**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

| x          |       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       | ** **                                                                                    |
| ** ** | ** ** | **For the  quarterly period ended April 28, 2007**                                            |
| ** ** | ** ** | ** **                                                                                    |
| ** ** | ** ** | **or**                                                                                        |
| ** ** | ** ** | ** **                                                                                    |
| o          |       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number: 001-33109**

**OPTIUMCORPORATION**

(Exact name of registrantas specified in its charter)

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

 

| **200 Precision Road Horsham PA  19044**              |
|-----------------------------------------------------------------|
| (Address of  principal executive offices)  (Zip Code) |

 

| **(267) 803-3800**                                         |
|------------------------------------------------------------|
| (Registrant’s  telephone number, including area code) |
|                                                       |
|                                                       |
| (Former name,  former address and former fiscal year,      |
| if changed since  last report)                             |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 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 for thepast 90 days.
|  | x | Yes | o | No |
|--|---|-----|---|----|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated filer  o | Accelerated  filer  o | Non-accelerated  filer  x |
|--------------------------------------|---------------------------------|-------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  o  No  x

The number of sharesof Common Stock, $.0001 par value,

outstanding as of June 6,2007 was 25,381,728.

 

----

**TABLE OF CONTENTS**

**PART I**

**Financial Information**
|                | ** **                                                                                                                                 | ** ** | **Page**   |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **     | ** **                                                                                                                                 | ** ** | ** ** |
| **ITEM 1.**    | **Financial Statements.**                                                                                                                  | ** ** | ** ** |
|           |                                                                                                                                       |       |       |
| 1.             | Condensed  Consolidated Statements of Operations (unaudited) for the three months and  nine months ended April 28, 2007 and April 29, 2006 |       | 2          |
|           |                                                                                                                                       |       |       |
| 2.             |   Condensed  Consolidated Balance Sheets as of April 28, 2007 (unaudited) and July 29,  2006                                     |       | 3          |
|           |                                                                                                                                       |       |       |
| 3.             |   Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months ended  April 28, 2007 and April 29, 2006      |       | 4          |
|           |                                                                                                                                       |       |       |
| 4.             |   Notes to Condensed Consolidated Financial  Statements (unaudited)                                                              |       | 5          |
|           |                                                                                                                                       |       |       |
| **ITEM 2.**    | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.**                                           |       | 17         |
| ** **     | ** **                                                                                                                                 |       |       |
| **ITEM 3.**    | **Quantitative  and Qualitative Disclosures about Market Risk.**                                                                           |       | 22         |
| ** **     | ** **                                                                                                                                 |       |       |
| **ITEM 4.**    | **Controls and  Procedures.**                                                                                                              |       | 23         |
| ** **     | ** **                                                                                                                                 |       |       |
| ** **     | **PART II**                                                                                                                                |       |       |
| ** **     | **Other Information**                                                                                                                      |       |       |
| ** **     | ** **                                                                                                                                 |       |       |
| **ITEM 1.**    | **Legal Proceedings**                                                                                                                      |       | 23         |
| **ITEM 1A.**   | **Risk Factors**                                                                                                                           |       | 24         |
| **ITEM 2.**    | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                           |       | 35         |
| **ITEM 3.**    | **Defaults  Upon Senior Securities**                                                                                                       |       | 35         |
| **ITEM 4.**    | **Submission  of Matters to a Vote of Security Holders**                                                                                   |       | 35         |
| **ITEM 5.**    | **Other Information**                                                                                                                      |       | 35         |
| **ITEM  6.**   | **Exhibits**                                                                                                                               |       | 35         |
| ** **     | ** **                                                                                                                                 |       |       |
| **SIGNATURES** |                                                                                                                                       | 35         |
|                |                                                                                                                                            |            |            |  |

 

ii

----

**FORWARD-LOOKINGSTATEMENTS**

Fromtime to time, the Company makes forward-looking statements. Forward-lookingstatements include financial projections, statements of plans and objectivesfor future operations, statements of future economic performance, and statementsof assumptions relating thereto. When used in this document, the words “will,” “plan,” “believe,” “may,”“anticipate,” “ could,” “seek,” “estimate,” “expect,” “continue,” “intend,” andsimilar expressions, variations or the negatives of these terms are intended toidentify forward-looking statements. Although management believes that theexpectations reflected in these forward-looking statements are reasonable atthe time they are made, no assurance can be made that these expectations willprove to be correct.

The Company may includeforward-looking statements in its periodic reports to the Securities andExchange Commission on Forms 10-K, 10-Q, and 8-K, in its annual report toshareholders, in its proxy statements, in its press releases, in other writtenmaterials, and in statements made by employees to analysts, investors,representatives of the media, and others.

Bytheir very nature, forward-looking statements are subject to uncertainties,both general and specific, and risks exist that predictions, forecasts,projections and other forward-looking statements will not be achieved.  Actual results may differ materially due to avariety of factors including, without limitation, those discussed under “CertainTrends Affecting Our Results of Operations;” Risk Factors;” and elsewhere inthis report.  Investors and others shouldcarefully consider these factors and other uncertainties and events, whether ornot the statements are described as forward-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

----

**PART I**

**FinancialInformation**

**ITEM 1.Financial Statements**

**Optium Corporation**

**CondensedConsolidated Statements of Operations**

**(unaudited)**

*(inthousands, except per share data)*
| ** **                                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **April 28,  2007**         | ** ** | **April 29,  2006**        | ** ** | **April 28,  2007** | ** ** | **April 29,  2006** | ** ** |
| Revenue                                             |       | $                                | 34,547     |                            | $          | 16,462 |   | $ | 98,696 |   | $ | 46,491 |   |
| Cost of revenue                                     |       | 25,190                           |       | 12,256                          |       | 70,709 |   | 35,636 |   |
| Gross profit                                        |       | 9,357                            |       | 4,206                           |       | 27,987 |   | 10,855 |   |
| Operating  expenses:                                |       |                             |       |                            |       |   |   |   |   |
| Research and product development                    |       | 3,379                            |       | 2,435                           |       | 9,888 |   | 5,979 |   |
| Selling, general and administrative                 |       | 3,711                            |       | 1,643                           |       | 9,897 |   | 3,571 |   |
| Acquired in-process research and development        |       | —                           |       | 11,187                          |       | — |   | 11,187 |   |
| Total operating  expenses                           |       | 7,090                            |       | 15,265                          |       | 19,785 |   | 20,737 |   |
| Income (loss)  from operations                      |       | 2,267                            |       | (11,059                         | )          | 8,202 |   | (9,882 | ) |
| Interest and  other income (expense), net           |       | 1,333                            |       | 68                              |       | 2,491 |   | 108 |   |
| Income (loss)  before income tax expense            |       | 3,600                            |       | (10,991                         | )          | 10,693 |   | (9,774 | ) |
| Income tax  expense                                 |       | 182                              |       | 21                              |       | 654 |   | 44 |   |
| Net income (loss)                                   |       | $                                | 3,418      |                            | $          | (11,012 | ) | $ | 10,039 |   | $ | (9,818 | ) |
|                                                |       |                             |       |                            |       |   |   |   |   |
| Basic net income  (loss) per share                  |       | $                                | 0.13       |                            | $          | (4.73 | ) | $ | 0.57 |   | $ | (4.93 | ) |
| Basic weighted  average common shares outstanding   |       | 25,350                           |       | 2,331                           |       | 17,576 |   | 1,991 |   |
|                                                |       |                             |       |                            |       |   |   |   |   |
| Diluted net  income (loss) per share                |       | $                                | 0.13       |                            | $          | (4.73 | ) | $ | 0.41 |   | $ | (4.93 | ) |
| Diluted weighted  average common shares outstanding |       | 26,647                           |       | 2,331                           |       | 24,639 |   | 1,991 |   |

 

*Seeaccompanying notes.*

2

----

**Optium Corporation**

**CondensedConsolidated Balance Sheets**

*(inthousands, except share amounts)*
| ** **                                                                                                                                                                               | ** ** | **April 28, 2007** | ** ** | **July 29, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                               |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                          |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                |       | $                            | 78,042     |                        | $          | 10,377 |   |
| Short-term investments                                                                                                                                                                   |       | 23,170                       |       | —                      |       |
| Accounts receivable, net of allowance of $36 and  $25, respectively                                                                                                                      |       | 26,857                       |       | 19,075                      |       |
| Inventories                                                                                                                                                                              |       | 16,856                       |       | 11,701                      |       |
| Prepaid expenses and other current assets                                                                                                                                                |       | 1,477                        |       | 407                         |       |
| Total current  assets                                                                                                                                                                    |       | 146,402                      |       | 41,560                      |       |
| Property and  equipment, net                                                                                                                                                             |       | 7,250                        |       | 5,207                       |       |
| Other assets                                                                                                                                                                             |       | 274                          |       | 2,009                       |       |
| Goodwill                                                                                                                                                                                 |       | 11,375                       |       | 10,533                      |       |
| Total assets                                                                                                                                                                             |       | $                            | 165,301    |                        | $          | 59,309 |   |
| **Liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)**                                                                                         |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                         |       | $                            | 21,781     |                        | $          | 18,386 |   |
| Accrued expenses                                                                                                                                                                         |       | 2,823                        |       | 2,207                       |       |
| Accrued warranty                                                                                                                                                                         |       | 305                          |       | 223                         |       |
| Other current liabilities                                                                                                                                                                |       | —                       |       | 2,640                       |       |
| Current portion of debt                                                                                                                                                                  |       | —                       |       | 320                         |       |
| Total current  liabilities                                                                                                                                                               |       | 24,909                       |       | 23,776                      |       |
| Long-term  debt, net of current portion                                                                                                                                                  |       | —                       |       | 351                         |       |
| Other long-term  liabilities                                                                                                                                                             |       | 190                          |       | 97                          |       |
| Total  liabilities                                                                                                                                                                       |       | 25,099                       |       | 24,224                      |       |
| Commitments and  contingencies                                                                                                                                                           |       |                         |       |                        |       |
| Series A  redeemable convertible preferred stock, $0.0001 par value—24,450,000 shares  authorized, 24,000,000 shares issued and 23,818,500 outstanding at July 29,  2006            |       | —                       |       | 7,939                       |       |
| Series B  redeemable convertible preferred stock, $0.0001 par value—42,702,958 shares  authorized, 42,702,949 shares issued and 41,969,418 outstanding at July 29,  2006            |       | —                       |       | 35,674                      |       |
| Series C senior  redeemable convertible preferred stock, $0.0001 par value—60,526,000 shares  authorized, 59,879,318 shares issued and outstanding at July 29, 2006                 |       | —                       |       | 11,962                      |       |
| Series D senior  redeemable convertible preferred stock, $0.0001 par value—25,500,000 shares  authorized, 25,245,570 shares issued and outstanding at July 29, 2006                 |       | —                       |       | 10,255                      |       |
| Series D-1  senior redeemable convertible preferred stock, $0.0001 par value—24,475,897  shares authorized, issued and outstanding at July 29, 2006                                 |       | —                       |       | 21,343                      |       |
| Stockholders’  equity (deficit):                                                                                                                                                    |       |                         |       |                        |       |
| Common stock,  $0.0001 par value — 100,000,000 shares authorized, 26,846,906 and 4,353,509  shares issued, respectively; 25,352,821 and 2,859,430 shares outstanding,  respectively |       | 2                            |       | —                      |       |
| Additional paid  in capital                                                                                                                                                              |       | 190,365                      |       | 9,173                       |       |
| Deferred  compensation                                                                                                                                                                   |       | (1,050                       | )          | (1,170                      | )          |
| Treasury stock,  1,494,085 shares of common stock—at cost                                                                                                                           |       | (2,762                       | )          | (2,762                      | )          |
| Accumulated  deficit                                                                                                                                                                     |       | (47,610                      | )          | (57,649                     | )          |
| Accumulated  other comprehensive income                                                                                                                                                  |       | 1,257                        |       | 320                         |       |
| Total  stockholders’ equity (deficit)                                                                                                                                               |       | 140,202                      |       | (52,088                     | )          |
| Total liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)                                                                                       |       | $                            | 165,301    |                        | $          | 59,309 |   |

 

*Seeaccompanying notes.*

3

----

**Optium Corporation**

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

*(inthousands)*
| ** **                                                                         | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **April 28,  2007**        | ** ** | **April 29,  2006** | ** ** |
| **Cash  flows from operating activities**                                          |       |                            |       |   |   |
| Net income  (loss)                                                                 |       | $                               | 10,039     |   | $ | (9,818 | ) |
| Adjustments to reconcile net income to net cash  (used in) provided by operations: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 1,969                           |       | 1,894 |   |
| Stock-based compensation                                                           |       | 849                             |       | 16 |   |
| Issuance of common stock and restricted common stock                               |       | 32                              |       | 34 |   |
| Acquired in-process research and development                                       |       | —                          |       | 11,187 |   |
| Provision for doubtful accounts                                                    |       | 11                              |       | 1 |   |
| Loss on disposal of property and equipment                                         |       | 9                               |       | — |   |
| Changes in  operating assets and liabilities:                                      |       |                            |       |   |   |
| Accounts receivable                                                                |       | (7,787                          | )          | (6,692 | ) |
| Inventories                                                                        |       | (5,133                          | )          | (3,169 | ) |
| Prepaid expenses and other current assets                                          |       | (1,065                          | )          | 81 |   |
| Other assets                                                                       |       | (180                            | )          | 18 |   |
| Accounts payable                                                                   |       | 3,369                           |       | 4,639 |   |
| Accrued expenses                                                                   |       | 343                             |       | 628 |   |
| Other current liabilities                                                          |       | (2,640                          | )          | 1,549 |   |
| Accrued warranty                                                                   |       | 82                              |       | 102 |   |
| Other long-term liabilities                                                        |       | 92                              |       | (2 | ) |
| Net cash (used  in) provided by operating activities                               |       | (10                             | )          | 468 |   |
| **Cash  flows from investing activities**                                          |       |                            |       |   |   |
| Purchase of  property and equipment                                                |       | (3,964                          | )          | (1,634 | ) |
| Cash acquired  from acquisition of Engana, net of transaction costs                |       | —                          |       | 4,068 |   |
| Proceeds from  sale of property and equipment                                      |       | 30                              |       | — |   |
| Maturities and  sales of short term investments                                    |       | 22,384                          |       | — |   |
| Purchases of  marketable securities                                                |       | (45,562                         | )          | — |   |
| Net cash (used  in) provided by investing activities                               |       | (27,112                         | )          | 2,434 |   |
| **Cash  flows from financing activities**                                          |       |                            |       |   |   |
| Payments on line  of credit                                                        |       | (671                            | )          | (74 | ) |
| Net proceeds  from initial public offering                                         |       | 95,378                          |       | — |   |
| Deferred  financing costs                                                          |       | —                          |       | (4 | ) |
| Proceeds from  warrant exercise                                                    |       | —                          |       | 33 |   |
| Proceeds from  exercise of employee stock options                                  |       | 47                              |       | 141 |   |
| Net cash  provided by financing activities                                         |       | 94,754                          |       | 96 |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 33                              |       | 54 |   |
|                                                                               |       |                            |       |   |   |
| **Net  increase in cash and cash equivalents**                                     |       | 67,665                          |       | 3,052 |   |
| ** **                                                                         |       |                            |       |   |   |
| **Cash  and cash equivalents, beginning of period**                                |       | 10,377                          |       | 8,474 |   |
| ** **                                                                         |       |                            |       |   |   |
| **Cash and cash equivalents, end  of period**                                      |       | $                               | 78,042     |   | $ | 11,526 |   |

 

*Seeaccompanying notes.*

4

----

**Optium Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

**1.  Organizationand Operations**

Optium Corporation (the “Company”) was incorporated inthe State of Delaware on September 8, 2000. The Company is a supplier ofhigh-performance optical subsystems for use in telecommunications andcable TV network systems. Since its founding in 2000, the Company has developedproprietary technology and products that enable transmission, reception andswitching functionality for high-bandwidth, intelligent opticalnetworking applications. The Company designs, manufactures and sells opticalsubsystems, including transceivers and transmitters. The Company has also recentlylaunched a technologically innovative reconfigurable add-drop multiplexeror ROADM, which enables dynamic wavelength processing.

