in thousands):

 
| Ending balance  July 29, 2006                 |   | $    | 223    |   |
|----------------------------------------------------|--------|------|--------|--------|
| Warranty accruals                                  |   | 428  |   |
| Warranty repairs                                   |   | (292 | )      |
| Ending balance  July 28, 2007                 |   | $    | 359    |   |
| Warranty accruals                                  |   | 31   |   |
| Warranty repairs                                   |   | (63  | )      |
| Effect of foreign currency  translation adjustment |   | (3   | )      |
| Ending balance  November 3, 2007              |   | $    | 324    |   |

 

**9.  Income Taxes**

 

**               **In July 2006, the FASB issued FASBInterpretation No. 48 *Accounting for Uncertaintyin Income Taxes, an Interpretation of FASB Statement 109, Accounting for IncomeTaxes,*or FIN 48. FIN 48 provides guidance on how a company shouldrecognize, measure and disclose in its financial statements uncertain incometax positions. Under the new provisions, a company should not recognize a taxbenefit for an uncertain income tax position unless it is “more likely than not”that such a position is sustainable. The Company adopted FIN 48 on July 29,2007.  As a result of the implementationof FIN 48, the Company recognized a net $100,000 increase in the liability forunrecognized tax benefits, which was accounted for as an increase to the July 28,2007 balance of the accumulated deficit. At November 3, 2007, the Company’stotal liability for unrecognized net tax benefits is $775,000. Consistent withpast practice, the Company will record interest and penalties associated withuncertain tax positions in income tax expense.

 

                AtNovember 3, 2007, the Company had U.S. federal net operating loss, or NOL,carry forwards of approximately $23.9 million which expire through July 2025.NOL carry forwards and credits are subject to review and possible adjustmentsby the Internal Revenue Service and may be limited by the occurrence of certainevents, including significant changes in ownership interests. The Companyperformed an analysis to determine whether an ownership change under Section 382of the Internal Revenue Code had occurred. The effect of an ownership changewould be the imposition of an annual limitation on the use of the net operatingloss carry forwards attributable to periods before the change.

 

                Inconnection with the acquisition of Engana Pty Limited in March 2006, theCompany acquired Australian NOL carry forwards and credits in the amount of $4.8million. These NOL carry forwards and credits are subject to review andpossible adjustments by the Australian Taxation Office and may be limited bythe occurrence of certain events, including significant changes in ownershipinterests or significant changes in the business of the Company. This is afactual test that can only be determined in the year in which the NOL carryforward is sought to be utilized. There is no time limit on the use ofAustralian NOL carry forwards. The acquired net operating losses have beenfully offset by a valuation allowance. Upon utilization of such NOL carryforwards, goodwill will be reduced. Losses since the acquisition have beenfully offset by a full valuation allowance due to the history of operatinglosses.

 

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                Inconnection with the Kailight Photonics, Inc. acquisition, the Companyacquired U.S. federal NOL carry forwards in the amount of approximately $7.5million. The Company will perform an analysis to determine whether a Section 382ownership change has occurred, but the Company expects the use of these NOLswill be significantly limited. Accordingly, management in its preliminaryallocation of the purchase price, recorded no value to the acquired deferredtax assets. If any of these acquired NOL carryforwards are utilized, goodwillwill be reduced.

 

                Inassessing the realizability of deferred tax assets, management concluded it is “morelikely than not” that some portion or all of the U.S. deferred tax assets willbe realized. The ultimate realization of these deferred tax assets is dependentupon the generation of future taxable income during those periods in whichthose temporary differences become deductible or within the periods before NOLcarry forwards expire. During the year ended July 28, 2007, based oncumulative U.S. taxable net earnings for the past three years and the expectedfuture profitability of the U.S. operations, the company reversed the valuationallowance on its net U.S. deferred tax assets and recognized an income taxbenefit of approximately $13 million.  The current quarterly consolidatedeffective tax rate of (6.5)% is  lessthan the U.S. statutory rate of 35% primarily due to foreign losses for whichno income tax benefit was recorded and U.S. research and development taxcredits available to the Company under U.S. tax law.

 

A reconciliation of the consolidated income taxrate to the effective tax rate for the Company is as follows:

 

| ** **                     | ** ** | **Three months ended**     | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **November 3,  2007** | ** ** | **October 28,  2006** | ** ** |
| Tax at statutory rate          |       | 35.0                       | %          | 35.0 | % |
| State taxes, net of  federal   |       | (1.4                       | )          | 3.7 |   |
| R&D credits                |       | 6.7                        |       | — |   |
| Foreign rate differential      |       | (6.2                       | )          | 2.0 |   |
| Federal and state AMT          |       | —                     |       | 6.1 |   |
| Change in valuation  allowance |       | (38.2                      | )          | (40.7 | ) |
| Other                          |       | (2.4                       | )          | — |   |
| Effective tax rate             |       | (6.5                       | )%         | 6.1 | % |

 

**10.  Commitments and Contingencies**

 

*Contingencies*

 

In December 2004,the Company terminated its relationship with Appletec Limited, an Israelicompany that was assisting us with our sales efforts in Israel. Beginning in February 2005and through May 2005, the Company received correspondence from Appletecclaiming it owed Appletec sales commissions. The Company does not believe thatit owes any further commissions to Appletec. However, in June 2005 OptiumCorporation sent a letter to Appletec’s counsel proposing a settlement. TheCompany did not receive a response to its proposal and Appletec filed an actionin Israel against Optium and an Optium consultant alleging damages in an amountof approximately $1,800,000. The Company intends to defend itself vigorouslyand does not expect the ultimate outcome of this matter to have a materialadverse effect on its business, financial condition, results of operations orcash flows.

 

On September 11,2006, JDS Uniphase Corporation and EMCORE Corporation filed a complaint in theUnited States District Court for the Western District of Pennsylvania allegingthat the Company’s 1550 nm HFC externally modulated transmitter, in addition topossibly “products as yet unidentified,” infringes on two U.S. patents.  Since no summary judgment motions have beenruled upon, the Company is unable to determine the ultimate outcome of thislitigation.  On March 14, 2007, JDSUniphase and EMCORE Corporation filed a second complaint in the United StatesDistrict Court for the Western District of Pennsylvania alleging that theCompany’s 1550 nm HFC quadrature amplitude modulated transmitter, in additionto possibly “products as yet unidentified,” infringes on another U.S. patent.Since discovery is currently in process, the Company is unable to determine theultimate outcome of this second litigation. During the three months ended November 3, 2007, sales of theCompany’s 1550 nm HFC externally modulated transmitter and 1550 nm HFCquadrature amplitude modulated transmitters, together, represented less than 5%of the Company’s revenues. The plaintiffs are seeking for the court to declarethat Optium has willfully infringed on such patents and to be awarded up tothree times the amount of any compensatory damages found, if any, plus anyother damages and costs incurred. The Company intends to vigorously defend theclaims asserted against it and believes that it has meritorious defenses.

 

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In the ordinary courseof business, the Company is a party to litigation, claims and assessments inaddition to those described above. Based on information currently available,management does not believe the impact of these other matters will have amaterial adverse effect on its business, financial condition, results ofoperations or cash flows of the Company.

 

*Employmentagreements*

 

                TheCompany has employment agreements with certain officers and key employees. Theagreements are for two or three year periods that expire in either April 2008,August 2008,or April 2009. According to the terms of the agreements,if there is a termination without cause, as defined, or if the agreements arenot renewed, the Company must pay, depending on the agreement, severance pay ofone to two years.

 

**11.  Major Customers**

 

                Accountsreceivable potentially subject the Company to a concentration of credit risk.The Company currently derives its revenues from a variety of companies in manydifferent geographic locations internationally and in the United Statesoperating within the telecommunications and cable TV industry.

 

                Revenuesfrom direct customers, including contract manufacturers, comprising 10% or moreof total revenues during the three months ended November 3, 2007 and October 28,2006, respectively were as follows:

 
| ** ** | ** ** | **Three months ended**     | ** ** |
|------------|------------|----------------------------|------------|
| ** ** | ** ** | **November 3,  2007** | ** ** | **October 28,  2006** | ** ** |
| ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Customer A |       | 26                         | %          | 33 | % |
| Customer B |       | 14                         | %          | 4 | % |
| Customer C |       | 13                         | %          | 18 | % |
| Customer D |       | 8                          | %          | 11 | % |

 

                Accountsreceivable from these four customers at November 3, 2007 represented 65%of total accounts receivable.

 

**12.  Related Party Transactions**

 

                Duringthe three months ended November 3, 2007 and October 28, 2006, theCompany paid a sales and marketing consultant, who is the brother of thepresident and chief executive officer of the Company, $36,400 and $32,900,respectively, in cash compensation during such fiscal periods.

