PART I

Financial Information

See accompanying notes to the financial statements.

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See accompanying notes to the financial statements.

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Optium Corporation

                At both November 3, 2007 and July 28, 2007, the Company had restricted cash relating to an operating lease in the form of a certificate of deposit for $68,000, which is renewed on a monthly basis. The term of the certificate of deposit extends from the commencement date of the lease (May 1, 2001) through at least ninety (90) days after the expiration of the lease term (April 30, 2008). There was a release of $180,000 of restricted cash made during fiscal year 2007, which the Company has not collected as of November 3, 2007.

Foreign currency translation

                The financial statements for the Company’s foreign subsidiary, Optium Australia, are measured using the local currency (the Australian dollar) as the functional currency. Foreign assets and liabilities in the consolidated balance sheets have been translated at the rate of exchange as of the balance sheet date. Revenues and expenses are translated at the average exchange rate for the month. Translation adjustments do not impact the results of operations and are reported as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are included in the results of operations.

Accounts receivable

                The Company carries its accounts receivable at the amount that it considers to be collectible and does not require collateral from its customers. Accordingly, an allowance account is established through a charge against operations in an amount deemed adequate to absorb the uncollectible portion of such receivables. The allowance is determined through management review of outstanding amounts per customer. At November 3, 2007 and July 28, 2007, an allowance of $56,200 and $46,440 respectively, based on management’s best estimate, was available to absorb any uncollectible balances.

Inventories

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

Property and equipment

                Property and equipment are stated at cost net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company provides for depreciation and amortization using the straight-line method and charges amounts to operations to allocate the cost of the assets over their estimated useful lives. Useful lives of the Company’s asset categories are: machinery and equipment of five years, computer equipment and software of three years; and furniture and office equipment of seven years. The costs of leasehold improvements on leased office and warehouse space are capitalized and amortized using the straight-line method over the shorter of the life of the applicable lease or the useful life of the improvement.

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

Intangible assets

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

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Valuation of goodwill

                Under the Statements of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets , goodwill is subject to annual impairment testing criteria. The Company’s policy is to compare the carrying value of a business unit’s net assets to the estimated fair value of the business unit, using a sales multiple approach to project the business unit’s fair value. The fair value is based on management’s estimate of future revenues to be generated by the business component. Such estimated future revenues consider factors such as future operating income and historical trends. The Company tests for impairment on an annual basis or on an interim basis if circumstances change that would indicate the possibility of impairment. The impairment review requires an analysis of future projections and assumptions about the Company’s operating performance. If such a review indicates that the assets are impaired, a charge to operations would be recorded for the amount of the impairment, and the corresponding impaired assets would be reduced in carrying value. The Company did not identify an asset impairment related to the carrying value of goodwill as of November 3, 2007.

Impairment of long-lived assets

                SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , or SFAS 144, established accounting standards for the impairment of long-lived assets and certain identifiable intangibles related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. Long-lived assets consist primarily of property and equipment. In accordance with SFAS 144, the Company continually evaluates whether events or circumstances have occurred to indicate that the estimated remaining useful life of its long-lived assets may warrant revision or the carrying value might be impaired. The carrying value of long-lived assets is considered impaired when the total projected undiscounted cash flows from such assets are less than carrying value. The Company determined that no event or circumstance occurred which would have warranted a revision to carrying value of its long-lived assets as of November 3, 2007.

Fair value of financial instruments

                Financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and notes payable. The carrying amounts of the Company’s financial instruments approximate their fair values.

Short-term investments

The Company considers all short-term investments as available-for-sale and records all short-term investments at fair value, with resulting unrealized gains or losses reported as a separate component of stockholders’ equity. Those investments with an original maturity of less than ninety days are classified as cash equivalents, while those with an original maturity of greater than ninety days are classified as short-term investments on the Company’s balance sheet.

Stock-based compensation

                Effective July 30, 2006, the Company adopted SFAS  No. 123R, Share-Based Payment, or SFAS 123R, which requires companies to recognize in their statement of operations all share-based payments, including grants of stock options and restricted stock units, based on the grant date fair value. The Company adopted SFAS 123R 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 123R 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 during the first quarter of fiscal year 2008 was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

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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 paying 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.

