** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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

**Forthe quarterly period ended January 27, 2007**

**or**

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

**CommissionFile Number: 001-33109**

**OPTIUM CORPORATION**

(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 principalexecutive offices)(Zip Code)

**(267)803-3800**

(Registrant’s telephonenumber, including area code)

**500Horizon Drive, Suite 505**

**Chalfont,PA 18914**

(Former name,former address and former fiscal year,

if changed since lastreport)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 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 |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

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

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

outstanding as ofMarch 1, 2007 was 25,346,887.

 

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**TABLE OF CONTENTS**

**PART I**

**Financial Information**
| **ITEM  1.** | ** ** | **Financial Statements.**                                                                                                         | ** ** | ** ** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|              | ** ** | ** **                                                                                                                        | ** ** | **Page**   |
| 1.           |       | Condensed Consolidated  Statements of Operations for the three months and six months ended January  27, 2007 and January 28, 2006 |       | 2          |
|         |       |                                                                                                                              |       |       |
| 2.           |       | Condensed Consolidated Balance  Sheets as of January 27, 2007 and July 29, 2006                                                   |       | 3          |
|         |       |                                                                                                                              |       |       |
| 3.           |       | Condensed Consolidated Statements of  Cash Flows for the six months ended January 27, 2007 and January 28, 2006                   |       | 4          |
|         |       |                                                                                                                              |       |       |
| 4.           |       | Notes to  Condensed Consolidated Financial Statements                                                                             |       | 5          |
|         |       |                                                                                                                              |       |       |
| **ITEM 2.**  | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.**                                  |       | 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**                                                |   | 23     |
| **ITEM 2.**    | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds** |   | 34     |
| **ITEM 3.**    | ** ** | **Defaults  Upon Senior Securities**                             |   | 34     |
| **ITEM 4.**    | ** ** | **Submission  of Matters to a Vote of Security Holders**         |   | 34     |
| **ITEM 5.**    | ** ** | **Other  Information**                                           |   | 34     |
| **ITEM 6.**    | ** ** | **Exhibits**                                                     |   | 34     |
| ** **     | ** ** | ** **                                                       |   |   |
| **SIGNATURES** |       | 35                                                               |

 

ii

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**FORWARD-LOOKING STATEMENTS**

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

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**PART IFinancial Information**

**ITEM 1.Financial Statements**

**Optium Corporation**

**CondensedConsolidated Statements of Operations**

**(unaudited)**

*(inthousands, except per share data)*
| ** **                                         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **January 27,**             | ** ** | **January 28,**           | ** ** | **January 27,** | ** ** | **January 28,** | ** ** |
| ** **                                         | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                            |       | $                                | 34,139     |                           | $          | 16,013 |   | $ | 64,149 |   | $ | 30,029 |   |
| Cost of revenue                                    |       | 24,214                           |       | 12,406                         |       | 45,519 |   | 23,380 |   |
| Gross profit                                       |       | 9,925                            |       | 3,607                          |       | 18,630 |   | 6,649 |   |
| Operating expenses:                                |       |                             |       |                           |       |   |   |   |   |
| Research and  product development                  |       | 3,513                            |       | 1,802                          |       | 6,509 |   | 3,544 |   |
| Selling, general  and administrative               |       | 3,359                            |       | 981                            |       | 6,186 |   | 1,928 |   |
| Total operating  expenses                          |       | 6,872                            |       | 2,783                          |       | 12,695 |   | 5,472 |   |
| Income from operations                             |       | 3,053                            |       | 824                            |       | 5,935 |   | 1,177 |   |
| Interest and other  income (expense), net          |       | 1,102                            |       | 8                              |       | 1,158 |   | 40 |   |
| Income before income  tax expense                  |       | 4,155                            |       | 832                            |       | 7,093 |   | 1,217 |   |
| Income tax expense                                 |       | 293                              |       | 15                             |       | 472 |   | 23 |   |
| Net income                                         |       | $                                | 3,862      |                           | $          | 817 |   | $ | 6,621 |   | $ | 1,194 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Basic net income per  share                        |       | $                                | 0.16       |                           | $          | 0.45 |   | $ | 0.48 |   | $ | 0.66 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Basic weighted average  common shares outstanding  |       | 24,592                           |       | 1,822                          |       | 13,668 |   | 1,820 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Diluted net income per  share                      |       | $                                | 0.15       |                           | $          | 0.05 |   | $ | 0.28 |   | $ | 0.07 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted average common shares outstanding |       | 26,592                           |       | 17,275                         |       | 23,564 |   | 17,128 |   |

*See accompanying notes.*

2

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**Optium Corporation**

**CondensedConsolidated Balance Sheets**

*(inthousands, except share amounts)*
| ** **                                                                                                                                                                               | ** ** | **January 27, 2007** | ** ** | **July 29, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **(unaudited)**                | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                               | ** ** | ** **                     |       |                        |       |
| Current assets:                                                                                                                                                                          |       |                           |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                |       | $                              | 80,799     |                        | $          | 10,377 |   |
| Short-term investments                                                                                                                                                                   |       | 19,425                         |       | —                      |       |
| Accounts receivable, net of allowance of $63 and  $25, respectively                                                                                                                      |       | 21,661                         |       | 19,075                      |       |
| Inventories                                                                                                                                                                              |       | 15,502                         |       | 11,701                      |       |
| Prepaid expenses and other current assets                                                                                                                                                |       | 1,147                          |       | 407                         |       |
| Total current  assets                                                                                                                                                                    |       | 138,534                        |       | 41,560                      |       |
| Property and  equipment, net                                                                                                                                                             |       | 6,306                          |       | 5,207                       |       |
| Other assets                                                                                                                                                                             |       | 221                            |       | 2,009                       |       |
| Goodwill                                                                                                                                                                                 |       | 10,670                         |       | 10,533                      |       |
| Total assets                                                                                                                                                                             |       | $                              | 155,731    |                        | $          | 59,309 |   |
| **Liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)**                                                                                         |       |                           |       |                        |       |
| Current  liabilities:                                                                                                                                                                    |       |                           |       |                        |       |
| Accounts payable                                                                                                                                                                         |       | $                              | 16,375     |                        | $          | 18,386 |   |
| Accrued expenses                                                                                                                                                                         |       | 3,362                          |       | 2,207                       |       |
| Accrued warranty                                                                                                                                                                         |       | 262                            |       | 223                         |       |
| Other current liabilities                                                                                                                                                                |       | —                         |       | 2,640                       |       |
| Current portion of debt                                                                                                                                                                  |       | —                         |       | 320                         |       |
| Total current  liabilities                                                                                                                                                               |       | 19,999                         |       | 23,776                      |       |
| Long-term  debt, net of current portion                                                                                                                                                  |       | —                         |       | 351                         |       |
| Other long-term  liabilities                                                                                                                                                             |       | 224                            |       | 97                          |       |
| Total  liabilities                                                                                                                                                                       |       | 20,223                         |       | 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, 26,835,298 and 4,353,509  shares issued, respectively; 25,341,213 and 2,859,430 shares outstanding,  respectively |       | 2                              |       | —                      |       |
| Additional paid  in capital                                                                                                                                                              |       | 190,032                        |       | 9,173                       |       |
| Deferred  compensation                                                                                                                                                                   |       | (1,175                         | )          | (1,170                      | )          |
| Accumulated  other comprehensive income                                                                                                                                                  |       | 439                            |       | 320                         |       |
| Treasury stock,  1,494,085 shares of common stock—at cost                                                                                                                           |       | (2,762                         | )          | (2,762                      | )          |
| Accumulated  deficit                                                                                                                                                                     |       | (51,028                        | )          | (57,649                     | )          |
| Total  stockholders’ equity (deficit)                                                                                                                                               |       | 135,508                        |       | (52,088                     | )          |
| Total liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)                                                                                       |       | $                              | 155,731    |                        | $          | 59,309 |   |

