Optium (OPTM)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended May 3, 2008

or

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

Commission File Number: 001-33109

(Exact name of registrant as specified in its charter)

200 Precision Road, Horsham PA 19044

(Address of principal executive offices)        (Zip Code)

(267) 803-3800

(Registrant’s telephone number, including area code)

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

x Yes                                o No

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

As of June 9, 2008, the registrant had 25,576,716 shares of Common Stock, par value $.0001, outstanding. This number excludes 1,494,085 shares held by the registrant as treasury shares.

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

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

By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved.  Actual results may differ materially due to a variety of factors including, without limitation, those discussed under “Management’s Discussion and Analysis of Financial Conditions and Results of Operations;” “Risk Factors;” and elsewhere in this report.  Investors and others should carefully consider these factors and other uncertainties and events, whether or not the statements are described as forward-looking.

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

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PART I

 Financial Information

ITEM 1. Financial Statements

Optium Corporation

Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)

See accompanying notes to the financial statements.

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Optium Corporation

Condensed Consolidated Balance Sheets

(in  thousands, except share amounts)

See accompanying notes to the financial statements.

3

Optium Corporation

Condensed Consolidated Statements of Cash Flows
(unaudited)

(in thousands)

See accompanying notes to the financial statements.

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Optium Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Optium Corporation (the “Company” or “Optium”) was incorporated in the State of Delaware on September 8, 2000. The Company is a leading designer and manufacturer of high-performance optical subsystems supporting core to the edge applications for use in telecommunications and cable TV network systems.  Since its founding in 2000, Optium has developed or acquired proprietary technology and products that enable transmission and switching functionality for high-bandwidth, intelligent optical networking applications. The Company supplies an extensive suite of optical subsystems, including 10Gb/s and 40Gb/s transceivers, cable TV and fiber to the home, or FTTH, transmitters, analog RF over fiber products, line cards, circuit packs and its technologically innovative wavelength selective switch reconfigurable optical add/drop multiplexer products, or WSS ROADMs.   The Company’s optical subsystems are used in network systems that deliver voice, video and other data services for consumers and enterprises that are delivered in the long haul, metropolitan and access segments, referred to as the core to the edge, of telecommunications and cable TV networks. The Company’s customers are network systems vendors whose customers include wireline and wireless telecommunications service providers and cable TV operators, collectively referred to as carriers.

On November 1, 2006, the Company closed its initial public offering of 5.98 million shares of common stock, including the sale of an additional 780,000 shares to cover underwriter over-allotments.  The Company’s common stock, quoted on the NASDAQ Global Market under the symbol “OPTM,” began trading on October 27, 2006.  Cash proceeds to the Company, net of underwriter commissions of approximately $7.3 million and related offering expenses of approximately $4.1 million, totaled approximately $93.2 million (including approximately $1.9 million of offering expenses paid during fiscal year 2006).  All preferred stock outstanding at November 1, 2006 was converted to common stock upon the completion of the initial public offering.

2.  Summary of Significant Accounting Policies

The consolidated financial statements include Optium Corporation and its wholly owned subsidiaries, Optium Australia Pty Limited, Optium Israel Limited, and Kailight Photonics Inc. All intercompany accounts and transactions have been eliminated in the consolidation.

Fiscal year

Optium operates on a 52 or 53 week fiscal year ending on the Saturday closest to July 31. Fiscal year 2008 and fiscal year 2007 consist of 53 and 52 weeks, respectively. Each quarter consists of 13 or 14 weeks; the third quarters of both fiscal year 2008 and fiscal year 2007 consisted of 13 weeks.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and loss during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods presented  have been included.

The Company considers all highly liquid securities purchased with original maturities of ninety days or less to be cash equivalents.  Money market accounts that are classified as cash equivalents are stated at cost, which approximates market value.  Other short-term investments that mature in less than ninety days and are classified as cash equivalents are reported at fair value, with resulting unrealized gains or losses reported as a separate component of stockholders’ equity.

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At May 3, 2008 and July 28, 2007, the Company had $415,300 and $68,000, respectively of short-term restricted cash.  At both May 3, 2008 and July 28, 2007 $68,000 of the restricted cash related to an operating lease in the form of a certificate of deposit, 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 days after the expiration of the lease term (April 30, 2008). At May 3, 2008, the Company also had $347,300 of short-term restricted cash related to a bank guarantee with a customer. The term of the bank guarantee extends through the length of the contract and renews on a monthly basis.

The financial statements for Optium Australia, the Company’s foreign subsidiary,  are measured using the local currency (the Australian dollar) as the functional currency. Foreign assets and liabilities in the condensed 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 condensed consolidated results of operations.

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 May 3, 2008 and July 28, 2007, an allowance of $69,200 and $46,440 respectively, based on management’s analysis, was available to absorb any uncollectible balances.

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 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, based upon information then available to the Company.

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 May 3, 2008 and July 28, 2007.

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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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 estimate 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. There were no indicators of impairment as of May 3, 2008.