Forfeiture rate: 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.

                Restricted stock units, or RSUs, have a fair value based on the closing price of the Company’s stock on the date of grant. The RSUs granted during the three months ended November 3, 2007 had a weighted average fair value of $9.66. These stock units will vest quarterly over a two year period beginning January 1, 2008, and the total stock-based compensation associated with the RSUs will be expensed over the requisite service period. A forfeiture rate of 5.1% was used to calculate the stock-based compensation related to the restricted stock units granted during the three months ended November 3, 2007.

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 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.   Collectability is reasonably assured and there are no uncertainties with respect to customer acceptance. We assess collectability 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 assesses 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.   Standard terms offered to customers are payment due 30 days from the date of invoice. For certain customers, the Company has negotiated payment terms different than 30 days to conform to such customer’s standard payment terms and/or such customer’s credit standing.

The Company may offer evaluation units to our current and potential customers, at no charge, for purposes of expanding our customer base and product portfolio. Such units are expensed when shipped and are recognized as part of selling, general and administrative expense in the accompanying statement of operations

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Product development costs

                The costs of the development of hardware products are expensed as incurred.

Shipping and handling costs

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

Income taxes

                The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes , or SFAS 109.  SFAS 109 requires the Company to account for income taxes using a balance sheet approach, requiring the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events having been recognized in the Company’s financial statements or tax returns. The Company adopted Financial Accounting Standards Board, or FASB,  Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109, Accounting for Income Taxe s, or FIN 48, on July 29, 2007. Under the new provisions, the Company will not recognize a tax benefit for an uncertain income tax positions unless it is “more likely than not” that position is sustainable. Deferred income taxes have been provided for the differences between the financial reporting carrying values and the income tax reporting basis of the Company’s assets and liabilities. These temporary differences consist of differences between the timing of the deduction of certain amounts between income tax and financial statement reporting purposes.

Comprehensive income (loss)

                SFAS 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 (in thousands):

Net income (loss) per share

                The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings per Share , or SFAS 128. Under the provisions of SFAS 128, basic net income (loss) per share 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 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 (loss) per share except when the effect would be anti-dilutive. On October 10, 2006, the Company’s 1-for-12 reverse stock split of the Company’s issued common stock became effective, and all share data has been retroactively adjusted to reflect this reverse stock split.

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

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                For the three months ended November 3, 2007, options, unvested restricted stock units and warrants to purchase 2,776,597 shares of common stock have been excluded from the calculation, as their impact would have been anti-dilutive.

Segment information

                SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , or SFAS 131, 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.

Reclassifications

                Certain prior year amounts have been reclassified to conform to the current financial statement presentation.

Recent accounting pronouncements

                In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, or SFAS 157.  SFAS 157 establishes a common definition to provide 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 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently determining the impact of implementing SFAS 157, which will be effective for the fiscal year 2009.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB No.115, or SFAS 159 .  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently determining the impact of implementing SFAS 159, which will be effective for the fiscal year 2009.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, or SFAS 141R. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008.  SFAS 141R establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in the business combination. The Company is currently determining the impact of implementing SFAS 141R, which will be effective for the fiscal year 2010.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an  Amendment of Accounting Research Bulletin, or ARB No. 51 , or SFAS 160.  SFAS 160 is effective for financial statements

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issued for fiscal years beginning after December 15, 2008.  SFAS 160 establishes and expands accounting and reporting standards for the noncontrolling interest in a subsidiary. The Company is currently determining the impact of implementing SFAS 160, which will be effective for the fiscal year 2010.

3.  Inventories

                Net inventories consist of the following at (in thousands):

4.  Investments

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

                The Company accounts for its investments pursuant to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, or SFAS 115 . All of the Company’s investments are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. Gains and losses are not recorded in earnings until realized. The Company monitors its investments for other than temporary impairment, which results from the carrying value of the investments exceeding the fair value. If other than temporary impairment is identified, the cost basis of the security is written down to fair value and the amount of the write-down is recorded as a realized loss through earnings. In evaluating unrealized losses for other than temporary impairment, the Company considers a number of factors including the duration and significance of the loss. The Company has the ability and intent to hold those investments with unrealized losses until a recovery of fair value. As of November 3, 2007, the Company held no securities with an unrealized loss position for more than twelve months and no realized losses were recorded.

