** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| x                                                         | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                      |                                                                                                    |
| **For the quarterly period ended February 2,  2008** |
| ** **                                                | ** **                                                                                              |
| **or**                                                    |
|                                                      |                                                                                                    |
| o                                                         | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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 suchfiling requirements for the past 90 days.

 

x Yes        o No

 

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

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x                        |   | Smaller reporting company o |
|---------------------------|--------|---------------------|--------|------------------------------------------------|--------|-----------------------------|
|                      |   |                |   | (Do not check if a smaller  reporting company) |   |                        |

 

                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 March 11,2008, the registrant had 25,481,832 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**

 
| ** **  | ** **                | **Page**   |
|-------------|---------------------------|------------|
| ** **  | ** **                | ** ** |
| **ITEM 1.** | **Financial Statements.** | ** ** |

 
| 1.     | Condensed  Consolidated Statements of Operations (unaudited) for the  three and six months ended February 2, 2008 and January 27, 2007 | 2      |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                             |   |
| 2.     | Condensed  Consolidated Balance Sheets as  of February 2, 2008 (unaudited) and July 28, 2007                                           | 3      |
|   |                                                                                                                                             |   |
| 3.     | Condensed  Consolidated Statements of Cash Flows (unaudited) for  the six months ended February 2, 2008 and January 27, 2007           | 4      |
|   |                                                                                                                                             |   |
| 4.     | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                                | 5      |

 
| **ITEM 2.**  | **Management’s  Discussion and Analysis of  Financial Condition and Results of Operations.** | 22     |
|--------------|---------------------------------------------------------------------------------------------------|--------|
|         |                                                                                              |   |
| **ITEM 3.**  | **Quantitative  and Qualitative Disclosures about  Market Risk.**                                 | 27     |
|         |                                                                                              |   |
| **ITEM  4.** | **Controls  and Procedures.**                                                                     | 27     |

 
| **PART II**      |
|-----------------------|
| **Other Information** |

 
| **ITEM  1.**   | **Legal  Proceedings.**                                           | 28     |
|----------------|-------------------------------------------------------------------|--------|
| **ITEM 1A.**   | **Risk  Factors.**                                                | 28     |
| **ITEM 2.**    | **Unregistered  Sales of Equity Securities and Use of Proceeds.** | 41     |
| **ITEM 3.**    | **Defaults Upon  Senior Securities.**                             | 41     |
| **ITEM 4.**    | **Submission of  Matters to a Vote of Security Holders.**         | 41     |
| **ITEM  5.**   | **Other  information.**                                           | 41     |
| **ITEM 6.**    | **Exhibits.**                                                     | 41     |
|           |                                                              |   |
| **SIGNATURES** | 42                                                                |

 

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;” “RiskFactors;” 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**    | ** ** | **Six months ended**      | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                          | ** ** | **February 2, 2008** | ** ** | **January 27, 2007** | ** ** | **February 2, 2008** | ** ** | **January 27, 2007** | ** ** |
| Revenue                                             |       | $                         | 40,294     |                      | $          | 34,139 |   | $ | 76,414 |   | $ | 64,149 |   |
| Cost of revenue                                     |       | 29,413                    |       | 24,214                    |       | 55,864 |   | 45,519 |   |
| Gross profit                                        |       | 10,881                    |       | 9,925                     |       | 20,550 |   | 18,630 |   |
| Operating expenses:                                 |       |                      |       |                      |       |   |   |   |   |
| Research and product development                    |       | 5,995                     |       | 3,513                     |       | 11,032 |   | 6,509 |   |
| Selling, general and administrative                 |       | 6,231                     |       | 3,359                     |       | 12,582 |   | 6,186 |   |
| Total operating expenses                            |       | 12,226                    |       | 6,872                     |       | 23,614 |   | 12,695 |   |
| Income (loss) from  operations                      |       | (1,345                    | )          | 3,053                     |       | (3,064 | ) | 5,935 |   |
| Interest and other income,  net                     |       | 614                       |       | 1,102                     |       | 1,319 |   | 1,158 |   |
| Income (loss) before  income tax expense            |       | (731                      | )          | 4,155                     |       | (1,745 | ) | 7,093 |   |
| Income tax expense                                  |       | 69                        |       | 293                       |       | 134 |   | 472 |   |
| Net income (loss)                                   |       | $                         | (800       | )                         | $          | 3,862 |   | $ | (1,879 | ) | $ | 6,621 |   |
|                                                |       |                      |       |                      |       |   |   |   |   |
| Basic net income (loss)  per share                  |       | $                         | (0.03      | )                         | $          | 0.16 |   | $ | (0.07 | ) | $ | 0.48 |   |
| Basic weighted average  common shares outstanding   |       | 25,452                    |       | 24,592                    |       | 25,443 |   | 13,668 |   |
|                                                |       |                      |       |                      |       |   |   |   |   |
| Diluted net income (loss)  per share                |       | $                         | (0.03      | )                         | $          | 0.15 |   | $ | (0.07 | ) | $ | 0.28 |   |
| Diluted weighted average  common shares outstanding |       | 25,452                    |       | 26,592                    |       | 25,443 |   | 23,564 |   |

 

*See accompanying notes to the financial statements.*

 

 

2

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**Optium Corporation**

**Condensed Consolidated Balance Sheets**

*(in  thousands, except shareamounts)*

 
| ** **                                                                                                                                                                                | ** ** | **February 2, 2008** | ** ** | **July 28, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(unaudited)**           | ** ** | ** **             | ** ** |
| **Assets**                                                                                                                                                                                | ** ** | ** **                | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                           |       |                      |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                 |       | $                         | 47,805     |                   | $          | 25,359 |   |
| Short-term investments                                                                                                                                                                    |       | 4,597                     |       | 36,018                 |       |
| Accounts receivable, net of allowances of $34 and $46, respectively                                                                                                                       |       | 30,345                    |       | 21,853                 |       |
| Inventories, net                                                                                                                                                                          |       | 23,834                    |       | 20,684                 |       |
| Restricted cash                                                                                                                                                                           |       | 68                        |       | 68                     |       |
| Deferred tax assets                                                                                                                                                                       |       | 6,071                     |       | 4,976                  |       |
| Prepaid expenses and other current assets                                                                                                                                                 |       | 1,873                     |       | 1,039                  |       |
| Total current assets                                                                                                                                                                      |       | 114,593                   |       | 109,997                |       |
| Property and equipment,  net                                                                                                                                                              |       | 14,482                    |       | 9,124                  |       |
| Other assets                                                                                                                                                                              |       | 433                       |       | 170                    |       |
| Intangible assets, net                                                                                                                                                                    |       | 1,806                     |       | 2,006                  |       |
| Goodwill                                                                                                                                                                                  |       | 38,509                    |       | 37,923                 |       |
| Deferred tax assets                                                                                                                                                                       |       | 7,745                     |       | 8,881                  |       |
| Total assets                                                                                                                                                                              |       | $                         | 177,568    |                   | $          | 168,101 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                            | ** ** | ** **                | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                                                                                                      |       |                      |       |                   |       |
| Accounts payable                                                                                                                                                                          |       | $                         | 26,756     |                   | $          | 20,222 |   |
| Accrued expenses                                                                                                                                                                          |       | 5,969                     |       | 4,389                  |       |
| Accrued warranty                                                                                                                                                                          |       | 392                       |       | 359                    |       |
| Current portion of debt                                                                                                                                                                   |       | 41                        |       | 46                     |       |
| Total current liabilities                                                                                                                                                                 |       | 33,158                    |       | 25,016                 |       |
| Long-term debt, net of  current portion                                                                                                                                                   |       | 3                         |       | 17                     |       |
| Other long-term  liabilities                                                                                                                                                              |       | 361                       |       | 189                    |       |
| Total liabilities                                                                                                                                                                         |       | 33,522                    |       | 25,222                 |       |
| **Stockholders’ equity:**                                                                                                                                                            | ** ** | ** **                | ** ** | ** **             | ** ** |
| Common stock, $0.0001 par value — 100,000,000 shares authorized,  26,970,632 and 26,924,963 shares issued, respectively; 25,476,547 and  25,430,878 shares outstanding, respectively |       | 3                         |       | 3                      |       |
| Additional paid in capital                                                                                                                                                                |       | 193,324                   |       | 191,118                |       |
| Deferred compensation                                                                                                                                                                     |       | (674                      | )          | (924                   | )          |
| Treasury stock, 1,494,085  shares of common stock—at cost                                                                                                                            |       | (2,762                    | )          | (2,762                 | )          |
| Accumulated deficit                                                                                                                                                                       |       | (48,370                   | )          | (46,395                | )          |
| Accumulated other  comprehensive income                                                                                                                                                   |       | 2,525                     |       | 1,839                  |       |
| Total stockholders’ equity                                                                                                                                                           |       | 144,046                   |       | 142,879                |       |
| Total liabilities and  stockholders’ equity                                                                                                                                          |       | $                         | 177,568    |                   | $          | 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)*

