**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

x     **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended May 3, 2008**

 

**or**

 

o      **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

x Yes                                o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer,  a non-acceleratedfiler or a smaller reporting company. See definitions of “ large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large  accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  Filer xDo not check if a  smaller reporting  company |   | Smaller  reporting company o |
|----------------------------|--------|----------------------|--------|-----------------------------------------------------------------------|--------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

o Yes   x No

 

As of June 9, 2008, the registrant had 25,576,716 shares of CommonStock, par value $.0001, outstanding. This number excludes 1,494,085 sharesheld by the registrant as treasury shares.

 

 

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**TABLE OF CONTENTS**
| ** **                 | ** **                                                                                                                                 | ** ** |
|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**            |
| **Financial  Information** |
| ** **                 | ** **                                                                                                                                 | ** ** |
| **ITEM 1.**                | **Financial  Statements.**                                                                                                                 |       |
|                       |                                                                                                                                       | **Page**   |
|                       |                                                                                                                                       |       |
| 1.                         | Condensed  Consolidated Statements of Operations (unaudited) for the three and nine  months ended May 3, 2008 and April 28, 2007 | 2          |
|                       |                                                                                                                                       |       |
| 2.                         | Condensed  Consolidated Balance Sheets as of May 3, 2008 (unaudited) and  July 28, 2007                                          | 3          |
|                       |                                                                                                                                       |       |
| 3.                         | Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months ended  May 3, 2008 and April 28, 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.**                                                                                                                    | 29         |
| **ITEM  1A.**              | **Risk  Factors.**                                                                                                                         | 29         |
| **ITEM 2.**                | **Unregistered  Sales of Equity Securities and Use of Proceeds.**                                                                          | 42         |
| **ITEM 3.**                | **Defaults  Upon Senior Securities.**                                                                                                      | 42         |
| **ITEM 4.**                | **Submission  of Matters to a Vote of Security Holders.**                                                                                  | 42         |
| **ITEM 5.**                | **Other information.**                                                                                                                     | 42         |
| **ITEM 6.**                | **Exhibits**                                                                                                                               | 42         |
|                       |                                                                                                                                       |       |
| **SIGNATURES**             |                                                                                                                                       | 43         |
|                            |                                                                                                                                            |            |  |  |  |  |

 

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)***(inthousands, except per share data)*

 
| ** **                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **May 3,  2008**            | ** ** | **April 28,  2007**        | ** ** | **May 3,  2008** | ** ** | **April 28,  2007** | ** ** |
| Revenue                                            |       | $                                | 45,004     |                            | $          | 34,547 |   | $ | 121,418 |   | $ | 98,696 |   |
| Cost of revenue                                    |       | 33,077                           |       | 25,190                          |       | 88,941 |   | 70,709 |   |
| Gross profit                                       |       | 11,927                           |       | 9,357                           |       | 32,477 |   | 27,987 |   |
| Operating expenses:                                |       |                             |       |                            |       |   |   |   |   |
| Research and product development                   |       | 6,149                            |       | 3,379                           |       | 17,181 |   | 9,888 |   |
| Selling, general and administrative                |       | 7,059                            |       | 3,711                           |       | 19,641 |   | 9,897 |   |
| Total operating expenses                           |       | 13,208                           |       | 7,090                           |       | 36,822 |   | 19,785 |   |
| Income (loss) from operations                      |       | (1,281                           | )          | 2,267                           |       | (4,345 | ) | 8,202 |   |
| Interest and other income, net                     |       | 402                              |       | 1,333                           |       | 1,721 |   | 2,491 |   |
| Income (loss) before income tax expense (benefit)  |       | (879                             | )          | 3,600                           |       | (2,624 | ) | 10,693 |   |
| Income tax expense (benefit)                       |       | (217                             | )          | 182                             |       | (83 | ) | 654 |   |
| Net income (loss)                                  |       | $                                | (662       | )                               | $          | 3,418 |   | $ | (2,541 | ) | $ | 10,039 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Basic net income (loss) per share                  |       | $                                | (0.03      | )                               | $          | 0.13 |   | $ | (0.10 | ) | $ | 0.57 |   |
| Basic weighted average common shares outstanding   |       | 25,499                           |       | 25,350                          |       | 25,461 |   | 17,576 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Diluted net income (loss) per share                |       | $                                | (0.03      | )                               | $          | 0.13 |   | $ | (0.10 | ) | $ | 0.41 |   |
| Diluted weighted average common shares outstanding |       | 25,499                           |       | 26,647                          |       | 25,461 |   | 24,639 |   |

 

*See accompanying notes to the financial statements.*

 

2

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**Optium Corporation**

**Condensed Consolidated Balance Sheets**

 

*(in  thousands, except shareamounts)*

 
| ** **                                                                                                                                                                                | ** ** | **May 3, 2008** | ** ** | **July 28, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(unaudited)**           | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                |       |                      |       |                        |       |
| Current assets:                                                                                                                                                                           |       |                      |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                 |       | $                         | 42,614     |                        | $          | 25,359 |   |
| Short-term investments                                                                                                                                                                    |       | 3,600                     |       | 36,018                      |       |
| Accounts receivable, net of allowances of $69 and $46, respectively                                                                                                                       |       | 32,758                    |       | 21,853                      |       |
| Inventories, net                                                                                                                                                                          |       | 27,699                    |       | 20,684                      |       |
| Restricted cash                                                                                                                                                                           |       | 415                       |       | 68                          |       |
| Deferred tax assets                                                                                                                                                                       |       | 6,219                     |       | 4,976                       |       |
| Prepaid expenses and other current assets                                                                                                                                                 |       | 1,941                     |       | 1,039                       |       |
| Total current assets                                                                                                                                                                      |       | 115,246                   |       | 109,997                     |       |
| Property and equipment, net                                                                                                                                                               |       | 16,164                    |       | 9,124                       |       |
| Other assets                                                                                                                                                                              |       | 612                       |       | 170                         |       |
| Intangible assets, net                                                                                                                                                                    |       | 1,705                     |       | 2,006                       |       |
| Goodwill                                                                                                                                                                                  |       | 38,993                    |       | 37,923                      |       |
| Deferred tax assets                                                                                                                                                                       |       | 7,776                     |       | 8,881                       |       |
| Total assets                                                                                                                                                                              |       | $                         | 180,496    |                        | $          | 168,101 |   |
| **Liabilities and stockholders’ equity**                                                                                                                                             |       |                      |       |                        |       |
| Current liabilities:                                                                                                                                                                      |       |                      |       |                        |       |
| Accounts payable                                                                                                                                                                          |       | $                         | 28,768     |                        | $          | 20,222 |   |
| Accrued expenses                                                                                                                                                                          |       | 5,155                     |       | 4,389                       |       |
| Accrued warranty                                                                                                                                                                          |       | 385                       |       | 359                         |       |
| Current portion of debt                                                                                                                                                                   |       | 31                        |       | 46                          |       |
| Total current liabilities                                                                                                                                                                 |       | 34,339                    |       | 25,016                      |       |
| Long-term debt, net of current portion                                                                                                                                                    |       | —                    |       | 17                          |       |
| Other long-term liabilities                                                                                                                                                               |       | 404                       |       | 189                         |       |
| Total liabilities                                                                                                                                                                         |       | 34,743                    |       | 25,222                      |       |
| Stockholders’ equity:                                                                                                                                                                |       |                      |       |                        |       |
| Common stock, $0.0001 par value — 100,000,000 shares authorized,  27,052,860 and 26,924,963 shares issued, respectively; 25,558,775 and 25,430,878  shares outstanding, respectively |       | 3                         |       | 3                           |       |
| Additional paid in capital                                                                                                                                                                |       | 194,634                   |       | 191,118                     |       |
| Deferred compensation                                                                                                                                                                     |       | (549                      | )          | (924                        | )          |
| Treasury stock, 1,494,085 shares of common stock — at cost                                                                                                                           |       | (2,762                    | )          | (2,762                      | )          |
| Accumulated deficit                                                                                                                                                                       |       | (49,032                   | )          | (46,395                     | )          |
| Accumulated other comprehensive income                                                                                                                                                    |       | 3,459                     |       | 1,839                       |       |
| Total stockholders’ equity                                                                                                                                                           |       | 145,753                   |       | 142,879                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                           |       | $                         | 180,496    |                        | $          | 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)*

* *
| ** **                                                                  | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **May 3,   2008**     | ** ** | **April  28,   2007** | ** ** |
| **Cash flows from operating activities**                                    |       |                            |       |   |   |
| Net income (loss)                                                           |       | $                               | (2,541     | ) | $ | 10,039 |   |
| Adjustments to reconcile net income (loss) to net cash used in  operations: |       |                            |       |   |   |
| Depreciation and amortization                                               |       | 3,379                           |       | 1,969 |   |
| Stock-based compensation                                                    |       | 3,615                           |       | 881 |   |
| Provision for doubtful accounts                                             |       | 23                              |       | 11 |   |
| Loss on disposal of property and equipment                                  |       | 4                               |       | 9 |   |
| Change in deferred taxes                                                    |       | (103                            | )          | — |   |
| Changes in operating assets and liabilities:                                |       |                            |       |   |   |
| Accounts receivable                                                         |       | (10,987                         | )          | (7,787 | ) |
| Inventories, net                                                            |       | (6,794                          | )          | (5,133 | ) |
| Prepaid expenses and other current assets                                   |       | (933                            | )          | (1,065 | ) |
| Other assets                                                                |       | (475                            | )          | (180 | ) |
| Accounts payable                                                            |       | 8,366                           |       | 3,369 |   |
| Accrued expenses                                                            |       | 896                             |       | 343 |   |
| Other current liabilities                                                   |       | —                          |       | (2,640 | ) |
| Accrued warranty                                                            |       | 24                              |       | 82 |   |
| Other long-term liabilities                                                 |       | 64                              |       | 92 |   |
| Net cash used in operating activities                                       |       | (5,462                          | )          | (10 | ) |
| **Cash flows from investing activities**                                    |       |                            |       |   |   |
| Purchases of property and equipment                                         |       | (9,542                          | )          | (3,964 | ) |
| Proceeds from sale of property and equipment                                |       | —                          |       | 30 |   |
| Restricted cash, net                                                        |       | (167                            | )          | — |   |
| Purchases of short-term investments                                         |       | (57,557                         | )          | (45,562 | ) |
| Maturities and sales of short-term investments                              |       | 89,975                          |       | 22,384 |   |
| Net cash provided by (used in) investing activities                         |       | 22,709                          |       | (27,112 | ) |
| **Cash flows from financing activities**                                    |       |                            |       |   |   |
| Payments on line of credit                                                  |       | (32                             | )          | (671 | ) |
| Net proceeds from initial public offering                                   |       | —                          |       | 95,378 |   |
| Proceeds from exercise of employee stock options                            |       | 28                              |       | 47 |   |
| Net cash (used in) provided by financing activities                         |       | (4                              | )          | 94,754 |   |
| Effect of exchange rate changes on cash and cash equivalents                |       | 12                              |       | 33 |   |
|                                                                        |       |                            |       |   |   |
| Net increase in cash and cash equivalents                                   |       | 17,255                          |       | 67,665 |   |
|                                                                        |       |                            |       |   |   |
| Cash and cash equivalents, beginning of period                              |       | 25,359                          |       | 10,377 |   |
|                                                                        |       |                            |       |   |   |
| Cash and cash equivalents, end of period                                    |       | $                               | 42,614     |   | $ | 78,042 |   |

 

*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**

 

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

 

On November 1, 2006, the Company closed its initial public 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***

 

The consolidatedfinancial statements include Optium Corporation and its wholly ownedsubsidiaries, Optium Australia Pty Limited, Optium Israel Limited, andKailight Photonics Inc. All intercompany accounts and transactions have beeneliminated in the consolidation.