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                All investments mature in less than one year; those that mature in less than ninety day are classified as cash equivalents.

5.  Acquisitions

Kailight Photonics Inc.

On May 15, 2007, the Company acquired Kailight Photonics, Inc. (“Kailight”), a technology leader in 40Gb/s optical transmission products, for approximately $35,860,000, including $711,300 of transaction costs associated with the acquisition and subject to certain working capital adjustments. Approximately $3,350,000 of the purchase price is being held in escrow pending the outcome of certain matters outlined in the purchase agreement, for which the Company is indemnified.  In addition, the Company may also be required to pay up to $5,000,000 in additional future payments based on the achievement of certain performance milestones. Any such payment will be recorded as additional purchase price in the period it is probable such payment is earned. Pursuant to the merger agreement, outstanding Kailight stock options were converted into Optium stock options. Of the total options granted to Kailight employees and consultants, 9,652 options with an exercise price of $0.11 were fully vested and assigned a fair value of $148,776 using the Black-Scholes option pricing model and were accordingly recorded as purchase price.

The transaction was accounted for as a purchase in accordance with SFAS 141. As a result, the assets acquired and liabilities assumed were accounted for at fair value on the acquisition date, and the results of operations of Kailight are included in the Company’s consolidated results of operations from the acquisition date. Management is responsible for the valuation of net assets acquired, including in-process research and development, and considered a number of factors, including valuations and appraisals, when estimating the fair market values and estimated useful lives of the acquired assets and liabilities. The Company believes the acquisition provides synergies with existing product lines and expands on our current transceiver capabilities, resulting in an excess purchase price over the fair value of identifiable assets. The excess purchase price of $26,072,000 has been recorded as goodwill. The purchase price allocation is not finalized as we have not yet determined fair market values for certain net assets acquired which may affect the closing balance sheet. We do not believe that any adjustments to the fair values will materially modify the preliminary purchase price allocation.

                The Kailight purchase price was preliminarily allocated as follows (in thousands):

                The following table summarizes the components of the assets acquired at fair value (in thousands):

                Kailight’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 at 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 $10,000,000 of acquired in-process research and development was expensed during fiscal year 2007 through the consolidated statement of operations as a separate component of operating expenses at the acquisition date.

The acquired in-process research and development expense of $10,000,000 relates to the acquired 40Gb/s project and was determined using the income approach assuming cash flows over ten years and using risk adjusted discount rates ranging from 20% to 30% for the four defined segments of the 40Gb/s project. The discount rates were based on fundamental data for a group of market participants, as well as venture capital studies. The ten year life is based on the life expectancy of the products

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in the market place with an assumed growth rate of up to 314% diminishing to 10% and no assumed terminal value. These products are expected to be available for shipment in fiscal year 2008.

Pro forma financial information

The following unaudited pro forma financial information represents the Company’s consolidated results from operations for the period indicated, as if the acquisition of Kailight had occurred at the beginning of the period presented. Unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results of operations. These pro forma results are based upon the respective historical financial statements of the respective companies, and do not incorporate, nor do they assume any benefits from cost savings or synergies of operations of the combined Company. Unaudited pro forma results of operations are presented after giving effect to certain adjustments, including adjustments to reflect increased intangible asset amortization, decreased interest income on the cash used to finance the acquisitions, and increased income taxes at a rate consistent with the Company’s effective tax rate in each period.

Pro forma results

Microdisplay asset s

On July 10, 2007, the Company acquired certain intellectual property assets of Microdisplay Corporation related to the design and manufacture of liquid crystal on silicon (LCoS) wafers used in its WSS ROADM product line. The aggregate purchase price of the transaction was approximately $2.0 million, including the assumption of certain liabilities. The purchase of these assets has been recorded as completed technology and classified as an intangible asset on the balance sheet as of the acquisition date. The acquired intangible assets will be amortized over a five year useful life. The amortization expense related to the Microdisplay assets is included in our condensed consolidated statements of operations in the selling, general and administrative expense line item for the three months ended November 3, 2007.

