Forward-Looking Information

This Form 10-Q may contain certain forward-looking information within the meaning of the federal securities laws. The forward-looking information may include, among other information, (i) statements concerning our outlook for the future, (ii) statements of belief, anticipation or expectation, (iii) future plans, strategies or anticipated events, and (iv) similar information and statements concerning matters that are not historical facts. Such forward-looking information is subject to variables, uncertainties, contingencies and risks that may cause actual events to differ materially from our expectations, and such variables, uncertainties, contingencies and risks may adversely affect the Company and the Company’s future results of operations and future financial condition. Factors that could cause or contribute to such differences from our expectations or could adversely affect the Company include, but are not limited to, the level of sales to key customers, including distributors; timing of certain projects and purchases by key customers; the economic conditions affecting network service providers; corporate and/or government spending on information technology; actions by competitors; fluctuations in the price of raw materials (including optical fiber, copper, gold and other precious metals, and plastics and other materials affected by petroleum product pricing); fluctuations in transportation costs; our dependence on customized equipment for the manufacture of our products and a limited number of production facilities; our ability to protect our proprietary manufacturing technology; our ability to replace royalty income as existing patented and licensed products expire by developing and licensing new products; market conditions influencing prices or pricing; our dependence on a limited number of suppliers; the loss of or conflict with one or more key suppliers or customers; an adverse outcome in litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in regulatory reviews and audits and potential regulatory reviews and audits; adverse changes in state tax laws and/or positions taken by state taxing authorities affecting us; technological changes and introductions of new competing products; changes in end-user preferences for competing technologies, relative to our product offering; economic conditions that affect the telecommunications sector, certain technology sectors or the economy as a whole; changes in demand of our products from certain competitors for which we provide private label connectivity products; terrorist attacks or acts of war, and any current or potential future military conflicts; changes in the level of military spending by the United States government; ability to retain key personnel; inability to recruit needed personnel; poor labor relations; the inability to successfully integrate the operations of our new subsidiaries; the impact of changes in accounting policies, including those by the Securities and Exchange Commission and the Public Company Accounting Oversight Board; our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs as we comply with such laws and regulations; impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with customers of ours; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the management of the Company; the additional costs of considering and possibly defending our position on such unsolicited proposals; impact of weather or natural disasters in the areas of the world in which we operate and market our products; economic downturns and/or changes in market demand, exchange rates, productivity, or market and economic conditions in the areas of the world in which we operate and market our products, and our success in managing the risks involved in the foregoing.

We caution readers that the foregoing list of important factors is not exclusive and we incorporate by reference those factors included in our current reports on Form 8-K, and/or in our other filings.

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Dollar amounts presented in the following discussion have been rounded to the nearest hundred thousand, unless the amounts are less than one million and except in the case of the table set forth in the “Results of Operations” section below, in which cases the amounts have been rounded to the nearest thousand.

Overview of Optical Cable Corporation

Founded in 1983, Optical Cable Corporation is headquartered in Roanoke, Virginia with offices, manufacturing and warehouse facilities located in Roanoke, Virginia, near Asheville, North Carolina, and near Dallas, Texas. We primarily manufacture our high quality fiber optic cables at our Roanoke facility which is ISO 9001:2008 registered and MIL-STD-790F certified, our high quality enterprise connectivity products at our Asheville facility which is ISO 9001:2008 registered, and our high quality military and harsh environment connectivity products and systems at our Dallas facility which is MIL-STD-790F certified.

Optical Cable Corporation (“OCC”) is a leading manufacturer of a broad range of fiber optic and copper data communication cabling and connectivity solutions primarily for the enterprise market, offering an integrated suite of high quality, warranted products which operate as a system solution or seamlessly integrate with other providers’ offerings. Our product offerings include designs for uses ranging from commercial, enterprise network, datacenter, residential and campus installations to customized products for specialty applications and harsh environments, including military, industrial, mining and broadcast applications. Our products include fiber optic and copper cabling, fiber optic and copper connectors, specialty fiber optic and copper connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, rack, cabinets, datacom enclosures, patch panels, face plates, multi-media boxes, and other cable and connectivity management accessories, and are designed to meet the most demanding needs of end-users, delivering a high degree of reliability and outstanding performance characteristics.

OCC is internationally recognized for pioneering the design and production of fiber optic cables for the most demanding military field applications, as well as of fiber optic cables suitable for both indoor and outdoor use, and creating a broad product offering built on the evolution of these fundamental technologies. OCC also is internationally recognized for its role in establishing copper connectivity data communications standards, through its innovative and patented technologies.

OCC sells its products internationally and domestically through its sales force to its customers, which include major distributors, regional distributors, various smaller distributors, original equipment manufacturers and value-added resellers.