 

***Fiscal year***

 

Optium operates on a 52 or 53 week fiscal year ending on theSaturday closest to July 31. Fiscal year 2008 and fiscal year 2007consist of 53 and 52 weeks, respectively. Each quarter consists of 13 or14 weeks; the third quarters of both fiscal year 2008 and fiscal year 2007consisted of 13 weeks.

 

***Use ofestimates and adjustments***

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statements,and the reported amounts of income and loss during the reporting period. Actualresults could differ from those estimates. In the opinion of management, alladjustments (consisting solely of normal recurring adjustments) necessary for afair presentation of the financial statements for the interim periods presented  have been included.

 

***Cash and cashequivalents***

 

The Company considersall highly liquid securities purchased with original maturities ofninety 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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At May 3, 2008 and July 28,2007, the Company had $415,300 and $68,000, respectively of short-termrestricted cash.  At both May 3,2008 and July 28, 2007 $68,000 of the restricted cash related to anoperating lease in the form of a certificate of deposit, which is renewed on amonthly basis. The term of the certificate of deposit extends from thecommencement date of the lease (May 1, 2001) through at least ninety daysafter the expiration of the lease term (April 30, 2008). At May 3,2008, the Company also had $347,300 of short-term restricted cash related to abank guarantee with a customer. The term of the bank guarantee extends throughthe length of the contract and renews on a monthly basis.

 

***Foreign currencytranslation***

 

The financial statementsfor Optium Australia, the Company’s foreign subsidiary,  are measured using the local currency (theAustralian dollar) as the functional currency. Foreign assets and liabilitiesin the condensed consolidated balance sheets have been translated at the rateof exchange as of the balance sheet date. Revenues and expenses are translatedat the average exchange rate for the month. Translation adjustments do notimpact the results of operations and are reported as a separate component ofstockholders’ equity. Foreign currency transaction gains and losses areincluded in the condensed consolidated results of operations.

 

***Accountsreceivable***

 

The Company carries itsaccounts receivable at the amount that it considers to be collectible and doesnot require collateral from its customers. Accordingly, an allowance account isestablished through a charge against operations in an amount deemed adequate toabsorb the uncollectible portion of such receivables. The allowance is determinedthrough management review of outstanding amounts per customer. At May 3,2008 and July 28, 2007, an allowance of $69,200 and $46,440 respectively,based on management’s analysis, was available to absorb any uncollectiblebalances.

 

***Inventories***

 

Inventories are valuedat the lower of cost or market value. Cost is determined on a first-in,first-out method. The Company makes inventory purchase decisions based uponsales forecasts. To mitigate potential component supply constraints, theCompany builds inventory levels for certain items with long supply lead times.The Company assesses the valuation of its inventory on a periodic basis andwrites down the value for estimated excess and obsolete inventory based onestimates of future demand. The Company defines obsolete inventory as inventorythat will no longer be used in its manufacturing processes. Excess inventory isdefined as inventory in excess of projected usage and is determined usingmanagement’s best estimate, based upon information then available to theCompany.

 

***Property andequipment***

 

Property and equipmentare stated at cost, net of accumulated depreciation. Expenditures formaintenance 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.

 

Assets held undercapital leases are recorded at the lower of the fair market value of the assetor the present value of future minimum lease payments and are amortized usingthe straight-line method over the primary term of the relevant capital lease.The Company had no capital lease obligations as of May 3, 2008 and July 28,2007.

 

***Intangible assets***

 

Intangible assetsconsist of intellectual property and are stated at cost less accumulatedamortization. Intangible assets are amortized using the straight-line methodover their estimated useful life, which is five years. Useful lives and relatedamortization expense are based on management’s estimate of the period that theassets will generate revenues or otherwise be used by the Company. If assetsare considered impaired, the impairment recognized is the amount by which thecarrying value of the assets exceeds the fair value of the assets.

 

6

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***Goodwill***

 

Under the Statements ofFinancial Accounting Standards, or SFAS, No. 142, *Goodwill andOther Intangible Assets*, goodwill is subject to annual impairmenttesting criteria. The Company’s policy is to compare the carrying value of abusiness unit’s net assets to the estimated fair value of the business unit,using a sales multiple approach to estimate the business unit’s fair value. Thefair value is based on management’s estimate of future revenues to be generatedby the business component. Such estimated future revenues consider factors suchas future operating income and historical trends. The Company tests forimpairment on an annual basis or on an interim basis if circumstances changethat would indicate the possibility of impairment. The impairment reviewrequires an analysis of future projections and assumptions about the Company’soperating performance. If such a review indicates that the assets are impaired,a charge to operations would be recorded for the amount of the impairment andthe corresponding impaired assets would be reduced in carrying value. Therewere no indicators of impairment as of May 3, 2008.

 

***Long-livedassets***

 

SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,or SFAS 144, established accounting standards for the impairment of long-livedassets and certain identifiable intangibles related to those assets to be heldand used, and for long-lived assets and certain identifiable intangibles to bedisposed. Long-lived assets consist primarily of property and equipment. Inaccordance with SFAS 144, the Company continually evaluates whether eventsor circumstances have occurred to indicate that the estimated remaining usefullife of its long-lived assets may warrant revision or the carrying value mightbe impaired. The carrying value of long-lived assets is considered impairedwhen the total projected undiscounted cash flows from such assets are less thancarrying value. The Company determined that no event or circumstance occurredthat would have warranted a revision to carrying value of its long-lived assetsas of May 3, 2008.

 

***Fair value offinancial instruments***

 

Financial instrumentsconsist of cash and cash equivalents, restricted cash, accounts receivable,accounts payable and notes payable. The carrying amounts of the Company’sfinancial 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 Companyadopted SFAS  No. 123R, *Share-Based Payment,* or SFAS 123R, whichrequires companies to recognize in their statement of operations allshare-based payments, including grants of stock options and restricted stockunits, based on the grant date fair value. The Company adopted SFAS 123R usingthe prospective transition method. Stock-based compensation is measured at thegrant 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 nine months of fiscal year 2008 was estimated on the date of thegrant using the Black-Scholes option-pricing model with the followingassumptions:

 

7

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| ** **                      | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **May 3, 2008**        | ** ** | **April 28, 2007**    | ** ** | **May 3, 2008** | ** ** | **April 28, 2007** | ** ** |
| Average risk-free interest rate |       | 2.74                             | %          | 4.52                            | %          | 3.56 | % | 4.60 | % |
| Expected dividend yield         |       | 0                                | %          | 0                               | %          | 0 | % | 0 | % |
| Expected life                   |       | 5  years                         |       | 5  years                        |       | 5  years |   | 5  years |   |
| Expected volatility             |       | 83.00                            | %          | 80.00                           | %          | 81.24 | % | 80.00 | % |
| Forfeiture rate                 |       | 9.90                             | %          | 9.28                            | %          | 9.99 | % | 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 fairvalue based on the closing price of the Company’s stock on the date of grant.The RSUs granted during the three and nine months ended May 3, 2008 had aweighted average fair value of $6.05 and $8.52, 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 5.80% and 5.29% were usedto calculate the stock-based compensation related to the RSUs granted duringthe three and nine months ended May 3, 2008, respectively.

 

***Revenuerecognition***

 

The Company derivesrevenue from the manufacture and sale of optical subsystem products for use inhigh-performance network systems. Our revenue recognition policy follows SECStaff Accounting Bulletin No. 104, “Revenue Recognition.” Specifically,the Company recognizes product revenue when the following requirements havebeen 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 to customers arepayment due 30 days from the date of invoice. For certain customers, theCompany has negotiated payment terms different than 30 days to conform tosuch customer’s standard payment terms and/or such customer’s credit standing.

 

8

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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***

 

The costs of thedevelopment of hardware products are expensed as incurred.

 

***Shipping andhandling costs***

 

Shipping and handlingcosts related to products sold are included in cost of revenue.

 

***Income taxes***

 

The Company accounts forincome taxes in accordance with the provisions of SFAS No. 109, *Accounting for Income Taxes*, or SFAS 109.  SFAS 109 requires the Company to accountfor income taxes using a balance sheet approach, requiring the recognition ofdeferred income tax assets and liabilities for the expected future taxconsequences of events having been recognized in the Company’s financialstatements or tax returns. Deferred income taxes have been provided for thedifferences between the financial reporting carrying values and the income taxreporting basis of the Company’s assets and liabilities. These temporarydifferences consist of differences between the timing of the deduction ofcertain amounts between income tax and financial statement reporting purposes. The Company adopted Financial AccountingStandards Board, or FASB,  InterpretationNo. 48 *Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement 109, Accounting for Income Taxe*s,or FIN 48, on July 29, 2007. Under the new provisions, the Company willnot recognize a tax benefit for an uncertain income tax position unless it is “morelikely than not” that such position is sustainable. As a result of theimplementation of FIN 48, the Company recognized a net $100,000 increase in theliability for unrecognized tax benefits, which was accounted for as an increaseto the July 28, 2007 balance of the accumulated deficit.

 

***Comprehensiveincome (loss)***

 

SFAS No. 130, *Reporting Comprehensive Income*, requires disclosure of allcomponents of comprehensive income (loss) on an annual and interim basis.Comprehensive income (loss) is defined as the change in equity of a businessenterprise during a period from transactions and other events and circumstancesfrom non-owner sources. Components of other comprehensive income (loss) thatthe Company currently reports are gains and losses from foreign currencytranslations and unrealized gains and losses from short-term investments, asfollows (in thousands):

 
| ** **                                                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **May 3, 2008**        | ** ** | **April 28, 2007**    | ** ** | **May 3, 2008** | ** ** | **April 28, 2007** | ** ** |
|                                                             |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                |       | $                                | (662       | )                               | $          | 3,418 |   | $ | (2,541 | ) | $ | 10,039 |   |
| Other comprehensive income:                                      |       |                             |       |                            |       |   |   |   |   |
| Unrealized gain (loss) on investments                            |       | (6                               | )          | 2                               |       | 0 |   | (8 | ) |
| Net change in cumulative foreign currency translation adjustment |       | 940                              |       | 816                             |       | 1,620 |   | 945 |   |
| Comprehensive income (loss)                                      |       | $                                | 272        |                            | $          | 4,236 |   | $ | (921 | ) | $ | 10,976 |   |

 

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

 

The Company computes netincome (loss) per share in accordance with SFAS No. 128, *Earnings per Share*, or SFAS 128. Under the provisionsof SFAS 128, basic net income (loss) per share is computed by dividing thenet income (loss) applicable to common stockholders for the period by theweighted average number of shares of common stock outstanding. In accordancewith SFAS 128, incremental potential common shares from the conversion ofpreferred stock and the exercise of stock options and warrants are included inthe calculation of diluted net income (loss) per share except when the effectwould be anti-dilutive. On October 10, 2006, the Company’s 1-for-12reverse stock split of the Company’s issued common stock became effective, andall share data has been retroactively adjusted to reflect this reverse stocksplit.

