UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended January 27, 2007

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

Commission File Number: 001-33109

OPTIUM CORPORATION

(Exact name of registrant as specified in its charter)

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

200 Precision Road Horsham PA 19044

(Address of principal executive offices)(Zip Code)

(267) 803-3800

(Registrant’s telephone number, including area code)

500 Horizon Drive, Suite 505

Chalfont, PA 18914

(Former name, former address and former fiscal year,

if changed since last report)

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

x Yes o No

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

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

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

outstanding as of March 1, 2007 was 25,346,887.

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

FORWARD-LOOKING STATEMENTS

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

The Company may include forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its annual report to shareholders, in its proxy statements, in its press releases, in other written materials, and in statements made by employees to analysts, investors, representatives of the media, and others.

By their very nature, forward-looking statements are subject to uncertainties, both general 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 a variety of factors including, without limitation, those discussed under “Certain Trends Affecting Our Results of Operations;” Risk Factors;” and elsewhere in this report. Investors and others should carefully consider these factors and other uncertainties and events, whether or not the statements are described as forward-looking.

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

PART I
Financial Information

ITEM 1. Financial Statements

Optium Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

	Three months ended				Six months ended
	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.

Optium Corporation

Condensed Consolidated Balance Sheets

(in thousands, 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.

Optium Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	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.

Optium Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Operations

Optium Corporation (the “Company”) was incorporated in the State of Delaware on September 8, 2000. The Company is a supplier of high-performance optical subsystems for use in telecommunications and cable TV network systems. Since its founding in 2000, the Company has developed proprietary technology and products that enable transmission, reception and switching functionality for high-bandwidth, intelligent optical networking applications. The Company designs, manufactures and sells optical subsystems, including transceivers and transmitters. The Company has also recently launched a technologically innovative reconfigurable add-drop multiplexer or ROADM, which enables dynamic wavelength processing.

On November 1, 2006, the Company closed its initial public offering of 5.2 million shares of common stock at a price to the public of $17.50 per share as well as the sale of an additional 780,000 shares to cover underwriter over-allotments. The Company’s common stock, quoted on the Nasdaq Global Market under the symbol “OPTM,” began trading on October 27, 2006. Cash proceeds to the Company, net of underwriter commissions of approximately $7.3 million and related offering expenses of approximately $4.1 million, totaled approximately $93.2 million, including approximately $1.9 million of offering expenses paid during fiscal year 2006. All preferred stock outstanding at November 1, 2006 was converted to common stock upon the completion of the initial public offering.

2. Summary of Significant Accounting Policies

Principles of consolidation

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

Fiscal year

The Company’s fiscal year ends on the Saturday closest to July 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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial information and 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 required by GAAP for complete financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and loss during the reporting period. Actual results could differ from those estimates. Operating results for the six months ended January 27, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ended July 28, 2007. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for these interim periods have been included. The accompanying financial information should be read in conjunction with the financial statements, including the notes thereto, for the fiscal year ended July 29, 2006 included with the Company’s registration statement on Form S-1 (Registration No. 333-135472) declared effective by the Securities and Exchange Commission on October 26, 2006.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Short-term investments

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

Stock-based compensation

Effective July 30, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment”, which requires companies to recognize in their statement of operations all share-based payments, including grants of stock options, based on the grant date fair value. The Company adopted SFAS No. 123(R) using the prospective-transition method. Stock-based compensation is measured at the grant date, based on the fair value of the award, and expensed over the requisite service period. The application of SFAS No. 123(R) involves significant amounts of judgment in the determination of inputs into the Black-Scholes model which the Company uses to determine the value of stock options. Inherent in this model are assumptions related to expected stock price volatility, option life, risk free interest rate and dividend yield. While the risk free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a greater level of judgment which make them critical accounting estimates. The fair value of each stock option grant was estimated on the date of the grant using the Black-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 risk free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.

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

Expected life: The Company’s expected life is based on the period the options are expected to remain outstanding based on the vesting periods and expectations of future employee actions.

Expected volatility: The Company estimated the expected volatility of the stock price based on an analysis of other volatility factors exhibited in the market because of the limited history of the Company’s stock.

Forfeitures: The Company estimates forfeitures based on historical experience and factors of known historical or future projected work force reduction actions to anticipate the projected forfeiture rates. The forfeiture rate for the six months ended January 27, 2007 was 9.3%.

During the six months ended January 27, 2007, 202,375 stock options with a weighted average grant date fair value of $10.29 per option were granted under the Company’s Stock Option Plans. The compensation expense charged against earnings for SFAS 123(R) stock-based compensation for the first six months of fiscal year 2007 was approximately $163,000. As of January 27, 2007, there was approximately $1.7 million unrecognized compensation expense related to non-vested stock option agreements. The stock-based compensation expense is expected to be recognized in earnings over the weighted-average vesting period of 4 years.

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

Additionally, in the prior period, the Company disclosed the information required by the Financial Accounting Standards Board (“FASB”) under Statement of Financial Accounting Standards Statement No. 123, “Accounting for Stock-Based Compensation” (“Statement 123”) using the minimum value method. Stock issued to non-employees is accounted for under the provisions of Statement 123 and the Emerging Issues Task Force (“EITF”) Consensus in Issue No. 96-18, “Accounting for Equity Instruments that 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 were valued using the minimum value method under Statement 123, for purposes of pro forma disclosure, must be transitioned to SFAS No. 123(R) using the prospective method. Under the prospective method, options granted prior to fiscal 2007 will continue to be accounted for under the same accounting principles (recognition and measurement) originally applied to those awards, which for the Company was APB 25. Accordingly, the adoption of SFAS 123(R) did not result in any compensation cost being recognized for the options granted prior to the adoption of SFAS 123(R).

Under Statement 123, non-employee stock-based compensation is accounted for based on the fair value of the consideration received or equity instruments issued, whichever is more readily determinable. However, Statement 123 does not address the

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

Under the pro forma disclosure previously required under SFAS 123, the compensation cost for the Company’s stock-based compensation plans had been determined based upon the fair value of the options at the grant date. Consistent with the methodology prescribed under Statement 123, the Company would have recorded $106,439 and $212,878 and $12,343 and $24,345 as stock based compensation in selling, general and administrative expenses for the three months and six months, respectively, ended January 27, 2007 and January 28, 2006, respectively, related to the grants issued prior to the 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 sale of optical subsystem products for use in high-performance network systems. Our revenue recognition policy follows SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.” Specifically, the Company recognizes product revenue when the following requirements have been met:

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

· Delivery and acceptance. Product has been shipped via third party carrier, accepted and title has transferred to the customer, under free on board, or FOB, terms agreed to by the 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 determinable at the time of shipment. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

· Collection is deemed probable. Collectibility is reasonably assured and there are no uncertainties with respect to customer acceptance. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

The Company is required to determine whether delivery has occurred, whether items will be returned or whether the Company will be paid under normal terms. The Company specifies delivery terms and accesses each shipment against those terms and only recognizes revenue when certain that the delivery terms have been met to the extent that one or more of the conditions are not present, the Company delays recognition of revenue until all conditions are present.