* *
| ** **                                                                  | ** ** | **Six months ended**      | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                  | ** ** | **February 2, 2008** | ** ** | **January 27, 2007** | ** ** |
| **Cash flows from operating  activities**                                   | ** ** | ** **                | ** ** | ** ** | ** ** |
| Net income (loss)                                                           |       | $                         | (1,879     | ) | $ | 6,621 |   |
| Adjustments to reconcile net income (loss) to net cash used in  operations: |       |                      |       |   |   |
| Depreciation and amortization                                               |       | 2,001                     |       | 1,318 |   |
| Stock-based compensation                                                    |       | 2,195                     |       | 433 |   |
| Provision for doubtful accounts                                             |       | (13                       | )          | 38 |   |
| Loss on disposal of property and equipment                                  |       | —                    |       | 9 |   |
| Change in deferred taxes                                                    |       | 76                        |       | — |   |
| Changes in operating assets and liabilities:                                |       |                      |       |   |   |
| Accounts receivable                                                         |       | (8,591                    | )          | (2,624 | ) |
| Inventories, net                                                            |       | (2,969                    | )          | (3,801 | ) |
| Prepaid expenses and other current assets                                   |       | (915                      | )          | (741 | ) |
| Other assets                                                                |       | (242                      | )          | (128 | ) |
| Accounts payable                                                            |       | 6,455                     |       | (2,011 | ) |
| Accrued expenses                                                            |       | 1,621                     |       | 753 |   |
| Other current liabilities                                                   |       | —                    |       | (2,640 | ) |
| Accrued warranty                                                            |       | 32                        |       | 39 |   |
| Other long-term liabilities                                                 |       | 19                        |       | 127 |   |
| Net cash used in operating  activities                                      |       | (2,210                    | )          | (2,607 | ) |
| **Cash flows from investing  activities**                                   | ** ** | ** **                | ** ** | ** ** | ** ** |
| Purchase of property and  equipment                                         |       | (6,873                    | )          | (2,299 | ) |
| Proceeds from sale of  property and equipment                               |       | —                    |       | 30 |   |
| Release of restricted cash                                                  |       | 180                       |       | — |   |
| Purchase of short-term  investments                                         |       | (35,854                   | )          | (27,819 | ) |
| Maturities and sales of  short-term investments                             |       | 67,275                    |       | 8,384 |   |
| Net cash provided by (used  in) investing activities                        |       | 24,728                    |       | (21,704 | ) |
| **Cash flows from financing  activities**                                   | ** ** | ** **                | ** ** | ** ** | ** ** |
| Payments on line of credit                                                  |       | (19                       | )          | (671 | ) |
| Net proceeds from initial  public offering                                  |       | —                    |       | 95,378 |   |
| Proceeds from exercise of  employee stock options                           |       | 13                        |       | 38 |   |
| Net cash (used in)  provided by financing activities                        |       | (6                        | )          | 94,745 |   |
| Effect of exchange rate  changes on cash and cash equivalents               |       | (66                       | )          | (12 | ) |
|                                                                        |       |                      |       |   |   |
| Net increase in cash and  cash equivalents                                  |       | 22,446                    |       | 70,422 |   |
|                                                                        |       |                      |       |   |   |
| Cash and cash equivalents,  beginning of period                             |       | 25,359                    |       | 10,377 |   |
|                                                                        |       |                      |       |   |   |   |   |
| Cash and cash equivalents,  end of period                                   |       | $                         | 47,805     |   | $ | 80,799 |   |

 

*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” or “Optium”) was incorporated in the State ofDelaware on September 8, 2000. The Company is a leading designer andmanufacturer of high-performance optical subsystems supporting core to the edgeapplications for use in telecommunications 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 offeringof 5.98 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 ending on the Saturday closestto July 31.Fiscal year 2008 consists of 53 weeks. Each quarter consists of 13 or 14weeks; the second quarter of fiscal year 2008 consisted of 13 weeks.

 

***Use ofestimates and 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 ninety 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 February 2, 2008 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 days after the expiration of the lease term (April 30,2008).

 

***Foreigncurrency translation***

 

                Thefinancial statements for Optium Australia, the Company’s foreignsubsidiary,  are measured using the localcurrency (the Australian dollar) as the functional currency. Foreign assets andliabilities in the condensed consolidated balance sheets have been translatedat the rate of exchange as of the balance sheet date. Revenues and expenses aretranslated at the average exchange rate for the month. Translation adjustmentsdo not impact the results of operations and are reported as a separatecomponent of stockholders’ equity. Foreign currency transaction gains andlosses are included in the condensed consolidated 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 February 2, 2008 and July 28, 2007, an allowance of$33,700 and $46,440 respectively, based on management’s analysis, was availableto 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, based uponinformation 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 arecapitalized and amortized using the straight-line method over the shorter ofthe life of the 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 February 2,2008 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 estimate the businessunit’s fair value. The fair value is based on management’s estimate of futurerevenues to be generated by the business component. Such estimated futurerevenues consider factors such as future operating income and historicaltrends. The Company tests for impairment on an annual basis or on an interimbasis if circumstances change that would indicate the possibility ofimpairment. The impairment review requires an analysis of future projectionsand assumptions about the Company’s operating performance. If such a reviewindicates that the assets are impaired, a charge to operations would berecorded for the amount of the impairment and the corresponding impaired assetswould be reduced in carrying value. The Company did not identify an assetimpairment related to the carrying value of goodwill as of February 2,2008.

 

***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 that would have warranted arevision to carrying value of its long-lived assets as of February 2,2008.

 

***Fair value offinancial instruments***

 

                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. Thoseinvestments with an original maturity of less than ninety days are classifiedas cash equivalents, while those with an original maturity of greater thanninety days and less than one year are classified as short-term investments onthe Company’s condensed consolidated 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 volatilityand option life assumptions require a greater level of judgment which make themcritical accounting estimates. The fair value of each stock option grant duringthe first six months of fiscal year 2008 was estimated on the date of the grantusing the Black-Scholes option-pricing model with the following assumptions:

 

7

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| ** **                       | ** ** | **Three months  ended  February 2, 2008** | ** ** | **Six months  ended  February 2, 2008** | ** ** | **Three months  ended  January  27, 2007** | ** ** | **Six months  ended  January  27, 2007** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| Average risk-free interest  rate |       | 2.97%                                          |       | 3.73%                                        |       | 4.45%                                           |       | 4.74%                                         |       |
| Expected dividend yield          |       | 0%                                             |       | 0%                                           |       | 0%                                              |       | 0%                                            |       |
| Expected life                    |       | 5  years                                       |       | 5  years                                     |       | 5  years                                        |       | 5  years                                      |       |
| Expected volatility              |       | 82.00%                                         |       | 80.87%                                       |       | 80.00%                                          |       | 80.00%                                        |       |
| Forfeiture rate                  |       | 9.76%                                          |       | 10.01%                                       |       | 9.28%                                           |       | 9.28%                                         |       |

 

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 and six months ended February 2,2008 had a weighted average fair value of $9.69 and $9.66, respectively. The stock units have varying vesting schedules, dependent on the grantdetails. The total stock-based compensation associated with the RSUs will beexpensed over the requisite service period of the respective grants.  Forfeiture rates of 4.88% and 5.06% were usedto calculate the stock-based compensation related to the restricted stock unitsgranted during the three and six months ended February 2, 2008,respectively.

 

***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 assesscollectability based primarily on the creditworthiness of the customer asdetermined by credit checks and analysis, as well as the customer’s paymenthistory.

 

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 

 

8

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to customers are payment due 30 days from thedate of invoice. For certain customers, the Company has negotiated paymentterms different than 30 days to conform to such customer’s standardpayment 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 condensed consolidated statement ofoperations.

 

***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. Deferredincome taxes have been provided for the differences between the financialreporting carrying values and the income tax reporting basis of the Company’sassets and liabilities. These temporary differences consist of differencesbetween the timing of the deduction of certain amounts between income tax andfinancial statement reporting purposes. TheCompany adopted Financial Accounting Standards Board, or FASB,  Interpretation No. 48 *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement 109, Accounting for Income Taxe*s, or FIN 48, on July 29,2007. Under the new provisions, the Company will not recognize a tax benefitfor an uncertain income tax position unless it is “more likely than not” thatsuch position is sustainable. As a result of the implementation of FIN 48, theCompany recognized a net $100,000 increase in the liability for unrecognizedtax benefits, which was accounted for as an increase to the July 28, 2007balance of the accumulated deficit.

 

***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**     | ** ** | **Six months ended**       | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                        | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** |
| ** **                                                        | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                 |       | $                          | (800       | )                          | $          | 3,862 |   | $ | (1,879 | ) | $ | 6,621 |   |
| Other comprehensive  income:                                      |       |                       |       |                       |       |   |   |   |   |
| Unrealized gain (loss) on  investments                            |       | (1                         | )          | (10                        | )          | 6 |   | (10 | ) |
| Net change in cumulative  foreign currency translation adjustment |       | (137                       | )          | 99                         |       | 680 |   | 129 |   |
| Comprehensive income  (loss)                                      |       | $                          | (938       | )                          | $          | 3,951 |   | $ | (1,193 | ) | $ | 6,740 |   |

 

***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 (loss) applicable to common stockholdersfor the period by the weighted average number of shares of common stockoutstanding. In accordance with SFAS 128, incremental potential commonshares from the conversion of preferred stock and the exercise of stock optionsand warrants are included in the calculation of diluted net income (loss) pershare except when the effect would be anti-dilutive. On October 10, 2006,the Company’s 1-for-12 reverse stock split of the Company’s issued common stockbecame effective, and all share data has been retroactively adjusted to reflectthis reverse stock split.