 

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

 

9

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| ** **                                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **May 3, 2008**        | ** ** | **April 28, 2007**    | ** ** | **May 3, 2008** | ** ** | **April 28, 2007** | ** ** |
| **Numerator:**                                      | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                   |       | $                                | (662       | )                               | $          | 3,418 |   | $ | (2,541 | ) | $ | 10,039 |   |
|                                                |       |                             |       |                            |       |   |   |   |   |
| **Denominator:**                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average common shares outstanding          |       | 25,499                           |       | 25,350                          |       | 25,461 |   | 17,576 |   |
| Effect of dilutive shares                           |       |                             |       |                            |       |   |   |   |   |
| Stock options                                       |       | —                           |       | 1,249                           |       | — |   | 1,317 |   |
| Series A and C warrants                        |       | —                           |       | 48                              |       | — |   | 63 |   |
| Conversion of preferred shares into common stock    |       | —                           |       | —                          |       | — |   | 5,683 |   |
| Adjusted weighted-average common shares outstanding |       | 25,499                           |       | 26,647                          |       | 25,461 |   | 24,639 |   |
|                                                |       |                             |       |                            |       |   |   |   |   |
| Basic net income (loss) per share                   |       | $                                | (0.03      | )                               | $          | 0.13 |   | $ | (0.10 | ) | $ | 0.57 |   |
| Diluted net income (loss) per share                 |       | $                                | (0.03      | )                               | $          | 0.13 |   | $ | (0.10 | ) | $ | 0.41 |   |

 

For the three and ninemonths ended May 3, 2008, options, unvested restricted stock units andwarrants to purchase 2,937,364 shares of common stock have been excluded fromthe calculation, as their impact would have been anti-dilutive.

 

***Segmentinformation***

 

SFAS No. 131, *Disclosures about Segments of an Enterprise and Related Information*,or SFAS 131, establishes standards for reporting information regardingoperating segments in annual financial statements and requires selectedinformation of those segments to be presented in interim financial reportsissued to stockholders. Operating segments are identified as components of anenterprise about which separate financial information is available forevaluation by the chief operating decision-maker, or decision-making group, inmaking decisions on how to allocate resources and assess performance. TheCompany views its operations and manages its business as one operating segment.

 

***Recentaccounting pronouncements***

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurement,*orSFAS 157.  SFAS 157 establishes a commondefinition to provide enhanced guidance when using fair value to measure assetsand liabilities, establishes a framework for measuring fair value, and expandsdisclosures about such fair value measurements. SFAS 157 is effective forfiscal years beginning after November 15, 2007. The Company is currentlydetermining the impact of implementing SFAS 157, which will be effective forfiscal year 2009.

 

In May 2007, theFASB 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, theFASB 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 ResearchBulletin, or ARB No. 51*, or SFAS 160.  SFAS 160 is effective for financialstatements issued for fiscal years beginning after December 15, 2008.  SFAS 160 establishes and expands accountingand reporting standards for the noncontrolling interest in a subsidiary andclarifies that a noncontrolling interest in a subsidiary is an ownershipinterest in a consolidated entity and should be reported as equity inconsolidated financial statements. The Company is currently determining theimpact of implementing SFAS 160, which will be effective for fiscal year 2010.

 

10

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**3.  Inventories**

 

Net inventories consistof the following at (in thousands):

 
| ** **         | ** ** | **May 3, 2008** | ** **   | **July 28, 2007** | ** ** |
|--------------------|------------|---------------------------|--------------|-----------------------------|------------|
| Raw materials | ** ** | $                         |  23,362 |                        | $          |  14,545 | ** ** |
| Work in process    |       | 1,875                     |         | 1,011                       |       |
| Finished goods     |       | 2,462                     |         | 5,128                       |       |
|               |       | $                         | 27,699       |                        | $          | 20,684 |   |

 

**4. Investments**

 

The following is asummary of the Company’s available-for-sale investments as of May 3, 2008and July 28, 2007 (in thousands):

 
| **Investment Type**                  | ** ** | **Amortized  cost** | ** ** | **Gross  unrealized   gain** | ** ** | **Gross  unrealized  loss** | ** ** | **Fair  value** | ** ** |
|-------------------------------------------|------------|---------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------|------------|
| **As of May 3, 2008** | ** ** | ** **          | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **      | ** ** |
| ** **                                | ** ** | ** **          | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **      | ** ** |
| Corporate                                 |       | $                   | 28,508     |                              | $          | —                      |       | $               | —     |   | $ | 28,508 |   |
| Municipal                                 |       | 600                 |       | —                            |       | —                      |       | 600             |       |
| Total                                     |       | $                   | 29,108     |                              | $          | —                      |       | $               | —     |   | $ | 29,108 |   |
|                                      |       |                |       |                              |       |                        |       |            |       |
| Reported as:                              |       |                |       |                              |       |                        |       |            |       |
| Cash equivalents                          |       | $                   | 25,508     |                              | $          | —                      |       | $               | —     |   | $ | 25,508 |   |
| Short-term investments                    |       | 3,600               |       | —                            |       | —                      |       | 3,600           |       |
| Total                                     |       | $                   | 29,108     |                              | $          | —                      |       | $               | —     |   | $ | 29,108 |   |
|                                      |       |                |       |                              |       |                        |       |            |       |
| **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 |   |

 

The Company accounts forits investments pursuant to SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities,*or SFAS 115*.*All of the Company’s investments are classified as available-for-sale securities and reportedat fair value, with unrealized gains and losses excluded from earnings andreported as a separate component of stockholders’ equity. Gains and losses arenot recorded in earnings until realized. The Company monitors its investmentsfor other than temporary impairment, which results from the carrying value ofthe investments exceeding the fair value. If other than temporary impairment isidentified, the cost basis of the security is written down to fair value andthe amount of the write-down is recorded as a realized loss through earnings.In evaluating unrealized losses for other than temporary impairment, theCompany considers a number of factors including the duration and significanceof the loss. The Company has the ability and intent to hold those investmentswith unrealized losses until a recovery of fair value. As of May 3, 2008,the Company held no securities with an unrealized loss position for more thantwelve months and no realized losses were recorded. All investments mature inless than one year; those that mature in less than ninety days are classifiedas cash equivalents.

 

The Company’s currentlyheld interest bearing auction rate securities, or ARS, are comprised offederally insured student loan backed securities.  During the nine month period ended May 3,2008, the Company’s auction rate securities experienced failures at auction.Uncertainty in credit markets has led to the amount of auction rate securitiessubmitted for sale exceeding the amount of orders for these securities,resulting in failed auction status. Typically, auction rate securities provideliquidity to holders through an auction process that resets the interest rateat predetermined calendar intervals, allowing the holder to roll over theirholdings in the ARS or sell the investment at par value. Because of the recentauction failures, the 

 

11

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securities are not currently liquid, as theCompany is not be able to access such funds until a successful future auctionor redemption of these securities.

 

The Company’s totalauction rate securities at May 3, 2008 had a fair value of $3,600,000 andrepresented approximately 7.8% of the Company’s total liquid assets, whichconsist of cash and cash equivalents and short-term investments. However, theCompany believes its remaining cash and cash equivalents will be sufficient tomeet anticipated cash needs.  Subsequentto May 3, 2008, the Company sold an auction rate security for full parvalue of $2,000,000 and interest through a tender offer. The Company believesthis indicates a favorable trend in the ARS market and as such continues toclassify the remaining ARS as short-term investments.

 

The auction ratesecurities are all AAA rated securities and the underlying assets of the Company’sauction rate securities are student loans backed by the federalgovernment.  Additionally, the governmentis actively pursuing legislation surrounding this issue in order to restore themarket. The Company believes the securities 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 isidentified, the Company may have to record an impairment charge throughearnings with respect 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 as additionalpurchase price in the period it is probable such payment is earned. Pursuant tothe merger agreement, certain outstanding Kailight stock options were convertedinto Optium stock options. Of the total options granted to Kailight employeesand consultants, 9,652 options with an exercise price of $0.11 were fullyvested and assigned a fair value of $148,776 using the Black-Scholes optionpricing model and were accordingly recorded as purchase price.

 

The transaction wasaccounted for as a purchase in accordance with SFAS 141. As a result, theassets acquired and liabilities assumed were accounted for at fair value on theacquisition date, and the results of operations of Kailight are included in theCompany’s consolidated results of operations from the acquisition date.Management is responsible for the valuation of net assets acquired, includingin-process research and development, and considered a number of factors,including valuations and appraisals, when estimating the fair market values andestimated useful lives of the acquired assets and liabilities. The Companybelieves the acquisition provides synergies with existing product lines andexpands on our current transceiver capabilities, resulting in an excesspurchase price over the fair value of identifiable assets. The excess purchaseprice of $26,089,700 has been recorded as goodwill.

 

The Kailight purchaseprice was allocated as follows (in thousands):

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

 

The following table summarizes the components ofthe 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   | )      |

 

12

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Kailight’s developmental project that had notreached technological feasibility and had no future alternative use wasclassified as acquired in-process research and development and expensed at theacquisition date. Efforts required to develop acquired in-process research anddevelopment into commercially viable products include the planning, designing,prototyping, verification and testing activities that are necessary toestablish that the products can be produced to meet their designspecifications, including functions, features and technical performancerequirements. The $10,000,000 of acquired in-process research and developmentwas expensed during fiscal year 2007 through the consolidated statement ofoperations as a separate component of operating expenses at the acquisitiondate.

 

The acquired in-processresearch and development expense of $10,000,000 relates to the acquired 40Gb/sproject and was determined using the income approach assuming cash flows overten years and using risk adjusted discount rates ranging from 20% to 30% forthe four defined segments of the 40Gb/s project. The discount rates were basedon fundamental data for a group of market participants, as well as venturecapital studies. The ten year life is based on the life expectancy of theproducts in the market place with an assumed growth rate of up to 314%diminishing to 10% and no assumed terminal value. We began to recognize revenuerelated to these products in fiscal year 2008.

 

*Pro forma financial information*

 

The following unaudited pro forma financial informationrepresents the Company’s consolidated results from operations for the periodindicated, as if the acquisition of Kailight had occurred at the beginning ofthe period presented. Unaudited pro forma information is presented forillustrative purposes only and is not necessarily indicative of the results ofoperations that would have actually been reported had the acquisition occurredat the beginning of the periods presented, nor is it necessarily indicative offuture results of operations. These pro forma results are based upon therespective historical financial statements of the respective companies, and donot incorporate, nor do they assume, any benefits from cost savings orsynergies of operations of the combined Company. Unaudited pro forma results ofoperations are presented after giving effect to certain adjustments, includingadjustments to reflect decreased interest income on the cash used to financethe acquisitions, and increased income taxes at a rate consistent with theCompany’s effective tax rate in each period.

 

*Pro forma results*

* *
| ** **                                    | ** ** | **Three months ended**                               | ** ** | **Nine months ended**                                | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **April 28, 2007**                                   | ** ** | **April 28, 2007**                                   | ** ** |
| ** **                                    | ** ** | **(in thousands, except  per share data)** | ** ** | **(in thousands, except  per share data)** | ** ** |
| Pro forma revenues                            |       | $                                                              | 34,585     |                                                           | $          | 98,797 |   |
| Pro forma net income                          |       | $                                                              | 2,381      |                                                           | $          | 5,612 |   |
| Pro forma net income per share — basic   |       | $                                                              | 0.09       |                                                           | $          | 0.32 |   |
| Pro forma net income per share — diluted |       | $                                                              | 0.09       |                                                           | $          | 0.23 |   |
| Reported net income                           |       | $                                                              | 3,418      |                                                           | $          | 10,039 |   |
| Reported net income per share — basic    |       | $                                                              | 0.13       |                                                           | $          | 0.57 |   |
| Reported net income per share — diluted  |       | $                                                              | 0.13       |                                                           | $          | 0.41 |   |

 

The results of theKailight acquisition have been included in the accompanying condensedconsolidated financial statements since the date of acquisition.