 

                Duringthe three months ended November 3, 2007 and October 28, 2006, theCompany used Gertel Asset Management, a company that provides jet airtransportation, for certain business travel by our executive officers and otheremployees.  The Company’s chief executiveofficer has an ownership interest in Gertel Asset Management. Payments toGertel Asset Management by the Company were approximately $19,200 and $20,300,respectively, during such periods.

 

                Amountspaid to related parties represented values considered fair and reasonable,reflective of an arm’s length transaction.

 

 

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**ITEM 2.****MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**FOR THE THREE MONTHS ENDED NOVEMBER3, 2007**

**AND COMPARABLE PERIOD ENDED OCTOBER28, 2006**

 

*                Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the Management’s Discussion andAnalysis of Financial Condition and Results of Operations and the consolidatedfinancial statements and notes thereto included in our Annual Report on Form 10-K** filed with the Securities and ExchangeCommission on October 24, 2007.*

 

*                Inaddition to historical information, Management’s Discussion and Analysis ofFinancial Condition and Results of Operation and other items in this QuarterlyReport on Form 10-Q contain forward-looking statements based on currentexpectations that involve risks, uncertainties and assumptions. Our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of various factors. When used in this document, thewords “will,” “plan,” “believe,” “may,” “anticipate,” “ could,”,” “seek,” “estimate,”“expect,” “continue,” “intend,” and similar expressions, variations or thenegatives of these terms are intended to identify forward-looking statements.Although management believes that the expectations reflected in theseforward-looking statements are reasonable at the time they are made, we cangive no assurance that these expectations will prove to be correct. Weundertake no obligation to publicly revise any forward-looking statement toreflect circumstances or events after the date of this document.*

 

**Executive Overview**

 

We are a leadingdesigner and manufacturer of high-performance optical subsystems supportingcore to the edge applications for use in telecommunications and cable TVnetwork systems.  Since our founding in2000, we have developed or acquired proprietary technology and products thatenable transmission and switching functionality for high-bandwidth, intelligentoptical networking applications. We supply an extensive suite of opticalsubsystems, including 10Gb/s and 40Gb/s transceivers, cable TV and fiber to thehome, or FTTH, transmitters, analog RF over fiber products, line cards, circuitpacks and our technologically innovative wavelength selective switchreconfigurable optical add/drop multiplexer products, or WSS ROADMs.   Our optical subsystems are used in network systemsthat deliver voice, video and other data services for consumers and enterprisesthat are delivered in the long haul, metropolitan and access segments, referredto as the core to the edge, of telecommunications and cable TV networks. Ourcustomers are network systems vendors whose customers include wireline andwireless telecommunications service providers and cable TV operators,collectively referred to as carriers.

 

**Background**

 

We were incorporated on September 8, 2000 andcommenced operations in October 2000. In November 2000 and April 2001,we raised approximately $7.9 million through the issuance of shares ofseries A convertible preferred stock. In May, June and July of2001, we raised approximately $35.7 million through the issuance of sharesof series B convertible preferred stock. We completed another round ofpreferred stock financing in April 2003 in which we sold shares ofseries C senior convertible preferred stock for an aggregate purchaseprice of approximately $11.9 million. In May 2004 we raisedapproximately $10.3 million through the issuance of shares ofseries D senior convertible preferred stock, bringing total funds raisedby us through preferred stock financings to approximately $65.9 million.

 

On November 1, 2006, we closed our initial public offering of 5.98million shares of common stock, including the sale of an additional 780,000shares to cover underwriter over-allotments. Our common stock, quoted on the NASDAQ Global Market under the symbol “OPTM,”began trading on October 27, 2006. Cash proceeds to us, net of underwriter commissions of approximately$7.3 million and related offering expenses of approximately $4.1 million,totaled approximately $93.2 million (including approximately $1.9 million ofoffering expenses paid during fiscal year 2006).  All preferred stock outstanding at November 1,2006 was converted to common stock upon the completion of the initial publicoffering.

 

**CriticalAccounting Policies**

 

                  The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 

 

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of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of income and loss during thereporting period. Actual results could differ from those estimates. Operatingresults for the fiscal quarters presented are not necessarily indicative of theresults that may be expected for the fiscal year. In the opinion of management,all adjustments (consisting solely of normal recurring adjustments) necessaryfor a fair presentation of the financial statements for these interim periodshave been included.There have been no material changes to the critical accounting policiesand estimates as disclosed in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission on October 24, 2007.

 

**Recent Accounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurement*,or SFAS 157. SFAS 157 establishes a common definition to provide enhancedguidance when using fair value to measure assets and liabilities, establishes aframework for measuring fair value, and expands disclosures about such fairvalue measurements. SFAS 157 is effective for fiscal years beginning after November 15,2007. We are currently determining the impact of implementing SFAS 157, whichwill be effective for the fiscal year 2009.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBNo.115,*or SFAS 159*.* SFAS 159 iseffective for financial statements issued for fiscal years beginning after November 15,2007. This Statement permits entities to choose to measure many financialinstruments and certain other items at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.We are currently determining theimpact of implementing SFAS 159 which will be effective for the fiscal year2009.

 

In December 2007,the FASB issued SFAS No. 141R, *Business Combinations,*or SFAS 141R. SFAS 141R is effective for financial statements issued for fiscalyears beginning after December 15, 2008. SFAS 141R establishes principles and requirements for how the acquirershall recognize and measure in its financial statements the identifiable assetsacquired, liabilities assumed, any noncontrolling interest in the acquiree andgoodwill acquired in the business combination. The Company is currentlydetermining the impact of implementing SFAS 141R, which will be effective forthe fiscal year 2010.

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — an Amendment of Accounting Research Bulletin, or ARB No. 51*,or SFAS 160.  SFAS 160 is effective forfinancial statements issued for fiscal years beginning after December 15,2008.  SFAS 160 establishes and expandsaccounting and reporting standards for the noncontrolling interest in asubsidiary. The Company is currently determining the impact of implementingSFAS 160, which will be effective for the fiscal year 2010.

 

**Resultsof operations**

 

***Comparisonof Results for the Three Months Ended November 3, 2007 to the Three MonthsEnded October 28, 2006***

 

             In order to more fully understandthe comparison of the results of operations for the three months ended November 3,2007 to the three months ended October 28, 2006, it is important to notethe following significant changes in our operations that occurred in fiscalyear 2007:

 

·                  Effective July 10, 2007, we acquiredcertain intellectual property assets of Microdisplay Corporation related to thedesign of Liquid Crystal on Silicon (LCoS) wafers used in its next generationWSS ROADM product line and

 

·                  Effective May 15, 2007, we acquired all of the outstanding capitalstock of Kailight Photonics, Inc. (“Kailight Photonics”).

 

             The results of operations for theKailight acquisition have been included in the consolidated statements ofoperations since the date of acquisition.

 

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             We completed our initial publicoffering on November 1, 2006 of 5.98 million shares of commonstock, including the sale of 780,000 shares to cover underwriterover-allotments. Our common stock began trading on the NASDAQ Global Market on October 27,2006. Net cash proceeds to us were approximately $93.2 million.

 

***Revenue***

 

                Totalrevenue increased 20.4% to approximately $36.1 million for the threemonths ended November 3, 2007 from approximately $30.0 million for thethree months ended October 28, 2006. This increase in revenue is primarilyattributable to an increase in sales of our ROADM product line of approximately$3.0 million, as well as increases in sales of our 10 Gb/s transceiversand our analog and cable TV products of approximately $1.7 million and$0.6 million, respectively. Additionally, sales of $0.8 million of our 40 Gb/s transceivers duringthe first quarter of fiscal year 2008 contributed to the increase in revenues.These products were not released to market for sale until late fiscal year 2007and did not contribute to revenues for the three months ended October 28,2006.

 

                Revenuesfrom end customers comprising 10% or more of total revenues during the threemonths ended November 3, 2007 and October 28, 2006, respectively wereas follows:

 
| ** ** | ** ** | **Three months ended**     | ** ** |
|------------|------------|----------------------------|------------|
| ** ** | ** ** | **November 3,  2007** | ** ** | **October 28,  2006** | ** ** |
| ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Customer A |       | 20                         | %          | 12 | % |
| Customer B |       | 17                         | %          | 23 | % |
| Customer C |       | 28                         | %          | 34 | % |

 

                Ourrevenues continue to be driven by accelerating investment in bandwidth capacityexpansion to support growing video transport traffic, including on-demandinternet video, IPTV and expanded HD cable TV offerings, as well as G3+ and G4cellular systems.