*See accompanying notes.*

3

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**Optium Corporation**

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

*(inthousands)*
| ** **                                                                     | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **January 27,**           | ** ** | **January 28,** | ** ** |
| ** **                                                                     | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities**                                      |       |                           |       |   |   |
| Net income                                                                     |       | $                              | 6,621      |   | $ | 1,194 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                  |       | 1,318                          |       | 1,204 |   |
| Stock-based compensation                                                       |       | 433                            |       | — |   |
| Provision for doubtful accounts                                                |       | 38                             |       | — |   |
| Loss on disposal of property and equipment                                     |       | 9                              |       | — |   |
| Changes in operating assets and liabilities:                                   |       |                           |       |   |   |
| Accounts receivable                                                            |       | (2,624                         | )          | (3,276 | ) |
| Inventories                                                                    |       | (3,801                         | )          | (196 | ) |
| Prepaid expenses and other current assets                                      |       | (741                           | )          | (16 | ) |
| Other assets                                                                   |       | (128                           | )          | 12 |   |
| Accounts payable                                                               |       | (2,011                         | )          | 376 |   |
| Accrued expenses                                                               |       | 753                            |       | 84 |   |
| Other current liabilities                                                      |       | (2,640                         | )          | — |   |
| Accrued warranty                                                               |       | 39                             |       | 65 |   |
| Other long-term liabilities                                                    |       | 127                            |       | (4 | ) |
| Net cash used in  operating activities                                         |       | (2,607                         | )          | (557 | ) |
| **Cash  flows from investing activities**                                      |       |                           |       |   |   |
| Purchase of  property and equipment                                            |       | (2,299                         | )          | (1,165 | ) |
| Proceeds from  sale of property and equipment                                  |       | 30                             |       | — |   |
| Maturities and  sales of short-term investments                                |       | 8,384                          |       | — |   |
| Purchases of short-term  investments                                           |       | (27,819                        | )          | — |   |
| Net cash used in  investing activities                                         |       | (21,704                        | )          | (1,165 | ) |
| **Cash  flows from financing activities**                                      |       |                           |       |   |   |
| Payments of line  of credit                                                    |       | (671                           | )          | — |   |
| Net proceeds  from initial public offering                                     |       | 95,378                         |       | — |   |
| Proceeds from  exercise of employee stock options                              |       | 38                             |       | 5 |   |
| Net cash  provided by financing activities                                     |       | 94,745                         |       | 5 |   |
| Effect of  exchange rate changes on cash and cash equivalents                  |       | (12                            | )          | — |   |
|                                                                           |       |                           |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                      |       | 70,422                         |       | (1,717 | ) |
| ** **                                                                     |       |                           |       |   |   |
| **Cash and  cash equivalents, beginning of period**                            |       | 10,377                         |       | 8,474 |   |
| ** **                                                                     |       |                           |       |   |   |
| **Cash and cash equivalents, end  of period**                                  |       | $                              | 80,799     |   | $ | 6,757 |   |
| ** **                                                                     |       |                           |       |   |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**   |       |                           |       |   |   |
| Unpaid receipts of  property and equipment                                     |       | 146                            |       | — |   |
| Accrued initial public  offering costs                                         |       | 250                            |       | — |   |

*See accompanying notes.*

4

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**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 alsorecently launched a technologically innovative reconfigurable add-dropmultiplexer or 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 duringfiscal year 2006. All preferred stock outstanding at November 1, 2006 wasconverted to common stock upon the completion of the initial 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 second quarters of fiscal 2007 and 2006 ended on January 27,2007 and January 28, 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 make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of income and loss during the reportingperiod. Actual results could differ from those estimates. Operating results forthe six months ended January 27, 2007 are not necessarily indicative of theresults that may be expected for the fiscal year ended July 28, 2007. In theopinion of management, all adjustments (consisting solely of normal recurringadjustments) necessary for a fair presentation of the financial statements forthese interim periods have been included. The accompanying financialinformation should be read in conjunction with the financial statements,including the notes thereto, for the fiscal year ended July 29, 2006 includedwith the Company’s registration statement on Form S-1 (Registration No.333-135472) declared effective by the Securities and Exchange Commission onOctober 26, 2006.

***Cash and cash equivalents***

The Company considers all highly liquidinvestments purchased with original maturities of three months or less to becash equivalents.

***Short-term investments***

The Company considers all short-terminvestments as available-for-sale, accounted for at fair value, with resultingunrealized gains or losses reported as a separate component of stockholders’equity.

5

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***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 of inputsinto the Black-Scholes model which the Company uses to determine the value ofstock options. Inherent in this model are assumptions related to expected stockprice volatility, option life, risk free interest rate and dividend yield.While the risk free interest rate and dividend yield are less subjectiveassumptions, typically based on factual data derived from public sources, theexpected stock-price volatility and option life assumptions require a greaterlevel of judgment which make them critical accounting estimates. The fair valueof each stock option grant was estimated on the date of the grant using theBlack-Scholes option-pricing model with the following assumptions: 
| ** **               | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **January 27, 2007**   | ** ** | **January 27, 2007** | ** ** |
| Risk-free  interest rate |       | 4.66%-4.39                       | %          | 4.82%-4.39                     | %          |
| Expected  dividend yield |       | 0                                | %          | 0                              | %          |
| Expected life            |       | 5 years                          |       | 5 years                        |       |
| Expected volatility      |       | 80                               | %          | 80                             | %          |

Risk-free interest rate: The Company uses the riskfree interest rate of a U.S. Treasury Note with a similar term on the date ofthe 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 futureemployee actions.

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

Forfeitures: TheCompany estimates forfeitures based on historical experience and factors ofknown historical or future projected work force reduction actions to anticipatethe projected forfeiture rates. The forfeiture rate for the six months endedJanuary 27, 2007 was 9.3%.

During the six months ended January 27, 2007, 202,375stock options  with a weighted averagegrant date  fair value of $10.29 peroption were granted under the Company’s Stock Option Plans. The compensationexpense charged against earnings for SFAS 123(R) stock-based compensation forthe first six months of fiscal year 2007 was approximately $163,000. As ofJanuary 27, 2007, there was approximately $1.7 million unrecognizedcompensation expense related to non-vested stock option agreements. Thestock-based compensation expense is expected to be recognized in earnings overthe 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 Equity Instrumentsthat are Issued to Other than Employees for Acquiring, or in Conjunction 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).

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 

6

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measurement date and recognition period. EITF 96-18 states aconsensus that the measurement date should be the earlier of the date at whicha commitment for performance by the counterparty is reached or the date atwhich the counterparty’s performance is complete.

Under the pro forma disclosure previously required underSFAS 123, the compensation cost for the Company’s stock-basedcompensation plans had been determined based upon the fair value of the optionsat the grant date. Consistent with the methodology prescribed under Statement123, the Company would have recorded $106,439 and $212,878 and $12,343 and$24,345 as stock based compensation in selling, general and administrativeexpenses for the three months and six months, respectively, ended January 27,2007 and January 28, 2006, respectively, related to the grants issued prior tothe adoption of SFAS 123(R), as presented below:

|                                                                                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **January 27,**             | ** ** | **January 28,**           | ** ** | **January 27,** | ** ** | **January 28,** | ** ** |
| ** **                                                                                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | **(in thousands)**          | ** ** |
| Net income, as  reported                                                                  |       | $                                | 3,862      |                           | $          | 817 |   | $ | 6,621 |   | $ | 1,194 |   |
| Add: Stock-based  compensation under APB 25                                          |       | 119                              |       | —                         |       | 257 |   | — |   |
| Add: Stock-based  compensation under SFAS123(R)                                           |       | 111                              |       | —                         |       | 155 |   | — |   |
| Less: Stock-based  compensation expense determined under fair value method for all awards |       | (212                             | )          | (11                            | )          | (358 | ) | (23 | ) |
| Net income, pro  forma                                                                    |       | $                                | 3,880      |                           | $          | 806 |   | $ | 6,675 |   | $ | 1,171 |   |
| Basic EPS, as  reported                                                                   |       | $                                | 0.16       |                           | $          | 0.45 |   | $ | 0.48 |   | $ | 0.66 |   |
| Diluted EPS, as  reported                                                                 |       | $                                | 0.15       |                           | $          | 0.05 |   | $ | 0.28 |   | $ | 0.07 |   |
| Basic EPS, pro  forma                                                                     |       | $                                | 0.16       |                           | $          | 0.44 |   | $ | 0.49 |   | $ | 0.64 |   |
| Diluted EPS, pro forma                                                                    |       | $                                | 0.15       |                           | $          | 0.05 |   | $ | 0.28 |   | $ | 0.07 |   |

***Revenue recognition***

The Company derives revenue from the manufacture and saleof optical subsystem products for use in high-performance network systems.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 arrangement with a customer, typicallyconsisting of a purchase order which details quantity, fixed schedule ofdelivery and agreed upon terms.

·                                          *Delivery and acceptance.* Product has been shipped via third party carrier, accepted and title hastransferred to the customer, under free on board, or FOB, terms agreed to bythe customer. The only rights of return are under our warranty policy.

·                                          *Fixed or determinable fee.* The amount of revenue to which we are entitled is fixed or determinableat the time of shipment. We assess whether the fee is fixed or determinablebased on the payment terms associated with the transaction and whether thesales 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 accesses 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 equity of a business enterpriseduring a period from transactions and other events and circumstances from non-ownersources. 