On November 1, 2006, theCompany closed its initial public offering of 5.2 million shares of commonstock at a price to the public of $17.50 per share as well as the sale of anadditional 780,000 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 fiscal year2006.  All preferred stock outstanding atNovember 1, 2006 was converted to common stock upon the completion of theinitial public offering.

**2.  Summary ofSignificant Accounting Policies**

***Principles of consolidation***

The consolidated financial statements include OptiumCorporation and its wholly owned subsidiary, Optium Australia Pty Limited.All significant intercompany accounts and transactions have been eliminated inthe consolidation.

***Fiscal year***

The Company’s fiscal year ends on the Saturday closest toJuly 31. The third quarters of fiscal 2007 and 2006 ended on April 28,2007 and April 29, 2006, respectively.

***Basis of presentation***

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States (GAAP) for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotesrequired by GAAP for complete financial statements. The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of income and loss during thereporting period. Actual results could differ from those estimates. Operatingresults for the nine months ended April 28, 2007 are not necessarily indicativeof the results that may be expected for the fiscal year ended July 28, 2007. Inthe opinion of management, all adjustments (consisting solely of normalrecurring adjustments) necessary for a fair presentation of the financialstatements for these interim periods have been included. Theaccompanying financial information should be read in conjunction with thefinancial statements, including the notes thereto, for the fiscal year endedJuly 29, 2006 included with the Company’s registration statement on Form S-1(Registration No. 333-135472) declared effective by the Securities and ExchangeCommission on October 26, 2006.

***Cash and cash equivalents***

TheCompany considers all highly liquid investments purchased with originalmaturities of three months or less to be cash equivalents.

***Short-term investments***

TheCompany considers all short-term investments as available-for-sale, accountedfor at fair value, with resulting unrealized gains or losses reported as aseparate component of stockholders’ equity.

5

----

***Stock-based compensation***

EffectiveJuly 30, 2006, the Company adopted Statement of Financial Accounting Standards(“SFAS”) No. 123(R) “Share-Based Payment”, 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 No. 123(R) 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 SFASNo. 123(R) involves significant amounts of judgment in the determination ofinputs into the Black-Scholes model which the Company uses to determine thevalue of stock options. Inherent in this model are assumptions related toexpected stock price volatility, option life, risk free interest rate anddividend yield. While the risk free interest rate and dividend yield are lesssubjective assumptions, typically based on factual data derived from publicsources, the expected stock-price volatility and option life assumptionsrequire a greater level of judgment which make them critical accountingestimates. The fair value of each stock option grant was estimated on the dateof the grant using the Black-Scholes option-pricing model with the followingassumptions: 
|                          | ** ** | **Three months ended   April 28, 2007** | ** ** | **Nine months ended   April 28, 2007** | ** ** |
|--------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Risk-free  interest rate |       | 4.84%-4.51                                                       | %          | 4.84%-4.39                                                      | %          |
| Expected  dividend yield |       | 0                                                                | %          | 0                                                               | %          |
| Expected life            |       | 5 years                                                          |       | 5 years                                                         |       |
| Expected volatility      |       | 80                                                               | %          | 80                                                              | %          |

 

Risk-free interestrate: The Company uses the risk free interest rate of a U.S. Treasury Note witha similar term on the date of the grant.

Expected dividendyield: The Company uses a 0% expected dividend yield as the Company has notpaid and does not anticipate declaring dividends in the near future.

Expected life: TheCompany’s expected life is based on the period the options are expected toremain outstanding based on the vesting periods and expectations of future employeeactions.

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.

Forfeitures: TheCompany estimates forfeitures based on historical experience and factors ofknown historical or future projected work force reduction actions to anticipatethe projected forfeiture rates.   Theforfeiture rate for the nine months ended April 28, 2007 was 9.3%.

During the nine months ended April 28, 2007, 560,726stock options  with a weighted averagegrant date fair value of $12.65 per option were granted under the Company’sStock Option Plans. The compensation expense charged against earnings for SFAS 123(R)stock-based compensation for the first nine months of fiscal year 2007 wasapproximately $454,000. As of April 28, 2007, there was approximately $5.9million unrecognized compensation expense related to non-vested stock optionagreements. The stock-based compensation expense is expected to be recognizedin earnings over the weighted-average vesting period of 4 years.

Prior to the adoption of SFAS No. 123(R), the Company accountedfor its stock-based compensation granted to employees in accordance withthe provisions of Accounting Principles Board Opinion 25 (“APB 25”), “Accountingfor Stock Issued to Employees.” Under APB 25, compensation expense is based onthe difference, if any, on the date of the grant, between the fair value of theCompany’s stock and the exercise price of the option. The Company recordedstock-based compensation to the extent that the exercise price was less thanthe fair value of the Company’s stock on the date of grant.

Additionally, in the prior period, the Company disclosedthe information required by the Financial Accounting Standards Board (“FASB”)under Statement of Financial Accounting Standards Statement No. 123, “Accountingfor Stock-Based Compensation” (“Statement 123”) using the minimum valuemethod. Stock issued to non-employees is accounted for under theprovisions of Statement 123 and the Emerging Issues Task Force (“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” (“EITF 96-18”).  In accordance with SFAS No. 123(R), options that werevalued using the minimum value method under Statement 123, for purposes of proforma disclosure, must be transitioned to SFAS No. 123(R) using the prospectivemethod. Under the prospective method, options granted prior to fiscal 2007 willcontinue to be accounted for under the same accounting principles (recognitionand measurement) originally applied to those awards, which for the Company wasAPB 25. Accordingly, the adoption of SFAS 123(R) did not result in anycompensation cost being recognized for the options granted prior to theadoption of SFAS 123(R).

6

----

Under Statement 123, non-employee stock-basedcompensation is accounted for based on the fair value of the considerationreceived or equity instruments issued, whichever is more readily determinable.However, Statement 123 does not address the measurement date and recognitionperiod. EITF 96-18 states a consensus that the measurement date should bethe 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 forma disclosure previously required underSFAS 123, the compensation cost for the Company’s stock-based compensationplans had been determined based upon the fair value of the options at the grantdate. Consistent with the methodology prescribed under Statement 123, theCompany would have recorded $137,714 and $350,592 and $74,020 and $98,365 asstock based compensation in selling, general and administrative expenses forthe three months and nine months, respectively, ended April 28, 2007 and April29, 2006, respectively, related to the grants issued prior to the adoption ofSFAS 123(R), as presented below:
| ** **                                                                                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **April 28, 2007**     | ** ** | **April 29,  2006**        | ** ** | **April 28,  2007** | ** ** | **April 29, 2006** | ** ** |
| ** **                                                                                | ** ** | **(in thousands)**               | * *   |
| Net income  (loss), as reported                                                           |       | $                                | 3,418      |                            | $          | (11,012 | ) | $ | 10,039 |   | $ | (9,818 | ) |
| Add: Stock-based  compensation under APB 25                                          |       | 119                              |       | —                          |       | 376 |   | — |   |
| Add: Stock-based  compensation under SFAS123(R)                                           |       | 277                              |       | —                          |       | 432 |   | — |   |
| Less: Stock-based  compensation expense determined under fair value method for all awards |       | (408                             | )          | (73                             | )          | (766 | ) | (96 | ) |
| Net income  (loss), pro forma                                                             |       | $                                | 3,406      |                            | $          | (11,085 | ) | $ | 10,081 |   | $ | (9,914 | ) |
| Basic EPS, as  reported                                                                   |       | $                                | 0.13       |                            | $          | (4.73 | ) | $ | 0.57 |   | $ | (4.93 | ) |
| Diluted EPS, as  reported                                                                 |       | $                                | 0.13       |                            | $          | (4.73 | ) | $ | 0.41 |   | $ | (4.93 | ) |
| Basic EPS, pro  forma                                                                     |       | $                                | 0.13       |                            | $          | (4.76 | ) | $ | 0.57 |   | $ | (4.98 | ) |
| Diluted EPS, pro forma                                                                    |       | $                                | 0.13       |                            | $          | (4.76 | ) | $ | 0.41 |   | $ | (4.98 | ) |

 

***Revenue recognition***

The Company derives revenue from the manufacture and saleof optical subsystem products for use in high-performance networksystems. Our revenue recognition policy follows SEC Staff Accounting BulletinNo. 104, “Revenue Recognition.” Specifically, the Company recognizesproduct revenue when the following requirements have been met:

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

·                  *Delivery and acceptance.*  Product has been shipped via third partycarrier, accepted and title has transferred to the customer, under free onboard, or FOB, terms agreed to by the customer. The only rights of return areunder 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.*  Collectibility is reasonably assured andthere are no uncertainties with respect to customer acceptance. We assesscollectibility based primarily on the creditworthiness of the customer asdetermined by credit checks and analysis, as well as the customer’s paymenthistory.

The Company is required to determine whether delivery hasoccurred, whether items will be returned or whether the Company will be paidunder normal terms. The Company specifies delivery terms and assesses eachshipment against those terms and only recognizes revenue when certain that thedelivery terms have been met to the extent that one or more of the conditionsare not present, the Company delays recognition of revenue until all conditionsare present.

***Comprehensive income (loss)***

Statement of Financial Accounting Standards No. 130,“Reporting Comprehensive Income”, requires disclosure of all components ofcomprehensive income (loss) on an annual and interim basis. Comprehensiveincome (loss) is defined as the change in

7

----

equity of a business enterprise during a period from transactions andother events and circumstances from non-owner sources. Components ofother comprehensive income (loss) that the Company currently reports are gainsand losses from foreign currency translations and unrealized gains and lossesfrom short-term investments, as follows:
| ** **                                                        | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **April 28, 2007**     | ** ** | **April 29, 2006**    | ** ** | **April 28, 2007** | ** ** | **April 29,  2006** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | * * |
| Net income  (loss)                                                |       | $                                | 3,418      |                            | $          | (11,012 | ) | $ | 10,039 |   | $ | (9,818 | ) |
| Other  comprehensive income:                                      |       |                             |       |                            |       |   |   |   |   |
| Unrealized gain  (loss) on investments                            |       | 2                                |       | —                          |       | (8 | ) | — |   |
| Net change in  cumulative foreign currency translation adjustment |       | 816                              |       | 54                              |       | 945 |   | 54 |   |
| Comprehensive income  (loss)                                      |       | $                                | 4,236      |                            | $          | (10,958 | ) | $ | 10,976 |   | $ | (9,764 | ) |

 

***Net income per share***

The Company computes net income per common share inaccordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”).Under the provisions of SFAS No. 128, basic net income per common share iscomputed by dividing the net income applicable to common stockholders for theperiod by the weighted average number of shares of common stock outstanding. Inaccordance with SFAS No. 128, incremental potential common shares from theconversion of preferred stock and the exercise of stock options and warrantsare included in the calculation of diluted net income per share except when theeffect would be anti-dilutive.

The calculations for basic and diluted net income pershare were as follows:
|                                                                                                                  | ** ** | **Three months ended**                                   | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                       | ** ** | **April 28,**                                                 | ** ** | **April 29,**              | ** ** | **April 28,** | ** ** | **April 29,** | ** ** |
| ** **                                                                                                       | ** ** | **2007**                                                           | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Numerator:**                                                                                                   | ** ** | ** **                                                         | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for  basic and diluted income per share - net income (loss)                                            |       | $                                                                  | 3,418      |                            | $          | (11,012 | ) | $ | 10,039 |   | $ | (9,818 | ) |
|                                                                                                             |       |                                                               |       |                            |       |   |   |   |   |
| **Denominator:**                                                                                                 | ** ** | ** **                                                         | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Denominator for  basic income (loss) per share - weighted average common shares outstanding                      |       | 25,350                                                             |       | 2,331                           |       | 17,576 |   | 1,991 |   |
| 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 |   | — |   |
| Denominator for  diluted net income (loss) per share – adjusted weighted-average common shares  outstanding |       | 26,647                                                             |       | 2,331                           |       | 24,639 |   | 1,991 |   |
| Basic net income  (loss) per share                                                                               |       | $                                                                  | 0.13       |                            | $          | (4.73 | ) | $ | 0.57 |   | $ | (4.93 | ) |
| Diluted net income  (loss) per share                                                                             |       | $                                                                  | 0.13       |                            | $          | (4.73 | ) | $ | 0.41 |   | $ | (4.93 | ) |

 

Diluted net income per share does not reflect thefollowing weighted-average potential common shares as the exercise prices ofsuch options were greater than the average fair value of the Company’s commonstock during the respective periods, or the effect would have been anti-dilutive:
| ** **                                                                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **April 28, 2007**     | ** ** | **April 29, 2006**    | ** ** | **April 28, 2007** | ** ** | **April 29, 2006** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | * * |
| Anti-dilutive  conversion of preferred shares                                        |       | —                           |       | 15,618                          |       | — |   | 14,787 |   |
| Anti-dilutive  unvested restricted common stock and exercise of options and warrants |       | —                           |       | 1,659                           |       | — |   | 1,481 |   |
| Unvested common  stock “out of money”                                      |       | 14                               |       | —                          |       | 81 |   | 4 |   |
| Total                                                                                |       | 14                               |       | 17,277                          |       | 81 |   | 16,272 |   |

 

8

----

***Recent accounting pronouncements***

In July 2006, the FASB issued FIN 48, “Accountingfor Uncertainty in Income Taxes,” which is an interpretation of SFASNo. 109, “Accounting for Income Taxes.” FIN 48 creates a single modelto address uncertainty in tax positions and clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS 109 by prescribing the minimum threshold a taxposition is required to meet before being recognized in an enterprise’sfinancial statements. FIN 48 also provides guidance on derecognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition, and clearly scopes out income taxes fromSFAS No. 5, “Accounting for Contingencies.” FIN 48 is effective forfiscal years beginning after December 15, 2006 but earlier application isencouraged. Differences between the amounts recognized in the statements offinancial position prior to adoption of FIN 48 and the amounts reportedafter adopted should be accounted for as a cumulative-effect adjustmentrecorded to the beginning balance of retained earnings. The Company iscurrently determining the impact of FIN 48 on its consolidated financialstatements which will be effective for the fiscal year ending August 2, 2008.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements”. SFAS No. 157 establishes a common definition to provideenhanced guidance when using fair value to measure assets and liabilities,establishes a framework for measuring fair value, and expands disclosures aboutsuch fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007. The Company is currently determining theimpact of implementating SFAS No. 157 which will be effective for the fiscalyear ending August 1, 2009.