 

***Gross profit***

 

                Grossprofit increased 11.1% to approximately $9.7 million for the three monthsended November 3, 2007 from approximately $8.7 million for the threemonths ended October 28, 2006. Gross margin decreased to 26.8% from 29.0%for the three months ended November 3, 2007 as compared to the threemonths ended October 28, 2006. The increase in gross profit was primarilyattributable to increases in revenues during the three months ended November 3,2007, as compared to the three months ended October 28, 2006.  The decrease in gross margin was due insignificant part to the low volume of sales of our new WSS ROADM and 40 Gb/sproduct lines, of which we have not been able to achieve economies that comewith scale. We expect that over time, the sale of these products willcontribute to margin expansion.

 

***Research andproduct development***

 

                Researchand product development expenses increased 68.1% to approximately$5.0 million for the three months ended November 3, 2007 fromapproximately $3.0 million for the three months ended October 28,2006. The increase in research and development expenses was due to higherheadcount and associated costs related to our decision to increase the numberof engineering projects which will further expand our product portfolio. Themajority of the increase can be attributed to our increased research anddevelopment efforts related to our Australian and Israeli operations. We had anincrease of approximately $1.3 million for the three months ended November 3,2007, as compared to the three months ended October 28, 2006, primarilyattributable to research and development efforts connected to our ROADM and40Gb/s product lines.  Additionally, weincurred an increase in stock-based compensation of approximately $0.4 million,primarily associated with increased headcount.

 

                Weexpect these costs to continue to increase as we undertake additional researchand development projects as we continue to expand our product suite. Theexpansion of research and development both internally and as a result of acquiredoperations are expected to continue to expand our product suite.

 

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***Selling,general and administrative***

 

                Selling,general and administrative expenses increased 124.7% to approximately$6.4 million for the three months ended November 3, 2007 fromapproximately $2.8 million for the three months ended October 28,2006. We experienced increased costs for the additional infrastructurenecessary to support our revenue growth. These costs included increased laborcosts as a result of additional headcount and additional legal and otherprofessional fees, as well as additional costs associated with being a publiccompany, including the costs of compliance with the Sarbanes-Oxley Act of 2002.Additionally, we incurred approximately $0.6 million in stock-basedcompensation, an increase of $0.4 million from the $0.2 million incurred in thesame period last year. We also incurred approximately $2.0 million of patentlitigation expenses in the three months ended November 3, 2007, ascompared to approximately $50,000 during the three months ended October 28,2006. These additional legal costs are related to the defense of patentinfringement lawsuits brought against us, as discussed in further detail in Part II,Item 1. We expect selling, general and administrative expenses to continue toincrease in the future, as we continue to expand our product line offerings.

 

***Interest andother income (expense), net***

 

                Interestand other income (expense), net, increased to approximately $0.7 million forthe three months ended November 3, 2007 from approximately $0.1 millionfor the three months ended October 28, 2006. The increase was due toadditional interest income earned on the remaining cash and cash equivalentsand short-term investments we held as a result of proceeds from our initialpublic offering. We expect our interest income to decrease in the future, asour cash balance decreases as we continue to incur costs related to theoperation of our business.

 

***Income taxexpense***

 

                Incometax expense was approximately $66,000 for the three months ended November 3,2007 compared to approximately $179,000 for the three months ended October 28,2006. Our overall effective tax rate was approximately (7)% and 6% in the threemonths ended November 3, 2007 and October 28, 2006, respectively.Because we report losses in our foreign jurisdictions and income in our U.S.operations, our expected quarterly consolidated effective tax rates willfluctuate significantly until our foreign operations establish a trend ofprofitability. Income tax expense will increase if our profits increase.

 

**Liquidity and Capital Resources**

 

**               **As of November 3, 2007 and October 28,2006, we had cash and cash equivalents of approximately $29.8 million and $8.5million, respectively.  Our workingcapital was approximately $83.9 million and $18.4 million at November 3,2007 and October 28, 2006, respectively. This increase was primarily dueto proceeds from our initial public offering. We held short-term investments of approximately $21.8 million, accountsreceivable of approximately$28.7 million, and debt of approximately$52,000 as of November 3, 2007.

 

***Operating activities***

 

                Netcash used in operating activities was approximately $7.1 million for the threemonths ended November 3, 2007, as compared to approximately $0.2 million provided by operating activities forthe three months ended October 28, 2006. Net cash used in operatingactivities for the three months ended November 3, 2007 primarily resultedfrom a net loss of approximately$1.1 million, adjusted forapproximately $0.9 million of depreciation and amortization and approximately $1.0 million ofstock-based compensation, offset by an increase in accounts receivable of approximately $7.0 million and adecrease in accounts payable ofapproximately $0.8 million. Net cash provided by operating activitiesfor the three months ended October 28, 2006 primarily resulted from netincome of approximately $2.8 million offset by a decrease in other currentliabilities of approximately$2.5 million and increases in inventories, accounts payables, and other assetsof approximately $4.7 million, $2.6 million, and $0.6 million,respectively.

 

***Investing activities***

 

                Netcash provided by investing activities was approximately $12.0 million for thethree months ended November 3, 2007 as compared to approximately $0.9 million used in investing activities in thethree months ended October 28, 2006. During the three months ended November 3,2007, approximately $27.8million of short-term investments were sold or matured. This was offset byadditional purchases of marketable securities of approximately $13.5 million and property and equipment of 

 

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approximately $2.3 million.  Net cash used ininvesting activities for the three months ended October 28, 2006 was forpurchases of property and equipment.

*** ***

***Financing activities***

 

                Netcash used in financing activities was approximately $4,000 for the three monthsended November 3, 2007 as compared to approximately $1.1 million for the three months ended October 28,2006. Net cash used in financing activities for the three months ended November 3,2007 primarily related to approximately$10,000 of debt pay down, offset byapproximately $6,000 of proceeds from the issuance of common stock inconnection with the exercise of employee stock options.  Net cash used in financing activities for thethree months ended October 28, 2006 of approximately $1.1 million related to payments of costsassociated with our initial public offering.

 

***Sources of cash***

 

On November 1, 2006, we completed our initial public offering of 5.2million shares of common stock at a price to the public of $17.50 per share aswell as the sale of an additional 780,000 shares to cover underwriterover-allotments.  Our common stock,quoted on the Nasdaq Global Market under the symbol “OPTM,” began trading on October 27,2006.  Cash proceeds to us, net ofunderwriter commissions of approximately $7.3 million and related offeringexpenses of approximately $4.1 million, totaled approximately $93.2million.  All preferred stock outstandingat November 1, 2006 was converted to common stock upon the completion ofthe initial public offering.

 

                Priorto our public offering of common stock, we had financed our operationsprimarily through internally generated cash flows, our lines of credit and theissuance of preferred stock.

 

                Webelieve our existing cash and cash equivalents and our cash flows fromoperating activities will be sufficient to meet our anticipated cash needs forat least the next twelve months. Our future working capital requirements willdepend on many factors, including the rate of our revenue growth, theintroduction and acceptance of new products, the rate of expansion of ourproduction capacity, and the rate of increase in our sales and marketing andresearch and development activities. To the extent that our cash and cashequivalents, cash flows from operating activities, and net proceeds of thisoffering are insufficient to fund our future activities, we may need to raiseadditional funds through bank credit arrangements or public or private equityor debt financings.

 

We also may need toraise additional funds in the event we determine, in the future, to effect oneor more acquisitions of businesses, technologies and/or products. Althoughthere are no present understandings, commitments or agreements with respect toacquisitions of other businesses, products or technologies, we may in thefuture consider such transactions, which may require debt or equityfinancing.  The issuance of debt orequity securities could be expected to have a dilutive impact on the ourstockholders, and there can be no assurance as to whether or when any acquiredbusiness would contribute positive operating results commensurate with theassociated investment. In the event we require additional cash resources, wemay not be able to obtain bank credit arrangements or affect an equity or debtfinancing on terms acceptable to us or at all. Any material acquisition could result in a decrease in working capitaldepending upon the amount, timing, and nature of the consideration paid.

 

**Foreign Currency Exchange Risk**

 

Our subsidiary Optium Australia is located in Sydney,Australia. As the Australian operations continue to expand, we will need toevaluate whether this growth will expose us to foreign currency exchange risks.All of our sales by the Australian operation are currently denominated in U.S.dollars, and it is our intent that sales will continue to be made in U.S.dollars. We currently do not use derivative financial instruments to mitigatethis exposure. We may hedge certain foreignexchange risks through the use of currency futures or options in futureperiods.

 

**Interest Rate Risk**

 

                Theprimary objective of our investment activities is to preserve principal whilemaximizing income without significantly increasing risk. Some of the securitiesin which we invest may be subject to market risk. This means that a change inprevailing interest rates may cause the principal amount of the investment tofluctuate. To minimize this risk in the future, we intend to maintain ourportfolio of cash equivalents and short-term investments in a variety ofsecurities, including money market funds and certificates of deposit. Our cashequivalents are not subject to market risk because the interest paid on these 

 

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funds fluctuates with the prevailing interestrate. We do not believe that a 10% change in interest rates would have asignificant effect on our interest income.