On May 30, 2008, OCC acquired Superior Modular Products Incorporated (doing business as SMP Data Communications) (“SMP Data Communications”), located near Asheville, North Carolina. SMP Data Communications, previously a wholly owned subsidiary of OCC, was merged with and into OCC on October 31, 2009. The acquisition of SMP Data Communications provided OCC with the capability to design, develop and manufacture a broad range of top-tier copper and fiber optic connectors and connectivity products, which we refer to as our “enterprise connectivity products”. The acquisition of SMP Data Communications was a strategic acquisition for OCC, allowing OCC to provide customers and end-users with a broad range of integrated fiber optic and copper datacom cabling and connectivity solutions.

On October 31, 2009, OCC acquired Applied Optical Systems, Inc. (“AOS”) located near Dallas, Texas. AOS, a wholly owned subsidiary of OCC, designs, develops and manufactures a broad range of specialty fiber optic connectors and connectivity solutions primarily for use in military and other harsh environment applications, which we refer to as our “applied interconnect system products”. The acquisition of AOS was a strategic acquisition for OCC, allowing OCC to enhance the integrated fiber optic and copper datacom cabling and connectivity solutions OCC provides in its targeted markets and to permit OCC to pair AOS’s innovative and unique fiber optic connectivity products with OCC’s fiber optic cabling products for military and other harsh environment applications.

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OCC markets and sells the products manufactured at its facility near Dallas, Texas under the names Optical Cable Corporation and OCC through the efforts of our integrated sales team.

Optical Cable Corporation, OCC, Superior Modular Products, SMP Data Communications, Applied Optical Systems, and associated logos are trademarks of Optical Cable Corporation.

Acquisition of Applied Optical Systems, Inc.

On October 31, 2009, we acquired AOS in a series of transactions that resulted in us owning 100% of the equity of AOS. In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS 141”), which was not included in the FASB’s Codification, but still applicable for us as of October 31, 2009, the purchase price of $2.6 million has been allocated to the assets and liabilities assumed based on the fair values at the date of acquisition. This allocation, including the impact of the pre-acquisition note of $4.5 million and accrued interest payable to OCC of $761,009, resulted in the recognition of $6.4 million in intangible assets, $6.2 million of which related to goodwill. The consideration for the transaction includes certain earn out provisions based upon the future performance of the product lines developed by our Dallas team. The agreement provides for a minimum earn out payment of $750,000 and a maximum of $14.75 million to be paid in 2017. The present value of the minimum earn out of $459,000 was included in the $2.6 million purchase price.

During the first quarter of 2010, we made a purchase accounting adjustment that resulted in a net decrease to goodwill in the amount of $42,499, with no impact to our condensed consolidated statement of operations. The purchase accounting adjustment was related to a change in the estimated fair value of certain long-lived assets and the related deferred income tax effects. During the second quarter of fiscal year 2010, we recorded a $6.2 million impairment charge to write-off the carrying value of the goodwill as of April 30, 2010.

Summary of Company Performance for Second Quarter 2010

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Results of Operations

All of our sales to customers located outside of the United States are denominated in U.S. dollars. We can experience fluctuations in the percentage of net sales to customers located outside of the United States from period to period based on the timing of large orders, coupled with the impact of increases and decreases in sales to customers located in the United States.

Net sales consist of gross sales of products less discounts, refunds and returns. Revenue is recognized at the time of product shipment or delivery to the customer (including distributors) provided that the customer takes ownership and assumes risk of loss (based on shipping terms), collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and sale price is fixed or determinable. Our customers generally do not have the right of return unless a product is defective or damaged and is within the parameters of the product warranty in effect for the sale.

Cost of goods sold consists of the cost of materials, product warranty costs and compensation costs, and overhead and other costs related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs of materials.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may deviate from expectations based on both anticipated and unanticipated changes in product mix. Additionally, gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales volumes.

Selling, general and administrative expenses (“SG&A expenses”) consist of the compensation costs for sales and marketing personnel, shipping costs, trade show expenses, customer support expenses, travel expenses, advertising, bad debt expense, the compensation costs for administration and management personnel, legal and accounting fees, costs incurred to settle litigation or claims and other actions against us, and other costs associated with our operations.

Royalty income, net consists of royalty income earned on licenses associated with our patented products, net of related expenses.

Amortization of intangible assets consists of the amortization of developed technology acquired in the acquisition of SMP Data Communications on May 30, 2008 and the amortization of intellectual property and customer list acquired in the acquisition of AOS on October 31, 2009. Amortization of intangible assets is calculated using an accelerated method and straight line method over the estimated useful lives of the intangible assets.

Other income, net consists of interest income, interest expense, and other miscellaneous income and expense items not directly attributable to our operations.