7

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Components of other comprehensive income (loss) that the Companycurrently reports are gains and losses from foreign currency translations andunrealized gains and losses from short-term investments, as follows:
| ** **                                                        | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **January 27,**             | ** ** | **January 28,**           | ** ** | **January 27,** | ** ** | **January 28,** | ** ** |
| ** **                                                        | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**          | ** ** |
| Net income                                                        |       | $                                | 3,862      |                           | $          | 817 |   | $ | 6,621 |   | $ | 1,194 |   |
| Other  comprehensive income:                                      |       |                             |       |                           |       |   |   |   |   |
| Unrealized loss  on short-term investments                        |       | (10                              | )          | —                         |       | (10 | ) | — |   |
| Net change in  cumulative foreign currency translation adjustment |       | 99                               |       | —                         |       | 129 |   | — |   |
| Comprehensive income                                              |       | $                                | 3,951      |                           | $          | 817 |   | $ | 6,740 |   | $ | 1,194 |   |

***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**                    | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|
| ** **                                                                                           | ** ** | **January 27,**                           | ** ** | **January 28,**      | ** ** | **January 27,** | ** ** | **January 28,** | ** ** |
| ** **                                                                                           | ** ** | **2007**                                  | ** ** | **2006**             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| **Numerator:**                                                                                       | * *   | * *                                  |       |                 |       |   |   |   |   |
| Numerator for basic and diluted income per share - net income                                        |       | $3,862                                    |       | $817                 |       | $6,621 |   | $1,194 |   |
|                                                                                                 |       |                                      |       |                 |       |   |   |   |   |
| **Denominator:**                                                                                     |       |                                      |       |                 |       |   |   |   |   |
| Denominator for basic income per share - weighted average common  shares outstanding                 |       | 24,592                                    |       | 1,822                |       | 13,668 |   | 1,820 |   |
| Effect of dilutive shares                                                                            |       |                                      |       |                 |       |   |   |   |   |
| Stock options                                                                                        |       | 1,403                                     |       | 999                  |       | 1,285 |   | 854 |   |
| Series A and C warrants                                                                              |       | 49                                        |       | 104                  |       | 71 |   | 104 |   |
| Conversion of preferred  shares into common stock                                                    |       | 548                                       |       | 14,350               |       | 8,540 |   | 14,350 |   |
| Denominator for diluted income per share — adjusted weighted-average  common shares outstanding |       | 26,592                                    |       | 17,275               |       | 23,564 |   | 17,128 |   |
| Basic net income per share                                                                           |       | $0.16                                     |       | $0.45                |       | $0.48 |   | $0.66 |   |
| Diluted net income per share                                                                         |       | $0.15                                     |       | $0.05                |       | $0.28 |   | $0.07 |   |

Dilutedincome per share does not reflect the following weighted-averagepotential common shares as the exercise prices of such options were greaterthan the average fair value of the Company’s common stock during the respectiveperiods.
| ** **                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **January 27,**             | ** ** | **January 28,**           | ** ** | **January 27,** | ** ** | **January 28,** | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(in thousands)**          | ** ** |
| Unvested common  stock “out of money” |       | 3                                |       | 5                              |       | 13 |   | 7 |   |

***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 statements 

8

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in accordance with SFAS 109 by prescribing the minimum threshold atax position 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 implementing 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 financial statementsfor fiscal years ending after November 15, 2006. The implementation of SAB 108is not expected to have a material impact on the Company’s consolidatedfinancial position or results of operations which will be effective for the fiscalyear 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 January 27, 2007 orJuly 29, 2006.

**3.  Inventories**

Inventories consist of the following at: 
| ** **      | ** ** | **January 27,**    | ** ** | **July 29,** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------|------------|
| ** **      | ** ** | **2007**                | ** ** | **2006**          | ** ** |
| ** **      | ** ** | **(in thousands)** | ** ** |
| Raw materials   |       | $                       | 10,664     |              | $          | 7,685 |   |
| Work in process |       | 1,472                   |       | 1,276             |       |
| Finished goods  |       | 3,366                   |       | 2,740             |       |
|            |       | $                       | 15,502     |              | $          | 11,701 |   |

**4.  Other Assets**

Other assets consist of the following at:
| ** **                | ** ** | **January 27,**    | ** ** | **July 29,** | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                | ** ** | **2007**                | ** ** | **2006**          | ** ** |
| ** **                | ** ** | **(in thousands)** | ** ** |
| Deferred  financing costs |       | $                       | —     |              | $          | 1,916 |   |
| Restricted cash           |       | 68                      |       | 68                |       |
| Other                     |       | 153                     |       | 25                |       |
|                      |       | $                       | 221        |              | $          | 2,009 |   |

Deferredfinancing costs represent direct transactional costs the Company incurred inconnection with the initial public offering. Deferred financing costs werereflected as a reduction of equity upon closing of the offering which occurredon November 1, 2006.

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**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 January 27, 2007 and July 29, 2006, respectively. TheCompany is required to determine whether delivery of each shipment hasoccurred, and the Company specifies delivery terms and assesses each shipmentagainst those terms and only recognizes revenue when there is certainty thatthe delivery terms are met. The Company recorded deferred revenue of $2,639,560as of July 29, 2006 for shipments when confirmation of delivery occurred afterthe end of the 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 |   |

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

Engana’sdevelopmental project that had not reached technological feasibility and had nofuture alternative use was classified as acquired in-process research anddevelopment and expensed on the acquisition date. Efforts required to developacquired in-process research and development into commercially viableproducts include the planning, designing, prototyping, verification and testingactivities that are necessary to establish that the products can be produced tomeet their design specifications, including functions, features and technicalperformance requirements.

The 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 

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and Engana, on a pro forma basis, for the period prior to theacquisition as if the acquisition occurred at the beginning of the periodpresented:

|                                                      | ** ** | **Six months ended**                            | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                           | ** ** | **January 28, 2006**                            | ** ** |
| ** **                                           | ** ** | **(in thousands, except  per share data)** | ** ** |
| Total revenues                                       |       | $                                                         | 30,029     |   |
| Pro forma net  loss                                  |       | (442                                                      | )          |
| Pro forma net  loss per share—basic and diluted |       | (0.24                                                     | )          |
| Reported net  income                                 |       | 1,194                                                     |       |
| Reported net  income per share—basic            |       | 0.66                                                      |       |
| Reported net income per  share—diluted          |       | 0.07                                                      |       |
|                                                      |            |                                                           |            |  |

Thepro forma financial information is presented for informational purposes onlyand is not indicative of the results of operations that would have beenachieved if the acquisition had taken place at the beginning of the periodpresented. The pro forma financial information excludes approximately $11.2million for acquired in-process research and development, which is a non-recurringcharge not representative of research and development expenses incurred forthat period.

**8.  RedeemableConvertible 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**           | ** ** | **As Converted into** | ** ** |
|------------|------------|---------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **Preferred Shares** | ** ** | **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                      |       |

Outstandingwarrants for preferred stock on November 1, 2006 became exercisable for commonstock as follows:

|                    | ** ** | **Outstanding**           | ** ** | **As Converted into** | ** ** |
|--------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **Preferred Shares** | ** ** | **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 Awarrant was exercised.

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** **

**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 January 27,2007, 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 to directors,officers, employees, and consultants of the Company. Option grants under the2000 Plan generally vest over four years and expire ten years from the date ofgrant.

Stock option transactions under the 2000 Plan for the sixmonths ended January 27, 2007 are summarized as follows:
| ** **                                | ** ** | **Number of** | ** ** | **Range of**        | ** **  | **Weighted Average** | ** ** |
|-------------------------------------------|------------|--------------------|------------|--------------------------|-------------|---------------------------|------------|
| ** **                                | ** ** | **Options**        | ** ** | **Exercise Prices** | ** **  | **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                                 |       | (17,591            | )          | $                        | 0.48-17.50  |                      | $          | 7.8580 |   |
| Exercised                                 |       | (20,624            | )          | $                        | 0.48-10.92  |                      | $          | 1.8282 |   |
| Outstanding—January 27,  2007        |       | 1,802,475          |       | $                        | 0.48-17.50  |                      | $          | 4.8315 |   |
| Options exercisable—January 27, 2007 |       | 782,477            |       | $                        | 0.48- 14.28 |                      | $          | 1.3313 |   |

Duringthe six months ended January 27, 2007 certain employees exercised options topurchase 20,264 shares of the Company’s common stock for proceeds of $37,705.

The weighted average remaining life of the options as ofJanuary 27, 2007 is 8.17 years.