             The acquisition of the LCoS integrated circuit technology was intended to strengthen the Company’s position in the ROADM product market, as the Company continues to integrate additional features into its WSS ROADM products and target new applications and market segments.   The rights to the LCoS integrated circuit technology used in the Company’s WSS ROADMs are expected to drive cost efficiencies including improved flexibility to add more unique software-defined features.

The results of the above acquisitions are included in the accompanying condensed consolidated financial statements as of their respective dates of acquisition.

6.  Stockholders’ Equity

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 were designated Series 2 nonvoting common stock. The Series 2

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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

                Effective July 30, 2006, the Company adopted SFAS 123R, 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 123R 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 123R 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 and the assumptions disclosed in the Summary of Significant Accounting Policies in Note 2.

                Prior to the adoption of SFAS 123R, the Company accounted for its stock-based compensation granted to employees in accordance with the provisions of the Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees , or APB 25 .  Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and 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 under SFAS 123, Accounting for Stock-Based Compensation , or SFAS 123, using the minimum value method. Stock issued to non-employees is accounted for under the provisions of the Emerging Issues Task Force, or 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 , or EITF 96-18.  In accordance with SFAS 123R, options that were valued using the minimum value method under SFAS 123, for purposes of pro forma disclosure, must be transitioned to SFAS 123R using the prospective transition method. Under the prospective transition 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 123R did not result in any compensation cost being recognized for the options granted prior to the adoption of SFAS 123R.

Under SFAS 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, SFAS 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 SFAS 123, the Company would have recorded approximately  $102,600 and $106,400 as stock based compensation in selling, general and administrative expenses for the three months ended November 3, 2007 and October 28, 2006, respectively, related to the grants issued prior to the adoption of SFAS 123R, as presented below (in thousands):

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                During the three months ended November 3, 2007, 121,175 stock options with a weighted average grant date fair value of $6.14 per option and 335,000 unvested restricted stock units with a grant date fair value of $9.66 were granted under the Company’s 2006 Stock Option and Incentive Plan. The compensation expense charged against earnings for SFAS 123R stock-based compensation for the first three months of fiscal year 2008 was approximately $939,600. The pre-tax impact of stock-based compensation expense was $0.03 per basic and diluted share in the three months ended November 3, 2007. As of November 3, 2007, there was approximately $6,706,200 in unrecognized compensation expense related to non-vested stock option agreements. This unrecognized expense is expected to be recognized as compensation expense over the weighted-average vesting period of four years.

                In fiscal year 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 November 3, 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, restricted stock units 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. All options and shares cancelled or forfeited after October 10, 2006 (the effective date of the 2006 Plan as defined below) under the 2000 Plan are added back to the balance of shares reserved for issuance under the 2006 Plan.

                Stock option transactions under the 2000 Plan for the three months ended November 3, 2007 are summarized as follows:

                During the three months ended November 3, 2007 certain employees exercised options to purchase 6,885 shares of the Company’s common stock for proceeds of $6,683. These option exercises had an intrinsic value of approximately $57,600.

                The weighted average remaining life of the options as of November 3, 2007 is 7.45 years.

During the first quarter of fiscal year 2007, the Company adopted the 2006 Optium Corporation Stock Option and Incentive Plan, as amended (the “2006 Plan”), under which 283,333 shares of common stock were 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 common stock. The 283,333 shares reserved does not include the additional 190,059, 190,146, 190,732, and 190,783 shares reserved as of the first day of the Company’s fiscal year 2007 third and fourth quarters and fiscal year 2008 first and second

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quarters, respectively.  In addition, the number of shares reserved for issuance under the 2006 Plan are automatically increased by the number of shares and options cancelled or forfeited under the 2000 Plan after October 10, 2006. Cancellations or forfeits under the 2006 Plan are also added back to increase the total number of shares available for issuance under the 2006 Plan, with the exception of those shares granted in connection with the Kailight acquisition.   During the three months ended November 3, 2007, 4,377 cancelled or forfeited shares were added to the number of shares reserved for issuance under the 2006 Plan pursuant to these provisions. Under the terms of the 2006 Plan, the Company may grant nonqualified or incentive stock options, restricted stock, restricted stock units or make awards of stock appreciation rights to directors, officers, employees, and consultants of the Company. The exercise price for option 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 November 3, 2007, 723,860 options for the purchase of common stock have been granted under the 2006 Plan. All options cancelled or forfeited under the 2006 Plan are added back to the balance of shares reserved for issuance under the Plan.