 

*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 nine months ended May 3, 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 

 

13

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WSS ROADMs are expected to drive cost efficiencies including improvedflexibility to add more unique software-defined features.

 

**6.  Stockholders’ Equity**

 

*Commonstock*

 

The Company has authorized under its Certificateof Incorporation, as amended October 10, 2006, the issuance of 100,000,000shares of common stock, of which 729,361 were designated Series 2nonvoting common stock. The Series 2 nonvoting common stock automaticallyconverted into voting common stock upon the closing of the Company’s initialpublic offering when the conversion of all shares of preferred stock occurred.

 

On October 9, 2006, the Company’s Board ofDirectors approved a 1-for-12 reverse stock split of the Company’s issuedcommon stock, subject to stockholder approval. On October 10, 2006, theCompany’s stockholders approved the reverse stock split. The reverse stocksplit became effective on October 10, 2006, upon the filing by the Companyof an amendment to the Certification of Incorporation with the DelawareSecretary of State giving effect to the reverse stock split. Common share andcommon share-equivalents have been restated to reflect the reverse stock splitfor all periods presented.

 

*Stockincentive plan*

 

EffectiveJuly 30, 2006, the Company adopted SFAS 123R, which requires companies torecognize in their statement of operations all share-based payments, includinggrants of stock options, based on the grant date fair value. The Companyadopted SFAS 123R using the prospective-transition method. Stock-basedcompensation is measured at the grant date, based on the fair value of theaward, and expensed over the requisite service period. The application of SFAS123R involves significant amounts of judgment in the determination of inputsinto the Black-Scholes model, which the Company uses to determine the value ofstock options. Inherent in this model are assumptions related to expected stockprice volatility, option life, risk free interest rate and dividend yield.While the risk free interest rate and dividend yield are less subjectiveassumptions, typically based on factual data derived from public sources, theexpected stock-price volatility and option life assumptions require a greaterlevel of judgment which make them critical accounting estimates. The fair valueof each stock 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.

 

Prior to the adoption of SFAS 123R, the Company accounted forits stock-based compensation granted to employees in accordance with theprovisions of the Accounting Principles Board, or APB, Opinion No. 25,*Accounting for Stock Issued to Employees*,or APB 25. Under APB 25, compensation expense is based on the difference, if any,on the date of the grant, between the fair value of the Company’s stock and theexercise price of the option. The Company recorded stock-based compensation tothe extent that the exercise price was less than the fair value of the Company’sstock 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 

 

14

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the methodology prescribed under SFAS 123, theCompany would have recorded approximately $102,600 and $307,900 and $137,700and $350,600 as stock based compensation in selling, general and administrativeexpenses for the three and nine months ended May 3, 2008 and April 28,2007, respectively, related to the grants issued prior to the adoption of SFAS123R, as presented below (in thousands):

 
| ** **                                                                                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **May 3, 2008**        | ** ** | **April 28,2007**          | ** ** | **May 3,2008** | ** ** | **April 27, 2007** | ** ** |
| ** **                                                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss), as reported                                                            |       | $                                | (662       | )                               | $          | 3,418 |   | $ | (2,541 | ) | $ | 10,039 |   |
| Add: Stock-based compensation under APB 25                                           |       | 86                               |       | 119                             |       | 255 |   | 376 |   |
| Add: Stock-based compensation under SFAS 123R                                             |       | 755                              |       | 277                             |       | 2,387 |   | 432 |   |
| Less: Stock-based compensation expense determined under fair value  method for all awards |       | (826                             | )          | (408                            | )          | (2,596 | ) | (766 | ) |
| Net income (loss), pro forma                                                              |       | $                                | (647       | )                               | $          | 3,406 |   | $ | (2,495 | ) | $ | 10,081 |   |
| Net income (loss) per share:                                                              |       |                             |       |                            |       |   |   |   |   |
| Reported net income (loss) per share - basic                                              |       | $                                | (0.03      | )                               | $          | 0.13 |   | $ | (0.10 | ) | $ | 0.57 |   |
| Reported net income (loss) per share - diluted                                            |       | (0.03                            | )          | 0.13                            |       | (0.10 | ) | 0.41 |   |
| Pro forma net income (loss) per share - basic                                             |       | (0.03                            | )          | 0.13                            |       | (0.10 | ) | 0.57 |   |
| Pro forma net income (loss) per share - diluted                                           |       | (0.03                            | )          | 0.13                            |       | (0.10 | ) | 0.41 |   |

 

During the nine months ended May 3, 2008,259,600 stock options with a weighted average grant date fair value of $5.48per option and 591,535 unvested restricted stock units with a weighted averagegrant date fair value of $8.52 were granted under the Company’s 2006 StockOption and Incentive Plan (the “2006 Plan”). The compensation expense chargedagainst earnings for SFAS 123R stock-based compensation for the first ninemonths of fiscal year 2008 was approximately $3,510,100. The pre-tax impact ofstock-based compensation expense was $0.14 per basic and diluted share,respectively, in the nine months ended May 3, 2008. As of May 3,2008, there was approximately $6,041,400 in unrecognized compensation expenserelated to non-vested stock options under the Company’s stock plans. Thisunrecognized expense is expected to be recognized as compensation expense overthe weighted-average vesting period of approximately four years.

 

In fiscal year 2000, the Company adopted the 2000Optium Corporation Stock Incentive Plan, as amended (the “2000 Plan”), underwhich 3,457,073 shares of common stock were reserved for issuance. As of May 3,2008, no shares are available for future grants under the 2000 Plan. Under theterms of the 2000 Plan, the Company could grant nonqualified or incentive stockoptions, restricted stock, restricted stock units or make awards of stockappreciation rights to directors, officers, employees, and consultants of theCompany. Option grants under the 2000 Plan generally vest over four years andexpire ten years from the date of grant. All options and shares cancelled orforfeited after October 10, 2006 (the effective date of the 2006 Plan asdefined below) under the 2000 Plan are added back to the balance of sharesreserved for issuance under the 2006 Plan.

 

Stock option transactions under the 2000 Plan forthe nine months ended May 3, 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                                 |       | (7,526                      | )          | $0.84  - $17.50                         |       | $                                              | 5.50       |   |
| Exercised                                 |       | (34,357                     | )          | $0.48  - $9.24                          |       | $                                              | 0.80       |   |
| Outstanding May 3, 2008              |       | 1,652,431                   |       | $0.48  - $17.50                         |       | $                                              | 5.03       |   |
| Options exercisable—May 3, 2008 |       | 1,171,083                   |       | $0.48  - $17.50                         |       | $                                              | 3.80       |   |

 

During the nine months ended May 3, 2008,certain employees exercised options to purchase 34,357 shares of the Company’scommon stock for proceeds of $27,600. These option exercises had an intrinsicvalue of approximately $231,800 and were granted under the 2000 Plan.

 

The weighted average remaining life of the 2000Plan stock options as of May 3, 2008 is 7.0 years.

 

During the first quarterof fiscal year 2007, the Company adopted the 2006 Optium Corporation StockOption and Incentive Plan, as amended (the “2006 Plan”), under which 283,333shares of common stock were reserved for issuance. The 

 

15

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2006 Plan provisions provide for an automaticincrease at the beginning of every quarter of each fiscal year in the number ofshares reserved and available for issuance under the plan by a number equal to0.75% of the then outstanding number of shares of common stock. The 283,333shares reserved does not include the additional 190,059, 190,146, 190,732,190,783, 191,074 and 191,691 shares reserved as of the first day of the Company’sfiscal year 2007 third and fourth quarters and fiscal year 2008 first, second,third and fourth quarters, respectively, or the aggregate substitute optionsgranted in the Kailight acquisition.  Inaddition, the number of shares reserved for issuance under the 2006 Plan isautomatically increased by the number of shares and options cancelled orforfeited under the 2000 Plan after October 10, 2006. Cancellations orforfeitures under the 2006 Plan are also added back to increase the totalnumber of shares available for issuance under the 2006 Plan, with the exceptionof those options granted in connection with the Kailight acquisition.   During the nine months ended May 3,2008, 49,829 cancelled or forfeited shares were added to the number of sharesreserved for issuance under the 2006 Plan pursuant to these provisions. Underthe terms of the 2006 Plan, the Company may grant nonqualified or incentivestock options, restricted stock, restricted stock units or make awards of stockappreciation rights to directors, officers, employees, and consultants of theCompany. The exercise price for option grants shall be determined by the Boardof Directors on the date of grant, but in no event shall the exercise price ofincentive stock options be less than 100% of the fair market value of thecommon stock (110% for any incentive stock option granted to a person owningmore than 10% of the total combined voting power of all classes of stock asdetermined by the Board of Directors on the date of grant). Option grants underthe 2006 Plan generally vest over four years and expire ten years from the dateof grant. As of May 3, 2008, 862,285 options for the purchase of commonstock have been granted under the 2006 Plan. All options cancelled or forfeitedunder the 2006 Plan are added back to the balance of shares reserved forissuance under the Plan.

 

Stock option transactions under the 2006 Plan forthe nine months ended May 3, 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                                    |       | 259,600                     |       | $6.33  - $11.13                         |       | $                                              | 8.20       |   |
| Forfeited                                  |       | (54,936                     | )          | $6.33  - $328.63                        |       | $                                              | 15.73      |   |
| Exercised                                  |       | —                      |       | —                                  |       | —                                         |       |
| Outstanding—May 3, 2008          |       | 787,239                     |       | $0.11  - $1,110.24                      |       | $                                              | 15.82      |   |
| Options exercisable— May 3, 2008 |       | 127,068                     |       | $0.11  - $1,110.24                      |       | $                                              | 19.34      |   |

 

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 pricesof $328.63, $657.26, and $1,110.24, respectively, all of which were fullyvested. The stock compensation expense related to the fully vested options withan exercise price of $0.11 was recorded as additional purchase price.

 

As of May 3, 2008,1,434,336, 106,874, and 787,239 shares were authorized, available for issuanceand subject to outstanding awards, respectively, under the 2006 Plan. Theweighted average remaining life of the 2006 Plan stock options as of May 3,2008 is 9.1 years. The detail of all options exercisable under the 2000 Planand the 2006 Plan as of May 3, 2008 is as follow:

 
| **Number of  options** | ** ** | **Range of  exercise prices** | ** ** | **Weighted average  exercise price** | ** ** | **Weighted average  remaining life** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| 599,396                     |       | $0.11 - $0.96                           |       | $                                              | 0.59       |                                           | 5.5        |   |
| 114,229                     |       | $1.08 - $3.96                           |       | $                                              | 1.60       |                                           | 7.0        |   |
| 220,905                     |       | $5.25 - $5.76                           |       | $                                              | 5.52       |                                           | 7.8        |   |
| 363,415                     |       | $9.24 -$23.56                           |       | $                                              | 13.79      |                                           | 8.3        |   |
| 206                         |       | $328.63 -$1,100.24                      |       | $                                              | 711.72     |                                           | 9.0        |   |

 

The total intrinsic value of the fully vested andexercisable options above, had they been exercised on May 3, 2008, wasapproximately $5,700,600.