In September 2006, the SEC staff issued Staff AccountingBulletin No. 108 “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 requires that public companies utilize a “dual-approach” to assessingthe quantitative effects of financial misstatements. The dual approach includesboth an income statement focused assessment and a balance sheet focusedassessment. The guidance in SAB 108 must be applied to annual financialstatements for fiscal years ending after November 15, 2006. The implementationof SAB 108 is not expected to have a material impact on the Company’sconsolidated financial position or results of operations which will beeffective for the fiscal year ending August 2, 2008.

***Segment information***

SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information” establishes standards for reportinginformation regarding operating segments in annual financial statements andrequires selected information of those segments to be presented in interimfinancial reports issued to stockholders. Operating segments are identified ascomponents of an enterprise about which separate financial information isavailable for evaluation by the chief operating decision-maker, ordecision-making group, in making decisions on how to allocate resourcesand assess performance. The Company views its operations and manages itsbusiness as one operating segment. There were no significant tangible assetslocated or revenue generated outside of the U.S. as of April 28, 2007 orJuly 29, 2006.

**3.  Inventories**

Inventories consist of the following at: 
|                 | ** ** | **April 28, 2007** | ** **   | **July 29,  2006** | ** ** |
|-----------------|------------|------------------------------|--------------|-------------------------|------------|
| ** **      | ** ** | **(in thousands)**      | *** *** |
| Raw materials   |       | $                            | 11,305       |                    | $          | 7,685 |   |
| Work in process |       | 1,884                        |         | 1,276                   |       |
| Finished goods  |       | 3,667                        |         | 2,740                   |       |
|            |       | $                            | 16,856       |                    | $          | 11,701 |   |

 

**4.  Other Assets**

Other assets consist of the following at:
|                           | ** ** | **April 28, 2007** | ** **   | **July 29,  2006** | ** ** |
|---------------------------|------------|------------------------------|--------------|-------------------------|------------|
| ** **                | ** ** | **(in thousands)**      | *** *** |
| Deferred  financing costs |       | $                            | —       |                    | $          | 1,916 |   |
| Restricted cash           |       | 68                           |         | 68                      |       |
| Other                     |       | 206                          |         | 25                      |       |
|                      |       | $                            | 274          |                    | $          | 2,009 |   |

 

9

----

Deferred financing costs represent direct transactionalcosts the Company incurred in connection with the initial public offering.Deferred financing costs were reflected as a reduction of equity upon closingof the offering which occurred on November 1, 2006.

**5.  Line ofCredit**

On May 25, 2004, the Company entered into a$3,500,000 line of credit agreement, including a revolving promissory note of$2,500,000 and an equipment term note of $1,000,000. The line of credit bearsinterest at 1.75% plus Prime. On June 27, 2005, the Company modified theterms of the debt to increase the equipment term note to $2,000,000; change theinterest rate to prime plus 1.25% (7.75% at July 30, 2005) for the initialequipment advance and the first draw on the line of credit of $820,778. OnJune 6, 2006, the Company renewed the line of credit to modify theinterest rate on the outstanding principal to prime plus 0.75% and to extendthe renewal date to May 22, 2007. The interest rate would be prime plus1.5% for supplemental advances.

On November 3, 2006, the Company paid the outstandingline of credit in full and subsequently cancelled the line of credit.

**6.  Other CurrentLiabilities**

Other current liabilities consist of $0 and $2,639,560 indeferred revenue at April 28, 2007 and July 29, 2006, respectively. The Companyis required to determine whether delivery of each shipment has occurred, andthe Company specifies delivery terms and assesses each shipment against thoseterms and only recognizes revenue when there is certainty that the deliveryterms are met. The Company recorded deferred revenue of $2,639,560 as of July29, 2006 for shipments when confirmation of delivery occurred after the end ofthe fiscal period.

**7.  Acquisition**

On March 5, 2006, the Company acquired Engana PtyLimited, renamed Optium Australia Pty Limited, a leading innovator of ROADMtechnology, for approximately $26,272,000 including $638,000 in relatedacquisition costs. The purchase was funded through the issuance of 24,475,897shares of Series D-1 Senior Convertible Preferred Stock and729,361 shares of Series 2 non-voting common stock of the Company,including 2,447,583 and 72,936 of shares held in escrow, respectively, for allof the outstanding shares of Engana Pty Limited. The escrow shares will bereleased six months following the closing of the Company’s initial publicoffering. In determining the aggregate purchase price paid for Engana PtyLimited, the Company used $0.87204 per share for the Series D-1Senior Convertible Preferred Stock, the per share base liquidation value ofsuch stock, and $5.76 per share for the Series 2 non-voting commonstock, the contemporaneous per share fair market value of the Company’s commonstock as determined by the Board of Directors. Additionally, fully-vestedoptions to purchase 55,305 shares of common stock were granted in exchangefor all outstanding options of Engana Pty Limited (which were fully-vested).This acquisition provided additional technology and products to enhance theCompany’s product offerings. The transaction was accounted for as a purchase inaccordance with Statement of Financial Accounting Standards, or SFAS,No. 141, “Business Combinations.” As a result, the assets that the Companyacquired were accounted for at fair value on the acquisition date, and theresults of operations of Engana Pty Limited are included in the Company’sconsolidated results of operations since the acquisition date.

The Engana Pty Limited purchase price was allocated asfollows *(in thousands)*:
| Net assets  acquired                          |   | $      | 4,788  |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Acquired in-process  research and development |   | 11,187 |   |
| Goodwill                                      |   | 10,297 |   |
| Total purchase price                          |   | $      | 26,272 |   |

 

The following table summarizes the components of theassets acquired at fair value *(in thousands)*:
| Cash                        |   | $    | 4,639  |   |
|-----------------------------|--------|------|--------|--------|
| Net fixed assets  and other |   | 491  |   |
| Less liabilities  assumed   |   | (342 | )      |
| Net assets acquired         |   | $    | 4,788  |   |

 

10

----

Engana’s developmental project that had not reachedtechnological feasibility and had no future alternative use was classified asacquired in-process research and development and expensed on theacquisition date. Efforts required to develop acquired in-processresearch and development into commercially viable products include theplanning, designing, prototyping, verification and testing activities that arenecessary to establish that the products can be produced to meet their designspecifications, including functions, features and technical performancerequirements.

The results of operations of Engana have been included inthe Company’s condensed consolidated financial statements subsequent to thedate of acquisition. The financial information in the table below summarizesthe combined results of operations of us and Engana, on a pro forma basis, forthe period prior to the acquisition as if the acquisition occurred at thebeginning of the period presented:
|                                                      | ** ** | **Nine months ended**                                      | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **April 29, 2006**                                         | ** ** |
| ** **                                           | ** ** | **(in thousands, except   per share data)** | ** ** |
| Total revenues                                       |       | $                                                                    | 46,491     |   |
| Pro forma net loss                                   |       | (857                                                                 | )          |
| Pro forma net loss per  share—basic and diluted |       | (0.43                                                                | )          |
| Reported net income                                  |       | (9,818                                                               | )          |
| Reported net income per share—basic and diluted |       | (4.93                                                                | )          |
|                                                      |            |                                                                      |            |  |

 

The pro forma financial information is presented forinformational purposes only and is not indicative of the results of operationsthat would have been achieved if the acquisition had taken place at thebeginning of the period presented. The pro forma financial information excludesapproximately $11.2 million for acquired in-process research anddevelopment, which is a non-recurring charge not representative ofresearch and development expenses incurred for that period.

**8. Redeemable Convertible Preferred Stock**

On November 1, 2006, the Company closed its initialpublic offering. Upon closing of the offering, all outstanding preferred sharesconverted to 16,444,407 shares of common stock, as follows:

|                 | ** ** | **Outstanding  Preferred Shares** | ** ** | **As Converted into  Common Stock** | ** ** |
|-----------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|
| Series A        |       | 23,818,500                             |       | 2,344,496                                          |       |
| Series B        |       | 41,969,418                             |       | 4,966,532                                          |       |
| Series C        |       | 59,879,318                             |       | 4,989,932                                          |       |
| Series D        |       | 25,245,570                             |       | 2,103,793                                          |       |
| Series D–1 |       | 24,475,897                             |       | 2,039,654                                          |       |
|            |       | 175,388,703                            |       | 16,444,407                                         |       |

 

Outstanding warrants for preferred stock on November 1,2006 became exercisable for common stock as follows:
|                    | ** ** | **Outstanding  Preferred Shares** | ** ** | **As Converted into  Common Stock** | ** ** |
|--------------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|
| Series A warrant   |       | 450,000                                |       | 44,294                                             |       |
| Series C  warrants |       | 587,769                                |       | 48,979                                             |       |
|               |       | 1,037,769                              |       | 93,273                                             |       |

 

On November 1, 2006, the Series A warrant was exercised.

11

----

**9. Stockholders’ Equity (Deficit)**

***Common stock***

The Company has authorized under its Certificate ofIncorporation, as amended October 10, 2006, the issuance of 100,000,000shares of common stock, of which 729,361 have been 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 of Directorsapproved 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 stocksplit for all periods presented.

***Stock incentive plan***

In fiscal 2000, the Company adopted the 2000 OptiumCorporation Stock Incentive Plan, as amended, (the “2000 Plan”) under which3,457,073 shares of common stock were reserved for issuance. As of April 28,2007, 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, or make awards of stock appreciation rights todirectors, officers, employees, and consultants of the Company. Option grantsunder the 2000 Plan generally vest over four years and expire ten years fromthe date of grant.

Stock option transactions under the 2000 Plan for thenine months ended April 28, 2007 are summarized as follows:
| ** **                              | ** ** | **Number of  Options** | ** ** | **Range of  Exercise Prices** | ** **  | **Weighted Average  Exercise Price** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------------------|-------------|------------------------------------------------|------------|
| Balance—July 29,  2006        |       | 1,651,766                   |       | $                                       | 0.48-10.92  |                                           | $          | 3.6692 |   |
| Granted                                 |       | 188,924                     |       | $                                       | 14.04-17.50 |                                           | $          | 14.9403 |   |
| Forfeited                               |       | (24,904                     | )          | $                                       | 0.48-17.50  |                                           | $          | 8.4981 |   |
| Exercised                               |       | (30,732                     | )          | $                                       | 0.48-10.92  |                                           | $          | 1.5364 |   |
| Outstanding—April 28,  2007        |       | 1,785,054                   |       | $                                       | 0.48-17.50  |                                           | $          | 4.8322 |   |
| Options exercisable—April 28, 2007 |       | 920,521                     |       | $                                       | 0.48- 14.28 |                                           | $          | 2.1487 |   |

 

During the nine months ended April 28, 2007 certainemployees exercised options to purchase 30,732 shares of the Company’s commonstock for proceeds of $47,217.

The weighted average remaining life of the options as ofApril 28, 2007 is 7.92 years.

The detail of the options exercisable as of April 28, 2007 is asfollows:
| Number of  Options | ** ** | **Range of  Exercise Prices** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Life** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| 675,826                 |       | $0.4800- 1.08                           |       | $                                              | 0.6149     |                                           | 6.50       |   |
| 172,476                 |       | $2.4000- 5.76                           |       | $                                              | 5.0886     |                                           | 8.65       |   |
| 68,748                  |       | $9.2400- 9.24                           |       | $                                              | 9.2400     |                                           | 8.96       |   |
| 3,471                   |       | $14.2800-14.28                          |       | $                                              | 14.2800    |                                           | 9.37       |   |

 

During the first quarter of fiscal year 2007, the Companyadopted the 2006 Optium Corporation Stock Incentive Plan, as amended, (the “2006Plan”) under which 283,333 shares of common stock have been reserved forissuance. The 2006 Plan provisions provide for an automatic increase at thebeginning of every quarter of each fiscal year in the number of shares reservedand available for issuance under the plan by a number equal to 0.75% of thethen outstanding number of shares of common stock. The 283,333 shares reserveddoes not include the additional 190,059 and 190,146 shares reserved as of thefirst day of the Company’s third and fourth quarter, respectively. Under theterms of the 2006 Plan, the Company may grant nonqualified or incentive stockoptions, restricted stock, or make awards of stock appreciation rights todirectors, officers, employees, and consultants of the Company. The exerciseprice for grants shall be determined by the Board of Directors on the date ofgrant, but in no event shall the exercise price of incentive stock options beless than 100% of the fair market value of the common stock (110% for anyincentive stock option granted to a person

12

----

owning more than 10% of the total combined voting power of all classesof stock as determined by the Board of Directors on the date of grant). Optiongrants under the 2006 Plan generally vest over four years and expire ten yearsfrom the date of grant. As of April 28, 2007, 371,801 shares of common stockwere granted under the 2006 Plan.

Stock option transactions under the 2006 Plan for the nine months endedApril 28, 2007 are summarized as follows:
| ** **                               | ** ** | **Number of  Options** | ** ** | **Range of  Exercise Prices** | ** **  | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-----------------------------------------|-------------|------------------------------------------------|------------|
| Balance—July 29,  2006         |       | —                      |       | —                                  |        | —                                         |       |
| Granted                                  |       | 371,801                     |       | $                                       | 18.55-23.56 |                                           | $          | 20.8963 |   |
| Forfeited                                |       | (5,710                      | )          | $                                       | 19.87-21.34 |                                           | $          | 20.8783 |   |
| Exercised                                |       | —                      |       | —                                  |        | —                                         |       |
| Outstanding— April 28,  2007        |       | 366,091                     |       | $                                       | 18.55-23.56 |                                           | $          | 20.8961 |   |
| Options exercisable— April 28, 2007 |       | —                      |       | —                                  |        | —                                         |       |

 

During the nine months ended April 28, 2007, 10 shareswere gifted to an employee and the Company recognized compensation expense forthe shares based on the fair market value of the stock at the date of grant.