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The following table sets forth and highlights fluctuations in selected line items from our condensed consolidated statements of operations for the periods indicated:

Three Months Ended April 30, 2010 and 2009

Net Sales

Consolidated net sales for each of the second quarters of fiscal years 2010 and 2009 were $15.3 million. Sequentially, consolidated net sales for the second quarter of fiscal year 2010 increased 1.7% compared to consolidated net sales of $15.0 million during the first quarter of fiscal year 2010.

We experienced an increase in our net sales during the second quarter of fiscal year 2010 in our commercial markets compared to the same period last year. This increase was partially offset by decreases in net sales in our specialty markets. We experienced increases in our net sales during the second quarter of fiscal year 2010 of our enterprise connectivity products, compared to the same period last year. These increases were offset by decreases in net sales of our fiber optic cable products.

Net sales to customers located outside of the United States decreased 23.4% in the second quarter of fiscal year 2010 compared to the same period last year, while net sales to customers located in the United States increased 9.7%.

We typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year. We believe this historical seasonality pattern is generally indicative of an overall trend. This pattern may be substantially altered by the timing of larger projects or other economic factors impacting our industry or impacting the industries of our customers and end-users. While we believe seasonality may be a factor that impacts our quarterly net sales results, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year.

We believe our consolidated net sales continue to be negatively impacted by the global economic recession. However, when comparing net sales for the second quarter of fiscal year 2010 to the second quarter of fiscal year 2009 and to the first quarter of fiscal year 2010, the sale of our enterprise connectivity products has improved. We believe that net sales of our product lines tend to be a lagging indicator of economic recovery and downturn when compared to the general economy. Generally, we believe our improvement in the sales of enterprise connectivity products may indicate the beginning of improvement in our markets. We cannot be certain at this time if this improvement is an indication of a trend or predict whether or not or how soon we may see a similar improvement in the sale of our fiber optic cable product line.

Gross Profit

Our gross profit decreased 25.1% to $4.3 million in the second quarter of fiscal year 2010, compared to $5.7 million in the second quarter of fiscal year 2009. Gross profit margin, or gross profit as a percentage of net sales, decreased to 28.1% in the second quarter of fiscal year 2010 from 37.3% in the second quarter of fiscal year 2009.

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The primary reason for the decrease in gross profit margin is that the gross profit margin associated with the sale of fiber optic cable products decreased to 31.7% for the second quarter of fiscal year 2010 compared to 41.4% for the same period last year due primarily to higher variable production costs associated with mix of products sold during the quarter as well as certain fixed manufacturing costs being spread over lower sales volumes. Further, sales of fiber optic cable products (which historically enjoy relatively higher gross profit margins when compared to our enterprise connectivity products) fell as a percentage of total net sales during the second quarter, negatively impacting total gross profit margin. The decrease in gross profit margin was partially mitigated by improvement in the gross profit margin associated with the sale of our enterprise connectivity products, which was 22.2% during the second quarter of fiscal year 2010 compared to 16.0% during the second quarter of fiscal year 2009. Historically, our enterprise connectivity and applied interconnect system products have lower gross profit margins than our fiber optic cable products. A trend we expect to continue.

We do not believe the lower gross profit margins we experienced for fiber optic cable products during the second quarter of fiscal year 2010 indicate a trend toward lower margins.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may deviate from expectations based on both anticipated and unanticipated changes in product mix. Additionally, our gross profit margins for our product lines tend to be higher when we achieve higher net sales levels of those product lines, as certain fixed manufacturing costs are spread over higher sales volumes.

Selling, General, and Administrative Expenses

SG&A expenses increased to $6.2 million in the second quarter of fiscal year 2010 from $5.8 million for the same period last year. SG&A expenses as a percentage of net sales were 40.6% in the second quarter of 2010 compared to 37.9% in the second quarter of 2009. Excluding the acquisition of AOS, we believe our SG&A expenses would have decreased in the second quarter of fiscal year 2010, when compared to the same period last year, as a result of cost reduction initiatives.

The acquisition of AOS added at least $848,000 to our consolidated SG&A expenses in our second quarter of fiscal year 2010, including $270,000 of employee related costs and $275,000 of legal fees (related to litigation in the patent infringement lawsuit). Despite the addition of these SG&A expenses, continued integration efforts, continued efforts to reduce costs and reductions in our work force completed in fiscal year 2009 partially offset the increase.