 

**Off-Balance Sheet FinancingArrangements**

 

                Wedo not engage in any off-balance sheet financing arrangements. We do not haveany interest in entities referred to as variable interest entities, which includesspecial purpose entities and other structured finance entities.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

                Marketrisk represents the risk of loss that may impact our financial position due toadverse changes in financial market prices and rates. Our market risk exposureis primarily a result of fluctuations in interest rates and foreign currencyexchange rates. We do not hold or issue financial instruments for tradingpurposes.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

                Under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, we evaluated the effectiveness of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report.

 

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.Legal Proceedings**

 

In December 2004,we terminated our relationship with Appletec Limited, an Israeli company thatwas assisting us with our sales efforts in Israel. Beginning in February 2005and through May 2005, we received correspondence from Appletec claiming weowed Appletec sales commissions. We do not believe that we owe any furthercommissions to Appletec. However, in June 2005 we sent a letter toAppletec’s counsel proposing a settlement. We did not receive a response to ourproposal and Appletec filed an action in Israel against us and a consultant ofours alleging damages in an amount of approximately $1,800,000. We intend todefend ourselves vigorously and we do not expect the ultimate outcome of thismatter to have material adverse effect on our business, financial condition,results of operations or cash flows.

 

On September 11,2006, JDS Uniphase Corporation and EMCORE Corporation filed a complaint in theUnited States District Court for the Western District of Pennsylvania allegingthat the Company’s 1550 nm HFC externally modulated transmitter, in addition topossibly “products as yet unidentified,” infringes on two U.S. patents.  Since no summary judgment motions have beenruled upon, the Company is unable to determine the ultimate outcome of thislitigation.  On March 14, 2007, JDSUniphase and EMCORE Corporation filed a second complaint in the United StatesDistrict Court for the Western District of Pennsylvania alleging that theCompany’s 1550 nm HFC quadrature amplitude modulated transmitter, in additionto possibly “products as yet unidentified,” infringes on another U.S. patent.Since discovery is currently in process, we are unable to determine theultimate outcome of this second litigation. During the three months ended November 3, 2007, sales of our 1550nm HFC externally modulated transmitter and our 1550 nm HFC quadratureamplitude modulated transmitters, together, represented less than 5% of ourrevenues. The plaintiffs are seeking for the court to declare that we havewillfully infringed on such patents and to be awarded up to three times theamount of any compensatory damages found, if any, plus any other damages andcosts incurred. We intend to vigorously defend the claims asserted against us andwe believe that we have meritorious defenses.

 

In the ordinary courseof business, the Company is party to a litigation, claims and assessments inaddition to those described above. Based on information currently available,management does not believe the impact of these other matters will have amaterial adverse effect on the business, financial condition, results ofoperations or cash flows of the Company.

 

**ITEM 1A.Risk Factors**

 

*Investing in our common stock involves a high degree ofrisk. You should carefully consider the following risk factors, as well as theother information in this Form 10-Q, before deciding whether to invest inour common stock. If any of the following risks actually materializes, ourbusiness, financial condition and results of operations will suffer. Thetrading price of our common stock could decline as a result of any of theserisks, and you might lose all or part of your investment in our common stock.*

 

**Risks Related toOur Business**

 

***Ifoptical communications networks do not continue to expand as expected, ourbusiness will be adversely affected.***

 

Ourfuture success as a manufacturer of optical subsystems ultimately depends onthe continued growth of the communications industry and, in particular, thecontinued expansion of global information networks, particularly those directlyor indirectly dependent upon a fiber optics infrastructure. As part of thatgrowth, we are relying on increasing demand for voice, video and other datadelivered over high-bandwidth network systems as well as commitments by networksystems vendors to invest in the expansion of the global information network.As network usage and bandwidth demand increase, so does the need for advancedoptical networks to provide the required bandwidth. Without network andbandwidth growth, the need for our optical subsystems, and hence our futuregrowth as a manufacturer of these products, is jeopardized. Currently, whileincreasing demand for network services and for broadband access, in particular,is apparent, growth is limited by several factors, including, among others, anuncertain regulatory environment, reluctance from content providers to supplyvideo and audio content over the communications infrastructure, and uncertaintyregarding long term sustainable business models as multiple industries (cableTV, traditional telecommunications, wireless, satellite, etc.) offernon-complementary and competing content delivery solutions. Ultimately, iflong-term expectations for network growth and bandwidth demand are not realizedor do not support a sustainable business model, our business would besignificantly harmed.

 

 

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***Oursuccess will depend on our ability to anticipate and quickly respond toevolving technologies and customer requirements.***

 

Themarket for optical networking equipment is characterized by substantial capitalinvestment and diverse and evolving technologies. For example, the market foroptical subsystems is currently characterized by a trend toward the adoption of“pluggable” modules and subsystems that do not require customizedinterconnections and by the development of more complex and integrated opticalsubsystems. Our ability to anticipate and respond to these and other changes intechnology, industry standards, customer requirements and product offerings,and to develop and introduce new and enhanced products, will be significantfactors in our ability to succeed. We expect that new technologies willcontinue to emerge as competition in the optical networking equipment industryincreases and the need for higher and more cost efficient bandwidth expands.Our success, in large part, depends upon our ability to continuously andsuccessfully introduce and market new products and technologies meeting or exceedingour customers’ expectations. The introduction of new products embodying newtechnologies or the emergence of new industry standards could render ourexistingproducts uncompetitive from a pricing standpoint, obsolete orunmarketable. Further, time to market with new products can provide significantcompetitive advantages in our industry. It is difficult to displace an existingsupplier or a particular type of optical subsystems once a network systemsvendor has chosen an initial optical subsystems supplier for a particularproduct even if a later to market product supplies superior performance and/orcost efficiency. If we are unable to make our new products commerciallyavailable quickly, we may lose existing and potential customers and our financialresults would suffer.

 

***Weand our customers are each dependent upon a limited number of end customers.***

 

Historically,we have generated most of our revenues from a limited number of end customers.For example, in the three months ended November 30, 2007 and October 26,2006, we generated 65.0% and 68.9%, respectively, of our revenues from ourthree largest end customers during those periods. We may not be able to offsetany decline in revenues from our existing major customers with revenues fromnew customers and our quarterly results may be volatile because we aredependent on large orders from these customers that may be reduced or delayed.Our dependence on a limited number of customers is due to the fact that thenetwork systems industry is dominated by a small number of large companies, andthe industry continues to consolidate, as with the recent mergers of CiscoSystems and Scientific-Atlanta, Ericsson and Marconi, Lucent and Alcatel andthe network divisions of Nokia and Siemens. Similarly, our customers dependprimarily on a limited number of major carrier customers to purchase theirnetwork systems products that incorporate our optical subsystems. Many majortelecommunication services providers are experiencing losses from operations.The further consolidation of the industry, coupled with potential decliningrevenues from our major customers, may have a material adverse impact on ourbusiness.

 

***Weare subject to a number of risks with respect to our Optium Australia ROADMoperations.***

 

Ourfuture results of operations will be substantially influenced by the success ofour WSS ROADM product line, and we are subject to a number of risks anduncertainties in this regard, including the following:

 

·                  In the near term, weare expecting that our WSS ROADMs will become key components of nextgeneration network systems demanded by the market. Any delay by network systemsvendors in including our WSS ROADMs in their network systems from the timetablewe expect, or any decision by such vendors not to include our WSSROADMs in amounts we expect, would significantly alter our near termprospects for growth and harm our business and financial condition.

 

·                  We are ramping thecapacity of the production line for our WSS ROADMs at our Optium Australiafacility in Sydney, Australia to meet expected customer demand. This ramping ofcapacity will involve significant investment by us, for which we will notrealize the benefit we expect if customer demand is not what we expect. Anydelay in the production line being able to provide commercial volumes in thequantities anticipated would delay and could limit our ability to realize thefull benefit of the commercialization of our WSS ROADMs, which would negativelyaffect our revenues and competitive position. In addition, a failure to achievemanufacturing yields from such production line comparable to the yieldsobtained at our Horsham, Pennsylvania facility would negatively impact ourmargins and operating results.

 

·                   During the firsthalf of calendar year 2008, we plan to relocate our Optium Australia operatingfacility.  This relocation includesrelocation of all of our Australian manufacturing operations, includingsignificant capital equipment and assets. There are various risks in connectionwith the planned relocation, including delays and other issues caused byinclement weather, damage to our equipment, and problems in recommencingmanufacturing 

 

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                         operations after therelocation of our equipment. If we fail to properly manage this relocation tominimize manufacturing and other business interruption, our business andfinancial results could be materially harmed.