Comprehensive income (loss)

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

Components of other comprehensive income (loss) that the Company currently reports are gains and losses from foreign currency translations and unrealized 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 in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net income per common share is computed by dividing the net income applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding. In accordance with SFAS No. 128, incremental potential common shares from the conversion of preferred stock and the exercise of stock options and warrants are included in the calculation of diluted net income per share except when the effect would be anti-dilutive.

The calculations for basic and diluted net income per share 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

Diluted income per share does not reflect the following weighted-average potential common shares as the exercise prices of such options were greater than the average fair value of the Company’s common stock during the respective periods.

	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 accordance with SFAS 109 by prescribing the minimum threshold a tax position is required to meet before being recognized in an enterprise’s financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition, and clearly scopes out income taxes from SFAS No. 5, “Accounting for Contingencies.” FIN 48 is effective for fiscal years beginning after December 15, 2006 but earlier application is encouraged. Differences between the amounts recognized in the statements of financial position prior to adoption of FIN 48 and the amounts reported after adopted should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently determining the impact of FIN 48 on its consolidated financial statements which will be effective for the fiscal year ending August 2, 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 establishes a common definition to provide enhanced guidance when using fair value to measure assets and liabilities, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently determining the impact of implementing SFAS No. 157 which will be effective for the fiscal year ending August 1, 2009.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. The dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The implementation of SAB 108 is not expected to have a material impact on the Company’s consolidated financial position or results of operations which will be effective for the fiscal year ending August 2, 2008.

Segment information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial reports issued to stockholders. Operating segments are identified as components of an enterprise about which separate financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment. There were no significant tangible assets located or revenue generated outside of the U.S. as of January 27, 2007 or July 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

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

5. Line of Credit

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 bears interest at 1.75% plus Prime. On June 27, 2005, the Company modified the terms of the debt to increase the equipment term note to $2,000,000; change the interest rate to prime plus 1.25% (7.75% at July 30, 2005) for the initial equipment advance and the first draw on the line of credit of $820,778. On June 6, 2006, the Company renewed the line of credit to modify the interest rate on the outstanding principal to prime plus 0.75% and to extend the renewal date to May 22, 2007. The interest rate would be prime plus 1.5% for supplemental advances.

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

6. Other Current Liabilities

Other current liabilities consist of $0 and $2,639,560 in deferred revenue at January 27, 2007 and July 29, 2006, respectively. The Company is required to determine whether delivery of each shipment has occurred, and the Company specifies delivery terms and assesses each shipment against those terms and only recognizes revenue when there is certainty that the delivery terms are met. The Company recorded deferred revenue of $2,639,560 as of July 29, 2006 for shipments when confirmation of delivery occurred after the end of the fiscal period.

7. Acquisition

On March 5, 2006, the Company acquired Engana Pty Limited, renamed Optium Australia Pty Limited, a leading innovator of ROADM technology, for approximately $26,272,000 including $638,000 in related acquisition costs. The purchase was funded through the issuance of 24,475,897 shares of Series D-1 Senior Convertible Preferred Stock and 729,361 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 all of the outstanding shares of Engana Pty Limited. The escrow shares will be released six months following the closing of the Company’s initial public offering. In determining the aggregate purchase price paid for Engana Pty Limited, the Company used $0.87204 per share for the Series D-1 Senior Convertible Preferred Stock, the per share base liquidation value of such stock, and $5.76 per share for the Series 2 non-voting common stock, the contemporaneous per share fair market value of the Company’s common stock as determined by the Board of Directors. Additionally, fully-vested options to purchase 55,305 shares of common stock were granted in exchange for all outstanding options of Engana Pty Limited (which were fully-vested). This acquisition provided additional technology and products to enhance the Company’s product offerings. The transaction was accounted for as a purchase in accordance with Statement of Financial Accounting Standards, or SFAS, No. 141, “Business Combinations.” As a result, the assets that the Company acquired were accounted for at fair value on the acquisition date, and the results of operations of Engana Pty Limited are included in the Company’s consolidated results of operations since the acquisition date.

The Engana Pty Limited purchase price was allocated as follows (in thousands):

Net assets acquired	$	4,788
Acquired in-process research and development	11,187
Goodwill	10,297
Total purchase price	$	26,272

The following table summarizes the components of 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’s developmental project that had not reached technological feasibility and had no future alternative use was classified as acquired in-process research and development and expensed on the acquisition date. Efforts required to develop acquired in-process research and development into commercially viable products include the planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technical performance requirements.

The results of operations of Engana have been included in the Company’s condensed consolidated financial statements subsequent to the date of acquisition. The financial information in the table below summarizes the combined results of operations of us

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

	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

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

8. Redeemable Convertible Preferred Stock

On November 1, 2006, the Company closed its initial public offering. Upon closing of the offering, all outstanding preferred shares converted 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

Outstanding warrants for preferred stock on November 1, 2006 became exercisable for common stock 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 A warrant was exercised.

9. Stockholders’ Equity (Deficit)

Common stock

The Company has authorized under its Certificate of Incorporation, as amended October 10, 2006, the issuance of 100,000,000 shares of common stock, of which 729,361 have been designated Series 2 nonvoting common stock. The Series 2 nonvoting common stock automatically converted into voting common stock upon the closing of the Company’s initial public offering when the conversion of all shares of preferred stock occurred.

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

Stock incentive plan

In fiscal 2000, the Company adopted the 2000 Optium Corporation Stock Incentive Plan, as amended, (the “2000 Plan”) under which 3,457,073 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 the terms of the 2000 Plan, the Company could grant nonqualified or incentive stock options, restricted stock, or make awards of stock appreciation rights to directors, officers, employees, and consultants of the Company. Option grants under the 2000 Plan generally vest over four years and expire ten years from the date of grant.