The weighted average remaining life of the options as ofApril 28, 2007 is 9.83 years.

The following is the rollforward of the Company’s common stock andadditional paid in capital (APIC) for the nine months ended April 28, 2007:
| ** **                                                                                 | ** ** | **Common Stock** | ** ** | ** **              | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **Shares**            | ** ** | **Par Value**      | ** ** | **APIC** | ** ** |
| ** **                                                                                 | ** ** | ** **            | ** ** | **(in thousands)** | ** ** |
| Balance July 29, 2006                                                                      |       | 4,353,509             |       | $                       | —     |   | $ | 9,172 |   |
| Exercise of employee stock options, gifted shares and  fractional reverse split adjustment |       | 30,701                |       | —                  |       | 47 |   |
| Series A warrant exercise                                                                  |       | 36,789                |       | —                  |       | — |   |
| Issuance of common stock for services                                                      |       | 1,500                 |       |                    |       | 31 |   |
| Issuance of common stock in initial public offering                                        |       | 5,980,000             |       | 1                       |       | 93,211 |   |
| Conversion of preferred stock upon initial public  offering                                |       | 16,444,407            |       | 1                       |       | 87,172 |   |
| Stock based compensation                                                                   |       | —                |       | —                  |       | 732 |   |
| Balance April 28, 2007                                                                     |       | 26,846,906            |       | $                       | 2          |   | $ | 190,365 |   |

 

***Deferred Compensation***

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

In June 2006, based on the Company’s retrospectivedeterminations of fair value of its common stock, the Company offered to therecipients 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 theSeptember 21, 2005 grants and from $1.20 to $3.96 in the case of theNovember 7, 2005 grants. All of such stock option recipients have chosento amend their stock options to a higher exercise price in order to avoidpotential adverse personal income tax consequences. There was no additionalconsideration offered to the employees in exchange for amending their stockoptions.

13

----

In relation to these amended stock options, the Companyrecorded deferred stock-based compensation of approximately $1.5 millionin the balance sheet in addition to the approximately $125,000 in deferredstock-based compensation referenced above. The amount of additionaldeferred stock-based compensation for each amended stock option wascalculated based upon the difference between the amended exercise price of$1.08 per share, $2.40 per share or $3.96 per share, as applicable, and $10.92per share, the valuation by the Board of Directors of the per share fair valueof our common stock as of the date of amendment of the stock options. TheCompany will amortize this additional deferred stock-based compensationexpense over the vesting period of the applicable stock option grants, subjectto adjustment for any stock options which are cancelled or accelerated. Duringthe three months and nine months ended April 28, 2007, total stock-basedcompensation related to the revaluation and remeasurement of these grants wasapproximately $125,100 and $395,200.

***Warrants issued to employees***

On April 31, 2003, the Company issued 1,308,954warrants with an exercise price of approximately $0.05 per share to purchaseshares of the Company’s Series C preferred stock to officers and employeeswho invested in the Series B preferred stock offering in fiscal 2001. Thewarrants are immediately exercisable and expire on the earliest of terminationof employment with the Company or January 31, 2013. The excess of the fairmarket value of the Series C preferred stock over the exercise price ofapproximately $195,900 was included in general and administrative expenses forthe year ended August 2, 2003. During fiscal year 2004, the Companycanceled 58,007 Series C warrants as a result of an employee terminationand reduced its fiscal year 2004 salary expense by $8,680. During the yearended July 29, 2006, 663,178 warrants were exercised for 55,264 shares ofcommon stock and proceeds of $33,398.

***Warrants issued in connection withcapital lease financing***

On May 16, 2001, in connection with the closing ofthe capital lease line of credit (see Note 5), the Company issued awarrant to purchase 450,000 shares of Series A preferred stock at $0.33333per share. The warrant vested immediately upon issuance and expires at thelater of (i) ten years from the date of issuance or (ii) five yearsafter the date of a qualified public offering of the Company’s common stock, asdefined. The Company has reserved 450,000 shares of Series A preferredstock for issuance under the warrant agreement. The Company accounts for thesewarrants in accordance with APB Opinion No. 14, “Accounting forConvertible Debt and Debt Issued with Stock Purchase Warrants.” The Companyvalued these warrants using the Black-Scholes option pricing model usingthe following assumptions: 80% volatility, 5.39% risk-free interest rate,0.0% dividend yield, and a ten-year expected life, resulting in deferredfinancing costs of $125,336. Deferred financing costs are amortized to interestexpense over the term of the debt using a method that approximates the interestmethod. In November 2006, these options were exercise in full pursuant to itscashless exercise provision and we issued 36,789 shares of common stock.

**10. Income Taxes**

At April 28, 2007, the Company has federal net operatingloss (“NOL”) carry forwards of approximately $27 million which expire throughJuly 2025. NOL carry forwards and credits are subject to review and possibleadjustments by the Internal Revenue Service (“IRS”) and may be limited by theoccurrence of certain events, including significant changes in ownershipinterests. The Company has 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 net operating loss carry forwardsattributable to periods before the change. The review determined the Companyhas potential limitations related to approximately $2.0 million of the NOLcarry forwards.

In connection with the acquisition of Engana Pty Limited,the Company acquired Australian NOL tax carry forwards and credits in theamount of approximately $4.8 million. These NOL carry forwards and credits aresubject to review and possible adjustments by the Australian Taxation Office (“ATO”)and may be limited by the occurrence of certain events, including significantchanges in ownership interests or significant changes in the business of theCompany. This is a factual test that can only be determined in the year inwhich the NOL carry forward is sought to be utilized. There is no time limit onthe use of Australian NOL carry forwards. The acquired net operating losseshave been offset by a valuation allowance. Upon utilization of such NOL carryforwards, goodwill will be reduced.

Because of the Company’s lack of earnings history, thedeferred tax assets have been fully offset by a valuation allowance. Inassessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during those periods inwhich those temporary differences become deductible or within the periodsbefore carry forwards expire.

14

----

For the nine months ended April 28, 2007, the Company hasa current tax provision of approximately $654,000 for federal AMT and stateincome tax purposes.

**11. Commitments and Contingencies**

***Litigation***

On September 11, 2006, JDS Uniphase Corporation andEMCORE Corporation filed a complaint in the United States District Court forthe Western District of Pennsylvania alleging that the Company’s 1550 nm HFCexternally modulated transmitter, in addition to possibly “products as yetunidentified,” infringes on two U.S. patents. A hearing on patent claim constructionfor this case was held on May 31, 2006, the outcome of which is not yet known. Sincediscovery is currently in process, the Company is unable to determine theultimate outcome of this litigation. On March 14, 2007, JDS Uniphase and EMCORECorporation filed a second complaint in the United States District Court forthe Western District of Pennsylvania alleging that the Company’s 1550 nm HFCquadratine amplitude modulated transmitter, in addition to possibly “productsas yet unidentified,” infringes on another U.S. patent. Since discovery iscurrently in process, the Company is unable to determine the ultimate outcomeof this second litigation.

In December 2004, the Company terminated a relationshipwith Appletec Limited, an Israeli company assisting the Company’s sales effortsin Israel. The Company had received correspondence from Appletec claiming moneyowed for sales commissions and in June 2005 proposed a settlement of which noresponse occurred. Appletec has filed an action against the Company allegingdamages. In December 2006, the Company received a letter from attorneysrepresenting Applectec enclosing a copy of a purported default judgment in anamount of approximately $1.2 million for failure to appear in the action filedagainst the Company. The Company has filed a motion with the Israeli court thatasserts among the other things, the Company has not to date been served noticeof the action pursuant to the requirements of Israeli law and, therefore, thedefault judgment is required to be reversed under Israeli law. The defaultjudgment has been stayed pending resolution of the Company’s motion. The Companydoes not expect the ultimate outcome of this matter to have a material adverseeffect on the business or financial position.

In the ordinary course of business, the Company is partyto litigation, claims and assessments. Based on information currentlyavailable, management does not believe the impact of these matters will have amaterial effect on the financial condition, results of operations or cash flowsof the Company.

***Employment agreements***

The Company has employment agreements with certainofficers and key employees. According to the terms of the agreements, if thereis a termination without cause, as defined, or, if following a change ofcontrol, for good reason, as defined, the Company must pay, depending on theagreement, severance pay of one to two years.

**12. Major Customers**

Accounts receivable potentially subject the Company to aconcentration of credit risk. The Company currently derives its revenues from avariety of companies in many different geographic locations internationally andin the United States operating within the telecommunications and Cable TVindustry.

Revenues from major customers during the three months andnine months ended April 28, 2007 comprising 10% or more of total revenues wereas follows:
|            | ** ** | **Three months   ended** | ** ** | **Nine months   ended** | ** ** |
|------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **April 28, 2007**       | ** ** | **April 28, 2007**      | ** ** |
| ** ** | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Customer A |       | 24                                 | %          | 26                                | %          |
| Customer B |       | 21                                 | %          | 20                                | %          |
| Customer C |       | 9                                  | %          | 13                                | %          |

 

Accounts receivable from these three customers at April28, 2007 represented 57% of total accounts receivable.

15

----

**13. Related Party Transactions**

During the three months and nine months ended April 28,2007 and April 29, 2006, the Company paid Guy Gertel, a consultant for salesand marketing and who is the brother of the president and chief executiveofficer of the Company, $34,197 and $100,780 and $31,568 and $94,705,respectively, in cash compensation during such fiscal periods. In addition,during the three months and nine months ended April 28, 2007 and April 29,2006, the Company granted, for no additional consideration, 1,500 and 6,250,respectively, shares of common stock with a fair market value of $31,275 and$33,750, respectively.

During the three months and nine months ended April 28, 2007, theCompany used Gertel Asset Management, a company that provides privatejet air transportation, for certain business travel by our executive officersand other employees. Eitan Gertel has an ownership interest in Gertel AssetManagement. Payments to Gertel Asset Management by the Company were approximately $12,957 and $50,874, respectively,during such periods.

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

**14. Subsequent Event**

On May 15, 2007, the Company acquired Kailight Photonics,Inc. for $35 million in cash consideration. In addition, the Company issuedoption grants for an aggregate of 198,209 shares under its 2006 Plan insubstitution for certain outstanding option grants from Kailight Photonics, Inc.,as permitted by the 2006 Plan. No forfeitures from the substitute grants willbe available for future grants.

16

----

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

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**FOR THE THREE AND NINE MONTHS ENDEDAPRIL 28, 2007**

**AND COMPARABLE PERIODS ENDED APRIL29, 2006**

*The following discussion and analysisof 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 registration statement on Form S-1**(Registration No. 333-135472)declared effective by the Securities and Exchange Commission on October 26,2006.*

*In addition to historical information,Management’s Discussion and Analysis of Financial Condition and Results ofOperation and other items in this Quarterly Report on Form 10-Q contain forward-lookingstatements based on current expectations that involve risks, uncertainties andassumptions. Our actual results may differ materially from those anticipated inthese forward-looking statements as a result of various factors. Whenused in this document, the words “will,” “plan,” “believe,” “may,” “anticipate,”“ could,”,” “seek,” “estimate,” “expect,” “continue,” “intend,” and similarexpressions, variations or the negatives of these terms are intended toidentify forward-looking statements. Although management believes that theexpectations reflected in these forward-looking statements are reasonable atthe time they are made, we can give no assurance that these expectations willprove to be correct. We undertake no obligation to publicly revise anyforward-looking statement to reflect circumstances or events after the date ofthis document.*

**Overview**

We are a supplier of high-performance opticalsubsystems for use in telecommunications and cable TV network systems. Sinceour founding in 2000, we have developed proprietary technology and productsthat enable transmission, reception and switching functionality for high-bandwidth,intelligent networking applications. We design, manufacture and sell a suite ofoptical subsystems including transceivers and transmitters. We have alsorecently launched a technologically innovative ROADM, that enables dynamicwavelength processing, or DWP, which we refer to as our DWP ROADM. We believethat we have a fundamentally different product design approach from that of ourcompetitors, allowing us to achieve mass customization of our products usingcommon hardware platforms and customized embedded software. We also haveimplemented several unique automated and semi-automated manufacturingsystems and processes designed to further improve our manufacturing yields andproduce higher volumes of products than generally possible using manualproduction techniques.

**Background**

We were incorporated on September 8, 2000 andcommenced operations in October 2000. In November 2000 andApril 2001, we raised approximately $7.9 million through the issuanceof shares of series A convertible preferred stock. In May, June and Julyof 2001, we raised approximately $35.7 million through the issuance ofshares of series B convertible preferred stock. We completed another roundof preferred 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 over the past nine years toapproximately $65.9 million.

On November 1, 2006, we closedour initial public offering of 5.98 million shares of common stock at a priceto the public of $17.50 per share, including the sale of 780,000 shares tocover underwriter over-allotments. Our common stock, quoted on the NasdaqGlobal Market under the symbol “OPTM,” began trading on October 27, 2006. Cashproceeds to us, net of underwriter commissions of approximately $7.3 millionand related offering expenses of approximately $4.1 million, totaledapproximately $93.2 million, including approximately $1.9 million of offeringexpenses paid during fiscal year 2006. All outstanding preferred stock wasconverted to common stock upon the completion of the initial public offering.

**CriticalAccounting Policies**

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of income and loss during

17

----

the reporting period. Actual results could differ fromthose estimates. Operating results for the fiscal quarters presented are notnecessarily indicative of the results that may be expected for the fiscal year.In the opinion of management, all adjustments (consisting solely of normalrecurring adjustments) necessary for a fair presentation of the financialstatements for these interim periods have been included. There have beenno material changes to the critical accounting policies and estimates asdisclosed in ourregistration statement on Form S-1 (RegistrationNo. 333-135472) declared effective by the Securities and Exchange Commission onOctober 26, 2006.

**Recent Accounting Pronouncements**

In July 2006, the FASB issued FIN 48, “Accountingfor Uncertainty in Income Taxes,” which is an interpretation of SFASNo. 109, “Accounting for Income Taxes.” FIN 48 creates a single modelto address uncertainty in tax positions and clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS 109 by prescribing the minimum threshold a taxposition is required to meet before being recognized in an enterprise’sfinancial statements. FIN 48 also provides guidance on derecognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition, and clearly scopes out income taxes fromSFAS No. 5, “Accounting for Contingencies.” FIN 48 is effective forfiscal years beginning after December 15, 2006 but earlier application isencouraged. Differences between the amounts recognized in the statements offinancial position prior to adoption of FIN 48 and the amounts reportedafter adopted should be accounted for as a cumulative-effect adjustmentrecorded to the beginning balance of retained earnings. We are currentlydetermining the impact of FIN 48 on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements”. SFAS No. 157 establishes a common definition to provideenhanced guidance when using fair value to measure assets and liabilities,establishes a framework for measuring fair value, and expands disclosures aboutsuch fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007. We are currently determining the impact ofimplementating SFAS No. 157.