 

***Weare under continuous pressure to reduce the prices of our products.***

 

Theoptical network equipment industry has been characterized by falling productprices over time. Many of our competitors outsource their manufacturingoperations to locations with low labor costs, allowing them to offer theirproducts at lower prices than if they used manufacturing facilities in theUnited States. If optical subsystem products become more standardized, the costadvantages of our embedded software approach to product customization will bereduced and our business would be significantly harmed. In addition, if we areunable to reduce our costs in connection with price reductions, our results ofoperations will be harmed.

 

***Ourfinancial results often vary significantly from quarter-to-quarter due to anumber of factors, which may lead to volatility in our stock price.***

 

Ourquarterly revenue and other operating results have varied in the past and arelikely to continue to vary significantly from quarter to quarter. Thisvariability may lead to volatility in our stock price as equity researchanalysts and investors respond to these quarterly fluctuations. Thesefluctuations are due to numerous factors, including:

 

·                  fluctuations indemand for intelligent optical networking products;

 

·                  the timing and sizeof sales of our products;

 

·                  length andvariability of the sales cycles of our products;

 

·                  the timing ofrecognizing revenue;

 

·                  new productintroductions and enhancements by our competitors and ourselves;

 

·                  changes in ourpricing policies or the pricing policies of our competitors;

 

·                  our ability todevelop, introduce and ship new products and product enhancements that meetcustomer requirements in a timely manner; and

 

·                  our ability toattain and maintain production volumes and quality levels for our products.

 

Becauseof quarterly fluctuations, we believe that quarter-to-quarter comparisons ofour operating results are not necessarily meaningful. Moreover, our operatingresults may not meet our announced guidance or expectations of equity researchanalysts or investors, in which case the price of our common stock coulddecrease significantly.

 

Inaddition, our expense levels are based, in significant part, on ourexpectations as to future revenue and are largely fixed in the short term. As aresult, we may be unable to adjust spending in a timely manner to compensatefor any unexpected shortfall in revenue. Furthermore, we intend to increase ouroperating expenses as we expand our manufacturing, research and development,sales and marketing, and administrative organizations. The timing of theseincreases and the rate at which new personnel become productive will affect ouroperating results. Any revenue shortfall, and the resulting decrease inoperating income or increase in operating loss, could lead to volatility in theprice of our common stock.

 

***Wedepend on a limited number of component suppliers who could disrupt ourbusiness if they stopped, decreased or delayed shipments, and increased demandfor components generally could lead to shortages.***

 

Wedepend on a limited number of suppliers of components used to manufacturecertain of our products. A small number of these suppliers are sole sources. Wetypically have not entered into long-term agreements with our suppliers and,therefore, these suppliers generally may stop supplying materials and equipmentat any time. The reliance on a sole supplier or limited number of supplierscould result in delivery problems, reduced control over product pricing andquality, and an inability to identify and qualify another supplier in a timelymanner. Recently, demand for components has rapidly increased, and we rely onour suppliers to ramp production to meet our demand. Any supply deficienciesrelating to the quality or quantities of 

 

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components we use to manufactureour products could adversely affect our ability to fulfill customer orders orour financial results of operations.

 

***Weare subject to a number of risks as a result of our recent acquisition ofKailight Photonics.***

 

In May 2007,we acquired Kailight Photonics, Inc. of Nes Ziona, Israel, a developer of40Gb/s transceivers and related technologies. Our future results of operationswill be substantially influenced by the operations of this new business, and weare subject to a number of risks and uncertainties related to this acquisition,including the following:

 

·                  In the near term, weare expecting that our 40Gb/s products will become key components of nextgeneration network systems demanded by the market. We acquired KailightPhotonics, in part, based upon this expectation. Any delay by network systemsvendors in including our 40Gb/s products  in their network systems fromthe timetable we expect, or any decision by such vendors not to include our40Gb/s products  in amounts we expect, would significantly alter our nearterm prospects for growth and harm our business and financial condition.

 

·                  We are currentlyexpanding our production line for our 40Gb/s products at our Horsham,Pennsylvania headquarters. This ramping of capacity will involve significantinvestment by us, for which we will not realize the benefit we expect ifcustomer demand is not what we expect. Any delay in the production line beingable to produce commercial volumes in the quantities anticipated would delayour ability to commercialize our 40Gb/s products, which would negatively affectour revenues and competitive position. In addition, a failure to achievemanufacturing yields from such production line comparable to the yieldsobtained with respect to our 10Gb/s products would negatively impact ourmargins and operating results.

 

·                  We may incur chargesto operations in amounts that are not currently estimable to reflect costsassociated with integrating the acquired business with our company. These costscould adversely affect our future operating results.

 

·                  We have become alarger and more geographically dispersed organization, and if our management isunable to effectively manage the combined business, our operating results willsuffer.

 

***Oursuccess will depend on our ability to quickly adjust to changes in customerdemand and lead times.***

 

Ourindustry is characterized by rapidly shifting demand among various producttypes and requests for shorter manufacturing lead times as our customersrespond to market trends.  As a result, forecasts from our customers maynot provide us with sufficient visibility into the breakdown of long-termdemand.  If we are not able to quickly adjust to shifting demand amongvarious product types or meet the required lead times of our customers, ourbusiness could be adversely affected. Further, lower visibility into customerdemand could cause our results to materially differ quarter to quarter.

 

***Wedo not have long-term volume purchase contracts with our customers.***

 

Generally,we have not entered into long-term volume purchase contracts with our customers.As a result, any of our customers may cease to purchase our products at anytime. If any of our major customers stop purchasing our products for anyreason, our business and results of operations would be harmed.

 

***Ifwe fail to retain our chief executive officer and other key personnel or if wefail to attract additional qualified personnel, we may not be able to achieveour anticipated level of growth and our business could suffer.***

 

Ourfuture depends, in part, on our ability to attract and retain key personnel.Our future depends on the continued contributions of our executive officers andother key technical personnel, each of whom would be difficult to replace. Inparticular, Eitan Gertel, our chief executive officer, president and chairman,is critical to the management of our business and operations, as well as thedevelopment of our strategic direction. The loss of services of Mr. Gertelor other executive officers or key personnel or the inability to continue toattract qualified personnel could have a material adverse effect on ourbusiness. Competition for highly skilled technical people is extremely intenseand we continue to face difficulty identifying and hiring qualified personnelin many areas of our business. We may not be able to hire and retain suchpersonnel at compensation levels consistent with our existing compensation andsalary structure. Many of the companies with which we compete for hiringexperienced employees have greater resources than we have. In addition, inmaking employment decisions, particularly in the 

 

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high-technology industries, jobcandidates often consider the value of the equity they are to receive inconnection with their employment. Therefore, significant volatility in theprice of our stock may adversely affect our ability to attract or retaintechnical personnel. Furthermore, changes to accounting principles generallyaccepted in the United States relating to the expensing of stock options maydiscourage us from granting the sizes or types of stock awards that jobcandidates may require to accept our offer of employment.

 

***Potentialfuture acquisitions could be difficult to integrate, divert the attention ofkey personnel, disrupt our business, dilute stockholder value and impair ourfinancial results.***

 

Aspart of our business strategy, we intend to pursue acquisitions of companies,technologies and products that we believe could accelerate our ability tocompete in our core markets or allow us to enter new markets. Acquisitionsinvolve numerous risks, any of which could harm our business, including:

 

·                  difficulties inintegrating the operations, technologies, products, existing contracts,accounting and personnel of the target company and realizing the anticipated synergiesof the combined businesses;

 

·                  difficulties insupporting and transitioning customers, if any, of the target company;

 

·                  diversion offinancial and management resources from existing operations;

 

·                  the price we pay orother resources that we devote may exceed the value we realize, or the value wecould have realized if we had allocated the purchase price or other resourcesto another opportunity;

 

·                  risks of enteringnew markets in which we have limited or no experience;

 

·                  potential loss ofkey employees, customers and strategic alliances from either our currentbusiness or the target company’s business;

 

·                  assumption ofunanticipated problems or latent liabilities, such as problems with the qualityof the target company’s products;

 

·                  inability togenerate sufficient revenue to offset acquisition costs;

 

·                  equity basedacquisitions may have a dilutive effect on our stock; and

 

·                  inability tosuccessfully complete transactions with a suitable acquisition candidate.

 

Acquisitionsalso frequently result in the recording of goodwill and other intangible assetswhich are subject to potential impairments in the future that could harm ourfinancial results. As a result, if we fail to properly evaluate acquisitions orinvestments, we may not achieve the anticipated benefits of any suchacquisitions, and we may incur costs in excess of what we anticipate. Thefailure to successfully evaluate and execute acquisitions or investments orotherwise adequately address these risks could materially harm our business andfinancial results.