                Stock option transactions under the 2006 Plan for the three months ended November 3, 2007 are summarized as follows:

Pursuant to the terms of the Kailight Photonics, Inc. acquisition agreement, the Company assumed stock options outstanding with Kailight employees and consultants.  The Company assumed 9,652 fully vested Kailight options with an exercise price of $0.11. Additionally, the Company assumed 222, 145, and 40 options with exercise prices of $328.63, $657.26, and $1,110.24, respectively, all of which were fully vested. The stock compensation expense related to the fully vested options with an exercise price of $0.11 was recorded as additional purchase price.

As of November 3, 2007, 1,052,479, 34,796, and 691,099 shares were authorized, available for issuance and subject to outstanding awards, respectively under the 2006 Plan. The weighted average remaining life of the options as of November 3, 2007 is 9.48 years. The detail of all options exercisable under the 2000 Plan and the 2006 Plan as of November 3, 2007 is as follows:

                The total intrinsic value of the fully vested and exercisable options above, had they been exercised on November 3, 2007, was approximately $8,490,400.

                The restricted stock unit transactions under the 2006 Plan for the three months ended November 3, 2007 are summarized as follows:

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                The per stock unit weighted average fair value of the restricted stock units granted under the 2006 Plan for the three months ended November 3, 2007 was $9.66, which was based on the closing stock price of the Company on the date of grant. These stock units will vest quarterly over a two year period beginning January 1, 2008. As of November 3, 2007, there was approximately $2,903,300 in unrecognized compensation expense related to non-vested restricted stock units. This unrecognized expense is expected to be recognized as compensation expense over the weighted-average vesting period of two years. All forfeitures or cancellations of restricted stock units are added back to the balance of shares reserved for issuance under the 2006 Plan.

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 Pty Limited, or 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 ended November 3, 2007, total stock-based compensation expense related to amortization of the deferred compensation balance was approximately $125,140.

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7.  Accrued Expenses

                Accrued expenses consist of the following at (in thousands):

8.  Accrued Warranty Costs

The Company provides a warranty on all products. Warranty expenses are charged to operations and included in the cost of revenue in the accompanying statements of operations. The Company accrues warranty for expected warranty claims based on historical return figures and accrues those costs at the time revenue is recorded.

                A summary of the accrued installation and warranty costs is as follows (in thousands):

9.  Income Taxes

                In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109, Accounting for Income Taxes, or FIN 48. FIN 48 provides guidance on how a company should recognize, measure and disclose in its financial statements uncertain income tax positions. Under the new provisions, a company should not recognize a tax benefit for an uncertain income tax position unless it is “more likely than not” that such a position is sustainable. The Company adopted FIN 48 on July 29, 2007.  As a result of the implementation of FIN 48, the Company recognized a net $100,000 increase in the liability for unrecognized tax benefits, which was accounted for as an increase to the July 28, 2007 balance of the accumulated deficit. At November 3, 2007, the Company’s total liability for unrecognized net tax benefits is $775,000. Consistent with past practice, the Company will record interest and penalties associated with uncertain tax positions in income tax expense.

                At November 3, 2007, the Company had U.S. federal net operating loss, or NOL, carry forwards of approximately $23.9 million which expire through July 2025. NOL carry forwards and credits are subject to review and possible adjustments by the Internal Revenue Service and may be limited by the occurrence of certain events, including significant changes in ownership interests. The Company performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code had 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.

                In connection with the acquisition of Engana Pty Limited in March 2006, the Company acquired Australian NOL carry forwards and credits in the amount of $4.8 million. These NOL carry forwards and credits are subject to review and possible adjustments by the Australian Taxation Office 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 Australian NOL carry forwards. The acquired net operating losses have been fully offset by a valuation allowance. Upon utilization of such NOL carry forwards, goodwill will be reduced. Losses since the acquisition have been fully offset by a full valuation allowance due to the history of operating losses.