 

16

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The restricted stock unit transactions under the2006 Plan for the nine months ended May 3, 2008 are summarized as follows:

 
| ** **                           | ** ** | **Number of  restricted stock  units** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| Balance—July 28, 2007      |       | —                                           |       |
| Granted                              |       | 591,535                                          |       |
| Forfeited                            |       | (9,551                                           | )          |
| Vested                               |       | (133,269                                         | )          |
| Unvested balance at May 3, 2008 |       | 448,715                                          |       |

 

The per stock unit weighted average fair value ofthe restricted stock units granted under the 2006 Plan for the nine monthsended May 3, 2008 was $8.52 which was based on the closing stock price ofthe Company on the date of grants.  Therestricted stock units have varying vesting schedules, dependent on the grantdetails. As of May 3, 2008, there was approximately $3,196,900 inunrecognized compensation expense related to non-vested restricted stock units.This unrecognized expense is expected to be recognized as compensation expenseover the requisite service periods of the respective grants.  The weighted average remaining vesting periodfor restricted stock units as of May 3, 2008 is 1.5 years. All forfeituresor cancellations of restricted stock units are added back to the balance ofshares reserved for issuance under the 2006 Plan. Additionally, those sharesthat are retained by the Company to satisfy tax withholding obligations areadded back to the balance of shares reserved for issuance under the 2006 Plan.

 

*Deferredcompensation*

 

The Company’s Board of Directors has determinedthe fair value of all stock option grants on the dates of the grants. In April 2006,as a result of improved operating performance, the execution of a letter ofintent to acquire Engana Pty Limited, or Engana, external market factorsaffecting the Company’s market sector, as well as feedback from investmentbankers indicating that the Company was now a viable initial public offeringcandidate, the Board of Directors retrospectively determined the fair value ofthe Company’s common stock for all stock options granted during the threefiscal quarters beginning May 1, 2005 and ending January 28, 2006. Asa result of the Company’s retrospective determinations of fair value of thecommon stock for prior option grant dates of June 23, 2005, September 21,2005 and November 7, 2005, the Company recorded an aggregate ofapproximately $125,000 of deferred stock-based compensation on the balancesheet for the stock options granted on those dates. The amount of deferredstock-based compensation for each stock option grant on these dates wascalculated based on the difference between the retrospectively determined fairvalue per share of the common stock at the date of the grant and the exerciseprice of the option. The Company will amortize this deferred stock-basedcompensation expense over the vesting period of the applicable stock optiongrants, subject to adjustment for any stock options which are cancelled oraccelerated.

 

In June 2006, based on the Company’sretrospective determinations of fair value of its common stock, the Companyoffered to the recipients of stock option grants on June 23, 2005, September 21,2005 and November 7, 2005, the ability to amend the terms of their stockoptions to increase their per share exercise price from $0.96 to $1.08 in thecase of June 23, 2005 grants, from $1.20 to $2.40 in the case of the September 21,2005 grants and from $1.20 to $3.96 in the case of the November 7, 2005grants. All of such stock option recipients have chosen to amend their stockoptions to a higher exercise price in order to avoid potential adverse personalincome tax consequences. There was no additional consideration offered to theemployees in exchange for amending their stock options.

 

In relation to these amended stock options, theCompany recorded deferred stock-based compensation of approximately $1.5million in the balance sheet in addition to the approximately $125,000 indeferred stock-based compensation referenced above. The amount of additionaldeferred stock-based compensation for each amended stock option was calculatedbased upon the difference between the amended exercise price of $1.08 pershare, $2.40 per share or $3.96 per share, as applicable, and $10.92 per share,the valuation by the Board of Directors of the per share fair value of ourcommon stock as of the date of amendment of the stock options. The Company willamortize this additional deferred stock-based compensation expense over thevesting period of the applicable stock option grants, subject to adjustment forany stock options which are cancelled or accelerated. During the nine monthsended May 3, 2008, total stock-based compensation expense related toamortization of the deferred compensation balance was approximately $375,420.

 

17

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**7. Accrued Expenses**

 

Accrued expenses consist of the following at (inthousands):

 
| ** **                | ** ** | **May 3, 2008** | ** ** | **July 28, 2007** | ** ** |
|---------------------------|------------|---------------------------|------------|-----------------------------|------------|
|                      |       |                      |       |                        |       |
| Fees and expenses payable |       | $                         | 1,293      |                        | $          | 1,531 |   |
| Compensation and benefits |       | 2,666                     |       | 1,789                       |       |
| Professional services     |       | 1,139                     |       | 1,012                       |       |
| Security deposit          |       | 57                        |       | 57                          |       |
|                      |       | $                         | 5,155      |                        | $          | 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 asfollows (in thousands):

 
| Ending balance July 29, 2006                 |   | $    | 223    |   |
|---------------------------------------------------|--------|------|--------|--------|
| Warranty accruals                                 |   | 428  |   |
| Warranty repairs                                  |   | (292 | )      |
| Ending balance July 28, 2007                 |   | $    | 359    |   |
| Warranty accruals                                 |   | 327  |   |
| Warranty repairs                                  |   | (305 | )      |
| Effect of foreign currency translation adjustment |   | 4    |   |
| Ending balance May 3, 2008                   |   | $    | 385    |   |

 

**9.  Income Taxes**

 

In July 2006, theFASB issued FASB Interpretation 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 income taxpositions. 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 May 3, 2008, the Company’stotal liability for unrecognized net tax benefits is $484,000, which relatesto the Company’s current position regarding its Federal R&D creditcalculation and support.  The Company hasnot undergone an audit by either the Federal or Pennsylvania taxing authoritiessince its inception, nor has it undergone an audit by either the Australian orIsraeli taxing authorities since the acquisitions of its respectivesubsidiaries.  Therefore, all of theCompany’s tax years remain open to audit, subject to the appropriate statutesof limitations.  Consistent with past practice, the Companywill record interest and penalties associated with uncertain tax positions inincome tax expense.

 

At May 3,2008, the Company had U.S. federal net operating loss, or NOL, carryforwards of approximately $20.0 million which expire through 2025. NOL carryforwards and credits are subject to review and possible adjustments by theInternal Revenue Service and may be limited by the occurrence of certainevents, including significant changes in ownership interests. The Companyperformed an analysis to determine whether an ownership change under Section 382of the Internal Revenue Code had occurred. The effect of an ownership changewould be the imposition of an annual limitation on the use of the net operatingloss carry forwards attributable to periods before the change.  As of May 3, 2008, the Company believesthere are no limitations on the use of these federal NOLs, other than thoserelated to the Company’s definitive merger with Finisar Corporation anddiscussed in the subsequent events footnote, herein.

 

In connection with the acquisition of Engana PtyLimited, (which was subsequently renamed Optium Australia Pty Ltd) in March 2006,the Company 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 

 

18

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business of the Company. This is a factual testthat can only be determined in the year in which the NOL carry forward issought to be utilized. There is no time limit on the use of Australian NOLcarry forwards. The acquired net operating losses have been fully offset by avaluation allowance. Upon utilization of such NOL carry forwards, goodwill willbe reduced. Losses since the acquisition have been fully offset by a fullvaluation allowance due to the history of operating losses.

 

Since acquisition, Optium Australia Pty Ltd. has incurredadditional NOLs of $14.0 million, which the Company believes can be used tooffset future Australian income. The Company has recorded a full valuationallowance on the Australian NOLs due to the lack of profitability to date ofthe Australian operations.

 

In connection with the Kailight Photonics, Inc.acquisition, the Company acquired U.S. federal NOL carry forwards in the amountof approximately $7.5 million. The Company will perform an analysis todetermine whether a Section 382 ownership change has occurred, but theCompany expects the use of these NOLs will be significantly limited.Accordingly, management in its allocation of the purchase price recorded novalue to the acquired deferred tax assets. If any of these acquired NOLcarryforwards are utilized, goodwill will be reduced.

 

In assessing the realizability of deferred taxassets, management concluded it is “more likely than not” that some portion orall of the U.S. deferred tax assets will be realized. The ultimate realizationof these deferred tax assets is dependent upon the generation of future taxableincome during those periods in which those temporary differences becomedeductible or within the periods before NOL carry forwards expire. During theyear ended July 28, 2007, based on cumulative U.S. taxable net earningsfor the past three years and the expected future profitability of the U.S.operations, the company reversed the valuation allowance on its net U.S.deferred tax assets and recognized an income tax benefit of approximately $13.0million.  The current quarterly and year to date consolidated effectivetax rates of 24.7% and 3.2%, respectively are less than the U.S. statutory rateof 35% primarily due to foreign losses for which no income tax benefit wasrecorded and U.S. research and development tax credits available to the Companyunder U.S. tax law.

 

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

 
| ** **                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **May 3,2008**              | ** ** | **April 28,2007**          | ** ** | **May 3,2008** | ** ** | **April 28,2007** | ** ** |
| Tax at statutory rate         |       | 35.0                             | %          | 35.0                            | %          | 35.0 | % | 35.0 | % |
| State taxes, net of federal   |       | 2.1                              |       | 7.2                             |       | 7.3 |   | 5.1 |   |
| R&D credits               |       | 2.2                              |       | —                          |       | 3.3 |   | — |   |
| Foreign rate differential     |       | (0.9                             | )          | 1.7                             |       | (4.8 | ) | 1.7 |   |
| Change in valuation allowance |       | (5.7                             | )          | (39.0                           | )          | (30.9 | ) | (35.7 | ) |
| Other                         |       | (8.0                             | )          | 0  .2                           |       | (6.7 | ) | — |   |
| Effective tax rate            |       | 24.7                             | %          | 5.1                             | %          | 3.2 | % | 6.1 | % |

 

**10.  Commitments and Contingencies**

 

*Contingencies*

 

In December 2004,the Company terminated its relationship with Appletec Limited, an Israeli companythat was assisting us with our sales efforts in Israel. Beginning in May 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 

 

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to determine the ultimate outcome of this secondlitigation.  During the three and ninemonths ended May 3, 2008, sales of the Company’s 1550 nm HFC externallymodulated transmitter and 1550 nm HFC quadrature amplitude modulatedtransmitters, together, represented approximately 5% and less than 5%,respectively, of the Company’s revenues. The plaintiffs are seeking for thecourt to declare that Optium has willfully infringed on such patents and to beawarded up to three times the amount of any compensatory damages found, if any,plus any other damages and costs incurred. The Company intends to vigorouslydefend the claims asserted against it and believes that it has meritoriousdefenses.

 

During mid-2007,we became aware that certain of our analog RF over fiber products may,depending on end use and customization, be subject to the International Trafficin Arms Regulations, or ITAR. Accordingly, we filed a detailed voluntarydisclosure with the United States Department of State, describing the detailsof possible inadvertent ITAR violations with respect to the export of a limitednumber of certain prototype products, and related technical data and defenseservices. We may have also made unauthorized transfers of ITAR-restrictedtechnical data and defense services to foreign persons in our workplace.  We have provided additional information uponrequest to the Department of State with respect to this matter.  The Department of State encourages voluntarydisclosures and generally affords parties mitigating credit under suchcircumstances. We nevertheless could be subject to continued investigation andpotential regulatory consequences ranging from a no-action letter, governmentoversight of facilities and export transactions, monetary penalties, and inextreme cases, debarment from government contracting, denial of exportprivileges 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 a materialadverse effect on its business, financial condition, results of operations orcash flows of the Company.