 

***Ifwe fail to manage or anticipate our long-term growth and expansionrequirements, our business will suffer.***

 

Inrecent years, we have experienced significant growth through among otherthings, internal expansion programs, product development and our acquisitionsof Engana, now Optium Australia and Kailight, now Optium Israel. We currentlyanticipate continued growth. In connection with this growth, we will berequired to expand our manufacturing operations, including hiring new personnel,purchasing additional equipment, leasing or purchasing additional facilitiesand developing the management infrastructure to manage any such expansion. Ifwe fail to secure these expansion requirements and /or manage our future growtheffectively, in particular during periods of industry uncertainty, our businesscould suffer.

 

 

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***Ourproducts are complex and may take longer to develop than anticipated and we maynot recognize revenues from new products until after long field testing andcustomer acceptance periods.***

 

Manyof our new products must be tailored to customer specifications. As a result,we are constantly developing new products and using new technologies in thoseproducts. These products often take substantial time to develop because oftheir complexity and because customer specifications sometimes change duringthe development cycle. We often incur substantial costs associated with theresearch and development and sales and marketing activities in connection withproducts that may be purchased long after we have incurred the costs associatedwith designing, creating and selling such products.

 

***Ifour customers do not qualify our products or if our customers determine not topurchase products we have in development, our operating results could suffer.***

 

Mostof our customers do not purchase our products, other than limited numbers ofevaluation units, prior to qualification of our products. Our existingproducts, as well as each new product, must pass through varying levels ofqualification with our customers. In addition, due to the rapid technologicalchanges in our market, a customer may cancel or modify a design project beforewe begin large-scale manufacture of the product and receive revenue from thecustomer. It is unlikely that we would be able to recover the expenses forcancelled or unutilized design projects. It is difficult to predict with anycertainty the frequency with which customers will cancel or modify theirprojects, or the effect that any cancellation or modification would have on ourresults of operations.

 

***Ifcarriers that purchase network systems from customers fail to qualify or delayqualifications of any products sold by our customers that contain our products,our business could be harmed.***

 

Thequalification and field testing of our customers’ network system products bytheir carrier customers is long and unpredictable. This process is not underthe control of us or our customers, and as a result timing of our revenues isunpredictable. Any delay in qualification of one of our customers’ networksystems from what we anticipate could result in the delay or cancellation oforders from our customers for subsystems included in the applicable networksystem, which could harm our results of operations.

 

***Delays,disruptions or quality control problems in manufacturing could result in delaysin product shipments to customers and could adversely affect our business.***

 

Wemay experience delays, disruptions or quality control problems in ourmanufacturing operations. As a result, we could incur additional costs thatwould adversely affect gross margins, and product shipments to our customerscould be delayed beyond the shipment schedules requested by our customers,which would negatively affect our revenues, competitive position andreputations.

 

***Wemay experience low manufacturing yields.***

 

Manufacturingyields depend on a number of factors, including the volume of production due tocustomer demand and the nature and extent of changes in specifications requiredby customers for which we perform design-in work. Higher volumes due to demandfor a fixed, rather than continually changing, design generally results inhigher manufacturing yields, whereas lower volume production generally resultsin lower yields. In addition, lower yields may result, and have in the pastresulted, from commercial shipments of products prior to full manufacturingqualification to the applicable specifications. Changes in manufacturingprocesses required as a result of changes in product specifications, changingcustomer needs and the introduction of new product lines have historicallycaused, and may in the future cause, significantly reduced manufacturingyields, resulting in low or negative margins on those products. Moreover, anincrease in the rejection rate of products during the quality control processbefore, during or after manufacture, results in lower yields and margins.Finally, manufacturing yields and margins can also be lower if we receive orinadvertently use defective or contaminated materials from our suppliers.

 

***Weface intense competition from other providers of optical subsystems, as well ascompetition from providers offering alternative products, which couldnegatively impact our results of operations and cause our market share todecline.***

 

Webelieve that a number of companies have developed or are developing opticalsubsystems that compete directly with our product offerings. Many current andpotential competitors have substantially greater financial, marketing, researchand 

 

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manufacturing resources than wepossess, and there can be no assurance that our current and future competitorswill not be more successful than us.

 

Inthe event that the optical subsystems market expands, competition may intensifyas additional competitors enter the market and current competitors expand theirproduct lines. Companies competing with us may introduce products that arecompetitively priced, have increased performance or functionality, orincorporate technological advances that we have not yet developed orimplemented, and may be able to react quicker to changing customer requirementsand expectations. There is also the risk that network systems vendors may re-enterthe subsystem market and begin to manufacture the optical subsystemsincorporated in their network systems. Increased competitive pressure or adecision by any of our customers to manufacture optical subsystems forinclusion in their network systems could result in a loss of sales or marketshare or cause us to lower prices for our products, any of which would harm ourbusiness and operating results.

 

***Ourfuture operating results may be subject to volatility as a result of exposureto foreign currency exchange risks and foreign losses.***

 

Allsales of our products are made in United States dollars. Nevertheless, a few ofour suppliers to our subsidiaries Optium Australia and Optium Israel are paidin Australian dollars and Israeli shekels, respectively. In addition, allemployee and other local expenses of Optium Australia and Optium Israel arepaid in Australian dollars and Israeli shekels, respectively. This exposes usto foreign currency exchange rate risks. If the value of the Australian dollarand/or Israeli shekel relative to the United States dollar rises, theseexpenses of Optium Australia and/or Optium Israel, as applicable, willcorrespondingly increase. We currently do not use derivative financialinstruments to mitigate this exposure. We continue to review this issue and mayconsider hedging certain foreign exchange risks through the use of currencyfutures or options in future periods.

 

Currently,we recognize income in our US operations and losses in our Australian andIsraeli operations; the combination of domestic income and foreign losses, inaddition to recognition of additional deferred tax assets, could affect ourquarterly and year to date effective tax rates.

 

***Ifwe fail to protect, or incur significant costs in defending, our intellectualproperty and other proprietary rights, our business and results of operationscould be materially harmed.***

 

Oursuccess depends on our ability to protect our intellectual property and otherproprietary rights. We rely primarily on patents, trademarks, copyrights, tradesecrets and unfair competition laws, as well as license agreements and othercontractual provisions, to protect our intellectual property and otherproprietary rights. Significant technology used in our products, however, isnot the subject of any patent protection, and we may be unable to obtain patentprotection on such technology in the future. Moreover, existing U.S. legalstandards relating to the validity, enforceability and scope of protection ofintellectual property rights offer only limited protection, may not provide uswith any competitive advantages, and may be challenged by third parties. Inaddition, the laws of countries other than the United States in which we marketour products may afford little or no effective protection of our intellectualproperty. Accordingly, despite our efforts, we may be unable to prevent thirdparties from infringing upon or misappropriating our intellectual property orotherwise gaining access to our technology. Unauthorized third parties may tryto copy or reverse engineer our products or portions of our products orotherwise obtain and use our intellectual property. If we fail to protect ourintellectual property and other proprietary rights, our business, results ofoperations or financial condition could be materially harmed.

 

Inaddition, defending our intellectual property rights may entail significantexpense. We believe that certain products in the marketplace may infringe ourexisting intellectual property rights. We have, from time to time, resorted tolegal proceedings to protect our intellectual property and may continue to doso in the future. We may be required to expend significant resources to monitorand protect our intellectual property rights. Any of our intellectual propertyrights may be challenged by others or invalidated through administrativeprocesses or litigation. If we resort to legal proceedings to enforce ourintellectual property rights or to determine the validity and scope of theintellectual property or other proprietary rights of others, the proceedingscould result in significant expense to us and divert the attention and effortsof our management and technical employees, even if we were to prevail.

 

***Thirdparties may claim we are infringing their intellectual property rights and wecould be prevented from selling our products, or suffer significant litigationexpense, even if these claims have no merit.***

 

Ourcompetitive position is driven in part by our intellectual property and otherproprietary rights. Third parties, however, may claim that we or our productsor operations are infringing their intellectual property rights, and we may be 

 

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unaware of intellectual propertyrights of others that may cover some of our assets, technology and products. Inthat regard, JDS Uniphase Corporation and EMCORE Corporation filed a complainton September 11, 2006 alleging that our 1550 nm HFC externally modulatedtransmitter, in addition to possibly “products as yet unidentified,” infringeson two U.S. patents.  On March 14, 2007, JDS Uniphase and EMCORECorporation filed a second complaint in the United States District Court forthe Western District of Pennsylvania alleging that the Company’s 1550 nm HFCquadrature amplitude modulated transmitters, in addition to possibly “productsas yet unidentified”,  infringe on another U.S. patent. The plaintiffs inboth cases are seeking for the court to declare that we have willfullyinfringed on such patents and to be awarded up to three times the amount of anycompensatory damages found, if any, plus any other damages or costs incurred.Any litigation regarding patents, trademarks, copyrights or other intellectualproperty rights, even those without merit, could be costly and time consuming,and divert our management and key personnel from operating our business. Thecomplexity of the technology involved and inherent uncertainty and cost ofintellectual property litigation increases our risks. If any third party has ameritorious or successful claim that we are infringing its intellectualproperty rights, we may be forced to change our products or manufacturingprocesses, which may be costly or impractical. This also may require us to stopselling our products as currently engineered, which could harm our competitiveposition. We also may be subject to significant damages or injunctions thatprevent the further development of certain of our products or services.