 

9

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

 
| ** **                                           | ** ** | **Three months ended**     | ** ** | **Six months ended**       | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** |
| **Numerator:**                                       | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                    |       | $                          | (800       | )                          | $          | 3,862 |   | $ | (1,879 | ) | $ | 6,621 |   |
|                                                 |       |                       |       |                       |       |   |   |   |   |
| **Denominator:**                                     | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common  shares outstanding          |       | 25,452                     |       | 24,592                     |       | 25,443 |   | 13,668 |   |
| Effect of dilutive shares                            |       |                       |       |                       |       |   |   |   |   |
| Stock options                                        |       | —                     |       | 1,403                      |       | — |   | 1,285 |   |
| Series A and C warrants                         |       | —                     |       | 49                         |       | — |   | 71 |   |
| Conversion of preferred shares into common stock     |       | —                     |       | 548                        |       | — |   | 8,540 |   |
| Adjusted weighted-average  common shares outstanding |       | 25,452                     |       | 26,592                     |       | 25,443 |   | 23,564 |   |
|                                                 |       |                       |       |                       |       |   |   |   |   |
| Basic net income (loss)  per share                   |       | $                          | (0.03      | )                          | $          | 0.16 |   | $ | (0.07 | ) | $ | 0.48 |   |
| Diluted net income (loss)  per share                 |       | $                          | (0.03      | )                          | $          | 0.15 |   | $ | (0.07 | ) | $ | 0.28 |   |

 

                Forthe three and six months ended February 2, 2008, options, unvestedrestricted stock units and warrants to purchase 2,856,129 shares of commonstock have been excluded from the calculation, as their impact would have beenanti-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.

 

***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 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 FASB No. 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 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 andrequirements for how the acquirer shall recognize and measure in its financialstatements the identifiable assets acquired, liabilities assumed, anynoncontrolling interest in the acquiree and goodwill acquired in the businesscombination. The Company is currently determining the impact of implementingSFAS 141R, which will be effective for fiscal year 2010.

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — an Amendment of Accounting ResearchBulletin, or ARB No. 51*, or SFAS 160.  SFAS 160 is effective for financialstatements 

 

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 fiscal year 2010.

 

**3.  Inventories**

 

                Netinventoriesconsist of the following at (inthousands):

 

| ** **      | ** ** | **February 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|-----------------|------------|----------------------------|------------|-------------------------|------------|
| Raw materials   |       | $                          | 17,272     |                    | $          | 14,545 |   |
| Work in process |       | 2,272                      |       | 1,011                   |       |
| Finished goods  |       | 4,290                      |       | 5,128                   |       |
|            |       | $                          | 23,834     |                    | $          | 20,684 |   |

 

**4. Investments**

 

**               **The following is a summary of the Company’s available-for-saleinvestments as of February 2, 2008 and July 28, 2007 (in thousands):

 
| **Investment Type**              | ** ** | **Amortized  cost** | ** ** | **Gross  unrealized  gain** | ** ** | **Gross  unrealized  loss** | ** ** | **Fair  value** | ** ** |
|----------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------|------------|
| **As of February 2, 2008**  |       |                |       |                        |       |                        |       |            |       |
| ** **                       | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **      | ** ** |
| Corporate                        |       | $                   | 31,646     |                        | $          | 6                           |       | $               | —     |   | $ | 31,652 |   |
| Government-sponsored  enterprise |       | —              |       | —                      |       | —                      |       | —          |       |
| Municipal                        |       | 7,595               |       | —                      |       | —                      |       | 7,595           |       |
| Total                            |       | $                   | 39,241     |                        | $          | 6                           |       | $               | —     |   | $ | 39,247 |   |
|                             |       |                |       |                        |       |                        |       |            |       |
| Reported as:                     |       |                |       |                        |       |                        |       |            |       |
| Cash equivalents                 |       | $                   | 34,646     |                        | $          | 4                           |       | $               | —     |   | $ | 34,650 |   |
| Short-term investments           |       | 4,595               |       | 2                           |       | —                      |       | 4,597           |       |
| Total                            |       | $                   | 39,241     |                        | $          | 6                           |       | $               | —     |   | $ | 39,247 |   |
|                             |       |                |       |                        |       |                        |       |            |       |
| **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 No. 115, *Accounting for Certain Investments in Debt and Equity Securities,*orSFAS 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 realizedloss through 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 February 2,2008, 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 days areclassified as cash equivalents. Subsequentto February 2, 2008, some of the Company’s currently held auction ratesecurities experienced failed auctions. Uncertainty in credit markets has ledto the amount of auction rate securities submitted for sale exceeding theamount of orders for these securities, resulting in failed auction status. TheCompany’s total auction rate securities have a fair value of $3,600,000 andrepresent approximately 7% of the Company’s total liquid assets, which consistof cash and cash equivalents and short-term investments. Because the auctionshave failed the securities are no longer liquid, as the Company will not beable to access such funds until a successful future auction or these securitiesare redeemed.  However, the Companybelieves its remaining cash and cash equivalents will be sufficient to meetanticipated cash needs.  The auction ratesecurities are all AAA rated securities and the underlying assets of theCompany’s auction rate securities are student loans backed by the federalgovernment.  The Company believes thesecurities are properly  valued at theirestimated fair market value on the balance sheet and has continued to classifythe auction rate securities as short-term investments.  The Company will continue to assess theeffects of the failed auctions on the fair value of the investments. If theauctions associated with the securities the Company owns are not successful inthe future and an other than temporary impairment of the security is identified,the Company may have to record an impairment charge through earnings withrespect to these securities.

 

**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 $35,877,700,including $729,000 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 merger 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 payments will be recorded asadditional purchase price in the period it is probable such payment is earned.Pursuant to the merger agreement, certain outstanding Kailight stock optionswere converted into Optium stock options. Of the total options granted toKailight employees and consultants, 9,652 options with an exercise price of$0.11 were fully vested and assigned a fair value of $148,776 using theBlack-Scholes option pricing model and were accordingly recorded as purchaseprice.

 

The transaction was accounted for as apurchase in accordance with SFAS 141. As a result, the assets acquired andliabilities assumed were accounted for at fair value on the acquisition date,and the results of operations of Kailight are included in the Company’sconsolidated results of operations from the acquisition date. Management isresponsible for the valuation of net assets acquired, including in-processresearch and development, and considered a number of factors, includingvaluations and appraisals, when estimating the fair market values and estimateduseful lives of the acquired assets and liabilities. The Company believes theacquisition provides synergies with existing product lines and expands on ourcurrent transceiver capabilities, resulting in an excess purchase price overthe fair value of identifiable assets. The excess purchase price of $26,089,700has been recorded as goodwill.

 

The Kailight purchase price was allocated asfollows (in thousands):

 
| Net assets acquired                           |   | $      | (212   | )      |
|-----------------------------------------------|--------|--------|--------|--------|
| Acquired in-process  research and development |   | 10,000 |   |
| Goodwill                                      |   | 26,090 |   |
| Total purchase price                          |   | $      | 35,878 |   |

 

The following tablesummarizes 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 and developmentand expensed at the acquisition date. Efforts required to develop 

 

12

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acquired in-process research and development intocommercially viable products include the planning, designing, prototyping, verificationand testing activities that are necessary to establish that the products can beproduced to meet their design specifications, including functions, features andtechnical performance requirements. The $10,000,000 of acquired in-processresearch and development was expensed during fiscal year 2007 through theconsolidated statement of operations as a separate component of operatingexpenses at the acquisition 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 based onfundamental data for a group of market participants, as well as venture capitalstudies. The ten year life is based on the life expectancy of the products inthe market place with an assumed growth rate of up to 314% diminishing to 10%and no assumed terminal value. We began to recognize revenue related to theseproducts in fiscal year 2008.

 

*Pro forma financial information*

 

The following unaudited pro forma financial informationrepresents the Company’s consolidated results from operations for the period indicated,as if 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 decreased interest income on the cash used to finance theacquisitions, and increased income taxes at a rate consistent with the Company’seffective tax rate in each period.

 

*Pro forma results*

 

| ** **                                     | ** ** | **Three months ended**                     | ** ** | **Six months ended**                       | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **January 27,  2007**            | ** ** | **January 27,  2007**            | ** ** |
| ** **                                     | ** ** | **(in thousands, except  per share data)** | ** ** | **(in thousands, except  per share data)** | ** ** |
| Pro forma revenues                             |       | $                                          | 34,168     |                                       | $          | 64,212 |   |
| Pro forma net income                           |       | $                                          | 2,666      |                                       | $          | 3,547 |   |
| Pro forma net income per  share — basic   |       | $                                          | 0.11       |                                       | $          | 0.26 |   |
| Pro forma net income per  share — diluted |       | $                                          | 0.10       |                                       | $          | 0.15 |   |
| Reported net income                            |       | $                                          | 3,862      |                                       | $          | 6,621 |   |
| Reported net income per  share — basic    |       | $                                          | 0.16       |                                       | $          | 0.48 |   |
| Reported net income per  share — diluted  |       | $                                          | 0.15       |                                       | $          | 0.28 |   |

 

*Microdisplay asset*s

 

On July 10, 2007, the Company acquired certainintellectual property assets of Microdisplay Corporation related to the designand manufacture of liquid crystal on silicon (“LCoS”) wafers used in its WSSROADM product line. The aggregate purchase price of the transaction wasapproximately $2.0 million, including the assumption of certain liabilities.The purchase of these assets has been recorded as completed technology andclassified as an intangible asset on the balance sheet as of the acquisitiondate. The acquired intangible assets will be amortized over a five year usefullife. The amortization expense related tothe Microdisplay assets is included in our condensed consolidated statements ofoperations in the selling, general and administrative expense line item for thethree and six months ended February 2, 2008.