Stock option transactions under the 2000 Plan for the six months 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

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

The weighted average remaining life of the options as of January 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

During the first quarter of fiscal year 2007, the Company adopted the 2006 Optium Corporation Stock Incentive Plan, as amended, (the “2006 Plan”) under which 283,333 shares of common stock have been reserved for issuance. The 2006 Plan provisions provide for an automatic increase at the beginning of every quarter of each fiscal year in the number of shares reserved and available for issuance under the plan by a number equal to 0.75% of the then outstanding number of shares of our common stock. The 283,333 shares reserved does not include the additional 190,059 shares reserved as of the first day of the Company’s third quarter. Under the terms of the 2006 Plan, the Company may grant nonqualified or incentive stock options, restricted stock, or make awards of stock appreciation rights to directors, officers, employees, and consultants of the Company. The exercise price for grants shall be determined by the Board of Directors on the date of grant, but in no event shall the exercise price of incentive stock 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 the Board of Directors on the date of grant). Option grants under the 2006 Plan

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

Stock option transactions under the 2006 Plan for the six months ended January 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	—		—		—

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

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

The following is the rollforward of the Company’s common stock and additional 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 fair value of all stock option grants on the date of the grants. In April 2006, as a result of improved operating performance, the execution of a letter of intent to acquire Engana, external market factors affecting the Company’s market sector, as well as feedback from investment bankers indicating that the Company was now a viable initial public offering candidate, the Board of Directors retrospectively determined the fair value of the Company’s common stock for all stock options granted during the three fiscal quarters beginning May 1, 2005 and ending January 28, 2006. As a result of the Company’s retrospective determinations of fair value of the common stock for prior option grant dates of June 23, 2005, September 21, 2005 and November 7, 2005, the Company recorded an aggregate of approximately $125,000 of deferred stock-based compensation on the balance sheet for the stock options granted on those dates. The amount of deferred stock-based compensation for each stock option grant on these dates was calculated based on the difference between the retrospectively determined fair value per share of the common stock at the date of the grant and the exercise price of the option. The Company will amortize this deferred stock-based compensation expense over the vesting period of the applicable stock option grants, subject to adjustment for any stock options which are cancelled or accelerated.

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

In relation to these amended stock options, the Company recorded deferred stock-based compensation of approximately $1.5 million in the balance sheet in addition to the approximately $125,000 in deferred stock-based compensation referenced above. The amount of additional deferred stock-based compensation for each amended stock option was calculated 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 $10.92 per share, the valuation by the Board of Directors of the per share fair value of our common stock as of the date of amendment of the stock options. The Company will amortize this additional deferred stock-based compensation expense over the vesting period of the applicable stock option grants, subject to adjustment for any stock options which are cancelled or accelerated. During the three months and six months ended January 27, 2007, total stock-based compensation related to the revaluation and remeaurement of these grants was approximately $144,900 and $270,000.

Warrants issued to employees

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

Warrants issued in connection with capital lease financing

On May 16, 2001, in connection with the closing of the capital lease line of credit (see Note 5), the Company issued a warrant to purchase 450,000 shares of Series A preferred stock at $0.33333 per share. The warrant vested immediately upon issuance and expires at the later of (i) ten years from the date of issuance or (ii) five years after the date of a qualified public offering of the Company’s common stock, as defined. The Company had reserved 450,000 shares of Series A preferred stock for issuance under the warrant agreement. The Company accounts for these warrants in accordance with APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” The Company valued these warrants using the Black-Scholes option pricing model using the following assumptions: 80% volatility, 5.39% risk-free interest rate, 0.0% dividend yield, and a ten-year expected life, resulting in deferred financing costs of $125,336. Deferred financing costs are amortized to interest expense over the term of the debt using a method that approximates the interest method.

10. Income Taxes

At January 27, 2007, the Company has federal net operating loss (“NOL”) carry forwards of approximately $29 million which expire through July 2025. NOL carry forwards and credits are subject to review and possible adjustments by the Internal Revenue Service (“IRS”) and may be limited by the occurrence of certain events, including significant changes in ownership interests. The Company has performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code has occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of the net operating loss carry forwards attributable to periods before the change. The review determined the Company has potential limitations related to approximately $2.0 million of the NOL carry forwards.

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

Because of the Company’s lack of earnings history, the deferred tax assets have been fully offset by a valuation allowance. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences become deductible or within the periods before carry forwards expire.

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

11. Commitments and Contingencies

Litigation

In December 2004, the Company terminated a relationship with Appletec Limited, an Israeli company assisting the Company’s sales efforts in Israel. The Company had received correspondence from Appletec claiming money owed for sales commissions and in June 2005 proposed a settlement of which no response occurred. Appletec has filed an action against the Company alleging damages. In December 2006, the Company received a letter from attorneys representing Applectec enclosing a copy of a purported default judgment in an amount of approximately $1.2 million for failure to appear in the action filed against the Company. The Company has filed a motion with the Israeli court that asserts among the other things, the Company has not to date been served notice of the action pursuant to the requirements of Israeli law and, therefore, the default judgment is required to be reversed under Israeli law. The default judgment has been stayed pending resolution of the Company’s motion. The Company does not expect the ultimate outcome of this matter to have a material adverse effect on the business or financial position.

In the ordinary course of business, the Company is party to litigation, claims and assessments. Based on information currently available, management does not believe the impact of these matters will have a material effect on the financial condition, results of operations or cash flows of the Company.

Employment agreements

The Company has employment agreements with certain officers and key employees. According to the terms of the agreements, if there is a termination without cause, as defined, the Company must pay, depending on the agreement, severance pay of one to two years.

12. Major Customers

Accounts receivable potentially subject the Company to a concentration of credit risk. The Company currently derives its revenues from a variety of companies in many different geographic locations internationally and in the United States operating within the telecommunications and Cable TV industry.

Revenues from major customers during the three months and six months ended January 27, 2007 comprising 10% or more of total revenues were as 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	%

Accounts receivable from these three customers at January 27, 2007 represented 59% of total accounts receivable.

13. Related Party Transactions

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

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

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JANUARY 27, 2007

AND COMPARABLE PERIODS ENDED JANUARY 28, 2006

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and 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 of Operation and other items in this Quarterly Report on Form 10-Q contain forward-looking statements based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. When used in this document, the words “will,” “plan,” “believe,” “may,” “anticipate,” “ could,”,” “seek,” “estimate,” “expect,” “continue,” “intend,” and similar expressions, variations or the negatives of these terms are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable at the time they are made, we can give no assurance that these expectations will prove to be correct. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this document.

Overview

We are a supplier of high-performance optical subsystems for use in telecommunications and cable TV network systems. Since our founding in 2000, we have developed proprietary technology and products that enable transmission, reception and switching functionality for high-bandwidth, intelligent networking applications. We design, manufacture and sell a suite of optical subsystems including transceivers and transmitters. We have also recently launched a technologically innovative ROADM, that enables dynamic wavelength processing, or DWP, which we refer to as our DWP ROADM. We believe that we have a fundamentally different product design approach from that of our competitors, allowing us to achieve mass customization of our products using common hardware platforms and customized embedded software. We also have implemented several unique automated and semi-automated manufacturing systems and processes designed to further improve our manufacturing yields and produce higher volumes of products than generally possible using manual production techniques.

Background

We were incorporated on September 8, 2000 and commenced operations in October 2000. In November 2000 and January 2001, we raised approximately $7.9 million through the issuance of shares of series A convertible preferred stock. In May, June and July of 2001, we raised approximately $35.7 million through the issuance of shares of series B convertible preferred stock. We completed another round of preferred stock financing in January 2003 in which we sold shares of series C senior convertible preferred stock for an aggregate purchase price of approximately $11.9 million. In May 2004 we raised approximately $10.3 million through the issuance of shares of series D senior convertible preferred stock, bringing total funds raised by us through preferred stock financings over the past six years to approximately $65.9 million.

On November 1, 2006, we closed our initial public offering of 5.2 million shares of common stock at a price to the public of $17.50 per share as well as the sale of an additional 780,000 shares to cover underwriter over-allotments. Our common stock, quoted on the Nasdaq Global Market under the symbol “OPTM,” began trading on October 27, 2006. Cash proceeds to us, net of underwriter commissions of approximately $7.3 million and related offering expenses of approximately $4.1 million, totaled approximately $93.2 million, including approximately $1.9 million of offering expenses paid during fiscal year 2006. All outstanding preferred stock was converted to common stock upon the completion of the initial public offering.

Critical Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and 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 required by generally accepted accounting principles for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and loss during the reporting period. Actual results could differ from those estimates. Operating results for the fiscal quarters presented are not

necessarily indicative of the results that may be expected for the fiscal year. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for these interim periods have been included. There have been no material changes to the critical accounting policies and estimates as disclosed in our registration statement on Form S-1 (Registration No. 333-135472) declared effective by the Securities and Exchange Commission on October 26, 2006.

Recent Accounting Pronouncements

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 by prescribing the minimum threshold a tax position is required to meet before being recognized in an enterprise’s financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition, and clearly scopes out income taxes from SFAS No. 5, “Accounting for Contingencies.” FIN 48 is effective for fiscal years beginning after December 15, 2006 but earlier application is encouraged. Differences between the amounts recognized in the statements of financial position prior to adoption of FIN 48 and the amounts reported after adopted should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are currently determining the impact of FIN 48 on our consolidated financial statements which will be effective for the fiscal year ending August 2, 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 establishes a common definition to provide enhanced guidance when using fair value to measure assets and liabilities, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently determining the impact of implementating SFAS No. 157 which will be effective for the fiscal year ending August 1, 2009.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. The dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The implementation of SAB 108 is not expected to have a material impact on our consolidated financial position or results of operations which will be effective for the fiscal year ending August 2, 2008.

Current Trends Affecting Our Results of Operations

We have experienced increased demand for our products, which has been driven by market trends in the telecommunications and cable TV carrier industries such as network expansion, the implementation of new technologies and value-added services, network changes and consolidations in these industries. We expect growth of our current product portfolio to continue, and we also expect the market for our new products to expand our potential sources of revenue. Growth was driven by increased volumes in telecommunication, fiber to the home, or FTTH, and cable TV applications. Service providers have driven demand with accelerated deployment of Internet protocol TV, or IPTV, networks, FTTH and 3G cellular backhaul requirements. These systems utilize products from our tunable and fixed 10 gigabit per second, or 10Gb/s, FTTH and cable TV wavelength offerings.

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

Steady increases in data traffic and the expected increase in bandwidth requirements are driving carriers to deploy high-bandwidth, flexible, or agile, network systems. Our optical subsystems are designed to enable our customers to shorten product development cycles and to readily add product features to their network systems. We believe this will allow carriers to support high-bandwidth applications at significantly lower operating costs while simplifying network reconfiguration, improving reliability and enabling greater network functionality. In addition, we believe that network systems vendors are increasing their focus on providing higher value-added solutions, services and software to their carrier customers and de-emphasizing their optical hardware manufacturing efforts. We believe that we are well positioned to capitalize on the hardware design and manufacturing opportunities created by this shift and enhance our position as a supplier of high-performance optical subsystems to network systems vendors.

We do remain cautious, however, in attempting to forecast future results. Visibility remains limited, and we cannot provide any assurance as to the timing or scale of any new optical network deployments or sustained industry recovery, in general. Further, we rely on a sole supplier or limited number of suppliers for certain components used in the manufacturing of certain of our products, which could result in delivery problems, reduced control over product pricing and quality, and an inability to identify and qualify additional

suppliers in a timely manner. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders and our results of operations.

Results of operations

Consolidated results of operations in dollars and as a percentage of revenues for the six months and three months ended 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 revenue increased 113.2% to approximately $34.1 million for the three months ended January 27, 2007 from approximately $16.0 million for the three months ended January 28, 2006. These increases in revenue are primarily attributable to an increase in sales of our 10 GB/s transceivers of approximately $22.9 and $11.1 million, respectively, as well as an increase in sales supporting hybrid 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 our business are the accelerated deployment of new IPTV networks, Fiber to the Home and cellular backhaul systems, as well as upgrades and expansion of traditional broadband systems to address the significant overall growth in bandwidth demand.

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 profit increased 175.2% to approximately $9.9 million for the three months ended January 27, 2007 from approximately $3.6 million for the three months ended January 28, 2006. Gross profit percentages increased to 29.0% from 22.1% the six 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 three months ended January 27, 2007, compared to the three months ended January 28, 2006. The increase in gross profit was primarily attributable to unit volume increases with increased demand for our products and driving additional operational cost efficiencies. Additionally, there was a favorable product mix shift from lower margin short 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, 2007 from approximately $3.5 million for the six months ended January 28, 2006. Research and product development expenses

increased 95.0% to approximately $3.5 million for the three months ended January 27, 2007 from approximately $1.8 million for the three months ended January 28, 2006. The increase in research and product development cost is partially a result of our research and product development activities related to our Optium Australia operations from our acquisition of Engana during the third quarter of our prior fiscal year, on March 5, 2006. The six and three months ended January 27, 2007 include approximately $1.9 million and $1.0 million, respectively, of research and development costs with respect to our Optium Australia operations. Additionally, research and product development costs increased as a result of our higher headcount and associated costs related to our decision to increase the number of engineering projects which will further expand our product portfolio. We expect these costs to continue to increase as we undertake additional research and development projects to expand our product suite.

Selling, general and administrative

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

Interest and other income (expense), net

Interest and other income (expense), net, increased to approximately $1.2 million and $1.1 million for the six months and three months ended January 27, 2007, respectively, from approximately $40,000 and $8,000 for the six months and three months ended January 28, 2006, respectively. The increase was due to additional cash and cash equivalents and short-term investments 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 months ended January 28, 2006, respectively. The Company’s overall effective tax rate was approximately 7% and 2% in the six month periods ended January 27, 2007 and January 28, 2006, respectively. Tax expense during the six months ended January 27, 2007 represents federal AMT and state income tax. Our tax rate is currently lower than the statutory tax rate as we currently have available operating loss carryforwards to effect taxable income. Our remaining carryforwards total approximately $29.0 million at January 27, 2007.

Net income

Net income increased 454.5% to approximately $6.6 million for the six months ended January 27, 2007 from approximately $1.2 million for the six months ended January 28, 2006. Net income increased 372.7% to approximately $3.9 million for the three months ended January 27, 2007 from approximately $817,000 for the three months ended January 28, 2006. As a percentage of sales, net income was approximately 10.3% and 11.3% during the six months and three months ended January 27, 2007, respectively, as compared to 4.0% and 5.1% in the six months and three months ended January 28, 2006, respectively. The changes are primarily attributable to the factors described above.

Liquidity and Capital Resources

Operating activities

Net cash used in operating activities was approximately $2.6 million 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 months ended January 27, 2007 primarily resulted from period to date net income of approximately $6.6 million offset by increases in accounts receivables of approximately $2.6 million, increases in inventories of approximately $3.8 million and decreases in other current liabilities of approximately $2.6 million.

Investing activities

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

Financing activities

Net cash provided by financing activities was approximately $94.7 million for the six months ended January 27, 2007 and approximately $5,000 for the six months ended January 28, 2006. Net cash provided by financing activities for the six months ended January 27, 2007 was primarily related to the proceeds from our initial public offering. Net cash provided by financing activities for the six months ended January 28, 2006 related to proceeds from employee stock options.

Sources of cash

On November 1, 2006, we closed our initial public offering of 5.2 million shares of common stock at a price to the public of $17.50 per share as well as the sale of an additional 780,000 shares to cover underwriter over-allotments. Our common stock, quoted on the Nasdaq Global Market under the symbol “OPTM,” began trading on October 27, 2006. Cash proceeds to us, net of underwriter commissions of approximately $7.3 million and related offering expenses of approximately $4.1 million, totaled approximately $93.2 million, including approximately $1.9 million of offering expenses paid during fiscal year 2006. All preferred stock outstanding at November 1, 2006 was converted to common stock upon the completion of the initial public offering.

Prior to our public offering of common stock, we had financed our operations primarily through internally generated cash flows, our lines of credit and the issuance of preferred stock. As of January 27, 2007 we had cash and cash equivalents of $80.8 million, short-term investments of $19.4 million and accounts receivable of approximately $21.7 million and no debt. Prior to our public offering, the aggregate redemption value of our Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Senior Convertible Preferred Stock, Series D Senior Convertible Preferred stock, and Series D-1 Senior Convertible Preferred 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 our cash flows from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, the introduction and acceptance of new products, and the expansion of our sales and marketing and research and development activities. To the extent that our cash and cash equivalents, cash flows from operating activities, and net proceeds of our initial public offering are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings.

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

Equity sales

We raised approximately $7.9 million of proceeds through sales of our series A convertible preferred stock in the fiscal year ended July 28, 2001. We raised approximately $35.7 million of proceeds through sales of our series B convertible preferred stock in the fiscal year ended July 28, 2001. We raised approximately $11.9 million of proceeds through sales of our series C senior convertible preferred stock in the fiscal year ended August 2, 2003. We raised approximately $10.3 million of proceeds through sales of our series D senior convertible preferred stock in the fiscal year ended July 31, 2004. We issued approximately $21.3 million of series D-1 senior convertible preferred stock and approximately $4.2 million in common stock during the fiscal year 2006 as consideration for the acquisition of all outstanding equity securities of Engana. In connection with the acquisition, we acquired Engana’s cash and cash equivalent assets of approximately $4.6 million. All of the shares of our preferred stock were converted into common stock in connection with the closing of our initial public offering on November 1, 2006.

Line of credit

On May 25, 2004, we entered into a $3.5 million line of credit agreement with Silicon Valley Bank, including a revolving credit facility 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%. On June 27, 2005, we modified the terms of the line of credit to increase the equipment term note to $2.0 million; change the interest rate to the prime rate 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 the outstanding principal to the prime rate plus 0.75% and extending the renewal date to May 22, 2007. The interest rate would be prime plus 1.5% for supplemental advances.

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

Off-Balance Sheet Financing Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We place our cash investments with high credit-quality financial institutions and currently invest primarily in money market funds placed with major banks and financial institutions, auction rate securities, corporate paper and United States government and United States government corporation and agency obligations and/or mutual funds investing in the like. We have investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. As of January 27, 2007, our cash and cash equivalents totaled approximately $80,799,000 and we had short-term investments totaling approximately $19,425,000. If, during the period ended January 27, 2007, average short-term interest rates increase or decrease by 50 basis points, our projected interest income from cash and cash equivalents and short-term investments would increase or decrease by approximately $125,000.

Due to the short-term nature of our cash and cash equivalents, the carrying value approximates market value and are not generally subject to price risk due to fluctuations in interest rates. Our short-term investments are subject to price risk due to fluctuations in interest rates. Neither a 10% increase nor decrease in prices would have a material effect on our consolidated financial statements. All short-term investments are considered to be available-for-sale, accounted for at fair value, with resulting unrealized gains or losses reported as a separate component of stockholders’ equity. If these available-for-sale securities experience declines in fair value that are considered other-than-temporary, an additional loss would be reflected in net income (loss) in the period when the subsequent impairment becomes apparent.

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

Foreign Currency Exchange Risk

Our subsidiary Optium Australia is located in Sydney, Australia. Due to the relative low volume of payments made by us through this subsidiary, and the fact we intend that all of our sales will continue to be made in U.S. dollars, we do not believe that we have significant exposure to foreign currency exchange risks. We currently do not use derivative financial instruments to mitigate this exposure. We continue to review this issue and may consider hedging certain foreign exchange risks through the use of currency futures or options in future years

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

In December 2004, we terminated our relationship with Appletec Limited, an Israeli company that was assisting us with our sales efforts in Israel. Beginning in February 2005 and through May 2005, we received correspondence from Appletec claiming we owed Appletec sales commissions. We do not believe that we owe any further commissions to Appletec. However, in June 2005 we sent a letter to Appletec’s counsel proposing a settlement. We did not receive a response to our proposal and Appletec filed an action in Israel against us and a consultant of ours alleging damages in an amount of approximately $1,800,000. In December 2006, we received a letter from attorneys representing Appletec enclosing a copy of a purported default judgment in an amount of approximately $1.2 million for failure to appear in the action filed against 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 action pursuant to the requirements of Israeli law and, therefore, the default judgment is required to be reversed under Israeli law. The default judgment has been stayed pending resolution of our motion. We intend to defend ourselves vigorously and we do not expect the ultimate outcome of this matter to have a material adverse effect on our business or financial position.

On September 11, 2006, JDS Uniphase Corporation and EMCORE Corporation filed a complaint in the United States District Court for the Western District of Pennsylvania alleging that our 1550 nm HFC externally modulated transmitter, in addition to possibly ‘‘products as yet identified,’’ infringes on two U.S. patents. On February 23, 2007, the plaintiffs in the case filed a motion to amend their complaint to allege in addition that our 1550 nm HFC quadratine amplitude modulator transmitter infringes another U.S. patent. Since discovery is currently in process, we are unable to determine the ultimate outcome of this litigation. During the fiscal year ended July 29, 2006 and the six months ended January 27, 2007, sales of our 1550 nm HFC externally modulated transmitter and our 1550 nm HFC quadratine amplitude modulated transmitters, together, represented less than 5% of our revenues. The plaintiffs are seeking for the court to declare that we have willfully infringed on such patents and to be awarded up to three times the amount of any compensatory damages found, if any, plus any other damages and costs incurred. We intend to vigorously defend the claims asserted against us and we believe that we have meritorious defenses.

ITEM 1A. Risk Factors

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

Risks Related to Our Business

If optical communications networks do not continue to expand as expected, our business will suffer.

Our future success as a manufacturer of optical subsystems ultimately depends on the continued growth of the communications industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optics infrastructure. As part of that growth, we are relying on increasing demand for voice, video and other data delivered over high-bandwidth network systems as well as commitments by network systems vendors to invest in the expansion of the global information network. As network usage and bandwidth demand increase, so does the need for advanced optical networks to provide the required bandwidth. Without network and bandwidth growth, the need for our optical subsystems, and hence our future growth as a manufacturer of these products, is jeopardized. Currently, while increasing demand for network services and for broadband access, in

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

We are under continuous pressure to reduce the prices of our products.

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

We depend on a limited number of component suppliers who could disrupt our business if they stopped, decreased or delayed shipments and increased demand for components generally could lead to shortages.

We depend on a limited number of suppliers of components used to manufacture certain of our products. Some of these suppliers are sole sources. We typically have not entered into long-term agreements with our suppliers and, therefore, these suppliers generally may stop supplying materials and equipment at any time. The reliance on a sole supplier or limited number of suppliers could result in delivery problems, reduced control over product pricing and quality, and an inability to identify and qualify another supplier in a timely manner. During the last several years the number of suppliers of components has decreased significantly and more recently, demand for components has rapidly increased. For example, a recent surge in demand for microprocessors and lasers has resulted in shortages of such components. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders or our financial results of operations.

Our success will depend on our ability to anticipate and quickly respond to evolving technologies and customer requirements.

The market for optical networking equipment is characterized by substantial capital investment and diverse and evolving technologies. For example, the market for optical subsystems is currently characterized by a trend toward the adoption of “pluggable” modules and subsystems that do not require customized interconnections and by the development of more complex and integrated optical subsystems. Our ability to anticipate and respond to these and other changes in technology, industry standards, customer requirements and product offerings, and to develop and introduce new and enhanced products, will be significant factors in our ability to succeed. We expect that new technologies will continue to emerge as competition in the optical networking equipment industry increases and the need for higher and more cost efficient bandwidth expands. Our success, in large part, depends upon our ability to continuously and successfully introduce and market new products and technologies meeting or exceeding our customers’ expectations. The introduction of new products embodying new technologies or the emergence of new industry standards could render our existing products uncompetitive from a pricing standpoint, obsolete or unmarketable. Further, time to market with new products can provide significant competitive advantages in our industry. It is difficult to displace an existing supplier or a particular type of optical subsystems once a network systems vendor has chosen an initial optical subsystems supplier for a particular product even if a later to market product supplies superior performance and/or cost efficiency. If we are unable to make our new products commercially available quickly, we may lose existing and potential customers and our financial results would suffer.

We are subject to a number of special risks as 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 future results of operations will be substantially influenced by the operations of this new business, and we are subject to a number of risks and uncertainties related to this acquisition, including the following:

· In the near term, we are expecting that our DWP ROADMs will become key components of next generation network systems demanded by the market. We acquired Engana, in part, based upon this expectation. Any delay by network systems vendors in including our DWP ROADMs in their network systems from the timetable we expect, or any decision by such vendors not to include our DWP ROADMs in amounts we expect, would significantly alter our near term prospects for growth and harm our business and financial condition.

· We are establishing a production line for our DWP ROADMs at our acquired facility in Sydney, Australia. Any delay in the production line being able to produce commercial volumes in the quantities anticipated would delay our ability to commercialize our DWP ROADMs, which would negatively affect our revenues and competitive position. In addition, a

failure to achieve manufacturing yields from such production line comparable to the yields obtained at our Chalfont, Pennsylvania facility would negatively impact our margins and operating results.

· The integration of the products and technology we acquired as part of our acquisition of Engana with our products and technology and the coordination of the manufacturing operations for such products will be complex, time-consuming and expensive. The execution of these activities could potentially disrupt our ongoing business operations and distract management from day-to-day operational matters, as well as other strategic opportunities, and could strain our financial and managerial controls and reporting systems and procedures. In addition, unanticipated costs could arise during the integration of the products and manufacturing operations. If we are unable to successfully integrate these products and technology with our products and technology, or if actual integration and manufacturing costs are significantly greater than currently anticipated, we may not achieve the anticipated benefits of the acquisition and our revenues and operating results could be adversely affected.

· Immediately prior to the acquisition, Engana was engaged in an ongoing research and development project related to ROADM technology. We may not be able to successfully complete this project, and our inability to do so could prevent us from achieving some of the strategic objectives and other anticipated potential benefits of the acquisition, and could have a material adverse effect on our revenues and operating results.

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

· We have become a larger and more geographically dispersed organization, and if our management is unable to effectively manage the combined business, our operating results will suffer.

We and our customers are each dependent upon a limited number of end customers.

Historically, we have generated most of our revenues from a limited number of end customers. For example, in the three months ended January 27, 2007 and January 28, 2006, we generated 65.7% and 49.8%, respectively, of our revenues from our three largest end customers during those periods. We may not be able to offset any decline in revenues from our existing major customers with revenues from new customers and our quarterly results may be volatile because we are dependent on large orders from these customers that may be reduced or delayed. Our dependence on a limited number of customers is due to the fact that the network systems industry is dominated by a small number of large companies, and the industry continues to consolidate, as with the recent mergers of Cisco Systems and Scientific Atlanta and of Lucent and Alcatel. Similarly, our customers depend primarily on a limited number of major carrier customers to purchase their network systems products that incorporate our optical subsystems. Many major telecommunication services providers are experiencing losses from operations. The further consolidation of the industry, coupled with potential declining revenues from our major customers, may have a material adverse impact on our business.

We do not have long-term volume purchase contracts with our customers.

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

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

Our future depends, in part, on our ability to attract and retain key personnel. Our future depends on the continued contributions of our executive officers and other key technical personnel, each of whom would be difficult to replace. In particular, Eitan Gertel, our chief executive officer, president and chairman, is critical to the management of our business and operations, as well as the development of our strategic direction. The loss of services of Mr. Gertel or other executive officers or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business. Competition for highly skilled technical people is extremely intense and we continue to face difficulty identifying and hiring qualified personnel in many areas of our business. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for hiring experienced employees have greater resources than we have. In addition, in making employment decisions, particularly in the high-technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Therefore, significant volatility in the price of our stock after this offering may adversely affect our ability to attract or retain technical personnel. Furthermore, changes to accounting principles generally accepted in

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

Potential future acquisitions could be difficult to 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 pursue acquisitions of companies, technologies and products that we believe could accelerate our ability to compete in our core markets or allow us to enter new markets. Acquisitions involve numerous risks, any of which could harm our business, including:

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

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

· diversion of financial and management resources from existing operations;

· the price 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 or other resources to another opportunity;

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

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

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

· inability to generate sufficient revenue to offset acquisition costs;

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

· inability to successfully complete transactions with a suitable acquisition candidate.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

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

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

If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.

Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Significant technology used in our products, however, is not the subject of any patent protection, and we may 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 offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. In addition, the laws of countries other than the United States in which we market our products may afford little or no effective protection of our intellectual property. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual

property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. If we fail to protect our intellectual property and other proprietary rights, our business, results of operations or financial condition could be materially harmed.

In addition, defending our intellectual property rights may entail significant expense. We believe that certain products in the marketplace may infringe our existing intellectual property rights. We have, from time to time, resorted to legal proceedings to protect our intellectual property and may continue to do so in the future. We may be required to expend significant resources to monitor and protect our intellectual property rights. Any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we were to prevail.

Third parties may claim we are infringing their intellectual property rights, and we could be prevented from selling our products, or suffer significant litigation expense, even if these claims have no merit.

Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may claim that we or our products or operations are infringing their intellectual property rights, and we may be unaware of intellectual property rights of others that may cover some of our assets, technology and products. In that regard, JDS Uniphase Corporation and EMCORE Corporation filed a complaint on September 11, 2006 alleging that our 1550 nm HFC externally modulated transmitter, in addition to possibly “products as yet identified,” infringes two U.S. patents. On February 23, 2007, the plaintiffs on the case filed a motion to amend their complaint to allege in addition that our 1550mm HFC quadatine amplitude modulator transmitter infringes another U.S. patent. The plaintiffs are seeking for the court to declare that we have willfully infringed on such patents and to be awarded up to three times the amount of any compensatory damages found, if any, plus any other damages or costs incurred. Any litigation regarding patents, trademarks, copyrights or other intellectual property rights, even those without merit, could be costly and time consuming, and divert our management and key personnel from operating our business. The complexity of the technology involved and inherent uncertainty and cost of intellectual property litigation increases our risks. If any third party has a meritorious or successful claim that we are infringing its intellectual property rights, we may be forced to change our products or manufacturing processes, which may be costly or impractical. This also may require us to stop selling our products as currently engineered, which could harm our competitive position. We also may be subject to significant damages or injunctions that prevent the further development of certain of our products or services.

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

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

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

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

· fluctuations in demand for intelligent optical networking products;

· the timing and size of sales of our products;

· length and variability of the sales cycles of our products;

· the timing of recognizing revenue;

· new product introductions and enhancements by our competitors and ourselves;

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

· our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; and

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

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

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

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

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

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

Most of our customers do not purchase our products, other than limited numbers of evaluation units, prior to qualification of our products. Our existing products, as well as each new product, must pass through varying levels of qualification with our customers. In addition, due to the rapid technological changes in our market, a customer may cancel or modify a design project before we begin large-scale manufacture of the product and receive revenue from the customer. It is unlikely that we would be able to recover the expenses for cancelled or unutilized design projects. It is difficult to predict with any certainty the frequency with which customers will cancel or modify their projects, or the effect that any cancellation or modification would have on our results of operations.