The detail of the options exercisable as of January 27, 2007 is as follows:

| Number of | ** ** | **Range of**        | ** **    | **Weighted Average** | ** ** | **Weighted Average** | ** ** |
|----------------|------------|--------------------------|---------------|---------------------------|------------|---------------------------|------------|
| **Options**    | ** ** | **Exercise Prices** | ** **    | **Exercise Price**   | ** ** | **Remaining Life**   | ** ** |
| 655,201        |       | $                        | 0.4800-  1.08 |                      | $          | 0.6061                    |       | 6.70 |   |
| 125,541        |       | $                        | 2.4000- 5.76  |                      | $          | 4.9373                    |       | 8.83 |   |
| 1,735          |       | $                        | 14.2800-14.28 |                      | $          | 14.2800                   |       | 9.62 |   |

Duringthe first quarter of fiscal year 2007, the Company adopted the 2006 OptiumCorporation Stock Incentive Plan, as amended, (the “2006 Plan”) under which283,333 shares of common stock have been reserved for issuance. The 2006 Planprovisions provide for an automatic increase at the beginning of every quarterof each fiscal year in the number of shares reserved and available for issuanceunder the plan by a number equal to 0.75% of the then outstanding number ofshares of our common stock. The 283,333 shares reserved does not include theadditional 190,059 shares reserved as of the first day of the Company’s thirdquarter. Under the terms of the 2006 Plan, the Company may grant nonqualifiedor incentive stock options, restricted stock, or make awards of stockappreciation rights to directors, officers, employees, and consultants of theCompany. The exercise price for grants shall be determined by the Board ofDirectors on the date of grant, but in no event shall the exercise price of incentivestock options be less than 100% of the fair market value of the common stock(110% for any incentive stock option granted to a person owning more than 10%of the total combined voting power of all classes of stock as determined by theBoard of Directors on the date of grant). Option grants under the 2006 Plan 

12

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generally vest over four yearsand expire ten years from the date of grant. As of January 27, 2007, 13,451shares of common stock were granted under the 2006 Plan.

Stock option transactions under the 2006 Plan for the six months endedJanuary 27, 2007 are summarized as follows:
| ** **                                 | ** ** | **Number of** | ** ** | **Range of**        | ** **  | **Weighted Average** | ** ** |
|--------------------------------------------|------------|--------------------|------------|--------------------------|-------------|---------------------------|------------|
| ** **                                 | ** ** | **Options**        | ** ** | **Exercise Prices** | ** **  | **Exercise Price**   | ** ** |
| Balance—July 29,  2006           |       | —             |       | —                   |        | —                    |       |
| Granted                                    |       | 13,451             |       | $                        | 19.87-23.10 |                      | $          | 20.5809 |   |
| Forfeited                                  |       | (210               | )          | $                        | 19.87-19.87 |                      | $          | 19.8700 |   |
| Exercised                                  |       | —             |       | —                   |        | —                    |       |
| Outstanding— January  27, 2007        |       | 13,241             |       | $                        | 19.87-23.10 |                      | $          | 20.5916 |   |
| Options exercisable— January 27, 2007 |       | —             |       | —                   |        | —                    |       |

Duringthe six months ended January 27, 2007, 10 shares were gifted to an employee andthe Company recognized compensation expense for the shares based on the fairmarket value of the stock at the date of grant.

The weighted average remaining life of the options as ofJanuary 27, 2007 is 9.86 years.

The following is the rollforward of the Company’s common stock andadditional paid in capital (APIC) for the six months ended January 27, 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   |       | 20,593                |       | —                  |       | 38 |   |
| Series A warrant exercise.                                                                        |       | 36,789                |       | —                  |       | — |   |
| 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 |   |
| Deferred compensation related to issuance of stock  options                                       |       | —                |       | —                  |       | 439 |   |
| Balance January 27, 2007.                                                                         |       | 26,835,298            |       | $                       | 2          |   | $ | 190,032 |   |

***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.

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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 six months ended January 27, 2007, total stock-basedcompensation related to the revaluation and remeaurement of these grants wasapproximately $144,900 and $270,000.

***Warrants issued to employees***

On January 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 year endedJuly 29, 2006, 663,178 warrants were exercised for 55,264 shares of commonstock and proceeds of $33,398.

***Warrants issued in connection with capitallease 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 had 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.

**10.  Income Taxes**

At January 27, 2007, the Company has federal netoperating loss (“NOL”) carry forwards of approximately $29 million which expirethrough July 2025. NOL carry forwards and credits are subject to review andpossible adjustments by the Internal Revenue Service (“IRS”) and may be limitedby the occurrence 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 NOL tax carry forwards and credits in the amount ofapproximately $4.8 million. These NOL carry forwards and credits are subject toreview and possible adjustments by the Australian Taxation Office (“ATO”) andmay 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 NOL carry forwards. The acquired net operating losses have beenoffset by a valuation allowance. Upon utilization of such NOL carry forwards,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.

For the six months ended January 27, 2007, the Company recordeda current tax provision of approximately $472,000 which consists principally offederal alternative minimum tax (AMT) and state taxes.

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**11.  Commitmentsand 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 yetidentified,” infringes two U.S. patents. On February 23, 2007, the plaintiffsin the case filed a motion to amend their complaint to allege in addition thatthe Companys 1550 nm HFC quadratine amplitude modulator transmitter infringes anotherU.S. patent. Since discovery is currently in process, the Company is unable todetermine the ultimate outcome of this litigation. The Company intends todefend the claim vigorously and does not expect the ultimate outcome of thismatter to have a material adverse effect on the business or financial position.

In December 2004, the Company terminated a relationshipwith Appletec Limited, an Israeli company assisting the Company’s sales effortsin Israel.  The Company had receivedcorrespondence from Appletec claiming money owed for sales commissions and inJune 2005 proposed a settlement of which no response occurred. Appletec hasfiled an action against the Company alleging damages. In December 2006, theCompany received a letter from attorneys representing Applectec enclosing acopy of a purported default judgment in an amount of approximately $1.2 millionfor failure to appear in the action filed against the Company. The Company hasfiled a motion with the Israeli court that asserts among the other things, theCompany has not to date been served notice of the action pursuant to therequirements of Israeli law and, therefore, the default judgment is required tobe reversed under Israeli law. The default judgment has been stayed pendingresolution of the Company’s motion. The Company does not expect the ultimateoutcome of this matter to have a material adverse effect on the business orfinancial 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, the Company must pay, depending onthe agreement, severance pay of one to two years.

**12.  MajorCustomers**

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 andsix months ended January 27, 2007 comprising 10% or more of total revenues wereas follows:
| ** ** | ** ** | **Three months** | ** ** | **Six months**  | ** ** |
|------------|------------|-----------------------|------------|----------------------|------------|
| ** ** | ** ** | **ended**             | ** ** | **ended**            | ** ** |
| ** ** | ** ** | **January 27,**  | ** ** | **January 27,** | ** ** |
| ** ** | ** ** | **2007**              | ** ** | **2007**             | ** ** |
| ** ** | ** ** | ** **            | ** ** | ** **           | ** ** |
| Customer A |       | 21                    | %          | 27                   | %          |
| Customer B |       | 21                    | %          | 20                   | %          |
| Customer C |       | 11                    | %          | 14                   | %          |

Accountsreceivable from these three customers at January 27, 2007 represented 59% oftotal accounts receivable.

**13.  RelatedParty Transactions**

During the three months and six months ended January 27,2007 and January 28, 2006, the Company paid Guy Gertel, a consultant for salesand marketing and brother of the president and chief executive officer of theCompany, $33,700 and $66,584 and $31,568 and $63,137, respectively, in cashcompensation during such fiscal periods.

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During the three months and six months ended January 27,2007, the Company reimbursed the president and chief executive officer forbusiness travel expenses on a private jet of which he currently owns afractional interest. The amount of such reimbursement was approximately $17,617and $37,917, respectively.

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

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

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**FOR THETHREE AND SIX MONTHS ENDED JANUARY 27, 2007**

**AND COMPARABLE PERIODS ENDED JANUARY28, 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 andJanuary 2001, we raised approximately $7.9 million through theissuance of shares of series A convertible preferred stock. In May, Juneand July of 2001, we raised approximately $35.7 million through theissuance of shares of series B convertible preferred stock. We completedanother round of preferred stock financing in January 2003 in which we soldshares of series C senior convertible preferred stock for an aggregatepurchase price 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 six years toapproximately $65.9 million.

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 the Nasdaq Global 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 ofoffering expenses paid during fiscal year 2006. All outstanding preferred stockwas converted to common stock upon the completion of the initial publicoffering.

**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 thereporting period. Actual results could differ from those estimates. Operatingresults for the fiscal quarters presented are not 

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necessarily 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 from SFASNo. 5, “Accounting for Contingencies.” FIN 48 is effective for fiscalyears 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 statementswhich 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. We are currently determining the impact ofimplementating SFAS No. 157 which will be effective for the fiscal year endingAugust 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 our consolidatedfinancial position or results of operations which will be effective for the fiscalyear ending August 2, 2008.