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                In connection with the Kailight Photonics, Inc. acquisition, the Company acquired U.S. federal NOL carry forwards in the amount of approximately $7.5 million. The Company will perform an analysis to determine whether a Section 382 ownership change has occurred, but the Company expects the use of these NOLs will be significantly limited. Accordingly, management in its preliminary allocation of the purchase price, recorded no value to the acquired deferred tax assets. If any of these acquired NOL carryforwards are utilized, goodwill will be reduced.

                In assessing the realizability of deferred tax assets, management concluded it is “more likely than not” that some portion or all of the U.S. deferred tax assets will be realized. The ultimate realization of these 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 NOL carry forwards expire. During the year ended July 28, 2007, based on cumulative U.S. taxable net earnings for the past three years and the expected future profitability of the U.S. operations, the company reversed the valuation allowance on its net U.S. deferred tax assets and recognized an income tax benefit of approximately $13 million.  The current quarterly consolidated effective tax rate of (6.5)% is  less than the U.S. statutory rate of 35% primarily due to foreign losses for which no income tax benefit was recorded and U.S. research and development tax credits available to the Company under U.S. tax law.

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

10.  Commitments and Contingencies

Contingencies

In December 2004, the Company terminated its 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, the Company received correspondence from Appletec claiming it owed Appletec sales commissions. The Company does not believe that it owes any further commissions to Appletec. However, in June 2005 Optium Corporation sent a letter to Appletec’s counsel proposing a settlement. The Company did not receive a response to its proposal and Appletec filed an action in Israel against Optium and an Optium consultant alleging damages in an amount of approximately $1,800,000. The Company intends to defend itself vigorously and does not expect the ultimate outcome of this matter to have a material adverse effect on its business, financial condition, results of operations or cash flows.

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 the Company’s 1550 nm HFC externally modulated transmitter, in addition to possibly “products as yet unidentified,” infringes on two U.S. patents.  Since no summary judgment motions have been ruled upon, the Company is unable to determine the ultimate outcome of this litigation.  On March 14, 2007, JDS Uniphase and EMCORE Corporation filed a second complaint in the United States District Court for the Western District of Pennsylvania alleging that the Company’s 1550 nm HFC quadrature amplitude modulated transmitter, in addition to possibly “products as yet unidentified,” infringes on another U.S. patent. Since discovery is currently in process, the Company is unable to determine the ultimate outcome of this second litigation.  During the three months ended November 3, 2007, sales of the Company’s 1550 nm HFC externally modulated transmitter and 1550 nm HFC quadrature amplitude modulated transmitters, together, represented less than 5% of the Company’s revenues. The plaintiffs are seeking for the court to declare that Optium has 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. The Company intends to vigorously defend the claims asserted against it and believes that it has meritorious defenses.

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

Employment agreements

                The Company has employment agreements with certain officers and key employees. The agreements are for two or three year periods that expire in either April 2008, August 2008,or April 2009. According to the terms of the agreements, if there is a termination without cause, as defined, or if the agreements are not renewed, the Company must pay, depending on the agreement, severance pay of one to two years.

11.  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 direct customers, including contract manufacturers, comprising 10% or more of total revenues during the three months ended November 3, 2007 and October 28, 2006, respectively were as follows:

                Accounts receivable from these four customers at November 3, 2007 represented 65% of total accounts receivable.

12.  Related Party Transactions

                During the three months ended November 3, 2007 and October 28, 2006, the Company paid a sales and marketing consultant, who is the brother of the president and chief executive officer of the Company, $36,400 and $32,900, respectively, in cash compensation during such fiscal periods.

                During the three months ended November 3, 2007 and October 28, 2006, the Company used Gertel Asset Management, a company that provides jet air transportation, for certain business travel by our executive officers and other employees.  The Company’s chief executive officer has an ownership interest in Gertel Asset Management. Payments to Gertel Asset Management by the Company were approximately $19,200 and $20,300, respectively, during such periods.

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

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