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. 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 that would have warranted a revision to carrying value of its long-lived assets as of May 3, 2008.

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.

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 and less than one year are classified as short-term investments on the Company’s condensed consolidated balance sheet.

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 nine months 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 and nine months ended May 3, 2008 had a weighted average fair value of $6.05 and $8.52, respectively. The stock units have varying vesting schedules, dependent on the grant details. The total stock-based compensation associated with the RSUs will be expensed over the requisite service period of the respective grants.  Forfeiture rates of 5.80% and 5.29% were used to calculate the stock-based compensation related to the RSUs granted during the three and nine months ended May 3, 2008, respectively.

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.

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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 condensed consolidated statement of operations.

Product development costs

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

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

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. 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. 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 Taxes, or FIN 48, on July 29, 2007. Under the new provisions, the Company will not recognize a tax benefit for an uncertain income tax position unless it is “more likely than not” that such position is sustainable. 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.

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):

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 (loss) 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 and nine months ended May 3, 2008, options, unvested restricted stock units and warrants to purchase 2,937,364 shares of common stock have been excluded from the calculation, as their impact would have been anti-dilutive.

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.

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 fiscal year 2009.

In May 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 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 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 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 and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in a consolidated entity and should be reported as equity in consolidated financial statements. The Company is currently determining the impact of implementing SFAS 160, which will be effective for fiscal year 2010.

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

The following is a summary of the Company’s available-for-sale investments as of May 3, 2008 and July 28, 2007 (in thousands):

The Company accounts for its investments pursuant to SFAS No. 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 May 3, 2008, the Company held no securities with an unrealized loss position for more than twelve months and no realized losses were recorded. All investments mature in less than one year; those that mature in less than ninety days are classified as cash equivalents.

The Company’s currently held interest bearing auction rate securities, or ARS, are comprised of federally insured student loan backed securities.  During the nine month period ended May 3, 2008, the Company’s auction rate securities experienced failures at auction. Uncertainty in credit markets has led to the amount of auction rate securities submitted for sale exceeding the amount of orders for these securities, resulting in failed auction status. Typically, auction rate securities provide liquidity to holders through an auction process that resets the interest rate at predetermined calendar intervals, allowing the holder to roll over their holdings in the ARS or sell the investment at par value. Because of the recent auction failures, the

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securities are not currently liquid, as the Company is not be able to access such funds until a successful future auction or redemption of these securities.

The Company’s total auction rate securities at May 3, 2008 had a fair value of $3,600,000 and represented approximately 7.8% of the Company’s total liquid assets, which consist of cash and cash equivalents and short-term investments. However, the Company believes its remaining cash and cash equivalents will be sufficient to meet anticipated cash needs.  Subsequent to May 3, 2008, the Company sold an auction rate security for full par value of $2,000,000 and interest through a tender offer. The Company believes this indicates a favorable trend in the ARS market and as such continues to classify the remaining ARS as short-term investments.

The auction rate securities are all AAA rated securities and the underlying assets of the Company’s auction rate securities are student loans backed by the federal government.  Additionally, the government is actively pursuing legislation surrounding this issue in order to restore the market. The Company believes the securities are properly valued at their estimated fair market value on the balance sheet and has continued to classify the auction rate securities as short-term investments.  The Company will continue to assess the effects of the failed auctions on the fair value of the investments. If the auctions associated with the securities the Company owns are not successful in the future and an other than temporary impairment of the security is identified, the Company may have to record an impairment charge through earnings with respect to these securities.

5.  Acquisitions

On May 15, 2007, the Company acquired Kailight Photonics, Inc. (“Kailight”), a technology leader in 40Gb/s optical transmission products, for approximately $35,877,700, including $729,000 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 merger 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 payments will be recorded as additional purchase price in the period it is probable such payment is earned. Pursuant to the merger agreement, certain 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 $26,089,700 has been recorded as goodwill.

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

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

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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 in the market place with an assumed growth rate of up to 314% diminishing to 10% and no assumed terminal value. We began to recognize revenue related to these products in fiscal year 2008.

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 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.

The results of the Kailight acquisition have been included in the accompanying condensed consolidated financial statements since the date of acquisition.

Microdisplay assets

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 and nine months ended May 3, 2008.

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

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WSS ROADMs are expected to drive cost efficiencies including improved flexibility to add more unique software-defined features.