Royalty Income, Net

We recognized royalty income, net of related expenses, totaling $363,000 during the second quarter of fiscal year 2010, compared to royalty income, net of related expenses totaling $220,000 during the same period last year. The increase is due to the increased sale of licensed product by licensees during the second quarter of fiscal year 2010 compared to the same period last year. This income is largely offset by the expense of the amortization of the intangible assets associated with our royalty income, net (as further described in the Amortization of Intangible Assets section described herein), resulting from the required write-up of intangible assets to fair value when acquired as part of the acquisition of SMP Data Communications on May 30, 2008.

Amortization of Intangible Assets

We recognized $147,000 of amortization expense, associated with intangible assets, for the second quarter of fiscal year 2010, compared to amortization expense of $209,000 during the second quarter of fiscal year 2009. The decrease in amortization expense, when comparing the two periods, is due to the fact that the trade name and customer list intangible assets, acquired in connection with the acquisition of SMP Data Communications, were written off during the third and fourth quarters, respectively, of fiscal year 2009 when it was concluded that these assets were impaired.

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Impairment of Goodwill

As of April 30, 2010, we performed our annual impairment analysis of goodwill as required by U.S. GAAP. OCC and our industry continue to face challenges given the current worldwide economic recession. We analyzed the carrying value of goodwill and determined that it is appropriate to write-off the carrying value of goodwill on our consolidated balance sheet. As a result, we recorded a non-recurring, non-cash impairment charge in the amount of $6.2 million to write-off the carrying value of the goodwill as of April 30, 2010.

Other Expense, Net

We recognized other expense, net, in the second quarter of fiscal year 2010 of $5,000 compared to other expense, net, of $167,000 in the second quarter of fiscal year 2009. Other expense, net is comprised of interest income, interest expense and other miscellaneous items which may fluctuate from period to period.

Loss Before Income Taxes

We reported a loss before income taxes of $7.9 million for the second quarter of fiscal year 2010 compared to loss before income taxes of $244,000 for the second quarter of fiscal year 2009. This increase was primarily due to the loss on the impairment of goodwill of $6.2 million. Also contributing to the increase in the loss before income taxes was the decrease in gross profit of $1.4 million in the second quarter of fiscal year 2010 compared to the same period in 2009.

Income Tax Benefit

Income tax benefit totaled $424,000 for the second quarter of fiscal year 2010 compared to income tax benefit of $260,000 for the same period in fiscal year 2009. Our effective tax rate for the second quarter of fiscal year 2010 was 5.3% compared to 106.6% in the second quarter of fiscal year 2009. Our effective tax rate for the second quarter of fiscal year 2010 is significantly lower, and our effective tax rate for the second quarter of fiscal year 2009 was significantly higher, than the statutory tax rate as a result of permanent differences in the GAAP and tax accounting treatment of certain expenses relative to our projected income or loss before taxes for the fiscal year. Generally, fluctuations in our effective tax rates are primarily due to permanent differences in GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income before taxes is at a level, generally close to breakeven, that permanent differences in GAAP and tax accounting treatment have a disproportional impact on our projected effective tax rate.

As of April 30, 2010, we recorded a non-recurring, non-cash impairment charge in the amount of $6.2 million to write-off the carrying value of goodwill. Since our tax basis in the goodwill was zero, this resulted in a permanent $6.2 million difference between book and taxable income and was the primary cause of our significantly lower effective tax rate.

Net Income (Loss)

Net loss attributable to OCC for the second quarter of fiscal year 2010 was $7.5 million compared to net income of $16,000 for the second quarter of fiscal year 2009. This change was due primarily to the increase in the loss before income taxes of $7.7 million in the second quarter of fiscal year 2010 compared with the same period in fiscal year 2009, partially offset by the increase in the tax benefit when comparing the two periods.

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Six Months Ended April 30, 2010 and 2009

Net Sales

Consolidated net sales for each of the first halves of fiscal years 2010 and 2009 were $30.3 million. We experienced an increase in net sales during the first half of fiscal year 2010 in our commercial markets compared to the same period last year. The increase in net sales in our commercial markets was partially offset by a decrease in net sales in our specialty markets for the first half of fiscal year 2010. We experienced increases in our net sales during the first half of fiscal year 2010 of our enterprise connectivity products, compared to the same period last year. These increases were offset by decreases in net sales of our fiber optic cable products.

Net sales to customers located outside of the United States decreased 7.0% in the first half of fiscal year 2010 compared to the same period last year, while net sales to customers located in the United States increased 2.7%.

We typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year. We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary cycles of our customers. However, this pattern may be substantially altered during any quarter or year by the timing of larger projects or other economic factors impacting our industry or impacting the industries of our customer and end-users. While we believe seasonality may be a factor that impacts our quarterly net sales results, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year.

Gross Profit

Our gross profit decreased 6.9% to $9.8 million for the first half of fiscal 2010 from $10.5 million for the same period in fiscal year 2009. Gross profit margin, or gross profit as a percentage of net sales, decreased to 32.3% for the first half of fiscal year 2010 from 34.7% for the same period last year.