In September 2006, the SEC staff issued Staff AccountingBulletin No. 108 “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 requires that public companies utilize a “dual-approach” to assessingthe quantitative effects of financial misstatements. The dual approach includesboth an income statement focused assessment and a balance sheet focusedassessment. The guidance in SAB 108 must be applied to annual financialstatements for fiscal years ending after November 15, 2006. The implementationof SAB 108 is not expected to have a material impact on our consolidatedfinancial position or results of operations.

**Results of operations**

***Consolidated results of operations indollars and as a percentage of revenues for the nine months and three months endedApril 28, 2007 and April 29, 2006 were as follows:***

18

----

 
| ** **                                | ** ** | **Nine months ended**                   | ** ** | **Three months ended**                  | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **(in thousands, except  percentages)** | ** ** | **(in thousands, except  percentages)** | ** ** |
| ** **                                | ** ** | **(unaudited)**                         | ** ** | **(unaudited)**                         | ** ** |
| ** **                                | ** ** | ** **                              | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **April 28,**                      | ** ** | **% of**                           | ** ** | **April 29,** | ** ** | **% of** | ** ** | ** ** | ** ** | **%** | ** ** | **April 28,** | ** ** | **% of** | ** ** | **April 29,** | ** ** | **% of** | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                                | ** ** | **2007**                                | ** ** | **Revenue**                             | ** ** | **2006** | ** ** | **Revenue** | ** ** | **Variance** | ** ** | **Variance** | ** ** | **2007** | ** ** | **Revenue** | ** ** | **2006** | ** ** | **Revenue** | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| Revenue                                   |       | $                                       | 98,696     |                                    |       |   | $ | 46,491 |   |   |   | $ | 52,205 |   | 112.3 | % | $ | 34,547 |   |   |   | $ | 16,462 |   |   |   | $ | 18,085 |   | 109.9 | % |
| Cost of revenue                           |       | 70,709                                  |       | 71.6                                    | %          | 35,636 |   | 76.7 | % | 35,073 |   | 98.4 | % | 25,190 |   | 72.9 | % | 12,256 |   | 74.5 | % | 12,934 |   | 105.5 | % |
| Gross profit                              |       | 27,987                                  |       | 28.4                                    | %          | 10,855 |   | 23.3 | % | 17,132 |   | 157.8 | % | 9,357 |   | 27.1 | % | 4,206 |   | 25.5 | % | 5,151 |   | 122.5 | % |
| Operating expenses:                       |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and product development          |       | 9,888                                   |       | 10.0                                    | %          | 5,979 |   | 12.9 | % | 3,909 |   | 65.4 | % | 3,379 |   | 9.8 | % | 2,435 |   | 14.8 | % | 944 |   | 38.8 | % |
| Acquired IPR&D                        |       | —                                  |       | 0.0                                     | %          | 11,187 |   | 24.1 | % | -11,187 |   | -100.0 | % | — |   | 0.0 | % | 11,187 |   | 68.0 | % | -11,187 |   | -100.0 | % |
| Selling, general and administrative       |       | 9,897                                   |       | 10.0                                    | %          | 3,571 |   | 7.7 | % | 6,326 |   | 177.1 | % | 3,711 |   | 10.7 | % | 1,643 |   | 10.0 | % | 2,068 |   | 125.9 | % |
| Total operating expenses                  |       | 19,785                                  |       | 20.0                                    | %          | 20,737 |   | 44.6 | % | -952 |   | -4.6 | % | 7,090 |   | 20.5 | % | 15,265 |   | 92.7 | % | -8,175 |   | -53.6 | % |
|                                      |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from  operations            |       | 8,202                                   |       | 8.3                                     | %          | (9,882 | ) | -21.3 | % | 18,084 |   | -183.0 | % | 2,267 |   | 6.6 | % | (11,059 | ) | -67.2 | % | 13,326 |   | -120.5 | % |
| Interest and other income  (expense), net |       | 2,491                                   |       | 2.5                                     | %          | 108 |   | 0.2 | % | 2,383 |   | 2206.5 | % | 1,333 |   | 3.9 | % | 68 |   | 0.4 | % | 1,265 |   | 1860.3 | % |
| Income (loss) before  income tax expense  |       | 10,693                                  |       | 10.8                                    | %          | (9,774 | ) | -21.0 | % | 20,467 |   | -209.4 | % | 3,600 |   | 10.4 | % | (10,991 | ) | -66.8 | % | 14,591 |   | -132.8 | % |
| Income tax expense                        |       | 654                                     |       | 0.7                                     | %          | 44 |   | 0.1 | % | 610 |   | 1386.4 | % | 182 |   | 0.5 | % | 21 |   | 0.1 | % | 161 |   | 766.7 | % |
| Net income (loss)                         |       | $                                       | 10,039     |                                    | 10.2       | % | $ | (9,818 | ) | -21.1 | % | $ | 19,857 |   | -202.3 | % | $ | 3,418 |   | 9.9 | % | $ | (11,012 | ) | -66.9 | % | $ | 14,430 |   | -131.0 | % |

 

***Revenue***

Total revenue increased 112.3% to approximately $98.7 million forthe nine months ended April 28, 2007 from approximately $46.5 million for thenine months ended April 29, 2006. Total revenue increased 109.9% toapproximately $34.5 million for the three months ended April 28, 2007 fromapproximately $16.5 million for the three months ended April 29, 2006. Theseincreases in revenue are primarily attributable to an increase in sales of our10 Gb/s transceivers of approximately $40.0 and $13.7 million,respectively, as well as an increase in sales supporting hybrid fiber coaxialnetwork systems of approximately $11.0 and $3.4 million, respectively. Growthcontinues to be driven by increased volumes in Telecom, Fiber to the Home andCable TV applications.

Our revenuescontinue to be driven by accelerating investment in bandwidth capacityexpansion to support growing video transport traffic, including on-demandinternet video, IPTV and expanded HD cable TV offerings, as well as G3+ and G4cellular systems. In the three months ended April 28, 2007, we experienced softnessin demand for our high-end 300 pin transceiver products and a significantincrease in demand for our short reach XFP products. Our high-end 300 pintransceiver products carry significantly higher average selling prices than ourshort reach XFP. While not material to our total revenues, we also experiencedincreased revenue for our ROADM products during the period. We currently expectthe softness in demand for high-end 300 pin transceivers to continue in thenear term.

***Gross profit***

Gross profit increased 157.8% to approximately $28.0 million forthe nine months ended April 28, 2007 from approximately $10.9 million for thenine months ended April 29, 2006. Gross profit increased 122.5% to approximately$9.4 million for the three months ended April 28, 2007 from approximately$4.2 million for the three months ended April 29, 2006. Gross profitpercentages increased to 28.4% and 27.1% from 23.3% and 25.5% over the ninemonths and three months ended April 28, 2007, respectively, compared to thenine and three months ended April 29, 2006, respectively. The increase in grossprofit for both the nine and three month periods ended April 28, 2007 wasprimarily attributable to unit volume increases with increased demand for ourproducts and driving additional operational cost efficiencies. Additionally,for the nine month period ended April 28, 2007, there was a favorable productmix shift from lower margin short reach products to higher margin long reachproducts.

In the threemonths ended April 28, 2007, we experienced softness in demand for our high-end300 pin transceiver products and a significant increase in demand for our shortreach XFP products. Our high-end 300 pin transceiver products typically carryhigher gross profit margins than our short reach XFP products and this changein demand negatively affected our total gross margin percentage for the threemonths ended April 29, 2007. We currently expect the

19

----

softness in demand forhigh-end 300 pin products to continue in the near term.

***Research and product development***

Research and product development expenses increased 65.4%to approximately $9.9 million for the nine months ended April 28, 2007from approximately $6.0 million for the nine months ended April 29, 2006.Research and product development expenses increased 38.8% to approximately$3.4 million for the three months ended April 28, 2007 from approximately$2.4 million for the three months ended April 29, 2006. The increase inresearch and product development cost is partially a result of our research andproduct development activities related to our Optium Australia operations fromour acquisition of Engana on March 5, 2006. The nine and three monthsended April 28, 2007 include approximately $3.1 million and $1.1 million,respectively, of research and development costs with respect to our ROADMdevelopment efforts. Additionally, research and product development costs increasedas a result of our higher headcount and associated costs related to ourdecision to increase the number of engineering projects which will furtherexpand our product portfolio. We expect these costs to continue to increase aswe undertake additional research and development projects and utilize ournewly-acquired Kailight Photonics engineering group, both of which are expectedto continue to expand our product suite. In general we expect our research anddevelopment expenses to increase as our revenues increase and we targetresearch and development expenses to range between 10% and 12% of revenues in aparticular period.

***Acquired in-process research anddevelopment***

Acquired in-process research and development costsdecreased to $0 from approximately $11.2 million for the three months and ninemonths ended April 28, 2007 and April 29, 2006, respectively, due to ouracquisition of Engana during the three months ended April 29, 2006. Acquired in-processresearch and development represents the value assigned in a businesscombination to research and development project of the acquired business thatwere commenced, but not completed, at the date of acquisition, for whichtechnological feasibility has not been established, and which have noalternative future use in research and development activities or otherwise. Weexpect to incur acquired research and development expense in the fiscal quarterending July 28, 2007 as the result of our acquisition of Kailight Photonicsduring the quarter.

***Selling, general and administrative***

Selling, general and administrative expenses increased177.1% to approximately $9.9 million for the nine months ended April 28,2007 from approximately $3.6 million for the nine months ended April 29,2006. Selling, general and administrative expenses increased 125.9% toapproximately $3.7 million for the three months ended April 28, 2007 fromapproximately $1.6 million for the three months ended April 29, 2006. TheCompany experienced increased costs for the additional infrastructure necessaryto support our revenue growth. These costs included increased labor costs as aresult of additional headcount and additional legal and other professionalfees. Additionally, during the nine months ended April 28, 2007, we incurred$0.9 million in stock-based compensation primarily related to the adoption ofSFAS 123(R) and $0.6 million related to duplicate facility costs as we relocateour operations to a new leased facility. Our selling, general andadministrative costs also increased during the nine months ended April 28, 2007as a result of the additional costs of being a publicly-traded company,including the costs of compliance with the Sarbanes-Oxley Act of 2002 andcertain professional fees for corporate governance. We expect these costs tocontinue to increase as we continue our compliance efforts and integrate ournewly-acquired Kailight Photonics administrative functions. During the periodwe also incurred additional legal fees as the result of being a publicly-tradedcompany and as a result of litigation matters commenced in the period.

***Interest and other income (expense),net***

Interest and other income (expense), net, increased toapproximately $2.5 million and $1.3 million for the nine months and threemonths ended April 28, 2007, respectively, from approximately $108,000 and$68,000 for the nine months and three months ended April 29, 2006,respectively. The increase was due to additional cash and cash equivalents andshort-term investments as a result of the proceeds of our initial public offering.We expect our interest income to decrease in the future as the result of $35million cash purchase price paid, plus expenses, in our acquisition of KailightPhotonics.

***Income tax expense***

Income tax expense was approximately $654,000 and$182,000 for the nine months and three months ended April 28, 2007,respectively, compared to approximately $44,000 and $21,000 for the nine monthsand three months ended April 29, 2006, respectively. The Company’s overalleffective tax rate was approximately 7% and 2% in the nine month periods endedApril 28, 2007 and April 29, 2006, respectively. Income tax expense willcontinue to increase as our profits increase.

20

----

The valuation allowance related to the US NOL iscurrently approximately $11 million. There are several criteria that are usedto determine when a valuation reserve is no longer needed. We continue toevaluate the appropriateness of the reserve. If we determine that the reserveis no longer appropriate, we will be required to record a deferred tax asset equalto the tax effect of our then current amount of NOL carryforwards. Therecognition of a deferred tax asset will in the future result in our U.S. GAAPeffective tax rate for an applicable period to exceed our actual cash tax ratefor the period, as long as we remain able to utilize our NOL carryforwards toreduce our actual cash tax rate.

***Net income***

Net income increased 202.3% to approximately $10.0million for the nine months ended April 28, 2007 from a net loss ofapproximately $9.8 million for the nine months ended April 29, 2006. Net incomeincreased 131.0% to approximately $3.4 million for the three months ended April28, 2007 from a net loss of approximately $11.0 million for the three monthsended April 29, 2006. As a percentage of sales, net income was approximately10.2% and 9.9% during the nine months and three months ended April 28, 2007,respectively, as compared to 21.1% and 66.9% in the nine months and threemonths ended April 29, 2006, respectively. The changes are primarilyattributable to the factors described above.

**Liquidity and Capital Resources**

***Operating activities***

Net cash used in operating activities was approximately$10,000 for the nine months ended April 28, 2007 and net cash provided byoperating activities for the nine months ended April 29, 2006 was approximately$468,000. Net cash used in operating activities for the nine months ended April28, 2007 primarily resulted from period to date net income of approximately$10.0 million offset by increases in accounts receivables of approximately $7.8million and inventories of approximately $5.1 million.

***Investing activities***

Net cash used in investing activities was approximately$27.1 million for the nine months ended April 28, 2007 and net cash provided byinvesting activities during the nine months ended April 29, 2006 wasapproximately $2.4 million. Net cash used in investing activities for the ninemonths ended April 28, 2007 was primarily related to purchasing marketablesecurities as part of our investing a portion of the initial public offeringproceeds. Net cash provided by investing activities for the nine months endedApril 29, 2006 was primarily related to our acquisition of Engana. Subsequentto April 28, 2007, the Company acquired Kailight Photonics for $35 million incash consideration.

***Financing activities***

Net cash provided by financing activities wasapproximately $94.8 million for the nine months ended April 28, 2007 andapproximately $96,000 for the nine months ended April 29, 2006. Net cashprovided by financing activities for the nine months ended April 28, 2007 wasprimarily related to the proceeds from our initial public offering. Net cashprovided by financing activities for the nine months ended April 29, 2006related to proceeds from the exercise of employee stock options.

***Sources of cash***

On November 1, 2006, we closedour initial public offering of 5.2 million shares of common stock at a price tothe public of $17.50 per share as well as the sale of an additional 780,000shares to cover underwriter over-allotments. Our common stock, quoted on theNasdaq Global Market under the symbol “OPTM,” began trading on October 27,2006. Cash proceeds to us, net of underwriter commissions of approximately $7.3million and related offering expenses of approximately $4.1 million, totaledapproximately $93.2 million. All preferred stock outstanding at November 1,2006 was converted to common stock upon the completion of the initial publicoffering.