**Current Trends Affecting Our Results of Operations**

We have experienced increased demand for our products, which has beendriven by market trends in the telecommunications and cable TV carrierindustries such as network expansion, the implementation of new technologiesand value-added services, network changes and consolidations in theseindustries. We expect growth of our current product portfolio to continue, andwe also expect the market for our new products to expand our potential sourcesof revenue. Growth was driven by increased volumes in telecommunication,fiber to the home, or FTTH, and cable TV applications.  Service providers have driven demand withaccelerated deployment of Internet protocol TV, or IPTV, networks, FTTH and 3Gcellular backhaul requirements.  Thesesystems utilize products from our tunable and fixed 10 gigabit per second, or10Gb/s, FTTH and cable TV wavelength offerings.

Network build-outopportunities in emerging economies have also driven increased demand for ourfixed wavelength dense wavelength division multiplexing, or DWDM, products,including our pluggable DWDM transceivers.

Steady increases in data traffic and the expectedincrease in bandwidth requirements are driving carriers to deploy high-bandwidth,flexible, or agile, network systems. Our optical subsystems are designed toenable our customers to shorten product development cycles and to readily addproduct features to their network systems. We believe this will allow carriersto support high-bandwidth applications at significantly lower operatingcosts while simplifying network reconfiguration, improving reliability andenabling greater network functionality. In addition, we believe that networksystems vendors are increasing their focus on providing higher value-addedsolutions, services and software to their carrier customers and de-emphasizingtheir optical hardware manufacturing efforts. We believe that we are wellpositioned to capitalize on the hardware design and manufacturing opportunitiescreated by this shift and enhance our position as a supplier of high-performanceoptical subsystems to network systems vendors.

We do remain cautious, however, in attempting to forecastfuture results. Visibility remains limited, and we cannot provide any assuranceas to the timing or scale of any new optical network deployments or sustainedindustry recovery, in general. Further, we rely on a sole supplier or limitednumber of suppliers for certain components used in the manufacturing of certainof our products, which could result in delivery problems, reduced control overproduct pricing and quality, and an inability to identify and qualifyadditional 

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suppliers in a timely manner. Any supply deficiencies relating to thequality or quantities of components we use to manufacture our products couldadversely affect our ability to fulfill customer orders and our results ofoperations.

**Results of operations**

***Consolidated results of operations indollars and as a percentage of revenues for the six months and three monthsended January 27, 2007 and January 28, 2006 were as follows:***
| ** **                                | ** ** | **Six months ended**                        | ** ** | **Three months ended**                      | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                | ** ** | **(in thousands, except percentages)** | ** ** | **(in thousands, except percentages)** | ** ** |
| ** **                                | ** ** | **(unaudited)**                                       | ** ** | **(unaudited)**                                       | ** ** |
| ** **                                | ** ** | **January**                                           | ** ** | **% of**                                         | ** ** | **January** | ** ** | **% of** | ** ** | ** ** | ** ** | **%** | ** ** | **January** | ** ** | **% of** | ** ** | **January** | ** ** | **% of** | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                                | ** ** | **27, 2007**                                     | ** ** | **Revenue**                                           | ** ** | **28, 2006** | ** ** | **Revenue** | ** ** | **Variance** | ** ** | **Variance** | ** ** | **27, 2007** | ** ** | **Revenue** | ** ** | **28, 2006** | ** ** | **Revenue** | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| Revenue                                   |       | $                                                     | 64,149     |                                                  |       |   | $ | 30,029 |   |   |   | $ | 34,120 |   | 113.6 | % | $ | 34,139 |   |   |   | $ | 16,013 |   |   |   | $ | 18,126 |   | 113.2 | % |
| Cost of revenue                           |       | 45,519                                                |       | 71.0                                                  | %          | 23,380 |   | 77.9 | % | 22,139 |   | 94.7 | % | 24,214 |   | 70.9 | % | 12,406 |   | 77.5 | % | 11,808 |   | 95.2 | % |
| Gross profit                              |       | 18,630                                                |       | 29.0                                                  | %          | 6,649 |   | 22.1 | % | 11,981 |   | 180.2 | % | 9,925 |   | 29.1 | % | 3,607 |   | 22.5 | % | 6,318 |   | 175.2 | % |
| Operating expenses:                       |       |                                                  |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and product development          |       | 6,509                                                 |       | 10.1                                                  | %          | 3,544 |   | 11.8 | % | 2,965 |   | 83.7 | % | 3,513 |   | 10.3 | % | 1,802 |   | 11.3 | % | 1,711 |   | 95.0 | % |
| Selling, general and administrative       |       | 6,186                                                 |       | 9.6                                                   | %          | 1,928 |   | 6.4 | % | 4,258 |   | 220.9 | % | 3,359 |   | 9.8 | % | 981 |   | 6.1 | % | 2,378 |   | 242.4 | % |
| Total operating expenses                  |       | 12,695                                                |       | 19.8                                                  | %          | 5,472 |   | 18.2 | % | 7,223 |   | 132.0 | % | 6,872 |   | 20.1 | % | 2,783 |   | 17.4 | % | 4,089 |   | 146.9 | % |
|                                      |       |                                                  |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from operations                    |       | 5,935                                                 |       | 9.3                                                   | %          | 1,177 |   | 3.9 | % | 4,758 |   | 404.2 | % | 3,053 |   | 8.9 | % | 824 |   | 5.1 | % | 2,229 |   | 270.5 | % |
| Interest and other income  (expense), net |       | 1,158                                                 |       | 1.8                                                   | %          | 40 |   | 0.1 | % | 1,118 |   | 2795.0 | % | 1,102 |   | 3.2 | % | 8 |   | 0.0 | % | 1,094 |   | 13675.0 | % |
| Income before income tax  expense         |       | 7,093                                                 |       | 11.1                                                  | %          | 1,217 |   | 4.1 | % | 5,876 |   | 482.8 | % | 4,155 |   | 12.2 | % | 832 |   | 5.2 | % | 3,323 |   | 399.4 | % |
| Income tax expense                        |       | 472                                                   |       | 0.7                                                   | %          | 23 |   | 0.1 | % | 449 |   | 1952.2 | % | 293 |   | 0.9 | % | 15 |   | 0.1 | % | 278 |   | 1853.3 | % |
| Net income                                |       | $                                                     | 6,621      |                                                  | 10.3       | % | $ | 1,194 |   | 4.0 | % | $ | 5,427 |   | 454.5 | % | $ | 3,862 |   | 11.3 | % | $ | 817 |   | 5.1 | % | $ | 3,045 |   | 372.7 | % |

***Revenue***

Total revenue increased 113.6% to approximately$64.1 million for the six months ended January 27, 2007 from approximately$30.0 million for the six months ended January 28, 2006. Total revenueincreased 113.2% to approximately $34.1 million for the three months endedJanuary 27, 2007 from approximately $16.0 million for the three months endedJanuary 28, 2006. These increases in revenue are primarily attributable to anincrease in sales of our 10 GB/s transceivers of approximately $22.9 and$11.1 million, respectively, as well as an increase in sales supportinghybrid fiber coaxial network systems of approximately $8.3 and $5.1 million,respectively. Growth continues to be driven by increased volumes in Telecom,Fiber to the Home and Cable TV applications. The key growth drivers for ourbusiness are the accelerated deployment of new IPTV networks, Fiber to the Homeand cellular backhaul systems, as well as upgrades and expansion of traditionalbroadband systems to address the significant overall growth in bandwidthdemand.

***Gross profit***

Gross profit increased 180.2% to approximately$18.6 million for the six months ended January 27, 2007 from approximately$6.6 million for the six months ended January 28, 2006. Gross profitincreased 175.2% to approximately $9.9 million for the three months endedJanuary 27, 2007 from approximately $3.6 million for the three monthsended January 28, 2006. Gross profit percentages increased to 29.0% from 22.1% thesix months ended January 27, 2007, compared to the six months ended January 28,2006. Gross profit percentages increased to 29.1% from 22.5% for the threemonths ended January 27, 2007, compared to the three months endedJanuary 28, 2006. The increase in gross profit was primarily attributableto unit volume increases with increased demand for our products and drivingadditional operational cost efficiencies. Additionally, there was a favorable product mix shift from lower marginshort reach products to higher margin long reach products.