 

             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.

 

13

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The results of theKailight acquisition have been included in the accompanying condensedconsolidated financial statements since the date 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 nonvotingcommon stock automatically converted into voting common stock upon the closingof the Company’s initial public offering when the conversion of all shares ofpreferred 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 are disclosed in theSummary of Significant Accounting Policies in Note 2.

 

                Priorto the 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 valueof the 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.

 

Under the pro formadisclosure previously required under SFAS 123, the compensation cost for theCompany’s stock-based compensation plans had been determined based upon thefair value of the options at the grant date. Consistent with 

 

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the methodology prescribed under SFAS 123, theCompany would have recorded approximately $102,600 and $205,200 and $106,400and $212,900 as stock based compensation in selling, general and administrativeexpenses for the three and six months ended February 2, 2008 and January 27,2007, respectively, related to the grants issued prior to the adoption of SFAS123R, as presented below (in thousands):

 

| ** **                                                                                | ** ** | **Three months ended**         | ** ** | **Six months ended**       | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|
| ** **                                                                                | ** ** | **February 2  2008** | ** ** | **January 27,  2007** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** |
| ** **                                                                                | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss), as reported                                                            |       | $                              | (800       | )                          | $          | 3,862 |   | $ | (1,879 | ) | $ | 6,621 |   |
| Add: Stock-based compensation under APB 25                                           |       | 85                             |       | 119                        |       | 170 |   | 257 |   |
| Add: Stock-based compensation under SFAS 123R                                             |       | 992                            |       | 111                        |       | 1,631 |   | 155 |   |
| Less: Stock-based compensation expense determined under fair value  method for all awards |       | (1,062                         | )          | (212                       | )          | (1,771 | ) | (358 | ) |
| Net income (loss), pro forma                                                              |       | $                              | (785       | )                          | $          | 3,880 |   | $ | (1,849 | ) | $ | 6,675 |   |
| Net income (loss) per share:                                                              |       |                           |       |                       |       |   |   |   |   |
| Reported net income (loss) per share — basic                                         |       | $                              | (0.03      | )                          | $          | 0.16 |   | $ | (0.07 | ) | $ | 0.48 |   |
| Reported net income (loss) per share — diluted                                       |       | (0.03                          | )          | 0.15                       |       | (0.07 | ) | 0.28 |   |
| Pro forma net income (loss) per share — basic                                        |       | (0.03                          | )          | 0.16                       |       | (0.07 | ) | 0.49 |   |
| Pro forma net income (loss) per share — diluted                                      |       | (0.03                          | )          | 0.15                       |       | (0.07 | ) | 0.28 |   |

 

                Duringthe six months ended February 2, 2008, 214,650 stock options with aweighted average grant date fair value of $5.63 per option and 404,632 unvestedrestricted stock units with a grant date fair value of $9.66 were granted underthe Company’s 2006 Stock Option and Incentive Plan (the “2006 Plan”). Thecompensation expense charged against earnings for SFAS 123R stock-basedcompensation for the first six months of fiscal year 2008 was approximately$2,399,200. The pre-tax impact of stock-based compensation expense was $0.09per basic and diluted share, respectively, in the six months ended February 2,2008. As of February 2, 2008, there was approximately $6,575,200 inunrecognized compensation expense related to non-vested stock options under theCompany’s stock plans. This unrecognized expense is expected to be recognizedas compensation expense over the weighted-average vesting period of 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 six months ended February 2,2008 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                                       |       | (3,310                 | )          | $0.84  - $17.50               |       | $                                    | 4.88       |   |
| Exercised                                       |       | (13,406                | )          | $0.48  - $9.24                |       | $                                    | 0.93       |   |
| Outstanding February   2, 2008             |       | 1,677,598              |       | $0.48  - $17.50               |       | $                                    | 4.98       |   |
| Options  exercisable—February 2, 2008 |       | 1,117,230              |       | $0.48  - $17.50               |       | $                                    | 3.55       |   |

 

                Duringthe six months ended February 2, 2008, certain employees exercised optionsto purchase 13,406 shares of the Company’s common stock for proceeds of$12,500. These option exercises had an intrinsic value of approximately $97,900and were granted under the 2000 Plan.

 

                Theweighted average remaining life of the 2000 Plan stock options as of February 2,2008 is 7.2 years.

 

15

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Duringthe first quarter of fiscal year 2007, the Company adopted the 2006 OptiumCorporation Stock Option and Incentive Plan, as amended (the “2006 Plan”),under which 283,333 shares of common stock were reserved for issuance. The 2006Plan provisions provide for an automatic increase at the beginning of everyquarter of each fiscal year in the number of shares reserved and available forissuance under the plan by a number equal to 0.75% of the then outstandingnumber of shares of common stock. The 283,333 shares reserved does not includethe additional 190,059, 190,146, 190,732, 190,783 and 191,074 shares reservedas of the first day of the Company’s fiscal year 2007 third and fourth quartersand fiscal year 2008 first, second  andthird quarters, respectively or the aggregate substitute options granted in theKailight acquisition.  In addition, thenumber of shares reserved for issuance under the 2006 Plan is automaticallyincreased by the number of shares and options cancelled or forfeited under the2000 Plan after October 10, 2006. Cancellations or forfeitures under the2006 Plan are also added back to increase the total number of shares availablefor issuance under the 2006 Plan, with the exception of those options grantedin connection with the Kailight acquisition.  During the six months ended February 2, 2008, 19,558 cancelled orforfeited shares were added to the number of shares reserved for issuance underthe 2006 Plan pursuant to these provisions. Under the terms of the 2006 Plan,the Company may grant nonqualified or incentive stock options, restrictedstock, restricted stock units or make awards of stock appreciation rights todirectors, officers, employees, and consultants of the Company. The exerciseprice for option grants shall be determined by the Board of Directors on thedate of grant, but in no event shall the exercise price of incentive stockoptions be less than 100% of the fair market value of the common stock (110%for any incentive stock option granted to a person owning more than 10% of thetotal combined voting power of all classes of stock as determined by the Boardof Directors on the date of grant). Option grants under the 2006 Plan generallyvest over four years and expire ten years from the date of grant. As of February 2,2008, 817,335 options for the purchase of common stock have been granted underthe 2006 Plan. All options cancelled or forfeited under the 2006 Plan are addedback to the balance of shares reserved for issuance under the Plan.

 

                Stockoption transactions under the 2006 Plan for the six months ended February 2,2008 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                                          |       | 214,650                |       | $6.70  - $11.13               |       | $                                    | 8.44       |   |
| Forfeited                                        |       | (23,476                | )          | $7.36  - $328.63              |       | $                                    | 17.39      |   |
| Exercised                                        |       | —                 |       | —                        |       | —                               |       |
| Outstanding—February 2,  2008          |       | 773,749                |       | $0.11  - $1,110.24            |       | $                                    | 16.27      |   |
| Options exercisable—  February 2, 2008 |       | 20,838                 |       | $0.11  - $1,110.24            |       | $                                    | 14.92      |   |

 

Pursuant to the terms ofthe Kailight Photonics, Inc. acquisition agreement, the Company assumedcertain vested and unvested stock options outstanding with Kailight employeesand consultants.  The Company assumed9,652 fully vested Kailight options with an exercise price of $0.11. Additionally,the Company assumed 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 stockcompensation expense related to the fully vested options with an exercise priceof $0.11 was recorded as additional purchase price.

 

As of February 2,2008, 1,243,262, 91,263, and 773,749 shares were authorized, available forissuance and subject to outstanding awards, respectively, under the 2006 Plan.The weighted average remaining life of the 2006 Plan stock options as of February 2,2008 is 9.3 years. The detail of all options exercisable under the 2000 Planand the 2006 Plan as of February 2, 2008 is as follows:
| **Number of  options** | ** ** | **Range of  exercise prices** | ** ** | **Weighted average  exercise price** | ** ** | **Weighted average  remaining life** | ** ** |
|------------------------|------------|-------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| 608,294                |       | $0.11  - $0.96                |       | $                                    | 0.59       |                                 | 5.7        |   |
| 103,956                |       | $1.08  - $3.96                |       | $                                    | 1.58       |                                 | 7.2        |   |
| 200,504                |       | $5.25  - $5.76                |       | $                                    | 5.52       |                                 | 8.1        |   |
| 225,108                |       | $9.24  -$23.56                |       | $                                    | 11.12      |                                 | 8.4        |   |
| 206                    |       | $328.63  -$1,100.24           |       | $                                    | 711.72     |                                 | 9.3        |   |

 

                Thetotal intrinsic value of the fully vested and exercisable options above, hadthey been exercised on February 2, 2008, was approximately $4,487,200.