 

***Ifwe fail to obtain the right to use the intellectual property rights of othersnecessary to operate our business, our ability to succeed will be adverselyaffected.***

 

Numerouspatents in our industry are held by others, including academic institutions andour competitors. Optical subsystem suppliers may seek to gain a competitiveadvantage or other third parties may seek an economic return on theirintellectual property portfolios by making infringement claims against us. Inthe future, we may need to obtain license rights to patents or otherintellectual property held by others to the extent necessary for our business.Unless we are able to obtain those licenses on commercially reasonable terms,patents or other intellectual property held by others could inhibit ourdevelopment of new products for our markets. Licenses granting us the right touse third party technology may not be available on commercially reasonableterms, if at all. Generally, a license, if granted, would include payments ofup-front fees, ongoing royalties or both. These payments or other terms couldhave a significant adverse impact on our operating results. Our largercompetitors may be able to obtain licenses or cross-license their technology onbetter terms than we can, which could put us at a competitive disadvantage.

 

***Weincur significant increased costs as a result of operating as a public company,our management is required to devote substantial time to new complianceinitiatives, and if we have deficiencies in our internal controls overfinancial reporting or other compliance controls,******themarket price of our stock could decline and we could be subject to sanctions orinvestigations******.***

 

As apublic company, we incur significant legal, accounting and other expenses thatwe did not incur as a private company. In addition, the Sarbanes-Oxley Act of2002, as well as new rules subsequently implemented by the Securities andExchange Commission, or SEC, and the NASDAQ Global Market, has imposed variousnew requirements on public companies, including requiring changes in corporategovernance practices. Our management and other personnel devote a substantialamount of time to these new compliance initiatives. Moreover, these rules andregulations increase our legal and financial compliance costs and make someactivities more time-consuming and costly.

 

Inaddition, the Sarbanes-Oxley Act requires, among other things, that we maintaineffective internal control over financial reporting and disclosure controls andprocedures. In particular, under current rules, commencing with respect to ourfiscal year ending August 2, 2008, we must perform system and processevaluation and testing of our internal control over financial reporting toallow management to report on the effectiveness of our internal control overfinancial reporting, as required by Section 404 of the Sarbanes-Oxley Act,or Section 404. Our testing, or the subsequent testing by our independentregistered public accounting firm, may reveal deficiencies in our internalcontrol over financial reporting that are deemed to be material weaknesses. Ourcompliance with Section 404 will require that we incur substantialaccounting expense and expend significant management time on compliance-relatedissues. We will evaluate the need to hire additional accounting and financialstaff with appropriate public company experience and technical accountingknowledge. Moreover, if we are not able to comply with the requirements of Section 404in a timely manner, or if we or our independent registered public accountingfirm identifies deficiencies in our internal controls over financial reporting,the market price of our stock could decline and we could be subject tosanctions or investigations by the NASDAQ Global Market, the SEC or otherregulatory authorities, which would require additional financial and managementresources.

 

 

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***Wemay not be able to obtain capital when desired on favorable terms, if at all,or without dilution to our stockholders.***

 

Weanticipate that our current cash, cash equivalents, and cash provided byoperating activities will be sufficient to meet our current and anticipatedneeds for general corporate purposes for at least the next 12 months. Weoperate in a market, however, that makes our prospects difficult to evaluate.It is possible that we may not generate sufficient cash flow from operations orotherwise have the capital resources to meet our future capital needs. If thisoccurs, we may need additional financing to execute on our current or futurebusiness strategies, including to:

 

·                  acquirecomplementary businesses or technologies;

 

·                  enhance our operatinginfrastructure;

 

·                  develop newproducts;

 

·                  hire additionaltechnical and other personnel; or

 

·                  otherwise respond tocompetitive pressures.

 

Ifwe raise additional funds through the issuance of equity or convertible debtsecurities, the percentage ownership of our stockholders could be significantlydiluted, and these newly-issued securities may have rights, preferences orprivileges senior to those of existing stockholders. We cannot assure you thatadditional financing will be available on terms favorable to us, or at all. Ifadequate funds are not available or are not available on acceptable terms, ifand when needed, our ability to fund our operations, take advantage ofunanticipated opportunities, develop or enhance our products, or otherwise respondto competitive pressures could be significantly limited.

 

***Wemay be faced with product liability claims.***

 

Despitequality assurance measures, there remains a risk that defects may occur in ourproducts. The occurrence of any defects in our products could give rise toliability for damages caused by such defects. They could, moreover, impair themarket’s acceptance of our products. Both could have a material adverse effecton our business and financial condition. Although we carry product liabilityinsurance, we cannot assure investors that this insurance would adequatelycover our costs arising from defects in our products.

 

****We willlose sales if we are unable to obtain government authorization to exportcertain of our products.****

 

                Exports of our products are subject to exportcontrols imposed by the U.S. Government and administered by the U.S.Departments of State and Commerce. In certain instances, these regulations mayrequire pre-shipment authorization from the administeringdepartment.  For products subject to the Export AdministrationRegulations, or EAR, administered by the Department of Commerce’s Bureau ofIndustry and Security, the requirement for a license is dependent on the typeand end use of the product, the final destination and the identity of the enduser.  Virtually all exports of products subject to the InternationalTraffic in Arms Regulations, or ITAR, administered by the Department of State’sDirectorate of Defense Trade Controls, require a license.  Most ofour fiber optics products are subject to EAR; certain of our RF over fiberproducts are currently subject to ITAR.

 

                Given the current global political climate, obtainingexport licenses can be difficult and time-consuming.   Failure toobtain export licenses for these shipments could significantly reduce ourrevenue and could materially adversely affect our business, financial conditionand results of operations. Compliance with U.S. Government regulations may alsosubject us to additional fees and costs. The absence of comparable restrictionson competitors in other countries may adversely affect our competitiveposition.

 

***Businessdisruptions resulting from international uncertainties could negatively impactour profitability.***

 

Wederive, and expect to continue to derive, a significant portion of our revenuefrom international sales in various markets. In addition, we have operations inSydney, Australia and Nes Ziona, Israel. Our international revenue andoperations are subject to a number of material risks, including, but not limitedto:

 

 

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·                  difficulties instaffing, managing and supporting operations in more than one country;

 

·                  difficulties inenforcing agreements and collecting receivables through foreign legal systems;

 

·                  fewer legalprotections for intellectual property;

 

·                  foreign and U.S.taxation issues and international trade barriers;

 

·                  difficulties inobtaining any necessary governmental authorizations for the export of ourproducts to certain foreign jurisdictions;

 

·                  fluctuations inforeign economies;

 

·                  fluctuations in thevalue of foreign currencies and interest rates;

 

·                  general economic andpolitical conditions in the markets in which we operate;

 

·                  domestic andinternational economic or political changes, hostilities and other disruptionsin regions where we currently operate or may operate in the future; and

 

·                  different andchanging legal and regulatory requirements in the jurisdictions in which wecurrently operate or may operate in the future.

 

Negativedevelopments in any of these areas in one or more countries could result in areduction in demand for our products, the cancellation or delay of ordersalready placed, difficulties in producing and delivering our products, threatsto our intellectual property, difficulty in collecting receivables, and ahigher cost of doing business, any of which could negatively impact ourbusiness, financial condition or results of operations. Moreover, our sales,including sales to customers outside the United States, are denominated in U.S.dollars, and downward fluctuations in the value of foreign currencies relativeto the U.S. dollar may make our products more expensive than other products,which could harm our business.

 

***Wemay be unable to utilize our net operating loss carryforwards to reduce ourincome taxes.***

 

Asof November 3, 2007, we had U.S. net operating loss, or NOL, carryforwardsof approximately $23.9 million for federal and $9.2 million for stateincome tax purposes expiring through fiscal year ending July 2025. TheseNOL carryforwards represent an asset to the extent they can be utilized toreduce future cash income tax payments. Utilization of our NOL carryforwardsdepends on the timing and amount of taxable income earned in the future, whichwe are unable to predict. We have performed an analysis to determine whether anownership change under Section 382 of the Internal Revenue Code hasoccurred. The effect of an ownership change would be the imposition of anannual limitation on the use of the U.S. NOL carry forwards attributable toperiods before the change. The review determined we have no current limitationsrelated to the NOL carryforwards. We have NOLs in the United States, Australiaand Israel. Currently, we recognize income in our U.S. operations and losses inour Australian and Israeli operations, and the complexity of the application ofthe NOLs in consolidation may adversely affect our future effective tax rate.