***Research and product development***

Research and product development expenses increased 83.7%to approximately $6.5 million for the six months ended January 27, 2007from approximately $3.5 million for the six months ended January 28, 2006.Research and product development expenses 

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increased 95.0% to approximately $3.5 million for the three monthsended January 27, 2007 from approximately $1.8 million for the threemonths ended January 28, 2006. The increase in research and product developmentcost is partially a result of our research and product development activitiesrelated to our Optium Australia operations from our acquisition of Enganaduring the third quarter of our prior fiscal year, on March 5, 2006. Thesix and three months ended January 27, 2007 include approximately $1.9 millionand $1.0 million, respectively, of research and development costs with respectto our Optium Australia operations. Additionally, research and product developmentcosts increased as a result of our higher headcount and associated costsrelated to our decision to increase the number of engineering projects whichwill further expand our product portfolio. We expect these costs to continue toincrease as we undertake additional research and development projects to expandour product suite.

***Selling, general and administrative***

Selling, general and administrative expensesincreased 220.9% to approximately $6.2 million for the six months endedJanuary 27, 2007 from approximately $1.9 million for the six months endedJanuary 28, 2006. Selling, general and administrative expenses increased 242.4%to approximately $3.4 million for the three months ended January 27, 2007from approximately $1.0 million for the three months ended January 28,2006. The Company experienced increased costs for the additional infrastructurenecessary support our revenue growth. These costs included increased laborcosts as a result of additional headcount and additional legal and other professionalfees. Additionally, during the six months ended January 27, 2007, we incurred$0.4 million in stock-based compensation primarily related to the adoption ofSFAS 123(R) and $0.4 million related to duplicate facility costs as we relocateour operations to a new facility. Our selling, general and administrative costsalso increased during the six months ended January 27, 2007 as a result of theadditional costs of being a publicly-traded company, including the costsof compliance with the Sarbanes-Oxley Act of 2002 and certainprofessional fees for corporate governance. We expect these costs to continueto increase as we continue our compliance efforts.

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

Interest and other income (expense), net, increased toapproximately $1.2 million and $1.1 million for the six months and three monthsended January 27, 2007, respectively, from approximately $40,000 and $8,000 forthe six months and three months ended January 28, 2006, respectively. Theincrease was due to additional cash and cash equivalents and short-terminvestments as a result of the proceeds of our initial public offering.

***Income tax expense***

Income tax expense was approximately $472,000 and$293,000 for the six months and three months ended January 27, 2007,respectively, compared to approximately $23,000 and  $15,000 for the six months and three monthsended January 28, 2006, respectively. The Company’s overall effective tax ratewas approximately 7% and 2% in the six month periods ended January 27, 2007 andJanuary 28, 2006, respectively. Tax expense during the six months endedJanuary 27, 2007 represents federal AMT and state income tax. Our tax rateis currently lower than the statutory tax rate as we currently have availableoperating loss carryforwards to effect taxable income. Our remainingcarryforwards total approximately $29.0 million at January 27, 2007.

***Net income***

Net income increased 454.5% to approximately $6.6 millionfor the six months ended January 27, 2007 from approximately $1.2 million forthe six months ended January 28, 2006. Net income increased 372.7% toapproximately $3.9 million for the three months ended January 27, 2007 fromapproximately $817,000 for the three months ended January 28, 2006. As apercentage of sales, net income was approximately 10.3% and 11.3% during thesix months and three months ended January 27, 2007, respectively, as comparedto 4.0% and 5.1% in the six months and three months ended January 28, 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 $2.6million and $557,000 for the six months ended January 27, 2007 and January 28,2006, respectively. Net cash used in operating activities for the six monthsended January 27, 2007 primarily resulted from period to date net income ofapproximately $6.6 million offset by increases in accounts receivables ofapproximately $2.6 million, increases in inventories of approximately $3.8million and decreases in other current liabilities of approximately $2.6million.

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***Investing activities***

Net cash used in investing activities was approximately$21.7 million for the six months ended January 27, 2007 and approximately $1.2million for the six months ended January 28, 2006. Net cash used in investingactivities for the six months ended January 27, 2007 was primarily related topurchasing marketable securities resulting from investing a portion of theinitial public offering proceeds. Net cash used in investing activities for thesix months ended January 28, 2006 was related to purchases of property andequipment.

***Financing activities***

Net cash provided by financing activities wasapproximately $94.7 million for the six months ended January 27, 2007 andapproximately $5,000 for the six months ended January 28, 2006. Net cashprovided by financing activities for the six months ended January 27, 2007 wasprimarily related to the proceeds from our initial public offering. Net cash providedby financing activities for the six months ended January 28, 2006 related toproceeds from 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 the Nasdaq Global 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 preferred stock outstanding atNovember 1, 2006 was converted to common stock upon the completion of theinitial public offering.

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 January 27, 2007 wehad cash and cash equivalents of $80.8 million, short-term investments of $19.4million and accounts receivable of approximately $21.7 million and nodebt. Prior to our public offering, the aggregate redemption value of ourSeries A Convertible Preferred Stock, Series B Convertible PreferredStock, Series C Senior Convertible Preferred Stock, Series D SeniorConvertible Preferred stock, and Series D-1 Senior ConvertiblePreferred Stock was approximately $7.9 million, $35.7 million,$11.9 million, $10.3 million, and $21.3 million, respectively.

We believe our existing cash and cash equivalents and ourcash flows from operating activities will be sufficient to meet our anticipatedcash needs for at least the next twelve months. Our future working capitalrequirements will depend on many factors, including the rate of our revenuegrowth, the introduction and acceptance of new products, and the expansion ofour sales and marketing and research and development activities. To the extentthat our cash and cash equivalents, cash flows from operating activities, andnet proceeds of our initial public offering are insufficient to fund our futureactivities, we may need to raise additional funds through bank creditarrangements or public or private equity or debt financings.

We also may need to raise additional funds in the eventwe determine to effect one or more acquisitions of businesses, technologiesand/or products. Although there are no present understandings, commitments oragreements with respect to acquisitions of other businesses, products ortechnologies, we may in the future consider such transactions, which mayrequire debt or equity financing.  Theissuance of debt or equity securities could be expected to have a dilutiveimpact on the our stockholders, and there can be no assurance as to whether orwhen any acquired business would contribute positive operating resultscommensurate with the associated investment. In the event we require additionalcash resources, we may not be able to obtain bank credit arrangements or affectan equity or debt financing on terms acceptable to us or at all. Any materialacquisition could result in a decrease in working capital depending upon theamount, timing, and nature of the 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.

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***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 MARKETRISK**

We are exposed to market risk from changesin interest rates.  Various financial instrumentsheld by us are sensitive to changes in interest rates.  Interest rate changes could result in anincrease or decrease in interest income as well as in gains or losses in themarket value of our debt security investments due to differences between themarket interest rates 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 have investment guidelines relative todiversification and maturities designed to maintain safety and liquidity.  As of January 27, 2007, our cash and cashequivalents totaled approximately $80,799,000 and we had short-term investmentstotaling approximately $19,425,000.  If,during the period ended January 27, 2007, average short-term interest ratesincrease or decrease by 50 basis points, our projected interest income fromcash and cash equivalents and short-term investments would increase or decreaseby approximately $125,000.

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.  Ourshort-term investments are subject to price risk due to fluctuations ininterest rates.  Neither a 10% increasenor decrease in prices would have a material effect on our consolidatedfinancial statements. All short-term investments are considered to beavailable-for-sale, accounted for at fair value, with resulting unrealizedgains or losses reported as a separate component of stockholders’ equity. Ifthese available-for-sale securities experience declines in fair value that areconsidered other-than-temporary, an additional loss would be reflected in netincome (loss) in the period when the subsequent 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 subsidiary Optium Australiais located in Sydney, Australia. Due to the relative low volume of paymentsmade by us through this subsidiary, and the fact we intend that all of oursales will continue to be made in U.S. dollars, we do not believe that we havesignificant exposure to foreign currency exchange risks. We currently do notuse derivative financial instruments to mitigate this exposure. We continue toreview this issue and may consider hedging certain foreign exchange risksthrough the use of currency futures or options in future years

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**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 withAppletec Limited, an Israeli company that was assisting us with our salesefforts in Israel. 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 our 1550 nm HFC externallymodulated transmitter, in addition to possibly ‘‘products as yet identified,’’infringes on two U.S. patents. On February 23, 2007, the plaintiffs in the casefiled a motion to amend their complaint to allege in addition that our 1550 nmHFC quadratine amplitude modulator transmitter infringes another U.S. patent.Since discovery is currently in process, we are unable to determine theultimate outcome of this litigation. During the fiscal year ended July 29, 2006and the six months ended January 27, 2007, sales of our 1550 nm HFC externallymodulated transmitter and our 1550 nm HFC quadratine amplitude modulatedtransmitters, together, represented less than 5% of our revenues. Theplaintiffs are seeking for the court to declare that we have willfullyinfringed on such patents and to be awarded up to three times the amount of anycompensatory damages found, if any, plus any other damages and costs incurred.We intend to vigorously defend the claims asserted against us and we believethat we have meritorious defenses.