 

 

16

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                Therestricted stock unit transactions under the 2006 Plan for the three monthsended February 2, 2008 are summarized as follows:

 

| ** **                                 | ** ** | **Number of  restricted stock  units** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| Balance—July 28, 2007            |       | —                                 |       |
| Granted                                    |       | 404,632                                |       |
| Forfeited                                  |       | (2,956                                 | )          |
| Vested                                     |       | (45,873                                | )          |
| Unvested balance at  February 2, 2008 |       | 355,803                                |       |

 

                Theper stock unit weighted average fair value of the restricted stock unitsgranted under the 2006 Plan for the six months ended February 2, 2008 was$9.66, which was based on the closing stock price of the Company on the date ofgrants.  The restricted stock units havevarying vesting schedules, dependent on the grant details. As of February 2,2008, there was approximately $3,076,400 in unrecognized compensation expenserelated to non-vested restricted stock units. This unrecognized expense isexpected to be recognized as compensation expense over the requisite serviceperiods of the respective grants.  Theweighted average remaining vesting period for restricted stock units as of February 2,2008 is 1.7 years. All forfeitures or cancellations of restricted stock unitsare added back to the balance of shares reserved for issuance under the 2006Plan. Additionally, those shares that are retained by the Company to satisfytax withholding obligations are added back to the balance of shares reservedfor issuance under the 2006 Plan.

 

*Deferredcompensation*

 

                TheCompany’s Board of Directors has determined the fair value of all stock optiongrants on the dates 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 additionaldeferred stock-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 six months ended February 2, 2008,total stock-based compensation expense related to amortization of the deferredcompensation balance was approximately $250,280.

 

 

17

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**7. Accrued Expenses**

 

                Accruedexpenses consist of the following at (in thousands):

 
| ** **                | ** ** | **February 2, 2008** | ** ** | **July 28, 2007** | ** ** |
|---------------------------|------------|---------------------------|------------|------------------------|------------|
| Fees and expenses payable |       | $                         | 1,651      |                   | $          | 1,531 |   |
| Compensation and benefits |       | 3,188                     |       | 1,789                  |       |
| Professional services     |       | 1,073                     |       | 1,012                  |       |
| Security deposit          |       | 57                        |       | 57                     |       |
|                      |       | $                         | 5,969      |                   | $          | 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 condensed consolidatedstatements of operations. The Company accrues warranty for expected warrantyclaims based on historical return figures and accrues those costs at the timerevenue is recorded.

 

**               **A summary of the accrued 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                                  |   | 62   |   |
| Warranty repairs                                   |   | (23  | )      |
| Effect of foreign currency  translation adjustment |   | (6   | )      |
| Ending balance  February 2, 2008              |   | $    | 392    |   |

 

**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 February 2, 2008, the Company’stotal liability for unrecognized net tax benefits is $482,000.  Consistent with past practice, the Company willrecord interest and penalties associated with uncertain tax positions in incometax expense.

 

                AtFebruary 2, 2008, theCompany had U.S. federal net operating loss, or NOL, carry forwards ofapproximately $21.8 million which expire through 2025. NOL carry forwards andcredits are subject to review and possible adjustments by the Internal RevenueService and may be limited by the occurrence of certain events, includingsignificant changes in ownership interests. The Company performed an analysisto determine whether an ownership change under Section 382 of the InternalRevenue Code had occurred. The effect of an ownership change would be theimposition of an annual limitation on the use of the net operating loss carryforwards attributable to periods before the change.  As of February 2, 2008, the Companybelieves there are no limitations on the use of these federal NOLs.

 

                Inconnection with the acquisition of Engana Pty Limited in March 2006, theCompany acquired Australian NOL carry forwards and credits in the amount of$4.8 million. 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.

 

 

18

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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 NOL carryforwards expire. During the year ended July 28, 2007, based on cumulativeU.S. taxable net earnings for the past three years and the expected futureprofitability 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 $13.0 million.  The current quarterly and year todate consolidated effective tax rates of (9.4)% and  (7.7)%,respectively  are  less than the U.S. statutory rate of 35%primarily due to foreign losses for which no income tax benefit was recordedand U.S. research and development tax credits available to the Company underU.S. tax law.

 

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

 
| ** **                     | ** ** | **Three months ended**     | ** ** | **Six months ended**       | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** |
| Tax at statutory rate          |       | 35.0                       | %          | 35.0                       | %          | 35.0 | % | 35.0 | % |
| State taxes, net of  federal   |       | 25.7                       |       | 4.2                        |       | 10.0 |   | 4.0 |   |
| R&D credits                |       | —                     |       | —                     |       | 3.9 |   | — |   |
| Foreign rate differential      |       | (7.6                       | )          | 1.4                        |       | (6.8 | ) | 1.7 |   |
| Change in valuation  allowance |       | (51.3                      | )          | (33.7                      | )          | (43.7 | ) | (34.1 | ) |
| Other                          |       | (11.2                      | )          | 0.2                        |       | (6.1 | ) | 0.1 |   |
| Effective tax rate             |       | (9.4                       | )%         | 7.1                        | %          | (7.7 | )% | 6.7 | % |

 

**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 and six months ended February 2, 2008, sales ofthe Company’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.

 

 

19

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                During mid-2007, we became aware that certain of ouranalog RF over fiber products may, depending on end use and customization, besubject to the International Traffic in Arms Regulations, or ITAR. Accordingly,we filed a detailed voluntary disclosure with the United States Department ofState, describing the details of possible inadvertent ITAR violations withrespect to the export of a limited number of certain prototype products, andrelated technical data and defense services. We may have also made unauthorizedtransfers of ITAR-restricted technical data and defense services to foreignpersons in our workplace.  We haveprovided additional information upon request to the Department of State withrespect to this matter.  The Departmentof State encourages voluntary disclosures and generally affords partiesmitigating credit under such circumstances. We nevertheless could be subject tocontinued investigation and potential regulatory consequences ranging from ano-action letter, government oversight of facilities and export transactions,monetary penalties, and in extreme cases, debarment from governmentcontracting, denial of export privileges and criminal sanctions.

 

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 April 2008, August 2008,or April 2009. According to the terms of the agreements, if there is atermination without cause, as defined, a termination for good reason, asdefined, of the employee in certain situations, or if the agreements are notrenewed, the Company must pay, depending on the agreement, severance of one totwo years salary and bonus.

 

**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 and six months ended February 2, 2008and January 27, 2007, respectively were as follows:

 
| ** ** | ** ** | **Three months ended**     | ** ** | **Six months ended**       | ** ** |
|------------|------------|----------------------------|------------|----------------------------|------------|
| ** ** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** |
| ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer A |       | 16                         | %          | 10                         | %          | 15 | % | 7 | % |
| Customer B |       | 13                         | %          | 21                         | %          | 13 | % | 20 | % |
| Customer C |       | 12                         | %          | —                     |       | 10 | % | 2 | % |
| Customer D |       | 10                         | %          | 18                         | %          | 10 | % | 14 | % |
| Customer E |       | 8                          | %          | 21                         | %          | 17 | % | 27 | % |

 

                Accountsreceivable from these five customers at February 2, 2008 represented 62%of total accounts receivable.

 

**12.  Related Party Transactions**

 

                Duringthe three and six months ended February 2, 2008 and January 27, 2007,the Company paid a sales and marketing consultant, who is the brother of thepresident and chief executive officer of the Company, $35,400 and $71,800 and$33,700 and $66,600, respectively, in cash compensation during such fiscalperiods.  In addition, during the threemonths ended February 2, 2008, the Company granted, for no additionalconsideration, 2,500 restricted shares of common stock with a fair market valueof $26,000. These stock units vest quarterly over a two year period, beginningon January 1, 2008.

 

                Duringthe three and six months ended February 2, 2008 and January 27, 2007,the Company 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 in the sixmonths ended February 2, 2008 and $17,600 and $37,900 in three and sixmonths ended January 27, 2007, respectively, during such periods.

 

 

20

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

 

 

21

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

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**FOR THE THREE AND SIX MONTHS ENDEDFEBRUARY 2, 2008**

**AND COMPARABLE PERIODS ENDED JANUARY27, 2007**

 

*                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 of series Aconvertible preferred stock. In May, June and July of 2001, we raisedapproximately $35.7 million through the issuance of shares ofseries 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 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted 

 

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accounting principles forcomplete financial statements. The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofincome and loss during the reporting period. Actual results could differ fromthose estimates. Operating results for the fiscal quarters presented are notnecessarily indicative of the results that may be expected for the fiscal year.In the opinion of management, all adjustments (consisting solely of normalrecurring adjustments) necessary for a fair presentation of the financialstatements for these interim periods have been included.There have been no material changes tothe critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K filedwith the Securities and Exchange Commission on October 24, 2007.

 

**Recent Accounting Pronouncements**

 

               In September 2006, the FASBissued 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 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 FASB No. 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 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 forfiscal 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 fiscal year 2010.