Prior to our public offering of common stock, we hadfinanced our operations primarily through internally generated cash flows, ourlines of credit and the issuance of preferred stock. As of April 28, 2007 wehad cash and cash equivalents of $78.0 million, short term investments of $23.2million and accounts receivable of approximately $26.9 million and nodebt.

We believe our existing cash and cash equivalents and ourexpected 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, and theexpansion of our sales and marketing and research and development activities.To the extent that our cash and cash equivalents, cash flows from operatingactivities, and net proceeds of our initial public offering are insufficient tofund our future activities, we may need to raise additional funds through bankcredit arrangements or public or private equity or debt financings.

21

----

We also may need to raise additional funds in the eventwe determine, in the future, to effect one or more acquisitions of businesses,technologies and/or products. Although there are no present understandings,commitments or agreements with respect to acquisitions of other businesses,products or technologies, we may in the future consider such transactions,which may require debt or equity financing. The issuance of debt or equitysecurities could be expected to have a dilutive impact on the our stockholders,and there can be no assurance as to whether or when any acquired business wouldcontribute positive operating results commensurate with the associatedinvestment. In the event we require additional cash resources, we may not beable to obtain bank credit arrangements or affect an equity or debt financingon terms acceptable to us or at all. Any material acquisition could result in adecrease in working capital depending upon the amount, timing, and nature ofthe consideration paid.

***Equity sales***

We raised approximately $7.9 million of proceedsthrough sales of our series A convertible preferred stock in the fiscalyear ended July 28, 2001. We raised approximately $35.7 million ofproceeds through sales of our series B convertible preferred stock in thefiscal year ended July 28, 2001. We raised approximately$11.9 million of proceeds through sales of our series C seniorconvertible preferred stock in the fiscal year ended August 2, 2003. Weraised approximately $10.3 million of proceeds through sales of ourseries D senior convertible preferred stock in the fiscal year endedJuly 31, 2004. We issued approximately $21.3 million of series D-1senior convertible preferred stock and approximately $4.2 million incommon stock during the fiscal year 2006 as consideration for the acquisitionof all outstanding equity securities of Engana. In connection with theacquisition, we acquired Engana’s cash and cash equivalent assets ofapproximately $4.6 million. All of the shares of our preferred stock wereconverted into common stock in connection with the closing of our initialpublic offering on November 1, 2006.

***Line of credit***

On May 25, 2004, we entered into a $3.5 millionline of credit agreement with Silicon Valley Bank, including a revolving creditfacility of $2.5 million and an equipment term loan of $1.0 million.This line of credit bears interest at the prime rate plus 1.75%. OnJune 27, 2005, we modified the terms of the line of credit to increase theequipment term note to $2.0 million; change the interest rate to the primerate plus 1.25% for the initial equipment advance of $820,778. On June 6,2006, we renewed the line of credit, to modify the interest rate on theoutstanding principal to the prime rate plus 0.75% and extending the renewaldate to May 22, 2007. The interest rate would be prime plus 1.5% forsupplemental advances.

On November 3, 2006, we paid the outstanding line ofcredit in full and subsequently cancelled the line of credit.

**Off-Balance Sheet Financing Arrangements**

We do not engage in any off-balance sheet financingarrangements. We do not have any interest in entities referred to as variableinterest entities, which includes special purpose entities and other structuredfinance entities.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed to market risk from changesin interest rates. Various financial instruments held by us are sensitive tochanges in interest rates. Interest rate changes could result in an increase ordecrease in interest income as well as in gains or losses in the market valueof our debt security investments due to differences between the market interestrates and rates at the date of purchase of these investments.

We place our cash investments with high credit-quality financialinstitutions and currently invest primarily in money market funds placed withmajor banks and financial institutions, auction rate securities, corporatepaper and United States government and United States government corporation andagency obligations and/or mutual funds investing in the like. We haveinvestment guidelines relative to diversification and maturities designed tomaintain safety and liquidity. As of April 28, 2007, our cash and cashequivalents totaled approximately $78,042,000 and we had short-term investmentstotaling approximately $23,170,000. If, during the nine month period endedApril 28, 2007, average short-term interest rates increase or decrease by 50basis points, our projected interest income from cash and cash equivalents andshort-term investments would increase or decrease by approximately $375,000.

Due tothe short-term nature of our cash and cash equivalents, the carrying valueapproximates market value and are not generally subject to price risk due tofluctuations in interest rates. Our short-term investments are subject to pricerisk due to fluctuations in interest rates. Neither a 10% increase nor decreasein prices would have a material effect on our consolidated financial

22

----

statements. Allshort-term investments are considered to be available-for-sale, accounted forat fair value, with resulting unrealized gains or losses reported as a separatecomponent of shareholders’ equity. If these available-for-sale securitiesexperience declines in fair value that are considered other-than-temporary, anadditional loss would be reflected in net income (loss) in the period when thesubsequent impairment becomes apparent.

Market risk represents the risk of loss that may impactour financial position due to adverse changes in financial market prices andrates. 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.

**Foreign Currency Exchange Risk**

Our subsidiaries Optium Australiaand Kailight Photonics Ltd. are located in Sydney, Australia and Nes Ziona,Israel, respectively. Due to the relative low volume of payments made by usthrough these subsidiaries, and the fact we intend that all of our sales willcontinue to be made in U.S. dollars, we do not believe that we have significantexposure to foreign currency exchange risks. 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 years

**ITEM 4.CONTROLS AND PROCEDURES**

Under the supervision andwith the participation of our management, including our Chief Executive Officerand our Chief Financial Officer, we evaluated the effectiveness of ourdisclosure controls and procedures, as such term is defined under Rule13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this quarterly report.

**PART II - OTHER INFORMATION**

**ITEM 1. Legal Proceedings**

In December 2004, we terminated our relationship with AppletecLimited, an Israeli company that was assisting us with our sales efforts inIsrael. Beginning in February 2005 and through May 2005, we receivedcorrespondence from Appletec claiming we owed Appletec sales commissions. We donot believe that we owe any further commissions to Appletec. However, in June2005 we sent a letter to Appletec’s counsel proposing a settlement. We did notreceive a response to our proposal and Appletec filed an action in Israelagainst us and a consultant of ours alleging damages in an amount ofapproximately $1,800,000. In December 2006, we received a letter from attorneysrepresenting Appletec enclosing a copy of a purported default judgment in anamount of approximately $1.2 million for failure to appear in the action filedagainst us. We have filed a motion with the Israeli court that asserts that,among other things, we have not to date been served notice of the actionpursuant to the requirements of Israeli law and, therefore, the defaultjudgment is required to be reversed under Israeli law. The default judgment hasbeen stayed pending resolution of our motion. We intend to defend ourselvesvigorously and we do not expect the ultimate outcome of this matter to have amaterial adverse effect on our business or financial position.

On September 11, 2006, JDS Uniphase Corporation andEMCORE Corporation filed a complaint in the United States District Court forthe Western District of Pennsylvania alleging that the Company’s 1550 nm HFCexternally modulated transmitter, in addition to possibly “products as yetunidentified,” infringes on two U.S. patents. A hearing on patent claim constructionfor this case was held on May 31, 2006, the outcome of which is not yet known. Sincediscovery is currently in process, the Company is unable to determine theultimate outcome of this litigation. On March 14, 2007, JDS Uniphase and EMCORECorporation filed a second complaint in the United States District Court forthe Western District of Pennsylvania alleging that the Company’s 1550 nm HFC quadratineamplitude modulated transmitter, in addition to possibly “products as yetunidentified,” infringes on another U.S. patent. Since discovery is currentlyin process, the Company is unable to determine the ultimate outcome of thissecond litigation. During the fiscal year ended July 29, 2006 and the ninemonths ended April 28, 2007, sales of our 1550 nm HFC externally modulatedtransmitter and our 1550 nm HFC quadratine amplitude modulated transmitters,together, represented less than 5% of our revenues. The plaintiffs are seekingfor the court to declare that we have willfully infringed on such patents andto be awarded up to three times the amount of any compensatory damages found,if any, plus any other damages and costs incurred. We intend to vigorouslydefend the claims asserted against us and we believe that we have meritoriousdefenses.

23

----

In the ordinary course of business, the Company is partyto litigation, claims and assessments. Based on information currentlyavailable, management does not believe the impact of these matters will have amaterial effect on the financial condition, results of operations or cash flowsof the Company.

**ITEM 1A. Risk Factors**

*Investing in our common stock involvesa high degree of risk. You should carefully consider the following riskfactors, as well as the other information in this Form 10-Q, before decidingwhether to invest in our common stock. If any of the following risks actuallymaterializes, our business, financial condition and results of operations willsuffer. The trading price of our common stock could decline as a result of anyof these risks, and you might lose all or part of your investment in our commonstock.*

**Risks Related to Our Business**

***If optical communications networks donot continue to expand as expected, our business will suffer.***

Our future success as a manufacturer of opticalsubsystems ultimately depends on the continued growth of the communicationsindustry and, in particular, the continued expansion of global informationnetworks, particularly those directly or indirectly dependent upon a fiberoptics infrastructure. As part of that growth, we are relying on increasingdemand for voice, video and other data delivered over high-bandwidthnetwork systems as well as commitments by network systems vendors to invest inthe expansion of the global information network. As network usage and bandwidthdemand increase, so does the need for advanced optical networks to provide therequired bandwidth. Without network and bandwidth growth, the need for ouroptical subsystems, and hence our future growth as a manufacturer of theseproducts, is jeopardized. Currently, while increasing demand for networkservices and for broadband access, in particular, is apparent, growth islimited by several factors, including, among others, an uncertain regulatoryenvironment, reluctance from content providers to supply video and audiocontent over the communications infrastructure, and uncertainty regarding longterm sustainable business models as multiple industries (cable TV, traditionaltelecommunications, wireless, satellite, etc.) offer non-complementaryand competing content delivery solutions. Ultimately, if long-termexpectations for network growth and bandwidth demand are not realized or do notsupport a sustainable business model, our business would be significantlyharmed.

***We are under continuous pressure toreduce the prices of our products.***

The optical network equipment industry has beencharacterized by falling product prices over time. Many of our competitors outsourcetheir manufacturing operations to locations with low labor costs, allowing themto offer their products at lower prices than if they used manufacturingfacilities in the United States. If optical subsystem products become morestandardized, the cost advantages of our embedded software approach to productcustomization will be reduced and our business would be significantly harmed.

***We depend on a limited number ofcomponent suppliers who could disrupt our business if they stopped, decreasedor delayed shipments and increased demand for components generally could leadto shortages.***

We depend on a limited number of suppliers of componentsused to manufacture certain of our products. A small number of these suppliersare sole sources. We typically have not entered into long-term agreementswith our suppliers and, therefore, these suppliers generally may stop supplyingmaterials and equipment at any time. The reliance on a sole supplier or limitednumber of suppliers could result in delivery problems, reduced control overproduct pricing and quality, and an inability to identify and qualify anothersupplier in a timely manner. Recently, demand for components has rapidlyincreased and we rely on our suppliers to ramp production to meet our demand. Anysupply deficiencies relating to the quality or quantities of components we useto manufacture our products could adversely affect our ability to fulfillcustomer orders or our financial results of operations.

***Our success will depend on ourability to anticipate and quickly respond to evolving technologies and customerrequirements.***

The market for optical networking equipment ischaracterized by substantial capital investment and diverse and evolvingtechnologies. For example, the market for optical subsystems is currentlycharacterized by a trend toward the adoption of “pluggable” modules andsubsystems that do not require customized interconnections and by thedevelopment of more complex and integrated optical subsystems. Our ability toanticipate and respond to these and other changes in technology, industrystandards, customer requirements and product offerings, and to develop andintroduce new and enhanced products, will be significant factors in our abilityto succeed. We expect that new technologies will continue to emerge ascompetition in the optical networking equipment industry increases and the needfor higher and more cost efficient bandwidth expands. Our success, in largepart, depends upon our ability to continuously and successfully introduce and marketnew products and technologies meeting or exceeding our customers’ expectations.The introduction of new products embodying new technologies or the emergence ofnew industry standards could render our existing

24

----

products uncompetitive from a pricing standpoint, obsolete orunmarketable. Further, time to market with new products can provide significantcompetitive advantages in our industry. It is difficult to displace an existingsupplier or a particular type of optical subsystems once a network systemsvendor has chosen an initial optical subsystems supplier for a particularproduct even if a later to market product supplies superior performance and/orcost efficiency. If we are unable to make our new products commerciallyavailable quickly, we may lose existing and potential customers and ourfinancial results would suffer.

***We are subject to a number of specialrisks with respect to our Optium Australia DWP ROADM operations.***

Our future results of operations will be substantiallyinfluenced by the success of our DWP ROADM product line, and we are subject toa number of risks and uncertainties in this regard, including the following:

·                  Inthe near term, we are expecting that our DWP ROADMs will become keycomponents of next generation network systems demanded by the market. Any delayby network systems vendors in including our DWP ROADMs in their networksystems from the timetable we expect, or any decision by such vendors not toinclude our DWP ROADMs in amounts we expect, would significantly alter ournear term prospects for growth and harm our business and financial condition.

·                  Weare ramping the capacity of the production line for our DWP ROADMs at ourOptium Australia facility in Sydney, Australia. Any delay in the productionline being able to provide commercial volumes in the quantities anticipatedwould delay and could limit our ability to realize the full benefit of thecommercialization of our DWP ROADMs, which would negatively affect our revenuesand competitive position. In addition, a failure to achieve manufacturingyields from such production line comparable to the yields obtained at ourHorsham, Pennsylvania facility would negatively impact our margins andoperating results.

***We are subject to a number of specialrisks as a result of our recent acquisition of Kailight Photonics.***

In May 2007, we acquired Kailight Photonics, Inc. of NesZiona, Israel, a developer of 40 Gb/s transceivers and related technologies.Our future results of operations will be substantially influenced by theoperations of this new business, and we are subject to a number of risks anduncertainties related to this acquisition, including the following:

·                  Inthe near term, we are expecting that our 40 Gb/s products will become keycomponents of next generation network systems demanded by the market. Weacquired Kailight Photonics, in part, based upon this expectation. Any delay bynetwork systems vendors in including our 40 Gb/s products  in theirnetwork systems from the timetable we expect, or any decision by such vendorsnot to include our 40 Gb/s products  in amounts we expect, wouldsignificantly alter our near term prospects for growth and harm our business andfinancial condition.

·                  Weare establishing a production line for our 40 Gb/s products  at ourHorsham, Pennsylvania headquarters. Any delay in the production line being ableto produce commercial volumes in the quantities anticipated would delay our abilityto commercialize our 40 Gb/s products , which would negatively affect ourrevenues and competitive position. In addition, a failure to achievemanufacturing yields from such production line comparable to the yieldsobtained with respect to our 10 Gb/s products would negatively impact ourmargins and operating results.