 

Inthe year ended July 28, 2007, we recorded a U.S. deferred tax asset, byremoving a valuation allowance, of approximately $13.9 million. This one timerecognition positively affected our net income for fiscal year 2007. Werecognized the U.S. deferred tax asset when it met a “more likely than not”recognition threshold in connection with likely future taxable incomerealization.  In the future, we mayrecognize additional deferred tax assets should our foreign operations meet the“more likely than not” recognition threshold in connection with likely futuretaxable income realization.

 

**Risks Related toOwnership of Our Common Stock**

 

***Ifequity research analysts do not publish research or reports about our businessor if they issue unfavorable commentary or downgrade our common stock, theprice of our common stock could decline.***

 

 

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Thetrading market for our common stock relies in part on the research and reportsthat equity research analysts publish about us and our business. The price ofour stock could decline if one or more securities analysts downgrade our stockor if those analysts issue other unfavorable commentary or cease publishingreports about us or our business.

 

Someof the factors that may cause the market price of our common stock to fluctuateinclude:

 

·                  fluctuations in ourquarterly financial results or the quarterly financial results of companiesperceived to be similar to us;

 

·                  changes in estimatesof our financial results or recommendations by securities analysts;

 

·                  failure of any ofour products to achieve or maintain market acceptance;

 

·                  changes in marketvaluations of similar companies;

 

·                  success ofcompetitive products;

 

·                  changes in ourcapital structure, such as future issuances of securities or the incurrence ofadditional debt;

 

·                  announcements by usor our competitors of significant products, contracts, acquisitions orstrategic alliances;

 

·                  regulatorydevelopments in the United States, foreign countries or both;

 

·                  litigation involvingour company, our general industry or both;

 

·                  additions ordepartures of key personnel;

 

·                  investors’ generalperception of us;

 

·                  changes in generaleconomic, industry and market conditions; and

 

·                  changes inregulatory and other dynamics.

 

Inaddition, if the market for technology stocks or the stock market in generalexperiences a loss of investor confidence, the trading price of our commonstock could decline for reasons unrelated to our business, financial conditionor results of operations. If any of the foregoing occurs, it could cause ourstock price to fall and may expose us to class action lawsuits that, even ifunsuccessful, could be costly to defend and a distraction to management.

 

***Asignificant portion of our total outstanding shares may be sold into the publicmarket, which could cause the market price of our common stock to dropsignificantly, even if our business is doing well.***

 

Salesof a substantial number of shares of our common stock in the public marketcould occur at any time.   These shares are able to be sold, subjectto any applicable volume limitations under federal securities laws, at anytime.  These sales, or the market perception that the holders of a largenumber of shares intend to sell shares, could reduce the market price of ourcommon stock.

 

Inaddition, as of December 10, 2007 there were 48,979 shares subject tooutstanding warrants, 2,384,280 shares subject to outstanding options, and345,000 unvested restricted stock units. Additional shares will be availablefor issuance under our stock option plans. These shares are eligible for salein the public market to the extent permitted by any applicable vestingrequirements. Moreover,  holders who, at the time of our initial publicoffering, held an aggregate of approximately 17 million shares of ourcommon stock have rights, subject to some conditions, to require us to fileregistration statements covering their shares or to include their shares inregistration statements that we may file for ourselves or other stockholders.We have also registered all shares of common stock that we may issue under ouremployee benefit plans. Once we register these shares, they can be freely soldin the public market upon issuance.

 

 

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***Ourdirectors, management and entities associated with them will exercisesignificant control over our company, which will limit your ability toinfluence corporate matters.***

 

Ourexecutive officers and directors and entities associated with them collectivelybeneficially own approximately 49% of our outstanding common stock as of December 10,2007. As a result, these stockholders, if they act together, will be able toinfluence our management and affairs and all matters requiring stockholderapproval, including the election of directors and approval of significantcorporate transactions. This concentration of ownership may have the effect ofdelaying or preventing a change in control of our company and might negativelyaffect the market price of our common stock.

 

***Provisionsin our certificate of incorporation and by-laws and Delaware law mightdiscourage, delay or prevent a change of control of our company or changes inour management and, therefore, depress the trading price of our common stock.***

 

Provisionsof our certificate of incorporation and by-laws and Delaware law maydiscourage, delay or prevent a merger, acquisition or other change in controlthat stockholders may consider favorable, including transactions in which youmight otherwise receive a premium for your shares of our common stock. Theseprovisions may also prevent or frustrate attempts by our stockholders toreplace or remove our management. These provisions include:

 

·                  limitations on theremoval of directors;

 

·                  a classified boardof directors so that not all members of our board are elected at one time;

 

·                  advance noticerequirements for stockholder proposals and director nominations;

 

·                  the inability ofstockholders to act by written consent or to call special meetings;

 

·                  the ability of ourboard of directors to make, alter or repeal our by-laws; and

 

·                  the ability of ourboard of directors to designate the terms of and issue new series of preferredstock without stockholder approval.

 

Theaffirmative vote of the holders of at least 75% of our shares of capital stockentitled to vote is necessary to amend or repeal the above provisions of ourcertificate of incorporation. In addition, absent approval of our board of directors,our by-laws may only be amended or repealed by the affirmative vote of theholders of at least 75% of our shares of capital stock entitled to vote.

 

Inaddition, Section 203 of the Delaware General Corporation Law prohibits apublicly-held Delaware corporation from engaging in a business combination withan interested stockholder, generally a person which together with itsaffiliates owns, or within the last three years has owned, 15% of our votingstock, for a period of three years after the date of the transaction in whichthe person became an interested stockholder, unless the business combination isapproved in a prescribed manner.

 

Theexistence of the foregoing provisions and anti-takeover measures could limitthe price that investors might be willing to pay in the future for shares ofour common stock. They could also deter potential acquirers of our company,thereby reducing the likelihood that you could receive a premium for yourcommon stock in an acquisition.

 

***Wedo not currently intend to pay dividends on our common stock and, consequently,your ability to achieve a return on your investment will depend on appreciationin the price of our common stock.***

 

Wehave never declared or paid any cash dividends on our common stock and do notcurrently intend to do so for the foreseeable future. We currently intend toinvest our future earnings, if any, to fund our growth. Therefore, you are notlikely to receive any dividends on your common stock for the foreseeablefuture.

 

 

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**ITEM 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

None.

 

**ITEM 3.  Defaults Upon Senior Securities**

 

None.

 

**ITEM4.  Submission of Matters to a Vote ofSecurity Holders**

 

None.

 

**ITEM5.  Other Information**

 

On December 7, 2007, Optium Australia PtyLimited entered into a lease agreement for a facility located in Waterloo, NewSouth Wales, Australia. The lease is a three year term, with the option torenew for an additional three years. The facility comprises approximately32,800 square feet. The monthly rent is approximately $45,000 AUD per month,including charges, subject to periodic increase. Optium plans to relocate itsOptium Australia operations to this location during the first half of calendaryear 2008.

 

**ITEM 6.  Exhibits**

 

(a)   Exhibit Index.

 

10.1*                    Form of Deferred Stock Award forIsraeli grantees under Optium Corporation 2006 Stock Option and Incentive Plan.

 

10.2*                    Form of Deferred Stock Award fordirectors under Optium Corporation 2006 Stock Option and Incentive Plan.

 

10.3                           LeaseAgreement, dated December 7, 2007, by and between Charvic Pty Ltd and OptiumAustralia Pty Limited for premises located at 244 Young Street, Waterloo, NSW,Australia.

 

31.1                           Certification of Chief Executive Officerpursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certification of Chief Financial Officerpursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                           Certifications of Chief Executive Officerand Chief Financial Officer pursuant to Rule 13a-14(b) of theExchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

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* Indicates a management contract or compensatory plan or arrangement

 

 

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**SIGNATURES**

 

                  Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|   |                   | OPTIUM CORPORATION.                    |
|--------|------------------------|----------------------------------------|
|   |                   |                                   |
|   |                   |                                   |
| Dated: | December 13, 2007 | /s/ Eitan Gertel                       |   |
|   |                   | Eitan  Gertel                          |
|   |                   | President  and Chief Executive Officer |
|   |                   |                                   |
|   |                   |                                   |
| Dated: | December 13, 2007 | /s/ David Renner                       |   |
|   |                   | David Renner                           |
|   |                   | Vice  President of Finance and         |
|   |                   | Chief  Financial Officer               |

 

 

 

 

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