The primary reason for the decrease in the gross profit margin for the first half of fiscal year 2010 is that the gross profit margins associated with the sale of fiber optic cable products decreased to 37.8% during the first half of fiscal year 2010, compared to 39.0% for the same period last year due primarily to higher variable production costs associated with mix or products sold during the first half of the fiscal year as well as certain fixed manufacturing costs being spread over lower sales volumes. Further, sales of fiber optic cable products (which historically enjoy relatively higher gross profit margins when compared to our enterprise connectivity products) fell as a percentage of total net sales during the first half of the fiscal year, negatively impacting total gross profit margin. Our enterprise connectivity and applied interconnect system products, both had gross profit margins of 20.8% during the first half of fiscal year 2010. Historically, our enterprise connectivity and applied interconnect system products have lower gross profit margins than our fiber optic cable products. A trend we expect to continue.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may deviate from expectations based on both anticipated and unanticipated changes in product mix.

Selling, General, and Administrative Expenses

SG&A expenses increased 5.3% to $12.2 million in the first half of 2010 from $11.6 million for the same period last year. SG&A expenses as a percentage of net sales were 40.4% for the six months ended April 30, 2010 compared to 38.4% for the same period in 2009. Excluding the acquisition of AOS, we believe our SG&A expenses would have decreased in the first half of fiscal year 2010, when compared to the same period last year, as a result of cost reduction initiatives.

The acquisition of AOS added at least $1.7 million to our consolidated SG&A expenses in the first half of fiscal year 2010, including $468,000 of employee related costs and $589,000 of legal fees (related to litigation in the

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patent infringement lawsuit). Despite the addition of these SG&A expenses, continued integration efforts, continued efforts to reduce costs and reductions in our work force completed in fiscal year 2009 partially offset the increase.

Royalty Income, Net

We recognized royalty income, net of related expenses, totaling $609,000 during the six months ended April 30, 2010, compared to royalty income, net of related expenses totaling $383,000 during the same period last year. The increase is due to the increased sale of licensed product by licensees during the first half of fiscal year 2010 compared to the same period last year. This income is largely offset by the expense of the amortization of the intangible assets associated with our royalty income, net (as further described in the Amortization of Intangible Assets section described herein), resulting from the required write-up of intangible assets to fair value when acquired as part of the acquisition of SMP Data Communications on May 30, 2008.

Amortization of Intangible Assets

We recognized $294,000 of amortization expense, associated with intangible assets, during the first half of fiscal year 2010, compared to amortization expense of $418,000 during the first half of fiscal year 2009. The decrease in amortization expense, when comparing the two periods, is due to the fact that the trade name and customer list intangible assets, acquired in connection with the acquisition of SMP Data Communications, were written off during the third and fourth quarters, respectively, of fiscal year 2009 when it was concluded that these assets were impaired.

Impairment of Goodwill

As of April 30, 2010, we performed our annual impairment analysis of goodwill as required by U.S. GAAP. OCC and our industry continue to face challenges given the current worldwide economic recession. We analyzed the carrying value of goodwill and determined that it is appropriate to write-off the carrying value of goodwill on our consolidated balance sheet. As a result, we recorded a non-recurring, non-cash impairment charge in the amount of $6.2 million to write-off the carrying value of the goodwill as of April 30, 2010.

Other Expense, Net

We recognized other expense, net, of $157,000 in the first half of fiscal 2010 compared to other expense, net, of $309,000 in the first half of 2009. Other expense, net is comprised of interest income, interest expense and other miscellaneous items.

Loss Before Income Taxes

We reported a loss before income taxes of $8.5 million for the first half of fiscal year 2010 compared to a loss before income taxes of $1.5 million for the first half of fiscal year 2009. This increase was primarily due to the loss on the impairment of goodwill of $6.2 million. Also contributing to the increase in the loss before income taxes was the decrease in gross profit of $724,000 and the increase in SG&A expenses of $618,000 in the first half of fiscal year 2010 compared to the same period in fiscal year 2009.

Income Tax Benefit

Income tax benefit totaled $646,000 for the first half of fiscal year 2010 compared to income tax benefit of $729,000 for the same period in fiscal 2009. Our effective tax rate was 7.6% in the first half of 2010 compared to 50.1% in the first half of 2009. Generally, fluctuations in our effective tax rates are primarily due to permanent differences in GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level, generally close to breakeven, that permanent differences in GAAP and tax accounting treatment have a disproportional impact on

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our projected effective tax rate. In the first half of fiscal year 2009, our effective tax rate was higher than the statutory tax rate as a result of permanent differences in the GAAP and tax accounting treatment of certain expenses relative to our projected income before taxes for the fiscal year.