·                  Theintegration of the products and technology we acquired as part of ouracquisition of Kailight Photonics with our products and technology and thecoordination of the manufacturing operations for such products will be complex,time-consuming and expensive. The execution of these activities couldpotentially disrupt our ongoing business operations and distract managementfrom day-to-day operational matters, as well as other strategic opportunities,and could strain our financial and managerial controls and reporting systemsand procedures. In addition, unanticipated costs could arise during theintegration of the products and manufacturing operations. If we are unable tosuccessfully integrate these products and technology with our products andtechnology, or if actual integration and manufacturing costs are significantlygreater than currently anticipated, we may not achieve the anticipated benefitsof the acquisition and our revenues and operating results could be adverselyaffected.

·                  Immediatelyprior to the acquisition, Kailight Photonics was engaged in an ongoing researchand development project related to 40 Gb/s technology. We may not be able tosuccessfully complete this project, and our inability to do so could prevent usfrom achieving some of the strategic objectives and other anticipated potentialbenefits of the acquisition, and could have a material adverse effect on ourrevenues and operating results.

25

----

·                  Wemay incur charges to operations in amounts that are not currently estimable toreflect costs associated with integrating the acquired business with ourcompany. These costs could adversely affect our future operating results.

·                  Wehave become a larger and more geographically dispersed organization, and if ourmanagement is unable to effectively manage the combined business, our operatingresults will suffer.

***We and our customers are eachdependent upon a limited number of end customers.***

Historically, we have generated most of our revenues froma limited number of end customers. For example, in the three months ended April28, 2007 and April 29, 2006, we generated 65.4% and 72.9%, respectively, of ourrevenues from our three largest end customers during those periods. We may notbe able to offset any decline in revenues from our existing major customerswith revenues from new customers and our quarterly results may be volatilebecause we are dependent on large orders from these customers that may bereduced or delayed. Our dependence on a limited number of customers is due tothe fact that the network systems industry is dominated by a small number oflarge companies, and the industry continues to consolidate, as with the recentmergers of Cisco Systems and Scientific Atlanta, Ericsson and Marconi, Lucentand Alcatel and the network divisions of Siemens and Nokia. Similarly, ourcustomers depend primarily on a limited number of major carrier customers topurchase their network systems products that incorporate our optical subsystems.Many major telecommunication services providers are experiencing losses fromoperations. The further consolidation of the industry, coupled with potentialdeclining revenues from our major customers, may have a material adverse impacton our business.

***Our success will depend on our ability toquickly adjust to changes in customer demand and lead times.***

Our industry is characterized by rapidly shifting demand among variousproduct types and requests for shorter manufacturing lead times as ourcustomers respond to market trends.  As a result, forecasts from ourcustomers may not provide us with sufficient visibility into the breakdown oflong-term demand.  If we are not able to quickly adjust to shifting demandamong various product types or meet the required lead times of our customers,our business could be significantly harmed.  Further, lower visibilitycould cause our results to materially differ quarter to quarter.

***We do not have long-term volumepurchase contracts with our customers.***

Generally, we have not entered into long-termvolume purchase contracts with our customers. As a result, any of our customersmay cease to purchase our products at any time. If any of our major customersstop purchasing our products for any reason, our business and results ofoperations would be harmed.

***If we fail to retain our chiefexecutive officer and other key personnel or if we fail to attract additionalqualified personnel, we may not be able to achieve our anticipated level ofgrowth and our business could suffer.***

Our future depends, in part, on our ability to attractand retain key personnel. Our future depends on the continued contributions ofour executive officers and other key technical personnel, each of whom would bedifficult to replace. In particular, Eitan Gertel, our chief executive officer,president and chairman, is critical to the management of our business andoperations, as well as the development of our strategic direction. The loss ofservices of Mr. Gertel or other executive officers or key personnel or theinability to continue to attract qualified personnel could have a materialadverse effect on our business. Competition for highly skilled technical peopleis extremely intense and we continue to face difficulty identifying and hiringqualified personnel in many areas of our business. We may not be able to hireand retain such personnel at compensation levels consistent with our existingcompensation and salary structure. Many of the companies with which we competefor hiring experienced employees have greater resources than we have. Inaddition, in making employment decisions, particularly in the high-technologyindustries, job candidates often consider the value of the equity they are toreceive in connection with their employment. Therefore, significant volatilityin the price of our stock after this offering may adversely affect our abilityto attract or retain technical personnel. Furthermore, changes to accountingprinciples generally accepted in the United States relating to the expensing ofstock options may discourage us from granting the sizes or types of stockoptions that job candidates may require to accept our offer of employment.

26

----

***Potential futureacquisitions could be difficult to integrate, divert the attention of keypersonnel, disrupt our business, dilute stockholder value and impair ourfinancial results.***

As part of our business strategy, we intend to pursueacquisitions of companies, technologies and products that we believe couldaccelerate our ability to compete in our core markets or allow us to enter newmarkets. Acquisitions involve numerous risks, any of which could harm ourbusiness, including:

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

·                  difficultiesin supporting and transitioning customers, if any, of the target company;

·                  diversionof financial and management resources from existing operations;

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

·                  risksof entering new markets in which we have limited or no experience;

·                  potentialloss of key employees, customers and strategic alliances from either ourcurrent business or the target company’s business;

·                  assumptionof unanticipated problems or latent liabilities, such as problems with thequality of the target company’s products;

·                  inabilityto generate sufficient revenue to offset acquisition costs;

·                  equitybased acquisitions may have a dilutive effect on our stock; and

·                  inabilityto successfully complete transactions with a suitable acquisition candidate.

Acquisitions also frequently result in the recording ofgoodwill and other intangible assets which are subject to potential impairmentsin the future that could harm our financial results. As a result, if we fail toproperly evaluate acquisitions or investments, we may not achieve theanticipated benefits of any such acquisitions, and we may incur costs in excessof what we anticipate. The failure to successfully evaluate and executeacquisitions or investments or otherwise adequately address these risks could materiallyharm our business and financial results.

***If we fail to manage or anticipateour long-term growth and expansion requirements, our business willsuffer.***

In recent years, we have experienced significant growththrough among other things, internal expansion programs, product developmentand our acquisitions of Engana, now Optium Australia, and Kailight Photonics.We currently anticipate continued growth. In connection with this growth, wewill be required 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.

***Our financial results often varysignificantly from quarter-to-quarter due to a number of factors,which may lead to volatility in our stock price.***

Our quarterly revenue and other operating results havevaried in the past and are likely to continue to vary significantly fromquarter to quarter. This variability may lead to volatility in our stock priceas equity research analysts and investors respond to these quarterlyfluctuations. These fluctuations are due to numerous factors, including:

·                  fluctuationsin demand for intelligent optical networking products;

·                  thetiming and size of sales of our products;

·                  lengthand variability of the sales cycles of our products;

27

----

·                  thetiming of recognizing revenue;

·                  newproduct introductions and enhancements by our competitors and ourselves;

·                  changesin our pricing policies or the pricing policies of our competitors;

·                  ourability to develop, introduce and ship new products and product enhancementsthat meet customer requirements in a timely manner; and

·                  ourability to attain and maintain production volumes and quality levels for ourproducts.

Because of quarterly fluctuations, we believe thatquarter-to-quarter comparisons of our operating results are notnecessarily meaningful. Moreover, our operating results may not meet ourannounced guidance or expectations of equity research analysts or investors, inwhich case the price of our common stock could decrease significantly.

In addition, our expense levels are based, in significantpart, on our expectations as to future revenue and are largely fixed in theshort term. As a result, we may be unable to adjust spending in a timely mannerto compensate for any unexpected shortfall in revenue. Furthermore, we intendto increase our operating expenses as we expand our manufacturing, research anddevelopment, sales and marketing, and administrative organizations. The timingof these increases and the rate at which new personnel become productive willaffect our operating results. Any revenue shortfall, and the resulting decreasein operating income or increase in operating loss, could lead to volatility inthe price of our common stock.

***Our products are complex and may takelonger to develop than anticipated and we may not recognize revenues from newproducts until after long field testing and customer acceptance periods.***

Many of our new products must be tailored to customerspecifications. As a result, we are constantly developing new products andusing new technologies in those products. These products often take substantialtime to develop because of their complexity and because customer specificationssometimes change during the development cycle. We often incur substantial costsassociated with the research and development and sales and marketing activitiesin connection with products that may be purchased long after we have incurredthe costs associated with designing, creating and selling such products.

***If our customers do not qualify ourproducts or if our customers determine not to purchase products we have indevelopment, our operating results could suffer.***

Most of our customers do not purchase our products, otherthan limited numbers of evaluation units, prior to qualification of ourproducts. Our existing products, as well as each new product, must pass throughvarying levels of qualification with our customers. In addition, due to therapid technological changes in our market, a customer may cancel or modify adesign project before we begin large-scale manufacture of the product andreceive revenue from the customer. It is unlikely that we would be able torecover the expenses for cancelled or unutilized design projects. It isdifficult to predict with any certainty the frequency with which customers willcancel or modify their projects, or the effect that any cancellation ormodification would have on our results of operations.

***If carriers that purchase networksystems from customers fail to qualify or delay qualifications of any productssold by our customers that contain our products, our business could be harmed.***

The qualification and field testing of our customers’network system products by their carrier customers is long and unpredictable.This process is not under the control of us or our customers, and as a resulttiming of our revenues is unpredictable. Any delay in qualification of one ofour customers’ network systems from what we anticipate could result in thedelay or cancellation of orders from our customers for subsystems included inthe applicable network system, which could harm our results of operations.

***Delays, disruptions or qualitycontrol problems in manufacturing could result in delays in product shipmentsto customers and could adversely affect our business.***

We may experience delays, disruptions or quality controlproblems in our manufacturing operations. As a result, we could incuradditional costs that would adversely affect gross margins, and productshipments to our customers could be delayed beyond the shipment schedulesrequested by our customers, which would negatively affect our revenues,competitive position and reputation.

28

----

***We may experience low manufacturingyields.***

Manufacturing yields depend on a number of factors,including the volume of production due to customer demand and the nature andextent of changes in specifications required by customers for which we performdesign-in work. Higher volumes due to demand for a fixed, rather thancontinually changing, design generally results in higher manufacturing yields,whereas lower volume production generally results in lower yields. In addition,lower yields may result, and have in the past resulted, from commercialshipments of products prior to full manufacturing qualification to theapplicable specifications. Changes in manufacturing processes required as aresult of changes in product specifications, changing customer needs and theintroduction of new product lines have historically caused, and may in thefuture cause, significantly reduced manufacturing yields, resulting in low ornegative margins on those products. Moreover, an increase in the rejection rateof products during the quality control process either before, during or aftermanufacture, results in lower yields and margins. Finally, manufacturing yieldsand margins can also be lower if we receive or inadvertently use defective orcontaminated materials from our suppliers.

***We face intense competition fromother providers of optical subsystems, as well as competition from providersoffering alternative products, which could negatively impact our results ofoperations and cause our market share to decline.***

We believe that a number of companies have developed orare developing optical subsystems that compete directly with our product offerings.Many current and potential competitors have substantially greater financial,marketing, research and manufacturing resources than we possess, and there canbe no assurance that our current and future competitors will not be moresuccessful than us.

In the event that the optical subsystems market expands,competition may intensify as additional competitors enter the market andcurrent competitors expand their product lines. Companies competing with us mayintroduce products that are competitively priced, have increased performance orfunctionality, or incorporate technological advances that we have not yetdeveloped or implemented, and may be able to react quicker to changing customerrequirements and expectations. There is also the risk that network systemsvendors may re-enter the subsystem market and begin to manufacture theoptical subsystems incorporated in their network systems. Increased competitivepressure or a decision by any of our customers to manufacture opticalsubsystems for inclusion in their network systems could result in a loss ofsales or market share or cause us to lower prices for our products, any ofwhich would harm our business and operating results.

***Our future operating results may besubject to volatility as a result of exposure to foreign currency exchangerisks.***

All sales of our products are made in United Statesdollars. Nevertheless, most of our suppliers to our subsidiaries OptiumAustralia and Kailight Photonics are paid in Australian dollars and Israelisheckels, respectively. In addition, all employee and other local expenses ofOptium Australia and Kailight Photonics are paid in Australian dollars andIsraeli sheckels, respectively. This exposes us to foreign currency exchangerate risks. If the value of the Australian dollar and/or Israeli sheckelrelative to the United States dollar rises, these expenses of Optium Australiaand/or Kailight Photonics, as applicable, will correspondingly increase. If therelative value of the Australian dollar and/or Israeli sheckel increasessignificantly, our expenses would increase and our results of operations couldbe harmed. We currently do not use derivative financial instruments to mitigatethis exposure. We continue to review this issue and may consider hedgingcertain foreign exchange risks through the use of currency futures or optionsin future periods.

***If we fail to protect, or incursignificant costs in defending, our intellectual property and other proprietaryrights, our business and results of operations could be materially harmed.***

Our success depends on our ability to protect ourintellectual property and other proprietary rights. We rely primarily onpatents, trademarks, copyrights, trade secrets and unfair competition laws, aswell as license agreements and other contractual provisions, to protect ourintellectual property and other proprietary rights. Significant technology usedin our products, however, is not the subject of any patent protection, and wemay be unable to obtain patent protection on such technology in the future.Moreover, existing U.S. legal standards relating to the validity,enforceability and scope of protection of intellectual property rights offeronly limited protection, may not provide us with any competitive advantages,and may be challenged by third parties. In addition, the laws of countriesother than the United States in which we market our products may afford littleor no effective protection of our intellectual property. Accordingly, despiteour efforts, we may be unable to prevent third parties from infringing upon ormisappropriating our intellectual property or otherwise gaining access to ourtechnology. Unauthorized third parties may try to copy or reverse engineer ourproducts or portions of our products or otherwise obtain and use our intellectualproperty. If we fail to protect our intellectual property and other proprietaryrights, our business, results of operations or financial condition could bematerially harmed.

In addition, defending our intellectual property rightsmay entail significant expense. We believe that certain products in themarketplace may infringe our existing intellectual property rights. We have,from time to time, resorted to legal proceedings to protect our intellectualproperty and may continue to do so in the future. We may be required to expendsignificant resources to monitor and 

29

----

protect our intellectual property rights. Any of our intellectualproperty rights may be challenged by others or invalidated throughadministrative processes or litigation. If we resort to legal proceedings toenforce our intellectual property rights or to determine the validity and scopeof the intellectual property or other proprietary rights of others, theproceedings could result in significant expense to us and divert the attentionand efforts of our management and technical employees, even if we were toprevail.