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 do notcontinue 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 

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particular, is apparent, growth is limited by several factors,including, among others, an uncertain regulatory environment, reluctance fromcontent providers to supply video and audio content over the communicationsinfrastructure, and uncertainty regarding long term sustainable business modelsas multiple industries (cable TV, traditional telecommunications, wireless,satellite, etc.) offer non-complementary and competing content deliverysolutions. Ultimately, if long-term expectations for network growth andbandwidth demand are not realized or do not support a sustainable businessmodel, our business would be significantly harmed.

***We are under continuous pressure to reducethe prices of our products.***

The optical network equipment industry has beencharacterized by falling product prices over time. Many of our competitorsoutsource their manufacturing operations to locations with low labor costs,allowing them to offer their products at lower prices than if they usedmanufacturing facilities in the United States. If optical subsystem productsbecome more standardized, the cost advantages of our embedded software approachto product customization will be reduced and our business would besignificantly harmed.

***We depend on a limited number of componentsuppliers who could disrupt our business if they stopped, decreased or delayedshipments and increased demand for components generally could lead toshortages.***

We depend on a limited number of suppliers of componentsused to manufacture certain of our products. Some of these suppliers are solesources. We typically have not entered into long-term agreements with oursuppliers 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. During the last several years the number ofsuppliers of components has decreased significantly and more recently, demandfor components has rapidly increased. For example, a recent surge in demand formicroprocessors and lasers has resulted in shortages of such components. 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 our ability toanticipate 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 andmarket new products and technologies meeting or exceeding our customers’expectations. The introduction of new products embodying new technologies orthe emergence of new industry standards could render our existing productsuncompetitive from a pricing standpoint, obsolete or unmarketable. Further,time to market with new products can provide significant competitive advantagesin our industry. It is difficult to displace an existing supplier or aparticular type of optical subsystems once a network systems vendor has chosenan initial optical subsystems supplier for a particular product even if a laterto market product supplies superior performance and/or cost efficiency. If weare unable to make our new products commercially available quickly, we may loseexisting and potential customers and our financial results would suffer.

***We are subject to a number of special risksas a result of our acquisition of Engana.***

In March 2006, we acquired Engana of Sydney,Australia, a developer of DWP ROADMs and related technologies. Our futureresults of operations will be substantially influenced by the operations ofthis new business, and we are subject to a number of risks and uncertaintiesrelated to this acquisition, 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. Weacquired Engana, in part, based upon this expectation. Any delay by networksystems vendors in including our DWP ROADMs in their network systems fromthe timetable we expect, or any decision by such vendors not to include our DWPROADMs in amounts we expect, would significantly alter our near termprospects for growth and harm our business and financial condition.

·                                          Weare establishing a production line for our DWP ROADMs at our acquired facilityin Sydney, Australia. Any delay in the production line being able to producecommercial volumes in the quantities anticipated would delay our ability tocommercialize our DWP ROADMs, which would negatively affect our revenues andcompetitive position. In addition, a 

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failure to achieve manufacturing yields from suchproduction line comparable to the yields obtained at our Chalfont, Pennsylvaniafacility would negatively impact our margins and operating results.

·                                          Theintegration of the products and technology we acquired as part of ouracquisition of Engana with our products and technology and the coordination ofthe manufacturing operations for such products will be complex, time-consumingand expensive. The execution of these activities could potentially disrupt ourongoing business operations and distract management from day-to-dayoperational matters, as well as other strategic opportunities, and could strainour financial and managerial controls and reporting systems and procedures. Inaddition, unanticipated costs could arise during the integration of theproducts and manufacturing operations. If we are unable to successfullyintegrate these products and technology with our products and technology, or ifactual integration and manufacturing costs are significantly greater thancurrently anticipated, we may not achieve the anticipated benefits of theacquisition and our revenues and operating results could be adversely affected.

·                                          Immediatelyprior to the acquisition, Engana was engaged in an ongoing research anddevelopment project related to ROADM technology. We may not be able to successfullycomplete this project, and our inability to do so could prevent us fromachieving some of the strategic objectives and other anticipated potentialbenefits of the acquisition, and could have a material adverse effect on ourrevenues and operating results.

·                                          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 each dependentupon 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 endedJanuary 27, 2007 and January 28, 2006, we generated 65.7% and 49.8%,respectively, of our revenues from our three largest end customers during thoseperiods. We may not be able to offset any decline in revenues from our existingmajor customers with revenues from new customers and our quarterly results maybe volatile because we are dependent on large orders from these customers thatmay be reduced or delayed. Our dependence on a limited number of customers isdue to the fact that the network systems industry is dominated by a smallnumber of large companies, and the industry continues to consolidate, as withthe recent mergers of Cisco Systems and Scientific Atlanta and of Lucent andAlcatel. Similarly, our customers depend primarily on a limited number of majorcarrier customers to purchase their network systems products that incorporateour optical subsystems. Many major telecommunication services providers areexperiencing losses from operations. The further consolidation of the industry,coupled with potential declining revenues from our major customers, may have amaterial adverse impact on our business.

***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 chief executiveofficer and other key personnel or if we fail to attract additional qualifiedpersonnel, we may not be able to achieve our anticipated level of growth andour 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 of servicesof 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 

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the United States relating to the expensing of stock options maydiscourage us from granting the sizes or types of stock options that jobcandidates may require to accept our offer of employment.

***Potential future acquisitions could be difficultto integrate, divert the attention of key personnel, disrupt our business,dilute stockholder value and impair our financial 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 couldmaterially harm our business and financial results.

***If we fail to manage or anticipate our long-termgrowth and expansion requirements, our business will suffer.***

In recent years, we have experienced significant growththrough among other things, internal expansion programs, product developmentand our acquisition of Engana. We currently anticipate continued growth. Inconnection with this growth, we will be required to expand our manufacturing operations,including hiring new personnel, purchasing additional equipment, leasing orpurchasing additional facilities and developing the management infrastructureto manage any such expansion. If we fail to secure these expansion requirementsand /or manage our future growth effectively, in particular during periods ofindustry uncertainty, our business could suffer.

***If we fail to protect, or incur significantcosts in defending, our intellectual property and other proprietary rights, ourbusiness 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 

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property or otherwise gaining access to our technology. Unauthorizedthird parties may try to copy or reverse engineer our products or portions ofour products or otherwise obtain and use our intellectual property. If we failto protect our intellectual property and other proprietary rights, ourbusiness, results of operations or financial condition could be materiallyharmed.

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 protect our intellectual property rights.Any of our intellectual property rights may be challenged by others orinvalidated through administrative processes or litigation. If we resort tolegal proceedings to enforce our intellectual property rights or to determinethe validity and scope of the intellectual property or other proprietary rightsof others, the proceedings could result in significant expense to us and divertthe attention and efforts of our management and technical employees, even if wewere to prevail.

***Third parties may claim we are infringingtheir intellectual property rights, and we could be prevented from selling ourproducts, or suffer significant litigation expense, even if these claims haveno 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 on September 11,2006 alleging that our 1550 nm HFC externally modulated transmitter, inaddition to possibly “products as yet identified,” infringes two U.S. patents. OnFebruary 23, 2007, the plaintiffs on the case filed a motion to amend theircomplaint to allege in addition that our 1550mm HFC quadatine amplitudemodulator transmitter infringes another U.S. patent. 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 or costs incurred. Any litigation regardingpatents, trademarks, copyrights or other intellectual property rights, eventhose without merit, could be costly and time consuming, and divert ourmanagement and key personnel from operating our business. The complexity of thetechnology involved and inherent uncertainty and cost of intellectual propertylitigation increases our risks. If any third party has a meritorious or successfulclaim that we are infringing its intellectual property rights, we may be forcedto change our products or manufacturing processes, which may be costly orimpractical. This also may require us to stop selling our products as currentlyengineered, which could harm our competitive position. We also may be subjectto significant damages or injunctions that prevent the further development ofcertain of our products or services.

***If we fail to obtain the right to use theintellectual property rights of others necessary to operate our business, ourability 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.

***Our financial results often vary significantlyfrom quarter-to-quarter due to a number of factors, which may leadto 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:

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·                                          fluctuationsin demand for intelligent optical networking products;

·                                          thetiming and size of sales of our products;

·                                          lengthand variability of the sales cycles of our products;

·                                          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 the shortterm. As a result, we may be unable to adjust spending in a timely manner tocompensate for any unexpected shortfall in revenue. Furthermore, we intend toincrease 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 to recoverthe expenses for cancelled or unutilized design projects. It is difficult topredict with any certainty the frequency with which customers will cancel ormodify their projects, or the effect that any cancellation or modificationwould have on our results of operations.