 

**Resultsof operations**

 

***Comparisonof Results for the Three and Six Months Ended February 2, 2008 to theThree and Six Months Ended January 27, 2007***

 

             In order to more fully understandthe comparison of the results of operations for the three and six months ended February 2, 2008 to the three and six months ended January 27, 2007, it isimportant to note the following significant changes in our operations thatoccurred in fiscal year 2007:

 

·                  Effective July 10, 2007, we acquiredcertain intellectual property assets of Microdisplay Corporation related to thedesign and manufacture of liquid crystal on silicon (“LCoS”) wafers used in itsnext generation WSS ROADM product line, and

 

·                  Effective May 15, 2007, we acquired all of theoutstanding capital stock of Kailight Photonics, Inc. (“Kailight Photonics”).

 

             The results of operations for theKailight acquisition have been included in the condensed consolidatedstatements of operations since the date of acquisition.

 

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***Revenue***

 

                Totalrevenue increased 18.0% to approximately $40.3 million for the three monthsended February 2, 2008 from approximately $34.1 million for the threemonths ended January 27, 2007. Total revenue increased 19.1% to approximately $76.4 million for the sixmonths ended February 2, 2008 from approximately $64.1 million for the sixmonths ended January 27, 2007. This increase in revenue is primarilyattributable to increases in sales of our ROADM product line of approximately$5.6 million and $8.7 million, respectively in the three and six monthsended February 2, 2008, as compared to the three and six months ended January 27,2007. Additionally, sales of approximately $1.8 million and $2.6 million of our40Gb/s transceivers during the three and six months ended February 2,2008, respectively, contributed to the increase in revenues. The 40Gb/sproducts were not released to market for sale until late fiscal year 2007 anddid not contribute to revenues for the three and six months ended January 27,2007. In addition, our ROADM sales in the three and six months ended January 27,2007 were only $0.2 million and did not significantly contribute to our overallrevenue. The increased ROADM and 40Gb/s sales in the three months ended February 2,2008 were offset by a decrease in cable TV and analog product sales ofapproximately $1.0 million. An increase of 10Gb/s product sales ofapproximately $1.4 million in the six months ended February 2, 2008 alsocontributed to our increased revenues.

 

                Endcustomers are defined as those customers who purchase our products directly orthrough contract manufacturers. Revenues from end customers comprising 10% ormore of total revenues during the three and six months ended February 2,2008 and January 27, 2007, respectively, were as follows:

 
| ** ** | ** ** | **Three months ended**     | ** ** | **Six months ended**       | ** ** |
|------------|------------|----------------------------|------------|----------------------------|------------|
| ** ** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** | **February 2,  2008** | ** ** | **January 27,  2007** | ** ** |
| ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer A |       | 21                         | %          | 14                         | %          | 15 | % | 11 | % |
| Customer B |       | 19                         | %          | 15                         | %          | 19 | % | 14 | % |
| Customer C |       | 17                         | %          | 24                         | %          | 17 | % | 23 | % |
| Customer D |       | 9                          | %          | 24                         | %          | 18 | % | 29 | % |

 

                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 backhaul systems.

 

***Gross profit***

 

                Grossprofit increased 9.6% to approximately $10.9 million for the three months endedFebruary 2, 2008 from approximately $9.9 million for the three monthsended January 27, 2007. Gross profit increased 10.3% to approximately$20.6 million for the six months ended February 2, 2008 from approximately$18.6 million for the six months ended January 27, 2007. The increasein gross profit was primarily attributable to increases in revenues during thethree and six months ended February 2, 2008, as compared to the three andsix months ended January 27, 2007. Gross margin decreased to 27.0% from29.1% for the three months ended February 2, 2008 as compared to the threemonths ended January 27, 2007. Gross margin decreased to 26.9% from 29%for the six months ended February 2, 2008 as compared to the six monthsended January 27, 2007. The decreases in gross margins were due insignificant part to the additional operational expenditures, capacity expansionand overhead associated with our high-growth WSS ROADM and 40Gb/s productlines.

 

***Research andproduct development***

 

                Researchand product development expenses increased 70.7% to approximately$6.0 million for the three months ended February 2, 2008 fromapproximately $3.5 million for the three months ended January 27,2007. Research and product development expenses increased 69.5% toapproximately $11.0 million for the six months ended February 2, 2008from approximately $6.5 million for the six months ended January 27, 2007.The increases in research and product development expenses for the three andsix months ended February 2, 2008, as compared to the same periods in theprior year were due to higher headcount, including our acquisition of Kailightin May 2007 and associated costs related to our decision to increase thenumber of engineering projects to further expand our product portfolio.

 

                Wehad increases of approximately $1.6 million and $2.9 million for the three andsix months ended February 2, 2008, respectively, as compared to the threeand six months ended January 27, 2007, primarily attributable to researchand product development efforts connected to our ROADM and 40Gb/s productlines.  Additionally, we incurredincreases in stock-based 

 

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compensation contained within research and productdevelopment expense of approximately $0.5 million and $0.8 million in the threeand six months ended February 2, 2008, respectively, as compared to thethree and six months ended January 27, 2007, primarily associated withincreased headcount and our adoption of FAS 123R at the beginning of our fiscalyear 2007.  We experienced increasedlabor and associated benefits costs of approximately $0.3 million and $0.6million in our U.S. research and product development operations in the threeand six months ended February 2, 2008 as compared to the same periods inthe prior year.

 

                Ourdevelopment and release of new products during our fiscal year 2008 has andwill continue to significantly impact our research and product developmentexpenses. We expect these costs to continue to increase as we undertakeadditional research and product development projects as we continue to expandour product suite. The expansion of research and product development bothinternally and as a result of acquired operations are expected to continue toexpand our product suite.

 

***Selling,general and administrative***

 

                Selling,general and administrative expenses increased 85.5% to approximately$6.2 million for the three months ended February 2, 2008 fromapproximately $3.4 million for the three months ended January 27, 2007.Selling, general and administrative expenses increased 103.4% to approximately$12.6 million for the six months ended February 2, 2008 from approximately$6.2 million for the six months ended January 27, 2007.

 

                Weexperienced increased costs for the additional infrastructure necessary tosupport our revenue growth. These costs included increased labor costs as aresult of additional headcount and additional legal and other professionalfees, as well as additional costs of compliance with the Sarbanes-Oxley Act of2002. Additionally, we incurred increases in stock-based compensation containedwithin selling, general and administrative expense of approximately $0.8million and $1.3 million in the three and six months ended February 2,2008, respectively as compared to the three and six months ended January 27,2007. In the three and six months ended February 2, 2008 approximately$0.2 million and $0.3 million, respectively, of stock-based compensationexpense charged to our income statement was related to restricted stock unitgrants made to employees and executives under the Executive Officer and USNon-Executive Employee Fiscal Year 2008 Bonus Plans.  In comparison, we incurred approximately $0.4million and $0.9 million of bonus expense in the three and six months ended January 27,2007, respectively.

 

                Wealso incurred increases of approximately $0.5 million and $2.5 million ofpatent litigation expenses in the three and six months ended February 2,2008, as compared to three and six months ended January 27, 2007. Theseadditional legal costs are related to the defense of patent infringementlawsuits brought against us, as discussed in further detail in Part II,Item 1on this Form 10-Q. Our professional accounting fees increased approximately$0.2 million and $0.4 million in the three and six months ended February 2,2008, respectively, as compared to the same periods in the prior year. We alsoexperienced increases in selling, marketing and administrative costs associatedwith the growth of our ROADM and 40Gb/s product lines of approximately $0.7million and $1.1 million in the three and six months ended February 2,2008, respectively, as compared to the same periods in the prior year. Weexpect selling, general and administrative expenses to continue to increase inthe future, as we continue to expand our product line offerings, and we expenseadditional stock grants under FAS 123R guidance.

 

***Interest andother income, net***

 

                Interestand other income, net, decreased to approximately $0.6 from $1.1 million forthe three months ended February 2, 2008, when compared to the three monthsended January 27, 2007.  Interestand other income, net, increased to approximately $1.3 million from $1.2million for the six months ended February 2, 2008, when compared to thesix months ended January 27, 2007. The decrease in the interim three month period can be attributed to adecrease in our cash and cash equivalents and short-term investments as aresult of our cash purchase of Kailight in May 2007, as well as declininginterest rates on many investment vehicles in recent months. The increase inthe interim six month period was due to additional interest income earned onthe cash and cash equivalents and short-term investments we held as a result ofproceeds from our initial public offering on October 26, 2006. We expectour interest income to fluctuate as interest rates increase or decrease and ourcash balances remain approximately flat.

 

***Income taxexpense***

 

                Duringthe three months ended February 2, 2008 and January 27, 2007 we hadincome tax expense of approximately $69,000 and $293,000, respectively.  Income tax expense was approximately $134,000and $472,000 for the six months ended February 2, 2008 and January 27,2007, respectively.  For the three monthsended February 2, 2008 and January 27, 2007 our overall effective taxrate was approximately (9.4)% and 7.1%, respectively.  Our overall effective tax rate wasapproximately 

 

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(7.7)% and 6.7% in the six months ended February 2,2008 and January  27, 2007, respectively. Because we report losses in ourforeign jurisdictions and income in our U.S. operations, our expected quarterlyconsolidated effective tax rates will fluctuate significantly until our foreignoperations establish a trend of profitability. Income tax expense will increaseif our profits increase.