***Third parties may claim we areinfringing their intellectual property rights, and we could be prevented fromselling our products, or suffer significant litigation expense, even if theseclaims have no merit.***

Our competitive position is driven in part by ourintellectual property and other proprietary rights. Third parties, however, mayclaim that we or our products or operations are infringing their intellectualproperty rights, and we may be unaware of intellectual property rights ofothers that may cover some of our assets, technology and products. In thatregard, JDS Uniphase Corporation and EMCORE Corporation filed a complaint onSeptember 11, 2006 alleging that our 1550 nm HFC externally modulatedtransmitter, in addition to possibly “products as yet unidentified,” infringeson two U.S. patents.  On March 14, 2007,JDS Uniphase and EMCORE Corporation filed a second complaint in the UnitedStates District Court for the Western District of Pennsylvania alleging thatthe Company’s 1550 nm HFC quadratine amplitude modulated transmitter, inadditiona to possibly “products as yet unidentified”,  infringes on another U.S. patent. Theplaintiffs in both cases are seeking for the court to declare that we havewillfully infringed on such patents and to be awarded up to three times theamount of any compensatory damages found, if any, plus any other damages orcosts incurred. Any litigation regarding patents, trademarks, copyrights orother intellectual property rights, even those without merit, could be costlyand time consuming, and divert our management and key personnel from operatingour business. The complexity of the technology involved and inherentuncertainty and cost of intellectual property litigation increases our risks.If any third party has a meritorious or successful claim that we are infringingits intellectual property rights, we may be forced to change our products ormanufacturing processes, which may be costly or impractical. This also mayrequire us to stop selling our products as currently engineered, which couldharm our competitive position. We also may be subject to significant damages orinjunctions that prevent the further development of certain of our products orservices.

***If we fail to obtain the right to usethe intellectual property rights of others necessary to operate our business,our ability to succeed will be adversely affected.***

Numerous patents in our industry are held by others,including academic institutions and our competitors. Optical subsystemsuppliers may seek to gain a competitive advantage or other third parties mayseek an economic return on their intellectual property portfolios by makinginfringement claims against us. In the future, we may need to obtain licenserights to patents or other intellectual property held by others to the extentnecessary for our business. Unless we are able to obtain those licenses oncommercially reasonable terms, patents or other intellectual property held byothers could inhibit our development of new products for our markets. Licensesgranting us the right to use third party technology may not be available oncommercially reasonable terms, if at all. Generally, a license, if granted,would include payments of up-front fees, ongoing royalties or both. Thesepayments or other terms could have a significant adverse impact on ouroperating results. Our larger competitors may be able to obtain licenses orcross-license their technology on better terms than we can, which couldput us at a competitive disadvantage.

***We will incur significant increasedcosts as a result of operating as a public company, and our management will berequired to devote substantial time to new compliance initiatives.***

We have only recently begun to operate as a publiccompany. As a public company, we will incur significant legal, accounting andother expenses that we did not incur as a private company. In addition, theSarbanes-Oxley Act of 2002, as well as new rules subsequently implementedby the Securities and Exchange Commission, or SEC, and the NASDAQ GlobalMarket, has imposed various new requirements on public companies, includingrequiring changes in corporate governance practices. Our management and otherpersonnel will need to devote a substantial amount of time to these newcompliance initiatives. Moreover, these rules and regulations will increase ourlegal and financial compliance costs and will make some activities more time-consumingand costly.

In addition, the Sarbanes-Oxley Act requires, amongother things, that we maintain effective internal control over financialreporting and disclosure controls and procedures. In particular, under currentrules, commencing with respect to fiscal year ending August 8, 2008, we mustperform system and process evaluation and testing of our internal control overfinancial reporting to allow management and our independent registered publicaccounting firm to report on the effectiveness of our internal control overfinancial reporting, as required by Section 404 of the Sarbanes-OxleyAct, or Section 404. Our testing, or the subsequent testing by ourindependent registered public accounting firm, may reveal deficiencies in ourinternal control over financial reporting that are deemed to be materialweaknesses. Our compliance with Section 404 will require that we incursubstantial accounting expense and expend significant management time oncompliance-related issues. We will evaluate the need to hire additionalaccounting and financial staff with appropriate public company experience andtechnical accounting knowledge. Moreover, if we are not able to comply with the

30

----

requirements of Section 404 in a timely manner, or if we or ourindependent registered public accounting firm identifies deficiencies in ourinternal control over financial reporting, the market price of our stock coulddecline and we could be subject to sanctions or investigations by the NASDAQGlobal Market, the SEC or other regulatory authorities, which would requireadditional financial and management resources.

***We may not be able to obtain capitalwhen desired on favorable terms, if at all, or without dilution to ourstockholders.***

We anticipate that the net proceeds of this offering,together with current cash, cash equivalents, cash provided by operatingactivities and funds available through our working capital line of credit, willbe sufficient to meet our current and anticipated needs for general corporatepurposes for at least the next 12 months. We operate in a market, however, thatmakes our prospects difficult to evaluate. It is possible that we may notgenerate sufficient cash flow from operations or otherwise have the capitalresources to meet our future capital needs. If this occurs, we may needadditional financing to execute on our current or future business strategies,including to:

·                  acquirecomplementary businesses or technologies;

·                  enhanceour operating infrastructure;

·                  hireadditional technical and other personnel; or

·                  otherwiserespond to competitive pressures.

If we raise additional funds through the issuance ofequity or convertible debt securities, the percentage ownership of ourstockholders could be significantly diluted, and these newly-issuedsecurities may have rights, preferences or privileges senior to those ofexisting stockholders, including those acquiring shares in this offering. Wecannot assure you that additional financing will be available on termsfavorable to us, or at all. If adequate funds are not available or are notavailable on acceptable terms, if and when needed, our ability to fund ouroperations, take advantage of unanticipated opportunities, develop or enhanceour products, or otherwise respond to competitive pressures could besignificantly limited.

***We may be faced with productliability claims.***

Despite quality assurance measures, there remains a riskthat defects may occur in our products. The occurrence of any defects in ourproducts could give rise to liability for damages caused by such defects. Theycould, moreover, impair the market’s acceptance of our products. Both couldhave a material adverse effect on our business and financial condition.Although we carry product liability insurance, we cannot assure investors thatthis insurance would adequately cover our costs arising from defects in ourproducts.

***Business disruptions resulting frominternational uncertainties could negatively impact our profitability.***

We derive, and expect to continue to derive, asignificant portion of our revenue from international sales in various markets.In addition, we have operations in Sydney, Australia and Nes Ziona, Israel. Ourinternational revenue and operations are subject to a number of material risks,including, but not limited to:

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

·                  difficultiesin enforcing agreements and collecting receivables through foreign legalsystems;

·                  fewerlegal protections for intellectual property;

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

·                  difficultiesin obtaining any necessary governmental authorizations for the export of ourproducts to certain foreign jurisdictions;

·                  fluctuationsin foreign economies;

·                  fluctuationsin the value of foreign currencies and interest rates;

31

----

·                  generaleconomic and political conditions in the markets in which we operate;

·                  domesticand international economic or political changes, hostilities and otherdisruptions in regions where we currently operate or may operate in the future;and

·                  differentand changing legal and regulatory requirements in the jurisdictions in which wecurrently operate or may operate in the future.

Negative developments in any of these areas in one ormore countries could result in a reduction in demand for our products, thecancellation or delay of orders already placed, difficulties in producing anddelivering our products, threats to our intellectual property, difficulty incollecting receivables, and a higher cost of doing business, any of which couldnegatively 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.

***We may be unable to utilize our netoperating loss carryforwards to reduce our income taxes.***

As of April 28, 2007 we have net operating loss, or NOL,carryforwards of approximately $27 million for federal and state incometax purposes expiring through fiscal year ending July 2025. These net operatingloss carryforwards represent an asset to us to the extent they can be utilizedto reduce cash income tax payments expected in the future. Utilization of ournet operating loss carryforwards depends on the timing and amount of taxableincome earned by us in the future, which we are unable to predict. We haveperformed an analysis to determine whether an ownership change underSection 382 of the Internal Revenue Code has occurred. The effect of anownership change would be the imposition of an annual limitation on the use ofthe net operating loss carryforwards attributable to periods before the change.The review determined we have limitations related to approximately$2.0 million of the NOL carryforwards.

**Risks Related to Ownership of Our Common Stock**

***If equity research analysts do notpublish research or reports about our business or if they issue unfavorablecommentary or downgrade our common stock, the price of our common stock coulddecline.***

The trading market for our common stock relies in part onthe research and reports that equity research analysts publish about us and ourbusiness. The price of our stock could decline if one or more securitiesanalysts downgrade our stock or if those analysts issue other unfavorablecommentary or cease publishing reports about us or our business.

Some of the factors that may cause the market price ofour common stock to fluctuate include:

·                  fluctuationsin our quarterly financial results or the quarterly financial results ofcompanies perceived to be similar to us;

·                  changesin estimates of our financial results or recommendations by securitiesanalysts;

·                  failureof any of our products to achieve or maintain market acceptance;

·                  changesin market valuations of similar companies;

·                  successof competitive products;

·                  changesin our capital structure, such as future issuances of securities or theincurrence of additional debt;

·                  announcementsby us or our competitors of significant products, contracts, acquisitions orstrategic alliances;

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

·                  litigationinvolving our company, our general industry or both;

·                  additionsor departures of key personnel;

·                  investors’general perception of us;

32

----

·                  changesin general economic, industry and market conditions; and

·                  changesin regulatory and other dynamics.

In addition, if the market for technology stocks or thestock market in general experiences a loss of investor confidence, the tradingprice of our common stock could decline for reasons unrelated to our business,financial condition or results of operations. If any of the foregoing occurs,it could cause our stock price to fall and may expose us to class actionlawsuits that, even if unsuccessful, could be costly to defend and adistraction to management.

***A significant portion of our totaloutstanding shares may be sold into the public market in the near future, whichcould cause the market price of our common stock to drop significantly, even ifour business is doing well.***

Sales of a substantial number of shares of our commonstock in the public market could occur at any time.   Lock-up agreements coveringapproximately 19.3 million shares of our outstanding common stock entered intoin connection with our initial public offering expired in April 2007.  These shares are able to be sold, subject toany applicable volume limitations under federal securities laws, at anytime.  These sales, or the market perceptionthat the holders of a large number of shares intend to sell shares, couldreduce the market price of our common stock.

In addition, as of June 1, 2007 there were48,979 shares subject to outstanding warrants and 2,370,063 shares subjectto outstanding options, and additional shares will be available for issuanceunder our stock option plans. These shares are eligible for sale in the publicmarket to the extent permitted by any applicable vesting requirements. Moreover  holders who, at the time of our initialpublic offering, held an aggregate of approximately 17 million shares ofour common 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, subject in certain cases to applicablevolume limitations.

***Our directors, management andentities associated with them will exercise significant control over ourcompany, which will limit your ability to influence corporate matters.***

Our executive officers and directors and entitiesassociated with them collectively beneficially own approximately 52.3% of ouroutstanding common stock as of June 1, 2007. As a result, these stockholders,if they act together, will be able to influence our management and affairs andall matters requiring stockholder approval, including the election of directorsand approval of significant corporate transactions. This concentration ofownership may have the effect of delaying or preventing a change in control ofour company and might negatively affect the market price of our common stock.

***Provisions in our certificate ofincorporation and by-laws and Delaware law might discourage, delay orprevent a change of control of our company or changes in our management and,therefore, depress the trading price of our common stock.***

Provisions of our certificate of incorporation and by-lawsand Delaware law may discourage, delay or prevent a merger, acquisition orother change in control that stockholders may consider favorable, including transactionsin which you might otherwise receive a premium for your shares of our commonstock. These provisions may also prevent or frustrate attempts by ourstockholders to replace or remove our management. These provisions include:

·                  limitationson the removal of directors;

·                  aclassified board of directors so that not all members of our board are electedat one time;

·                  advancenotice requirements for stockholder proposals and director nominations;

·                  theinability of stockholders to act by written consent or to call specialmeetings;

·                  theability of our board of directors to make, alter or repeal our by-laws;and

·                  theability of our board of directors to designate the terms of and issue newseries of preferred stock without stockholder approval.

33

----

The affirmative vote of the holders of at least 75% ofour shares of capital stock entitled to vote is necessary to amend or repealthe above provisions of our certificate of incorporation. In addition, absentapproval of our board of directors, our by-laws may only be amended orrepealed by the affirmative vote of the holders of at least 75% of our sharesof capital stock entitled to vote.

In addition, Section 203 of the Delaware GeneralCorporation Law prohibits a publicly-held Delaware corporation fromengaging in a business combination with an interested stockholder, generally aperson which together with its affiliates owns, or within the last three yearshas owned, 15% of our voting stock, for a period of three years after the dateof the transaction in which the person became an interested stockholder, unlessthe business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeovermeasures could limit the price that investors might be willing to pay in thefuture for shares of our common stock. They could also deter potentialacquirers of our company, thereby reducing the likelihood that you couldreceive a premium for your common stock in an acquisition.

***We do not currently intend to paydividends on our common stock and, consequently, your ability to achieve areturn on your investment will depend on appreciation in the price of ourcommon stock.***

We have never declared or paid any cash dividends on ourcommon stock and do not currently intend to do so for the foreseeable future.We currently intend to invest our future earnings, if any, to fund our growth.Therefore, you are not likely to receive any dividends on your common stock forthe foreseeable future.

34

----

**ITEM 2. Unregistered Sales of Equity Securities and Use ofProceeds**

None.

**ITEM 3. Defaults Upon Senior Securities**

None.

**ITEM 4.  Submission ofMatters to a Vote of Security Holders**

None.

**ITEM 5.  OtherInformation**

None.

**ITEM 6. Exhibits**

(a)   Exhibit Index.
|        | 4.1*   | Israeli Addendum to 2006 Stock Option and Incentive  Plan                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                      |
|   | 31.1   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                     |
|   |   |                                                                                                                                                                                                                      |
|   | 31.2   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                     |
|   |   |                                                                                                                                                                                                                      |
|   | 32.1   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

----

* Previously filed andincorporated by reference from the registrant’s Form 8-K filed June 5, 2007.

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|        |   |          |   | OPTIUM CORPORATION.                    |
|--------|--------|---------------|--------|----------------------------------------|
|   |   |          |   |                                   |
|   |   |          |   |                                   |
| Dated: |   | June 11, 2007 |   | /s/ Eitan Gertel                       |   |   |
|   |   |          |   | Eitan Gertel                           |
|   |   |          |   | President and Chief  Executive Officer |
|   |   |          |   |                                   |
|   |   |          |   |                                   |
| Dated: |   | June 11, 2007 |   | /s/ David Renner                       |   |   |
|   |   |          |   | David Renner                           |
|   |   |          |   | Vice President  of Finance and         |
|   |   |          |   | Chief Financial  Officer               |
|        |        |               |        |                                        |  |  |  |  |

 

35

----