***If carriers that purchase network systemsfrom customers fail to qualify or delay qualifications of any products sold byour 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.

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***Delays, disruptions or quality control problemsin manufacturing could result in delays in product shipments to customers andcould adversely affect our business.***

We may experience delays, disruptions or quality controlproblems in our manufacturing operations. As a result, we could incur additionalcosts that would adversely affect gross margins, and product shipments to ourcustomers could be delayed beyond the shipment schedules requested by ourcustomers, which would negatively affect our revenues, competitive position andreputation.

***We may experience low manufacturing yields.***

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 from otherproviders of optical subsystems, as well as competition from providers offeringalternative products, which could negatively impact our results of operationsand cause our market share to decline.***

We believe that a number of companies have developed orare developing optical subsystems that compete directly with our productofferings. Many current and potential competitors have substantially greaterfinancial, marketing, research and manufacturing resources than we possess, andthere can be no assurance that our current and future competitors will not bemore successful 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 be subjectto volatility as a result of exposure to foreign currency exchange risks.***

All sales of our products are made in United Statesdollars. Nevertheless, most of our suppliers to our subsidiary Engana, renamedOptium Australia Pty Limited (“Optium Australia”), are paid in Australiandollars. In addition, all employee and other local expenses of Optium Australiaare paid in Australian dollars. This exposes us to foreign currency exchangerate risks. If the value of the Australian dollar relative to the United Statesdollar rises, these expenses of Optium Australia will correspondingly increase.If the relative value of the Australian dollar increases significantly, ourexpenses would increase and our results of operations could be harmed. Wecurrently do not use derivative financial instruments to mitigate thisexposure. We continue to review this issue and may consider hedging certainforeign exchange risks through the use of currency futures or options in futureperiods.

***We will incur significant increased costsas 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 our 

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independent registered public accounting firm, may reveal deficienciesin our internal 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 therequirements 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 capital whendesired on favorable terms, if at all, or without dilution to our stockholders.***

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 product liabilityclaims.***

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 recently acquired Engana, which is located in Sydney,Australia. Our international revenue and operations are subject to a number ofmaterial 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;

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·                                          fluctuationsin foreign economies;

·                                          fluctuationsin the value of foreign currencies and interest rates;

·                                          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 January 27, 2007 we have net operating loss, orNOL, carryforwards of approximately $29 million for federal and stateincome tax purposes expiring through fiscal year ending August 2, 2025.These net operating loss carryforwards represent an asset to us to the extentthey can be utilized to reduce cash income tax payments expected in the future.Utilization of our net operating loss carryforwards depends on the timing andamount of taxable income earned by us in the future, which we are unable topredict. We have performed an analysis to determine whether an ownership changeunder Section 382 of the Internal Revenue Code has occurred. The effect ofan ownership change would be the imposition of an annual limitation on the useof the net operating loss carryforwards attributable to periods before thechange. 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 not publishresearch or reports about our business or if they issue unfavorable commentaryor downgrade our common stock, the price of our common stock could decline.***

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 of our common stockto 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;

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·                                          litigationinvolving our company, our general industry or both;

·                                          additionsor departures of key personnel;

·                                          investors’general perception of us;

·                                          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 after the expiration of thelock-up agreements covering approximately 19.3 million shares of ouroutstanding common stock.  These sales,or the market perception that the holders of a large number of shares intend tosell shares, could reduce the market price of our common stock.  These shares will be able to be sold, subjectto any applicable volume limitations under federal securities laws, beginning180 days following the effective date of our initial public offering.

In addition, as of March 1, 2007, there were48,979 shares subject to outstanding warrants and 1,827,187 shares subjectto outstanding options, and additional shares will be available for issuanceunder our stock option plans. These shares will become eligible for sale in thepublic market to the extent permitted by any applicable vesting requirements,the lock-up agreements and Rules 144 and 701 under the SecuritiesAct of 1933, as amended. Moreover, after this offering, holders of an aggregateof approximately 17 million shares of our common stock have rights,subject to some conditions, to require us to file registration statementscovering their shares or to include their shares in registration statementsthat we may file for ourselves or other stockholders. We have also registeredall shares of common stock that we may issue under our employee benefit plans.Once we register these shares, they can be freely sold in the public marketupon issuance, subject to the lock-up agreements, and in certain cases,applicable volume limitations.

***Our directors, management and entitiesassociated with them will exercise significant control over our company, whichwill limit your ability to influence corporate matters.***

Our executive officers and directors and entitiesassociated with them will collectively beneficially own approximately 50.1% ofour outstanding common stock. As a result, these stockholders, if they acttogether, will be able to influence our management and affairs and all mattersrequiring stockholder approval, including the election of directors andapproval of significant corporate transactions. This concentration of ownershipmay have the effect of delaying or preventing a change in control of ourcompany 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, includingtransactions in which you might otherwise receive a premium for your shares ofour common stock. These provisions may also prevent or frustrate attempts byour stockholders 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;

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·                                          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.

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 pay dividendson our common stock and, consequently, your ability to achieve a return on yourinvestment will depend on appreciation in the price of our common 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 for theforeseeable future.

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**ITEM 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

Duringthe three months ended January 27, 2007, the Series A warrant for 44,294 shareswas exercised in full pursuant to its cashless exercise provision and we issued36,789 shares of common stock.

**ITEM 3. Defaults Upon SeniorSecurities**

None.

**ITEM 4.  Submission of Matters to a Vote of SecurityHolders**

None.

**ITEM 5. Other Information**

*(a) Management Compensation Plans*

On March 3, 2007, the Compensation Committee amendedthe Optium Corporation Executive Officer Fiscal Year Bonus Plan so that theadditional annualbonus of up to $350,000 that our Chief Executive Officer is eligible to receivebased on our achievement in strategic development, investor relations, humanresources and corporate citizenship, as well as our stock trading priceperformance, may be paid in up to $175,000 semi-annual amounts.

On the same date, theCompensation Committee made option grants to certain executive officers withvesting acceleration provisions not included in the Optium Corporation standardform option grant.  The executiveofficers were Chief Executive Officer Eitan Gertel, Senior Vice President andGeneral Manager Mark Colyar, General Counsel and Vice President of Corporate DevelopmentChristopher Brown, Vice President of Sales and Marketing Anthony Musto andChief Financial Officer David Renner. In the case of Mr. Gertel, such vestingprovisions provide for the acceleration of vesting of (i) 25% of theoriginal grant (or 100% of remaining unvested portion if less) followingtermination of employment without Cause or for Constructive Termination (eachterm as defined in Mr. Gertel’s employment agreement) prior to an Acquisition(as defined in the 2006 Stock Option and Incentive Plan) and (ii) 100% ofremaining unvested portion following termination of employment without Cause orfor Constructive Termination within one year of an Acquisition.  In the case of Messrs. Colyar, Brown, Mustoand Renner, such vesting provisions provide for acceleration of vesting of 25%of the original grant (or 100% of remaining unvested portion if less) followingtermination of employment without Cause at any time or for ConstructiveTermination (each term as defined in the optionee’s employment agreement)within one year of an Acquisition.

ITEM 6**. Exhibits**

(a)   Exhibit Index.

10.1         Executive Officer Fiscal Year BonusPlan, as amended.

10.2         Form of Stock Option Grant Notice forAustralian Employees under Optium Corporation 2006 Stock Option and Grant Plan.

10.3         Form of Australian Employee Non-QualifiedStock Option Agreement under the Optium Corporation 2006 Stock Option and GrantPlan.

10.4         Stock Option Grant Notice, dated March3, 2007, for Eitan Gertel.

10.5         Stock Option Grant Notice, dated March3, 2007, for Mark Colyar.

10.6         Stock Option Grant Notice, dated March3, 2007, for Christopher Brown.

10.7         Stock Option Grant Notice, dated March3, 2007, for Anthony Musto.

10.8         Stock Option Grant Notice, dated March3, 2007, for David Renner.

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

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

31.2         Certifications of Chief ExecutiveOfficer and Chief Financial Officer pursuant to Rule 13a-14(b) of the ExchangeAct and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

** **

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**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:     March  7, 2007 |   | /s/ Eitan Gertel                      |   |   |
|                                               |   | Eitan Gertel                          |   |   |
|                                               |   | President and Chief Executive Officer |   |   |
|                                               |   |                                  |   |   |
|                                               |   |                                  |   |   |
|                                               |   |                                  |   |   |
| Dated:     March  7, 2007 |   | /s/ David Renner                      |   |   |
|                                               |   | David Renner                          |   |   |
|                                               |   | Vice President  of Finance and        |   |   |
|                                               |   | Chief Financial  Officer              |   |   |

 

 

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