As of April 30, 2010, we recorded a non-recurring, non-cash impairment charge in the amount of $6.2 million to write-off the carrying value of goodwill. Since our tax basis in the goodwill was zero, this resulted in a permanent $6.2 million difference between book and taxable income and was the primary cause of our significantly lower effective tax rate.

Net Loss

Net loss attributable to OCC for the first half of 2010 was $7.8 million compared to a net loss of $726,000 for the first half of fiscal 2009. This increase was due primarily to the increase in the loss before income taxes of $7.1 million in the first half of fiscal year 2010 compared to the same period last year and to the decrease in the tax benefit when comparing the two periods.

Financial Condition

Total assets decreased $6.6 million or 13.0%, to $43.8 million at April 30, 2010, from $50.3 million at October 31, 2009. This decrease was primarily due to the $6.2 million non-recurring, non-cash impairment charge related to goodwill, a $843,000 decrease in cash and cash equivalents, partially offset by a $1.0 million increase in inventories. Further detail regarding the decrease in cash and cash equivalents is provided in our discussion of “Liquidity and Capital Resources.” The increase in inventories is largely due to the timing of raw material purchases and efforts to decrease lead times by increasing certain standard stock items.

Total liabilities increased $883,000, or 5.2%, to $18.0 million at April 30, 2010, from $17.1 million at October 31, 2009. This increase was primarily due to a $1.0 million increase in long term debt and note payable to bank under our line of credit and a $762,000 increase in deferred revenue related to a shipment made during the quarter, for which revenue was not recognized due to the nature of the terms of the sale, partially offset by a $696,000 decrease in accounts payable and accrued expenses, largely due to the timing of related payments when comparing the two periods.

Total shareholders’ equity attributable to OCC at April 30, 2010 decreased $7.3 million in the first half of fiscal year 2010. The decrease resulted from the net loss attributable to OCC of $7.8 million, partially offset by share-based compensation totaling $456,000.

Liquidity and Capital Resources

Our primary capital needs during the first half of fiscal year 2010 have been to fund working capital requirements and capital expenditures. Our primary source of capital for these purposes has been existing cash and cash equivalents and our bank credit facilities. As of April 30, 2010, we had outstanding loan balances under our bank credit facilities totaling $9.6 million. As of October 31, 2009, we had outstanding loan balances under our bank credit facilities totaling $8.5 million.

Our cash totaled $1.1 million as of April 30, 2010, a decrease of $843,000 compared to $1.9 million as of October 31, 2009. The decrease in cash for the six months ended April 30, 2010 primarily resulted from net cash used in operating activities of $1.6 million and capital expenditures totaling $230,000, partially offset by the net cash provided by financing activities of $944,000 primarily related to proceeds from a note payable to our bank under our line of credit.

On April 30, 2010, we had working capital of $20.2 million compared to $20.1 million on October 31, 2009. The ratio of current assets to current liabilities as of April 30, 2010 and October 31, 2009 was 3.6 to 1.

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Net Cash

Net cash used in operating activities was $1.6 million in the first half of fiscal year 2010, compared to net cash provided by operating activities of $423,000 in the first half of fiscal year 2009. Net cash used in operating activities during the first half of fiscal year 2010 primarily resulted from a net loss of $7.9 million, the increase in inventories of $1.0 million and the decrease in accounts payable and accrued expenses of $658,000, partially offset by the increase in deferred revenue of $762,000. The aforementioned factors contributing to cash used in operating activities were partially offset by certain adjustments to reconcile net loss to net cash used in operating activities, including the loss on the impairment of goodwill of $6.2 million and depreciation and amortization of $1.5 million. Net cash provided by operating activities during the first half of fiscal year 2009 primarily resulted from certain adjustments to reconcile net loss to net cash provided by operating activities, including depreciation and amortization of $1.6 million and share-based compensation expense of $470,000. Additionally, the decrease in trade accounts receivable in the amount of $2.4 million further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by the increase in income taxes refundable of $1.1 million, a decrease in accounts payable and accrued expenses (including accrued compensation and payroll taxes) totaling $2.9 million and a net loss totaling $726,000.

Net cash used in investing activities totaled $230,000 in the first half of fiscal year 2010 compared to $690,000 in the first half of fiscal year 2009. Net cash used in investing activities during the first half of fiscal year 2010 resulted from purchases of property and equipment. Net cash used in investing activities during the first half of fiscal year 2009 resulted from purchases of property and equipment and an investment in other assets.