 

*Employmentagreements*

 

The Company has employment agreements with certainofficers and key employees. The agreements are for one to three year periodsthat expire in August 2008 or April 2009, subject to automaticrenewal. According to the terms of the agreements, if there is a terminationwithout cause, as defined, a termination for good reason, as defined, of theemployee in certain situations, or if the agreements are not renewed, theCompany must pay, depending on the agreement, severance of one to two yearssalary and bonus.

 

**11.  Major Customers**

 

Accounts receivable potentially subject theCompany to a concentration of credit risk. The Company currently derives itsrevenues from a variety of companies in many different geographic locationsinternationally and in the United States operating within thetelecommunications and cable TV industry.

 

Revenues from direct customers, including contractmanufacturers, comprising 10% or more of total revenues during the three andnine months ended May 3, 2008 and April 28, 2007, respectively wereas follows:

 
| ** ** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **May 3, 2008**        | ** ** | **April 28, 2007**    | ** ** | **May 3, 2008** | ** ** | **April 28, 2007** | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer A |       | 16                               | %          | 2                               | %          | 12 | % | 2 | % |
| Customer B |       | 15                               | %          | 21                              | %          | 14 | % | 20 | % |
| Customer C |       | 14                               | %          | 9                               | %          | 11 | % | 13 | % |
| Customer D |       | 7                                | %          | 24                              | %          | 13 | % | 26 | % |
| Customer E |       | 9                                | %          | 7                               | %          | 13 | % | 7 | % |

 

Accounts receivable from these five customers at May 3,2008 represented 58% of total accounts receivable.

 

**12.  Related Party Transactions**

 

During the three and nine months ended May 3,2008 and April 28, 2007, the Company paid a sales and marketingconsultant, who is the brother of the president and chief executive officer ofthe Company, $43,900 and $115,700 and $34,200 and $100,800, respectively, incash compensation during such fiscal periods. In addition, during the nine months ended May 3, 2008, the Companygranted, for no additional consideration, 2,500 restricted shares of commonstock with a fair market value of $26,000. These stock units vest quarterlyover a two year period, beginning on January 1, 2008.

 

20

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During the three and nine months ended May 3,2008 and April 28, 2007, the Company used Gertel Asset Management, acompany that provides jet air transportation, for certain business travel byour executive officers and other employees. The Company’s chief executive officer has an ownership interest inGertel Asset Management. Payments to Gertel Asset Management by the Companywere approximately $31,400 and $50,600 in the three and nine months ended May 3,2008 and $13,000 and $50,900 in three and nine months ended April 28,2007, respectively, during such periods.

 

Amounts paid to related parties represented valuesconsidered fair and reasonable, reflective of an arm’s length transaction.

 

**13.  Subsequent Event**

 

On May 16, 2008 the Company announced it had entered into adefinitive merger agreement with Finisar Corporation.  Finisar Corporation, a technology leader forfiber optic components and subsystems and network performance test andmonitoring systems, will be combined with Optium Corporation through anall-stock merger, creating the world’s largest supplier of optical components,modules and subsystems for the communications industry.  Under the terms of the merger, which has beenapproved by the boards of directors of both companies, Optium stockholders willreceive 6.262 Finisar shares for each Optium share they own. Outstanding Optiumoptions and warrants will represent a corresponding right to acquire a numberof Finisar shares based on the above exchange ratio. Shares of the combinedcompany will continue to trade on the NASDAQ Select Market under the symbol FNSR.The proposed combination is subject to the approval of both companies’stockholders and other customary conditions including required regulatory andother approvals. The merger is expected to close in the third quarter ofcalendar year 2008.

 

It is anticipated that the merger will impact various key accountingissues and assumptions currently taken by Optium Corporation.  They include possible limitations on thefuture use of the Company’s federal, state and international NOL carryforwardsand acceleration of vesting of certain outstanding stock options and restrictedstock units that will result in accelerated stock compensation expense underFASB 123R.  Additionally, futurepayments of up to $5,000,000 to be made to Kailight shareholders based upon theachievement of certain performance milestones may be accelerated by the merger.At the current time, the potential changes in these tax, compensationexpense and milestone payments cannot be determined or estimated, as the mergeris not final.

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINEMONTHS ENDED MAY 3, 2008 AND COMPARABLE PERIODS ENDED APRIL 28, 2007**

 

*The following discussion andanalysis of our financial condition and results of operations should be read inconjunction with the Management’s Discussion and Analysis of FinancialCondition and Results of Operations and the consolidated financial statementsand notes thereto included in our Annual Report on Form 10-K**filed with the Securities and Exchange Commission on October 24,2007.*

 

*In addition to historicalinformation, Management’s Discussion and Analysis of Financial Condition andResults of Operation and other items in this Quarterly Report on Form 10-Qcontain forward-looking statements based on current expectations that involverisks, uncertainties and assumptions. Our actual results may differ materiallyfrom those anticipated in these forward-looking statements as a result ofvarious factors. 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 terms areintended to identify forward-looking statements. Although management believesthat the expectations reflected in these forward-looking statements arereasonable at the time they are made, we can give no assurance that theseexpectations will prove to be correct. We undertake no obligation to publiclyrevise any forward-looking statement to reflect circumstances or events afterthe date of this document.*

 

**Executive Overview**

 

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

 

**Background**

 

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

 

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

 

**CriticalAccounting Policies**

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by generally accepted 

 

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accounting principlesfor complete 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 financial statementsfor these interim periods have been included.There have been no material changes to the criticalaccounting policies and estimates as disclosed in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission on October 24, 2007.

 

**Recent Accounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurement*,or SFAS 157. SFAS 157 establishes a common definition to provide enhancedguidance when using fair value to measure assets and liabilities, establishes aframework for measuring fair value, and expands disclosures about such fairvalue measurements. SFAS 157 is effective for fiscal years beginning after November 15,2007. We are currently determining the impact of implementing SFAS 157, whichwill be effective for 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 ResearchBulletin, or ARB No. 51*, or SFAS 160.  SFAS 160 is effective for financialstatements issued for fiscal years beginning after December 15, 2008.  SFAS 160 establishes and expands accountingand reporting standards for the noncontrolling interest in a subsidiary andclarifies that a noncontrolling interest in a subsidiary is an ownershipinterest in a consolidated entity and should be reported as equity inconsolidated financial statements. The Company is currently determining theimpact of implementing SFAS 160, which will be effective for fiscal year 2010.

 

**Resultsof operations**

 

***Comparisonof Results for the Three and Nine Months Ended May 3, 2008 to the Threeand Nine Months Ended April 28, 2007***

 

In order to more fully understand the comparison of theresults of operations for the three and nine months ended May 3, 2008 tothe three and nine months ended April 28, 2007, it is important to notethe following significant changes in our operations that occurred in fiscalyear 2007:

 

·        Effective July 10, 2007, we acquiredcertain intellectual property assets of Microdisplay Corporation related to thedesign 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 the Kailight acquisitionhave been included in the condensed consolidated statements of 

 

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operations sincethe date of acquisition.

 

***Revenue***

 

Total revenue increased 30.3% to approximately$45.0 million for the three months ended May 3, 2008 from approximately$34.5 million for the three months ended April 28, 2007.  Total revenue increased 23.0% toapproximately $121.4 million for the nine months ended May 3, 2008 fromapproximately $98.7 million for the nine months ended April 28, 2007. Thisincrease in revenue is primarily attributable to increases in sales of ourROADM product line of approximately $7.4 million and $16.0 million,respectively in the three and nine months ended May 3, 2008, as comparedto the three and nine months ended April 28, 2007. Our ROADM sales in thethree and nine months ended April 28, 2007 were only $1.0 million and $1.2million, respectively and did not significantly contribute to our overallrevenue.  Additionally, sales ofapproximately $2.3 million and $4.9 million of our 40Gb/s transceivers duringthe three and nine months ended May 3, 2008, respectively, contributed tothe increase in revenues. The 40Gb/s products were not released to market forsale until late fiscal year 2007 and did not contribute to revenues for thethree and nine months ended April 28, 2007.

 

End customers are defined as those customers whopurchase our products directly or through contract manufacturers. Revenues fromend customers comprising 10% or more of total revenues during the three andnine months ended May 3, 2008 and April 28, 2007, respectively wereas follows:

 
| ** ** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **May 3, 2008**        | ** ** | **April 28, 2007**    | ** ** | **May 3, 2008** | ** ** | **April 28, 2007** | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer A |       | 26                               | %          | 7                               | %          | 19 | % | 10 | % |
| Customer B |       | 16                               | %          | 24                              | %          | 17 | % | 23 | % |
| Customer C |       | 13                               | %          | 15                              | %          | 17 | % | 14 | % |
| Customer D |       | 8                                | %          | 26                              | %          | 14 | % | 28 | % |

 

Our revenues continue to be driven by acceleratinginvestment in bandwidth capacity expansion to support growing video transporttraffic, including on-demand internet video, IPTV and expanded HD cable TVofferings, as well as G3+ and G4 cellular backhaul systems.

 

***Gross profit***

 

Gross profit increased 27.5% to approximately$11.9 million for the three months ended May 3, 2008 from approximately$9.4 million for the three months ended April 28, 2007. Gross profitincreased 16.0% to approximately $32.5 million for the nine months ended May 3,2008 from approximately $28.0 million for the nine months ended April 28,2007. The increase in gross profit was primarily attributable to increases inrevenues during the three and nine months ended May 3, 2008, as comparedto the three and nine months ended April 28, 2007. Gross margin decreasedto 26.5% from 27.1% for the three months ended May 3, 2008 as compared tothe three months ended April 28, 2007. Gross margin decreased to 26.7%from 28.4% for the nine months ended May 3, 2008 as compared to the ninemonths ended April 28, 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 product lines,as well as pricing and mix.

 

***Research andproduct development***

 

Research and product development expensesincreased 82.0% to approximately $6.1 million for the three months ended May 3,2008 from approximately $3.4 million for the three months ended April 28,2007. Research and product development expenses increased 73.8% toapproximately $17.2 million for the nine months ended May 3, 2008from approximately $9.9 million for the nine months ended April 28, 2007.The increases in research and product development expenses for the three andnine months ended May 3, 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 the numberof engineering projects to further expand our product portfolio.

 

We had increases of approximately $1.8 million and$4.7 million for the three and nine months ended May 3, 2008,respectively, as compared to the three and nine months ended April 28,2007, primarily attributable to research and product development effortsconnected to our ROADM and 40Gb/s product lines.  Additionally, we incurred increases instock-based compensation contained within research and product developmentexpense of approximately $0.3 million and $1.1 million in the 

 

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three and nine months ended May 3, 2008,respectively, as compared to the three and nine months ended April 28,2007, primarily associated with increased headcount and the issuance of certainemployee bonuses in restricted stock units. We experienced increased labor and associated benefits costs ofapproximately $0.5 million and $1.3 million in our U.S. research and productdevelopment operations in the three and nine months ended May 3, 2008 ascompared to the same periods in the prior year.

 

Our development and release of new products duringour fiscal year 2008 has and will continue to significantly impact our researchand product development expenses. We expect these costs to continue to increaseas we undertake additional research and product development projects as wecontinue to expand our product suite. The expansion of research and productdevelopment both internally and as a result of acquired operations are expectedto continue to expand our product suite.

 

***Selling,general and administrative***

 

Selling, general and administrative expensesincreased 90.2% to approximately $7.1 million for the three months ended May 3,2008 from approximately $3.7 million for the three months ended April 28,2007. Selling, general and administrative expenses increased 98.5% toapproximately $19.6 million for the nine months ended May 3, 2008 fromapproximately $9.9 million for the nine months ended April 28, 2007.

 

We experienced increased costs for the additionalinfrastructure necessary to support our revenue growth. These costs includedincreased labor costs as a result of additional headcount and additional legaland other professional fees, as well as additional costs of compliance with theSarbanes-Oxley Act of 2002. Additionally, we incurred increases in stock-basedcompensation contained within selling, general and administrative expense ofapproximately $0.5 million and $1.8 million in the three and nine months ended May 3,2008, respectively as compared to the three and nine months ended April 28,2007. In the three and nine months ended May 3, 2008 approximately $0.1million and $0.4 million, respectively, of stock-based compensation expensecharged to our income statement was related to restricted stock unit grantsmade to employees and executives under the Executive Officer and USNon-Executive Employee Fiscal Year 2008 Bonus Plans.  In comparison, we incurred approximately $0.9million of bonus expense in the nine months ended April 28, 2007.

 

We also incurred an increase of approximately $2.5million of patent litigation expenses in the nine months ended May 3,2008, as compared to the nine months ended April 28, 2007.  Patent litigation expenses in the three monthperiods ended May 3, 2008 and April 28, 2007 were comparable. 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. During the three and nine months ended May 3,2008, we incurred expenses related to our recently announced merger withFinisar. These expenses totaled approximately $0.6 million and were primarilylegal and accounting fees related to due diligence procedures. We expect toincur additional charges related to our merger with Finisar in the future.  Our professional accounting fees and otherlegal fees increased approximately $0.3 million and $0.1 million in the threeand nine months ended May 3, 2008, respectively, as compared to the sameperiods in the prior year.

 

We also experienced increases in selling,marketing and administrative costs associated with the growth of our ROADM and40Gb/s product lines of approximately $0.6 million and $1.7 million in thethree and nine months ended May 3, 2008, respectively, as compared to thesame periods in the prior year. Additionally, we have experienced increasedcommission expenses of $0.2 million and $0.6 million for the three and ninemonth periods ended May 3, 2008, when compared to the three and nine monthperiods ended April 28, 2007. This is primarily related to our salesefforts in the Asia, leading to increased shipments which has increased ourcommission payments to sales representatives and consultants.  We have also had increases of $0.2 millionrelated to our trade shows and demonstration products in both the three andnine month periods year to year. This can be attributed to increased expensesand participation in trade shows and increased distribution of demonstration productsto our growing customer base. We expect selling, general and administrativeexpenses to continue to increase in the future, as we continue to expand ourproduct line offerings, and we expense additional stock grants under SFAS 123Rguidance.

 

***Interest andother income, net***

 

Interest and other income, net, decreased toapproximately $0.4 million from $1.3 million for the three months ended May 3,2008, when compared to the three months ended April 28, 2007.  Interest and other income, net, decreased toapproximately $1.7 million from $2.5 million for the nine months ended May 3,2008, when compared to the nine months ended April 28, 2007.  The decrease in the three and nine monthperiods can be attributed to a decrease in our cash and cash equivalents andshort-term investments as a result of our cash purchase of Kailight in May 2007,as well as declining interest rates on many investment vehicles in recentmonths. We expect our interest income to fluctuate as interest rates increaseor decrease.

 

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***Income taxexpense***

 

During the three months ended May 3, 2008 andApril 28, 2007 we had income tax benefit and expense of approximately$217,000 and $182,000, respectively.  Wehad income tax benefit and expense of approximately $83,000 and $654,000 forthe nine months ended May 3, 2008 and April 28, 2007,respectively.  For the three months endedMay 3, 2008 and April 28, 2007 our overall effective tax rates wereapproximately 24.7% and 5.1%, respectively. Our overall effective tax rate was approximately 3.2% and 6.1% in thenine months ended May 3, 2008 and April 28, 2007, respectively.Because we report losses in our foreign jurisdictions and income in our U.S.operations, our expected quarterly consolidated effective tax rates willfluctuate significantly until our foreign operations establish a trend ofprofitability. Income tax expense will increase if our profits increase.

 

**Liquidity and Capital Resources**

 

As of May 3, 2008and April 28, 2007, we had cash and cash equivalents of approximately$42.6 million and $78.0 million, respectively. Our working capital was approximately $80.9 million and $121.5 millionat May 3, 2008 and April 28, 2007, respectively. This decrease wasprimarily due to our purchase of Kailight in May 2007 and additional costsrelated to our ramp up of production and relocation of our Australianoperations.  We held short-term investments of approximately$3.6 million, accounts receivable of approximately$32.8 million, and debt of approximately$31,000 as of May 3, 2008.

 

***Operating activities***

 

Net cash used in operating activities wasapproximately $5.5 million for the nine months ended May 3, 2008, ascompared to approximately$10,000 for the nine months ended April 28, 2007. Net cash used inoperating activities for the nine months ended May 3, 2008 primarilyresulted from a net loss of approximately$2.5 million, adjusted forapproximately $3.4 million of depreciation and amortization and approximately $3.6 million ofstock-based compensation, offset by increases in accounts receivable andinventories of approximately$11.0 million and $6.8 million, respectively. Net cash used in operatingactivities for the nine months ended April 28, 2007 primarily resultedfrom period to date net income of approximately $10.0 million offset byincreases in accounts receivable of approximately $7.8 million and inventoriesof approximately $5.1 million.

 

***Investing activities***

 

Net cash provided by investing activities wasapproximately $22.7 million for the nine months ended May 3, 2008 ascompared to approximately $27.1million used in investing activities in the nine months ended April 28,2007. During the nine months ended May 3, 2008, approximately $90.0 million of short-term investments were sold ormatured. This was offset by additional purchases of marketable securities of approximately $57.6 million andproperty and equipment of approximately$9.5 million.  Net cash used in investingactivities for the nine months ended April 28, 2007 was primarily relatedto purchasing marketable securities with a portion of our initial publicoffering proceeds.

 

***Financing activities***

 

Net cash used in financing activities wasapproximately $4,000 for the nine months ended May 3, 2008 as compared to approximately $94.8 million providedby financing activities for the nine months ended April 28, 2007. Net cashused in financing activities for the nine months ended May 3, 2008primarily related to approximately$32,000 of debt pay down, offset byapproximately $28,000 of proceeds from the issuance of common stock inconnection with the exercise of employee stock options.  Net cash provided by financing activities forthe nine months ended April 28, 2007 was primarily related to the proceedsfrom 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.

 

 

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Prior to our public offering of common stock, wehad financed our operations primarily through internally generated cash flows,our lines of credit and the issuance of preferred stock.

 

We believe our existing cash and cash equivalentsand our cash flows from operating activities will be sufficient to meet ouranticipated cash needs for at least the next twelve months. Our future workingcapital requirements will depend on many factors, including the rate of ourrevenue growth, the introduction and acceptance of new products, the rate ofexpansion of our production capacity, and the rate of increase in our sales andmarketing and research and development activities. To the extent that our cashand cash equivalents, cash flows from operating activities, and net proceeds ofthis offering are insufficient to fund our future activities, we may need toraise additional funds through bank credit arrangements or public or privateequity or debt financings.

 

We also may need to raise additional funds in theevent we determine, in the future, to effect one or more acquisitions ofbusinesses, technologies and/or products. Although there are no presentunderstandings, commitments or agreements with respect to acquisitions of otherbusinesses, products or technologies, we may in the future consider suchtransactions, which may require debt or equity financing.  The issuance of debt or equity securitiescould be expected to have a dilutive impact on our stockholders, and there canbe no assurance as to whether or when any acquired business would contributepositive operating results commensurate with the associated investment. In theevent we require additional cash resources, we may not be able to obtain bankcredit arrangements or affect an equity or debt financing on terms acceptableto us or at all.  Any materialacquisition could result in a decrease in working capital depending upon theamount, 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 foreignexchange risks through the use of currency futures or options in futureperiods.

 

**Interest Rate Risk**

 

The primary objective of our investment activitiesis to preserve principal while maximizing income without significantlyincreasing risk. Some of the securities in which we invest may be subject tomarket risk. This means that a change in prevailing interest rates may causethe principal amount of the investment to fluctuate. To minimize this risk inthe future, we intend to maintain our portfolio of cash equivalents andshort-term investments in a variety of securities, including money market fundsand certificates of deposit. Our cash equivalents are not subject to marketrisk because the interest paid on these funds fluctuates with the prevailinginterest rate. We do not believe that a 10% change in interest rates would havea significant effect on our interest income.

 

**Off-Balance Sheet FinancingArrangements**

 

We do not engage in any off-balance sheetfinancing arrangements. We do not have any interest in entities referred to asvariable interest entities, which includes special purpose entities and otherstructured finance entities.

 

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

 

Market risk represents the risk of loss that mayimpact our financial position due to adverse changes in financial market pricesand rates. Our market risk exposure is primarily a result of fluctuations ininterest rates and foreign currency exchange rates. We do not hold or issuefinancial instruments for trading purposes.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Under the supervision and with the participation of our management,including our Chief Executive Officer and our Chief Financial Officer, weevaluated the effectiveness of our disclosure controls and procedures, as suchterm is defined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. No change in our internal control overfinancial reporting occurred during the fiscal quarter ended May 3, 2008that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting. Based upon that evaluation, ourChief Executive 

 

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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 - OTHERINFORMATION**

 

**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 May 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 nine months ended May 3, 2008, sales of our1550 nm HFC externally modulated transmitter and our 1550 nm HFC quadratureamplitude modulated transmitters, together, represented approximately 5% andless than 5%, respectively, of the Company’s revenues.  . The plaintiffs are seeking for the court todeclare that we have willfully infringed on such patents and to be awarded upto three times the amount of any compensatory damages found, if any, plus anyother damages and costs incurred. We intend to vigorously defend the claimsasserted against us and we believe that we have meritorious defenses.

 

During mid-2007, we became aware that certain of our analog RF overfiber products may, depending on end use and customization, be subject to theInternational Traffic in Arms Regulations, or ITAR. Accordingly, we filed adetailed voluntary disclosure with the United States Department of State,describing the details of possible inadvertent ITAR violations with respect tothe export of a limited number of certain prototype products, and relatedtechnical 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, our businesswill 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 the global information network. As networkusage and bandwidth demand increase, so does the need for advanced opticalnetworks to provide the required bandwidth. Without network and bandwidthgrowth, the need for our optical subsystems, and hence our future growth as amanufacturer of these products, is jeopardized. Currently, while increasingdemand for network services and for broadband access, in particular, isapparent, growth is limited by several factors, including, among others, anuncertain regulatory environment, reluctance from content providers to supplyvideo and audio content over the communications infrastructure, and uncertaintyregarding long term sustainable business models as multiple industries (cableTV, traditional telecommunications, wireless, satellite, etc.) offernon-complementary and competing content delivery solutions. Ultimately, iflong-term expectations for network growth and bandwidth demand are not realizedor do not support a sustainable business model, our business would besignificantly harmed.

 

***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 productsembodying new technologies or the emergence of new industry standards couldrender our existingproducts uncompetitive from a pricing standpoint,obsolete or unmarketable. Further, time to market with new products can providesignificant competitive advantages in our industry. It is difficult to displacean existing supplier or a particular type of optical subsystems once a networksystems vendor has chosen an initial optical subsystems supplier for aparticular product even if a later to market product supplies superiorperformance and/or cost efficiency. If we are unable to make our new productscommercially available quickly, we may lose existing and potential customersand our financial 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 May 3, 2008 and April 28,2007, we generated 63% and 72%, 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 pending merger withFinisar Corporation.***

 

On May 16, 2008, weannounced that we had entered into a definitive agreement to merge with FinisarCorporation. The pendency of the merger will subject the Company toconsiderable risks, including the potential disruption of its ongoing businessand distraction of its management team, unanticipated expenses related to themerger, and the potential loss of key employees of the Company. Additionally,the merger may affect our current accounting positions, including possiblelimitations on the future use of our federal, state and international NOLcarryforwards, acceleration of vesting of certain outstanding stock options andrestricted stock units that will result in accelerated stock compensationexpense under FASB 123R.

 

Moreover, management willneed to deal with the challenges resulting from uncertainty regarding thecompletion of the merger because stated conditions of closing, many of whichare outside of the control of us and Finisar, must be met, including approvalof the merger by each company’s stockholders. This uncertainty may causecustomers and suppliers to delay or defer decisions concerning us, which couldnegatively affect our business. Customers and suppliers may also seek to changeexisting agreements with us as a result of the merger. Any delay or deferral ofthose decisions or changes in existing agreements could 

 

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have a material adverse affect on our business andour company, regardless of whether the merger is ultimately completed. If we donot succeed in addressing these challenges or other problems encountered inconnection with the pending merger, our operating results and financialcondition could be adversely affected.

 

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

 

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

 

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

 

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

 

·                  During the fourthquarter of calendar year 2008, we plan to complete the relocation of our OptiumAustralia operating facility.  Thisrelocation includes relocation of all of our Australian manufacturingoperations, including significant capital equipment and assets. There arevarious risks in connection with the planned relocation, including delays andother issues caused by inclement weather, damage to our equipment, and problemsin recommencing manufacturing operations after the relocation of our equipment.If we fail to properly manage this relocation to minimize manufacturing andother business interruption, our business and financial results could bematerially 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;

 

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·                  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.

 

***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.

 

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***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 consistent with our existing compensation andsalary structure. Many of the companies with which we compete for hiringexperienced employees have greater resources than we have. In addition, inmaking employment decisions, particularly in the high-technology industries,job candidates often consider the value of the equity they are to receive inconnection with their employment. Therefore, significant volatility in theprice of our stock may adversely affect our ability to attract or retaintechnical personnel. Furthermore, changes to accounting principles generallyaccepted in the United States relating to the expensing of stock options maydiscourage us from granting the sizes or types of stock awards that jobcandidates may require to accept our offer of employment.

 

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

 

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

 

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

 

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

 

·                  diversion offinancial and management resources from existing operations;

 

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

 

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

 

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

 

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

 

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·                inability togenerate sufficient revenue to offset acquisition costs;

 

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

 

·                inability tosuccessfully complete transactions with a suitable acquisition candidate.

 

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

 

***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.

 

***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 for cancelledor unutilized design projects. It is difficult to predict with any certaintythe frequency with which customers will cancel or modify their projects, or theeffect that any cancellation or modification would have on our results ofoperations.

 

***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 

 

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beyond the shipment schedules requested by our customers, which wouldnegatively affect our revenues, competitive position and reputations.

 

***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.

 

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 Statesdollar rises, these expenses of Optium Australia and/or Optium Israel, asapplicable, will correspondingly increase. We currently do not use derivativefinancial instruments to mitigate this exposure. We continue to review thisissue and may consider hedging certain foreign exchange risks through the useof currency futures 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 

 

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no effective protection of our intellectual property. Accordingly,despite our efforts, we may be unable to prevent third parties from infringingupon or misappropriating our intellectual property or otherwise gaining accessto our technology. Unauthorized third parties may try to copy or reverseengineer our products or portions of our products or otherwise obtain and useour intellectual property. If we fail to protect our intellectual property andother proprietary rights, our business, results of operations or financialcondition 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 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 competitive advantageor other third parties may seek an economic return on their intellectualproperty portfolios by making infringement claims against us. In the future, wemay need to obtain license rights to patents or other intellectual propertyheld by others to the extent necessary for our business. Unless we are able toobtain those licenses on commercially reasonable terms, patents or otherintellectual property held by others could inhibit our development of newproducts for our markets. Licenses granting us the right to use third partytechnology may not be available on commercially reasonable terms, if at all.Generally, a license, if granted, would include payments of up-front fees,ongoing royalties or both. These payments or other terms could have a significantadverse impact on our operating results. Our larger competitors may be able toobtain licenses or cross-license their technology on better 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, 

 

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including requiring changes in corporate governance practices. Ourmanagement and other personnel devote a substantial amount of time to these newcompliance initiatives. Moreover, these rules and regulations increase ourlegal and financial compliance costs and make some activities moretime-consuming and costly.

 

Inaddition, the Sarbanes-Oxley Act requires, among other things, that we maintaineffective internal control over financial reporting and disclosure controls andprocedures. In particular, under current rules, commencing with respect to ourfiscal year ending August 2, 2008, we must perform system and processevaluation and testing of our internal control over financial reporting toallow management to report on the effectiveness of our internal control overfinancial reporting, as required by Section 404 of the Sarbanes-Oxley Act,or Section 404. Our testing, or the subsequent testing by our independentregistered public accounting firm, may reveal deficiencies in our internalcontrol over financial reporting that are deemed to be material weaknesses. Ourcompliance with Section 404 will require that we incur substantialaccounting expense and expend significant management time on compliance-relatedissues. We will evaluate the need to hire additional accounting and financial staffwith appropriate 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 productsare subject to export controls imposed by the U.S. Government and administeredby the U.S. Departments of State and Commerce. In certain instances, theseregulations may require pre-shipment authorization from the administeringdepartment.  For products subject to the Export AdministrationRegulations, or EAR, administered by the Department of Commerce’s Bureau ofIndustry and Security, the requirement for a license is dependent on the typeand end use of the product, the final destination, the identity of the end userand whether a license exception might apply.  Virtually all exportsof products subject to the International Traffic in Arms Regulations, or ITAR,administered by the Department of State’s Directorate of Defense TradeControls, require a license.  Most of our fiber optics products aresubject to EAR; certain of our RF over fiber products are currently subject toITAR.

 

Given the current globalpolitical climate, obtaining export licenses can be difficult and time-consuming.  Failure to obtain export licenses for these shipments could significantlyreduce our revenue and could materially adversely affect our business,financial condition and results of operations. Compliance with U.S. Governmentregulations may also subject us to additional fees and costs. The absence ofcomparable restrictions on competitors in other countries may adversely affectour competitive position.

 

During mid-2007, webecame aware that certain of our analog RF over fiber products may, dependingon end use and customization, be subject to the International Traffic in ArmsRegulations, or ITAR. Accordingly, we filed a detailed voluntary disclosurewith the United States Department of State, describing the details of possibleinadvertent ITAR violations with respect to the export of a limited number ofcertain prototype products, and related technical data and defense services. Wemay have also made unauthorized transfers of ITAR-restricted technical data anddefense services to foreign persons in our workplace.  We have provided additional information uponrequest to the Department of State with respect to this matter.  The Department of State encourages voluntarydisclosures and generally affords parties mitigating credit under such circumstances.We nevertheless could be subject to continued investigation and potentialregulatory consequences ranging from a no-action letter, government oversightof facilities and export transactions, monetary penalties, and in extremecases, debarment from government contracting, denial of export privileges andcriminal 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:

 

·                  acquirecomplementary businesses or technologies;

 

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·                  enhance ouroperating infrastructure;

 

·                  develop newproducts;

 

·                  hire additionaltechnical and other personnel; or

 

·                  otherwise respond tocompetitive pressures.

 

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

 

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

 

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

 

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

 

Wederive, and expect to continue to derive, a significant portion of our revenuefrom international sales in various markets. In addition, we have operations inSydney, Australia and Nes Ziona, Israel. Our international revenue andoperations are subject to a number of material risks, including, but notlimited to:

 

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

 

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

 

·                  fewer legalprotections for intellectual property;

 

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

 

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

 

·                  fluctuations inforeign economies;

 

·                  fluctuations in thevalue of foreign currencies and interest rates;

 

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

 

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

 

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

 

Negativedevelopments in any of these areas in one or more countries could result in areduction in demand for our products, the cancellation or delay of ordersalready placed, difficulties in producing and delivering our products, threatsto our intellectual property, difficulty in collecting receivables, and ahigher cost of doing business, any of which could negatively 

 

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impact our business, financial condition or results of operations.Moreover, our sales, including sales to customers outside the United States,are denominated in U.S. dollars, and downward fluctuations in the value offoreign currencies relative to the U.S. dollar may make our products moreexpensive than other products, which could harm our business.

 

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

 

Asof May 3, 2008, we had U.S. net operating loss, or NOL, carryforwards ofapproximately $20.0 million for federal and $7.3 million for state incometax purposes expiring through fiscal year ending July 2025. These NOLcarryforwards represent an asset to the extent they can be utilized to reducefuture cash income tax payments. Utilization of our NOL carryforwards dependson the timing and amount of taxable income earned in the future, which we areunable 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 incomerealization.  In the future, we mayrecognize additional deferred tax assets should our foreign operations meet the“more likely than not” recognition threshold in connection with likely futuretaxable income realization.

 

**Risks Related toOwnership of Our Common Stock**

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  changes in marketvaluations of similar companies;

 

·                  success ofcompetitive products;

 

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

 

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

 

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

 

·                  litigation involvingour company, our general industry or both;

 

·                  additions ordepartures of key personnel;

 

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·                  investors’ generalperception of us;

 

·                  changes in generaleconomic, industry and market conditions; and

 

·                  changes inregulatory and other dynamics.

 

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

 

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

 

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

 

Inaddition, as of June 9, 2008 there were 48,496 shares subject tooutstanding warrants, 2,430,229 shares subject to outstanding options, and433,814 unvested restricted stock units. Additional shares will be availablefor issuance under our stock option plans. These shares are eligible for salein the public market to the extent permitted by any applicable vestingrequirements. Moreover,  holders who, at the time of our initial publicoffering, held an aggregate of approximately 17 million shares of ourcommon stock have rights, subject to some conditions, to require us to fileregistration statements covering their shares or to include their shares inregistration statements that we may file for ourselves or other stockholders.We have also registered all shares of common stock that we may issue under ouremployee benefit plans. Once we register these shares, they can be freely soldin the public market upon issuance.

 

***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 37% of our outstanding common stock as of June 9, 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 theremoval of directors;

 

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

 

·                  advance noticerequirements for stockholder proposals and director nominations;

 

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

 

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

 

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

 

Theaffirmative vote of the holders of at least 75% of our shares of capital stockentitled to vote is necessary to amend or repeal the above provisions of ourcertificate of incorporation. In addition, absent approval of our board 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.

 

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

 

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

 

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

 

None.

 

**ITEM 3.  Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**ITEM5.  Other Information**

 

None.

 

**ITEM 6.  Exhibits**

 

(a)   Exhibit Index.

 

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 requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |               | OPTIUM CORPORATION.                    |
|--------|--------------------|----------------------------------------|
|   |               |                                   |
|   |               |                                   |
| Dated: | June 13, 2008 | /s/  Eitan Gertel                      |
|   |               | Eitan  Gertel                          |
|   |               | President  and Chief Executive Officer |
|   |               |                                   |
|   |               |                                   |
| Dated: | June 13, 2008 | /s/ David Renner                       |
|   |               | David Renner                           |
|   |               | Vice  President of Finance and         |
|   |               | Chief  Financial Officer               |

 

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