 

**Liquidity and Capital Resources**

 

**               **As of February 2, 2008 and January 27,2007, we had cash and cash equivalents of approximately $47.8 million and $80.8million, respectively.  Our workingcapital was approximately $81.4 million and $118.5 million at February 2,2008 and January 27, 2007, respectively. This decrease was primarily dueto our purchase of Kailight in May 2007 and additional costs related toour ramp up of production and relocation of our Australian operations.  We held short-terminvestments of approximately$4.6 million, accounts receivable of approximately$30.3 million, and debt of approximately$44,000 as of February 2, 2008.

 

***Operating activities***

 

                Netcash used in operating activities was approximately $2.2 million for the sixmonths ended February 2, 2008, as compared to approximately $2.6 million for the six months ended January 27,2007. Net cash used in operating activities for the six months ended February 2,2008 primarily resulted from a net loss of approximately $1.9 million, adjusted for approximately $2.0 million of depreciation and amortization and approximately $2.2 million ofstock-based compensation, offset by increases in accounts receivable and  inventories of approximately $8.6 million and $3.0 million, respectively. Net cash used in operating activities forthe six months ended January 27, 2007 primarily resulted from period todate net income of approximately $6.6 million offset by increases inaccounts receivable of approximately $2.6 million, increases in inventories ofapproximately $3.8 million and decreases in other current liabilities ofapproximately $2.6 million.

 

***Investing activities***

 

                Netcash provided by investing activities was approximately $24.7 million for thesix months ended February 2, 2008 as compared to approximately $21.7 million used in investing activities in thesix months ended January 27, 2007. During the six months ended February 2,2008, approximately $67.3million of short-term investments were sold or matured. This was offset byadditional purchases of marketable securities of approximately $35.9 million and property and equipment of approximately $6.9 million.  Net cash used in investing activities for thesix months ended January 27, 2007 was primarily related to purchasingmarketable securities with a portion of our initial public offering proceeds.

 

***Financing activities***

 

                Netcash used in financing activities was approximately $6,000 for the six monthsended February 2, 2008 as compared to approximately $94.7 million provided by financing activities forthe six months ended January 27, 2007. Net cash used in financingactivities for the six months ended February 2, 2008 primarily related to approximately $19,000 of debt paydown, offset by approximately$13,000 of proceeds from the issuance of common stock in connection with theexercise of employee stock options.  Netcash provided by financing activities for the six months ended January 27,2007 was primarily related to the proceeds from 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 

 

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many factors, including the rate of our revenuegrowth, the introduction and acceptance of new products, the rate of expansionof our production capacity, and the rate of increase in our sales and marketingand research 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 our stockholders,and there can be no assurance as to whether or when any acquired business wouldcontribute positive operating results commensurate with the associatedinvestment. In the event we require additional cash resources, we may not beable to obtain bank credit arrangements or affect an equity or debt financingon terms acceptable to us or at all.  Anymaterial acquisition could result in a decrease in working capital dependingupon the amount, timing, and nature of the consideration paid.

 

**Foreign Currency Exchange Risk**

 

Our subsidiary Optium Australia is located in Sydney,Australia. As our 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 foreign exchangerisks through the use of currency futures or options in future periods.

 

**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 thesefunds fluctuates with the prevailing interest rate. We do not believe that a10% change in interest rates would have a significant effect on our interestincome.

 

**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, whichincludes special 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 thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis 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 and six months ended February 2, 2008, sales ofour 1550 nm 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 usand we believe that we have meritorious defenses.

 

                During mid-2007, we became aware that certain of ouranalog RF over fiber products may, depending on end use and customization, besubject to the International Traffic in Arms Regulations, or ITAR. Accordingly,we filed a detailed voluntary disclosure with the United States Department ofState, describing the details of possible inadvertent ITAR violations withrespect to the export of a limited number of certain prototype products, andrelated technical data and defense services. We may have also made unauthorizedtransfers of ITAR-restricted technical data and defense services to foreignpersons in our workplace.  We haveprovided additional information upon request to the Department of State withrespect to this matter.  The Departmentof State encourages voluntary disclosures and generally affords partiesmitigating credit under such circumstances. We nevertheless could be subject tocontinued investigation and potential regulatory consequences ranging from ano-action letter, government oversight of facilities and export transactions,monetary penalties, and in extreme cases, debarment from governmentcontracting, denial of export privileges and criminal sanctions.

 

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 

 

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invest in the expansion of theglobal information network. As network usage and bandwidth demand increase, sodoes the need for advanced optical networks to provide the required bandwidth.Without network and bandwidth growth, the need for our optical subsystems, andhence our future growth as a manufacturer of these products, is jeopardized.Currently, while increasing demand for network services and for broadbandaccess, in particular, is apparent, growth is limited by several factors,including, among others, an uncertain regulatory environment, reluctance fromcontent providers to supply video and audio content over the communicationsinfrastructure, and uncertainty regarding long term sustainable business modelsas multiple industries (cable TV, traditional telecommunications, wireless,satellite, etc.) offer non-complementary and competing content deliverysolutions. Ultimately, if long-term expectations for network growth andbandwidth demand are not realized or do not support a sustainable businessmodel, our business would be significantly harmed.

 

***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 orexceeding our customers’ expectations. The introduction of new products embodyingnew technologies 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 ourfinancial results 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 February 2, 2008 and January 27,2007, we generated 65% and 77%, respectively, of our revenues from our fourlargest end customers during those periods. We may not be able to offset anydecline in revenues from our existing major customers with revenues from newcustomers and our quarterly results may be volatile because we are dependent onlarge orders from these customers that may be reduced or delayed. Ourdependence on a limited number of customers is due to the fact that the networksystems industry is dominated by a small number of large companies, and theindustry continues to consolidate, as with the recent mergers of Cisco Systemsand Scientific-Atlanta, Ericsson and Marconi, Lucent and Alcatel and thenetwork 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 thetimetable we 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. 

 

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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 operations after the relocation of our equipment. If we fail toproperly manage this relocation to minimize manufacturing and other businessinterruption, our business and financial 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.

 

In addition, our expense levelsare based, in significant part, on our expectations as to future revenue andare largely fixed in the short term. As a result, we may be unable to adjustspending in a timely manner to compensate for any unexpected shortfall inrevenue. Furthermore, we intend to increase our operating expenses as we expandour manufacturing, research and development, sales and marketing, andadministrative organizations. The timing of these increases and the rate atwhich new personnel become productive will affect our operating results. Anyrevenue shortfall, and the resulting decrease in operating income or increasein operating loss, could lead to volatility in the price of our common stock.

 

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***Weare subject to a number of risks as a result of our Optium Israel operations.***

 

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.

 

***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 components we use to manufacture ourproducts could adversely affect our ability to fulfill customer orders or ourfinancial results of operations.

 

***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 ourcustomers. As a result, any of our customers may cease to purchase our productsat any time. 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 

 

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consistent with our existingcompensation and salary structure. Many of the companies with which we competefor hiring experienced employees have greater resources than we have. Inaddition, in making employment decisions, particularly in the high-technologyindustries, job candidates often consider the value of the equity they are toreceive in connection with their employment. Therefore, significant volatilityin the price 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 in integrating theoperations, technologies, products, existing contracts, accounting andpersonnel of the target company and realizing the anticipated synergies of thecombined businesses;

 

·                  difficulties in supporting andtransitioning customers, if any, of the target company;

 

·                  diversion of financial andmanagement resources from existing operations;

 

·                  the price we pay or otherresources that we devote may exceed the value we realize, or the value we couldhave realized if we had allocated the purchase price or other resources to anotheropportunity;

 

·                  risks of entering new markets inwhich we have limited or no experience;

 

·                  potential loss of key employees,customers and strategic alliances from either our current business or thetarget company’s business;

 

·                  assumption of unanticipatedproblems or latent liabilities, such as problems with the quality of the targetcompany’s products;

 

·                  inability to generate sufficientrevenue to offset acquisition costs;

 

·                  equity based acquisitions mayhave a dilutive effect on our stock; and

 

·                  inability to successfullycomplete 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 newpersonnel, purchasing additional equipment, leasing or purchasing additionalfacilities and developing the management infrastructure to manage any suchexpansion. If we fail to secure these expansion requirements and /or manage ourfuture growth effectively, in particular during periods of industryuncertainty, our business could 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 manufacturing resources than we possess, and there can be no assurance thatour current and future competitors will not be more successful than us.

 

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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 mayre-enter the 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, some ofour expenses from Optium Australia and Optium Israel are derived in Australiandollars and Israeli shekels, respectively. This exposes us to foreign currency exchange rate risks. If the value ofthe Australian dollar and/or Israeli shekel relative to the United States dollarrises, these expenses of Optium Australia and/or Optium Israel, as applicable,will correspondingly 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 beunaware of intellectual property rights of others that may cover some of ourassets, technology and products. In that regard, JDS Uniphase Corporation andEMCORE Corporation filed a complaint on September 11, 2006 alleging thatour 1550 nm HFC externally modulated transmitter, in addition to possibly “productsas yet unidentified,” infringes on two U.S. patents.  On March 14,2007, JDS Uniphase and EMCORE Corporation filed a second complaint in theUnited States District Court for the Western 

 

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District of Pennsylvania allegingthat the Company’s 1550 nm HFC quadrature amplitude modulated transmitters, inaddition to possibly “products as yet unidentified”,  infringe on anotherU.S. patent. The plaintiffs in both cases are seeking for the court to declarethat we have willfully infringed on such patents and to be awarded up to threetimes the amount of any compensatory damages found, if any, plus any otherdamages or costs incurred. Any litigation regarding patents, trademarks,copyrights or other intellectual property rights, even those without merit,could be costly and time consuming, and divert our management and key personnelfrom operating our business. The complexity of the technology involved andinherent uncertainty and cost of intellectual property litigation increases ourrisks. If any third party has a meritorious or successful claim that we areinfringing its intellectual property rights, we may be forced to change ourproducts or manufacturing processes, which may be costly or impractical. Thisalso may require us to stop selling our products as currently engineered, whichcould harm our competitive position. We also may be subject to significantdamages or injunctions that prevent the further development of certain of ourproducts 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 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 substantial accountingexpense and expend significant management time on compliance-related issues. Wewill evaluate the need to hire additional accounting and financial staff withappropriate public company experience and technical accounting knowledge.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.

 

****We willlose sales if we are unable to obtain government authorization to exportcertain of our products, and we would be subject to legal and regulatoryconsequences if we do not comply with applicable laws and regulations.****

 

                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 

 

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the Department ofCommerce’s Bureau of Industry and Security, the requirement for a license isdependent on the type and end use of the product, the final destination, theidentity of the end user and whether a license exception mightapply.  Virtually all exports of products subject to theInternational Traffic in Arms Regulations, or ITAR, administered by theDepartment of State’s Directorate of Defense Trade Controls, require alicense.  Most of our fiber optics products are subject to EAR;certain of our RF over fiber products 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.

 

                During mid-2007, we became aware that certain of ouranalog RF over fiber products may, depending on end use and customization, besubject to the International Traffic in Arms Regulations, or ITAR. Accordingly,we filed a detailed voluntary disclosure with the United States Department ofState, describing the details of possible inadvertent ITAR violations withrespect to the export of a limited number of certain prototype products, andrelated technical data and defense services. We may have also made unauthorizedtransfers of ITAR-restricted technical data and defense services to foreignpersons in our workplace.  We haveprovided additional information upon request to the Department of State withrespect to this matter.  The Departmentof State encourages voluntary disclosures and generally affords partiesmitigating credit under such circumstances. We nevertheless could be subject tocontinued investigation and potential regulatory consequences ranging from ano-action letter, government oversight of facilities and export transactions,monetary penalties, and in extreme cases, debarment from governmentcontracting, denial of export privileges and criminal sanctions.

 

***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:

 

·                  acquire complementary businessesor technologies;

 

·                  enhance our operatinginfrastructure;

 

·                  develop new products;

 

·                  hire additional technical andother personnel; or

 

·                  otherwise respond to competitivepressures.

 

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 of unanticipatedopportunities, develop or enhance our products, or otherwise respond tocompetitive 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.

 

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***Business disruptions resulting from international uncertainties couldnegatively impact our 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 notlimited to:

 

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

 

·                  difficulties in enforcingagreements and collecting receivables through foreign legal systems;

 

·                  fewer legal protections forintellectual property;

 

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

 

·                  difficulties in obtaining anynecessary governmental authorizations for the export of our products to certainforeign jurisdictions;

 

·                  fluctuations in foreigneconomies;

 

·                  fluctuations in the value offoreign currencies and interest rates;

 

·                  general economic and politicalconditions in the markets in which we operate;

 

·                  domestic and internationaleconomic or political changes, hostilities and other disruptions in regionswhere we currently operate or may operate in the future; and

 

·                  different and changing legal andregulatory requirements in the jurisdictions in which we currently operate ormay 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 orders alreadyplaced, difficulties in producing and delivering our products, threats to ourintellectual property, difficulty in collecting receivables, and a higher costof doing business, any of which could negatively impact our business, financialcondition or results of operations. Moreover, our sales, including sales tocustomers outside the United States, are denominated in U.S. dollars, anddownward fluctuations in the value of foreign currencies relative to the U.S.dollar may make our products more expensive than other products, which couldharm our business.

 

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

 

Asof February 2, 2008, we had U.S. net operating loss, or NOL, carryforwardsof approximately $21.8 million for federal and $8.3 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.

 

Wehave NOLs in the United States, Australia and Israel. Currently, we recognizeincome in our U.S. operations and losses in our Australian and Israelioperations, and the complexity of the application of the NOLs in consolidationmay 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 

 

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income realization.  In the future, we may recognize additionaldeferred tax assets should our foreign operations meet the “more likely thannot” recognition threshold in connection with likely future taxable incomerealization.

 

**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.***

 

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 our quarterlyfinancial results or the quarterly financial results of companies perceived tobe similar to us;

 

·                  changes in estimates of ourfinancial results or recommendations by securities analysts;

 

·                  failure of any of our products toachieve or maintain market acceptance;

 

·                  changes in market valuations ofsimilar companies;

 

·                  success of competitive products;

 

·                  changes in our capital structure,such as future issuances of securities or the incurrence of additional debt;

 

·                  announcements by us or ourcompetitors of significant products, contracts, acquisitions or strategicalliances;

 

·                  regulatory developments in theUnited States, foreign countries or both;

 

·                  litigation involving our company,our general industry or both;

 

·                  additions or departures of keypersonnel;

 

·                  investors’ general perception ofus;

 

·                  changes in general economic,industry and market conditions; and

 

·                  changes in regulatory and otherdynamics.

 

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 market couldoccur at any time.   These shares are able to be sold, subject to anyapplicable volume limitations under federal securities laws, at any time. These sales, or the market perception that the holders of a large number ofshares intend to sell shares, could reduce the market price of our commonstock.

 

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Inaddition, as of March 11, 2008 there were 48,979 shares subject tooutstanding warrants, 2,447,650 shares subject to outstanding options, and521,218 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 in registrationstatements that we may file for ourselves or other stockholders. We have alsoregistered all shares of common stock that we may issue under our employeebenefit plans. Once we register these shares, they can be freely sold in thepublic market upon issuance.

 

***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, over whichone or more of them has voting or dispositive power, collectively beneficiallyown approximately 49% of our outstanding common stock as of March 11,2008. 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 the removal ofdirectors;

 

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

 

·                  advance notice requirements forstockholder proposals and director nominations;

 

·                  the inability of stockholders toact by written consent or to call special meetings;

 

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

 

·                  the ability of our board ofdirectors to designate the terms of and issue new series of preferred stockwithout 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 ofdirectors, our by-laws may only be amended or repealed by the affirmative voteof the holders 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.

 

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***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 and Use of Proceeds**

 

*               *None.

 

**ITEM 3.Defaults Upon Senior Securities**

 

None.

 

**ITEM4.  Submission of Matters to a Vote of SecurityHolders**

 

    The Company’s annual meeting of stockholders washeld on Monday, December 17, 2007, at the offices of DrinkerBiddle &Reath, LLP located at One Logan Square, 18th & CherryStreets, Philadelphia, Pennsylvania, 19103-6996, at which the following matterswere submitted to a vote of the stockholders.

 

(a) votes regarding the election of two (2) class I members,Steven Foster and Russell Johnson, to the board of directors as directors eachto serve for a three-year term until his successor has been duly elected andqualified or until his earlier resignation or removal, were as follow:

 

| ** **      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-----------------|------------|------------|------------|--------------|------------|
| Steven Foster   |       | 22,456,412 |       | 293,251      |       |
| Russell Johnson |       | 22,456,412 |       | 293,251      |       |

 

(b) votesregarding the ratification of the selection of the accounting firm of Ernst &Young, LLP as the Company’s independent registered public accountants for thecurrent fiscal year, were as follows:

 

| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 22,499,463 |       | 16,212      |       | 233,988     |       |

 

**ITEM5.  Other Information**

 

None.

 

**ITEM 6.Exhibits**

 

(a)   Exhibit Index.

 

10.1         Deferred Stock Award Agreement, datedMarch 11, 2008, by and between Optium Corporation and Eitan Gertel.

 

10.2         Deferred Stock Award Agreement, datedMarch 11, 2008, by and between Optium Corporation and Christopher Brown.

 

10.3         Deferred Stock Award Agreement, datedMarch 11, 2008, by and between Optium Corporation and Mark Colyar.

 

10.4         Deferred Stock Award Agreement, datedMarch 11, 2008, by and between Optium Corporation and Anthony Musto.

 

10.4         Deferred Stock Award Agreement, datedMarch 11, 2008, by and between Optium Corporation and David Renner.

 

10.5         First Amendment to lease for 200Precision Road, Horsham, PA by and between Horsham Property Assoc., L.P. andOptium Corporation.

 

31.1         Certification of Chief ExecutiveOfficer pursuant to Rule 13a-14(a) of the Exchange Act, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2         Certification of Chief FinancialOfficer pursuant to Rule 13a-14(a) of the Exchange Act, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1         Certifications of Chief ExecutiveOfficer and 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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**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: | March 13, 2008 |  /s/ Eitan Gertel                 |   |
|   |                | Eitan  Gertel                          |
|   |                | President  and Chief Executive Officer |
|   |                |                                   |
| Dated: | March 13, 2008 |  /s/ David Renner                 |   |
|   |                | David Renner                           |
|   |                | Vice  President of Finance and         |
|   |                | Chief  Financial Officer               |

 

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