Net cash provided by financing activities totaled $944,000 in the first half of fiscal year 2010, compared to net cash used in financing activities of $754,000 in the first half of fiscal year 2009. Net cash provided by financing activities in the first half of fiscal year 2010 resulted primarily from proceeds from a note payable to our bank under our line of credit in the amount of $1.1 million. Net cash used in financing activities during the first half of fiscal year 2009 resulted primarily from the repurchase and retirement of 110,000 shares of our common stock and the reversal of outstanding checks in excess of funds on deposit.

Credit Facilities

On May 30, 2008, we established $17.0 million in credit facilities (collectively, the “Credit Facilities”) with Valley Bank to provide for our working capital needs and to finance the acquisition of Superior Modular Products Incorporated, doing business as SMP Data Communications. The Credit Facilities provided a working capital line of credit (the “Revolving Loan”), a real estate term loan (the “Virginia Real Estate Loan”), a supplemental real estate term loan (the “North Carolina Real Estate Loan”), and a capital acquisitions term loan (the “Capital Acquisitions Term Loan”). The Capital Acquisitions Term Loan was fully funded in fiscal year 2008 and repaid in fiscal year 2009. Therefore, the $2.3 million portion of the credit facility related to the Capital Acquisitions Term Loan is no longer available.

The Revolving Loan originally provided up to $6.0 million for our working capital needs and bore interest at LIBOR plus 2.15%, but provided a lower rate option if we maintained specific depository amounts with Valley Bank. The Revolving Loan was modified on February 16, 2010 (“Amended Revolving Loan”) and provided up to $3.0 million for our working capital needs and bore interest at LIBOR plus 2.15%, but at no time was the applicable rate to decrease below 4.5% per annum. We could borrow up to 85% of our consolidated eligible accounts receivable, (excluding foreign accounts receivable), plus 35% of certain consolidated uninsured foreign receivables (or 100% of insured foreign receivables, without duplication) up to a maximum of $1.5 million plus 25% of our consolidated eligible inventory. The Amended Revolving Loan was due to expire on May 31, 2010.

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On April 30, 2010, we entered into a revolving credit facility with SunTrust Bank consisting of a Commercial Note and Agreement to Commercial Note under which SunTrust Bank will provide us with a revolving line of credit for approximately 2 years for our working capital needs (the “Commercial Loan”). The Commercial Loan provides a $6.0 million working capital line of credit and replaces our Amended Revolving Loan with Valley Bank. Under the Commercial Loan, we may borrow an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) $6.0 million, or (ii) the sum of 85% of certain receivables aged 90 days or less plus 35% of the lesser of $1.0 million or certain foreign receivables plus 25% of certain raw materials inventory. Advances under the Commercial Loan accrue at the greater of (x) LIBOR plus 2.0%, or (y) 3.0%. Accrued interest on the outstanding principal balance is due on the first day of each month beginning June 1, 2010, with all then outstanding principal, interest, fees and costs due at the Commercial Loan Termination Date of May 31, 2012.

As of April 30, 2010, we had $1.1 million of outstanding borrowings on our Commercial Loan and, as a result, $4.9 million in available credit.

Additionally, on April 30, 2010, we entered into a Second Loan Modification Agreement with Valley Bank whereby upon satisfaction and termination of the Amended Revolving Loan, Valley Bank consented to the release of certain collateral used to secure the Amended Revolving Loan, including but not limited to our accounts, deposit accounts, inventory and general intangibles and permitted the existence of the Commercial Loan.

The Virginia Real Estate Loan was fully funded on May 30, 2008. The Virginia Real Estate Loan accrues interest at 6% and payments of principal and interest are based on a 25 year amortization. Payments on the Virginia Real Estate Loan will be made in 59 equal installments of principal and interest in the amount of $42,241 for the period from July 1, 2008 through May 1, 2013. The balance of the Virginia Real Estate Loan will be due June 1, 2013. As of April 30, 2010, we had outstanding borrowings of $6.3 million under our Virginia Real Estate Loan.

The North Carolina Real Estate Loan was fully funded on May 30, 2008. The North Carolina Real Estate Loan accrues interest at 6% and payments of principal and interest are based on a 25 year amortization. Payments on the North Carolina Real Estate Loan will be made in 59 equal installments of principal and interest in the amount of $14,557 for the period from July 1, 2008 through May 1, 2013. The balance of the North Carolina Real Estate Loan will be due June 1, 2013. As of April 30, 2010, we had outstanding borrowings of $2.2 million under our North Carolina Real Estate Loan.

The Commercial Loan is secured by a first priority lien on all of our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper. The Virginia Real Estate Loan and the North Carolina Real Estate Loan are secured by a first priority lien on all of our personal property and assets, except for our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper, as well as a first lien deed of trust on our real property, in both cases including the assets at our Asheville facility.

Capital Expenditures

We did not have any material commitments for capital expenditures as of April 30, 2010. During our 2010 fiscal year budgeting process, we included an estimate for capital expenditures for the fiscal year of $2.0 million. This budget includes estimates for capital expenditures for new manufacturing equipment, improvements to existing manufacturing equipment, new information technology equipment and software, upgrades to existing information technology equipment and software, furniture and all other capitalizable expenditures for property, plant and equipment. These expenditures will be funded out of our working capital or our credit facilities. Capital

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expenditures are reviewed and approved based on a variety of factors including, but not limited to, current cash flow considerations, the expected return on investment, project priorities, impact on current or future product offerings, availability of personnel necessary to implement and begin using acquired equipment, and economic conditions in general. Historically, we have spent less than our budgeted capital expenditures in any given year.

Corporate acquisitions and other strategic investments are considered outside of our annual capital expenditure budgeting process.

Future Cash Flow Considerations

We believe that our cash flow from operations, our cash on hand and our existing credit facilities will be adequate to fund our operations for at least the next twelve months.

From time to time, we are involved in various claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.

Seasonality

Historically, net sales are relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year, which we believe may be partially due to construction cycles and budgetary considerations of our customers. For example, our trend has been that an average of approximately 45% of our net sales occurred during the first half of the fiscal year and an average of approximately 55% of our net sales occurred during the second half of the fiscal year for the past ten fiscal years, excluding fiscal years 2001, 2002 and 2009. Fiscal years 2001, 2002, and 2009 are excluded because we believe net sales did not follow this pattern due to overall economic conditions in the industry and/or in the world during these years.

We believe our net sales have generally been impacted by seasonality factors. We typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year. We have seen that this pattern may be substantially altered by the timing of larger projects or other economic factors impacting our industry or impacting the industries of our customers and end-users. As a result, while we believe seasonality may be a factor that impacts our quarterly net sales results, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and accompanying condensed notes that have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 1 to the consolidated financial statements filed with our Annual Report on Form 10-K for fiscal year 2009 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2009 Form 10-K did not change during the period from November 1, 2009 through April 30, 2010.

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Future Accounting Considerations

In September 2006, the FASB issued Accounting Standards Codification 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), which clarifies the definition of fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles, and expands disclosures regarding fair value measurements. ASC 820-10 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. ASC 820-10 is effective for financial statements issued for fiscal years beginning after November 15, 2007, but was delayed for treatment of non-financial assets and liabilities until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of the portion of ASC 820-10 other than for treatment of non-financial assets and liabilities was effective November 1, 2008, and did not have any impact on our results of operations, financial position or liquidity. The adoption of ASC 820-10 for the treatment of non-financial assets and liabilities was effective for us on November 1, 2009 and did not have any impact on our results of operations, financial position or liquidity.

In December 2007, the FASB issued Accounting Standards Codification 805-10, Business Combinations (“ASC 805-10”). ASC 805-10 requires all business combinations completed after the effective date to be accounted for by applying the acquisition method (previously referred to as the purchase method). Companies applying this method will have to identify the acquirer, determine the acquisition date and purchase price and recognize at their acquisition-date fair values the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree. In the case of a bargain purchase the acquirer is required to reevaluate the measurements of the recognized assets and liabilities at the acquisition date and recognize a gain on that date if an excess remains. The adoption of ASC 805-10, effective November 1, 2009, did not have any impact on our results of operations, financial position or liquidity.

In December 2007, the FASB issued Accounting Standards Codification 810-10, Consolidation (“ASC 810-10”). ASC 810-10 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. In addition, this statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The adoption of ASC 810-10, effective November 1, 2009, did not have a material impact on our results of operations, financial position or liquidity. However, we have disclosed on the face of the condensed consolidated statement of operations for the three months and six months ended April 30, 2010, the amount of consolidated net loss attributable to the noncontrolling interest associated with Centric Solutions, LLC. Similar disclosure has also been reflected on the face of our condensed consolidated balance sheet as of April 30, 2010, our condensed consolidated statement of shareholders’ equity for the six months ended April 30, 2010 and in certain condensed notes to the condensed consolidated financial statements.

In April 2008, the FASB issued Accounting Standards Codification 350-30, Determination of the Useful Life of Intangible Assets (“ASC 350-30”). ASC 350-30 amends the factors that an entity should consider in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. ASC 350-30 requires an entity to consider its own historical experience in renewing or extending the term of the arrangement, consistent with its expected use of the asset. In the absence of historical experience, an entity should consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. The adoption of ASC 350-30, effective November 1, 2009, did not have any impact on our results of operations, financial position or liquidity.

There are no other new accounting standards issued, but not yet adopted by us, which are expected to be applicable to our financial position, operating results or financial statement disclosures.

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