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

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

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

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

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 and extent of changes in specifications required by customers for which we perform design-in work. Higher volumes due to demand for a fixed, rather than continually 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 commercial shipments of products prior to full manufacturing qualification to the applicable specifications. Changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new product lines have historically caused, and may in the future cause, significantly reduced manufacturing yields, resulting in low or negative margins on those products. Moreover, an increase in the rejection rate of products during the quality control process either before, during or after manufacture, results in lower yields and margins. Finally, manufacturing yields and margins can also be lower if we receive or inadvertently use defective or contaminated materials from our suppliers.

We face intense competition from other providers of optical subsystems, as well as competition from providers offering alternative products, which could negatively impact our results of operations and cause our market share to decline.

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

In the event that the optical subsystems market expands, competition may intensify as additional competitors enter the market and current competitors expand their product lines. Companies competing with us may introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented, and may be able to react quicker to changing customer requirements and expectations. There is also the risk that network systems vendors may re-enter the subsystem market and begin to manufacture the optical subsystems incorporated in their network systems. Increased competitive pressure or a decision by any of our customers to manufacture optical subsystems for inclusion in their network systems could result in a loss of sales or market share or cause us to lower prices for our products, any of which would harm our business and operating results.

Our future operating results may be subject to volatility as a result of exposure to foreign currency exchange risks.

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

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

We have only recently begun to operate as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Global Market, has imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, under current rules, commencing with respect to fiscal year ending August 8, 2008, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Our testing, or the subsequent testing by our

independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. We will evaluate the need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Global Market, the SEC or other regulatory authorities, which would require additional financial and management resources

We may not be able to obtain capital when desired 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 operating activities and funds available through our working capital line of credit, will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. We operate in a market, however, that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to execute on our current or future business strategies, including to:

· acquire complementary businesses or technologies;

· enhance our operating infrastructure;

· hire additional technical and other personnel; or

· otherwise respond to competitive pressures.

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

We may be faced with product liability claims.

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

Business disruptions resulting from international uncertainties could negatively impact our profitability.

We derive, and expect to continue to derive, a significant 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 of material risks, including, but not limited to:

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

· difficulties in enforcing agreements and collecting receivables through foreign legal systems;

· fewer legal protections for intellectual property;

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

· difficulties in obtaining any necessary governmental authorizations for the export of our products to certain foreign jurisdictions;

· fluctuations in foreign economies;

· fluctuations in the value of foreign currencies and interest rates;

· general economic and political conditions in the markets in which we operate;

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

· different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future.

Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulties in producing and delivering our products, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could negatively 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 of foreign currencies relative to the U.S. dollar may make our products more expensive than other products, which could harm our business.

We may be unable to utilize our net operating loss carryforwards to reduce our income taxes.

As of January 27, 2007 we have net operating loss, or NOL, carryforwards of approximately $29 million for federal and state income tax purposes expiring through fiscal year ending August 2, 2025. These net operating loss carryforwards represent an asset to us to the extent they can be utilized to reduce cash income tax payments expected in the future. Utilization of our net operating loss carryforwards depends on the timing and amount of taxable income earned by us in the future, which we are unable to predict. We have performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code has occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of the net operating loss carryforwards attributable to periods before the change. The review determined we have limitations related to approximately $2.0 million of the NOL carryforwards.

Risks Related to Ownership of Our Common Stock

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

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

· fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

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

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

· changes in market valuations of similar companies;

· success of competitive products;

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

· announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;

· regulatory developments in the United States, foreign countries or both;

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

· additions or departures of key personnel;

· investors’ general perception of us;

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

· changes in regulatory and other dynamics.

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price 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 action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements covering approximately 19.3 million shares of our outstanding common stock. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. These shares will be able to be sold, subject to any applicable volume limitations under federal securities laws, beginning 180 days following the effective date of our initial public offering.

In addition, as of March 1, 2007, there were 48,979 shares subject to outstanding warrants and 1,827,187 shares subject to outstanding options, and additional shares will be available for issuance under our stock option plans. These shares will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of approximately 17 million shares of our common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We have also registered all 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 market upon issuance, subject to the lock-up agreements, and in certain cases, applicable volume limitations.

Our directors, management and entities associated with them will exercise significant control over our company, which will limit your ability to influence corporate matters.

Our executive officers and directors and entities associated with them will collectively beneficially own approximately 50.1% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might negatively affect the market price of our common stock.

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

· limitations on the removal of directors;

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

· advance notice requirements for stockholder proposals and director nominations;

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

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

· the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

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

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

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

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common 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 the foreseeable future.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended January 27, 2007, the Series A warrant for 44,294 shares was exercised in full pursuant to its cashless exercise provision and we issued 36,789 shares of common stock.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

ITEM 5. Other Information

(a) Management Compensation Plans

On March 3, 2007, the Compensation Committee amended the Optium Corporation Executive Officer Fiscal Year Bonus Plan so that the additional annual bonus of up to $350,000 that our Chief Executive Officer is eligible to receive based on our achievement in strategic development, investor relations, human resources and corporate citizenship, as well as our stock trading price performance, may be paid in up to $175,000 semi-annual amounts.

On the same date, the Compensation Committee made option grants to certain executive officers with vesting acceleration provisions not included in the Optium Corporation standard form option grant. The executive officers were Chief Executive Officer Eitan Gertel, Senior Vice President and General Manager Mark Colyar, General Counsel and Vice President of Corporate Development Christopher Brown, Vice President of Sales and Marketing Anthony Musto and Chief Financial Officer David Renner. In the case of Mr. Gertel, such vesting provisions provide for the acceleration of vesting of (i) 25% of the original grant (or 100% of remaining unvested portion if less) following termination of employment without Cause or for Constructive Termination (each term 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% of remaining unvested portion following termination of employment without Cause or for Constructive Termination within one year of an Acquisition. In the case of Messrs. Colyar, Brown, Musto and Renner, such vesting provisions provide for acceleration of vesting of 25% of the original grant (or 100% of remaining unvested portion if less) following termination of employment without Cause at any time or for Constructive Termination (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 Bonus Plan, as amended.

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

10.3 Form of Australian Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Grant Plan.

10.4 Stock Option Grant Notice, dated March 3, 2007, for Eitan Gertel.

10.5 Stock Option Grant Notice, dated March 3, 2007, for Mark Colyar.

10.6 Stock Option Grant Notice, dated March 3, 2007, for Christopher Brown.

10.7 Stock Option Grant Notice, dated March 3, 2007, for Anthony Musto.

10.8 Stock Option Grant Notice, dated March 3, 2007, for David Renner.

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

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

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

SIGNATURES

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

		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