6.  Stockholders’ Equity

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 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 are 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

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the methodology prescribed under SFAS 123, the Company would have recorded approximately $102,600 and $307,900 and $137,700 and $350,600 as stock based compensation in selling, general and administrative expenses for the three and nine months ended May 3, 2008 and April 28, 2007, respectively, related to the grants issued prior to the adoption of SFAS 123R, as presented below (in thousands):

During the nine months ended May 3, 2008, 259,600 stock options with a weighted average grant date fair value of $5.48 per option and 591,535 unvested restricted stock units with a weighted average grant date fair value of $8.52 were granted under the Company’s 2006 Stock Option and Incentive Plan (the “2006 Plan”). The compensation expense charged against earnings for SFAS 123R stock-based compensation for the first nine months of fiscal year 2008 was approximately $3,510,100. The pre-tax impact of stock-based compensation expense was $0.14 per basic and diluted share, respectively, in the nine months ended May 3, 2008. As of May 3, 2008, there was approximately $6,041,400 in unrecognized compensation expense related to non-vested stock options under the Company’s stock plans. This unrecognized expense is expected to be recognized as compensation expense over the weighted-average vesting period of approximately 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 May 3, 2008, 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 nine months ended May 3, 2008 are summarized as follows:

During the nine months ended May 3, 2008, certain employees exercised options to purchase 34,357 shares of the Company’s common stock for proceeds of $27,600. These option exercises had an intrinsic value of approximately $231,800 and were granted under the 2000 Plan.

The weighted average remaining life of the 2000 Plan stock options as of May 3, 2008 is 7.0 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

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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, 190,783, 191,074 and 191,691 shares reserved as of the first day of the Company’s fiscal year 2007 third and fourth quarters and fiscal year 2008 first, second, third and fourth quarters, respectively, or the aggregate substitute options granted in the Kailight acquisition.  In addition, the number of shares reserved for issuance under the 2006 Plan is automatically increased by the number of shares and options cancelled or forfeited under the 2000 Plan after October 10, 2006. Cancellations or forfeitures 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 options granted in connection with the Kailight acquisition.   During the nine months ended May 3, 2008, 49,829 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 May 3, 2008, 862,285 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 nine months ended May 3, 2008 are summarized as follows:

Pursuant to the terms of the Kailight Photonics, Inc. acquisition agreement, the Company assumed certain vested and unvested 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 May 3, 2008, 1,434,336, 106,874, and 787,239 shares were authorized, available for issuance and subject to outstanding awards, respectively, under the 2006 Plan. The weighted average remaining life of the 2006 Plan stock options as of May 3, 2008 is 9.1 years. The detail of all options exercisable under the 2000 Plan and the 2006 Plan as of May 3, 2008 is as follow:

The total intrinsic value of the fully vested and exercisable options above, had they been exercised on May 3, 2008, was approximately $5,700,600.

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The restricted stock unit transactions under the 2006 Plan for the nine months ended May 3, 2008 are summarized as follows:

The per stock unit weighted average fair value of the restricted stock units granted under the 2006 Plan for the nine months ended May 3, 2008 was $8.52 which was based on the closing stock price of the Company on the date of grants.  The restricted stock units have varying vesting schedules, dependent on the grant details. As of May 3, 2008, there was approximately $3,196,900 in unrecognized compensation expense related to non-vested restricted stock units. This unrecognized expense is expected to be recognized as compensation expense over the requisite service periods of the respective grants.  The weighted average remaining vesting period for restricted stock units as of May 3, 2008 is 1.5 years. All forfeitures or cancellations of restricted stock units are added back to the balance of shares reserved for issuance under the 2006 Plan. Additionally, those shares that are retained by the Company to satisfy tax withholding obligations are added back to the balance of shares reserved for issuance under the 2006 Plan.

The Company’s Board of Directors has determined the fair value of all stock option grants on the dates 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 nine months ended May 3, 2008, total stock-based compensation expense related to amortization of the deferred compensation balance was approximately $375,420.

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

The Company provides a warranty on all products. Warranty expenses are charged to operations and included in the cost of revenue in the accompanying condensed consolidated 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 warranty costs is as follows (in thousands):

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 May 3, 2008, the Company’s total liability for unrecognized net tax benefits is $484,000, which relates to the Company’s current position regarding its Federal R&D credit calculation and support.  The Company has not undergone an audit by either the Federal or Pennsylvania taxing authorities since its inception, nor has it undergone an audit by either the Australian or Israeli taxing authorities since the acquisitions of its respective subsidiaries.  Therefore, all of the Company’s tax years remain open to audit, subject to the appropriate statutes of limitations.  Consistent with past practice, the Company will record interest and penalties associated with uncertain tax positions in income tax expense.

At May 3, 2008, the Company had U.S. federal net operating loss, or NOL, carry forwards of approximately $20.0 million which expire through 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.  As of May 3, 2008, the Company believes there are no limitations on the use of these federal NOLs, other than those related to the Company’s definitive merger with Finisar Corporation and discussed in the subsequent events footnote, herein.

In connection with the acquisition of Engana Pty Limited, (which was subsequently renamed Optium Australia Pty Ltd) 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

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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.

Since acquisition, Optium Australia Pty Ltd. has incurred additional NOLs of $14.0 million, which the Company believes can be used to offset future Australian income. The Company has recorded a full valuation allowance on the Australian NOLs due to the lack of profitability to date of the Australian operations.

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 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 $13.0 million.  The current quarterly and year to date consolidated effective tax rates of 24.7% and 3.2%, respectively are 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: