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 risks and uncertainties that may cause actual events to differ materially from our expectations. Factors that could cause or contribute to such differences 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; 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; 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 current reports on Form 8-K.

Dollar amounts presented in the following discussion have been rounded to the nearest hundred thousand, unless the amounts are less than one million, in which case the amounts have been rounded to the nearest thousand.

Overview of Optical Cable Corporation

We are 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. Optical Cable Corporation products are designed to meet the most demanding needs of end-users, delivering a high degree of reliability and outstanding performance characteristics.

Optical Cable Corporation, founded in 1983, 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.

On May 30, 2008, Optical Cable Corporation acquired Superior Modular Products Incorporated, doing business as SMP Data Communications ("SMP Data Communications"). Founded in 1990, SMP Data Communications is a wholly owned subsidiary of Optical Cable Corporation that develops copper and fiber passive connectivity hardware components for use in the enterprise market, including a broad range of commercial and residential applications. SMP Data Communications is internationally recognized for its role in establishing copper connectivity data communications standards, through its innovative and patented technologies.

Our combined product offerings are exceptionally complementary. While Optical Cable Corporation and SMP Data Communications are separate legal entities, we go to market as one company, offering a comprehensive and integrated suite of high quality, warranted cabling and connectivity products, primarily for the enterprise market. Our fiber optic product lines are branded Optical Cable Corporation and copper product lines are branded SMP Data Communications. In addition to the integrated management of sales and marketing functions, a number of other functions are integrated under a single management structure, including accounting, finance, information technology and human resources. At the current time, manufacturing, engineering and quality are managed separately at our Roanoke, Virginia and Asheville, North Carolina facilities.

We are headquartered in Roanoke, Virginia with offices and manufacturing and warehouse facilities located both in Roanoke, Virginia and near Asheville, North Carolina. We primarily manufacture our high quality fiber optic cables at our ISO 9001:2008 registered and MIL-STD-790F certified facility located in Roanoke, Virginia and we primarily manufacture our high quality fiber optic and copper connectivity products at our ISO 9001:2000 registered facility located near Asheville, North Carolina.

Summary of Company Performance for First Quarter 2009

During the first quarter of our 2009 fiscal year, consolidated net sales increased 18.1% to $15.0 million compared to $12.7 million for the same period last year. Gross profit decreased 10.2% to $4.8 million for the first quarter of fiscal year 2009 compared to $5.3 million for the same period last year. We reported a net loss of $742,000, or $0.12 per share, during the first quarter of fiscal year 2009, compared to net income of $862,000, or $0.14 per share, for the comparable period last year.

We experienced an increase in net sales during the first quarter of fiscal year 2009 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. The addition of the net sales of SMP Data Communications contributed to the increases in net sales in our commercial markets and the increase in net sales overall. However, the gross profit margin associated with those additional net sales of SMP Data Communications diluted our consolidated gross profit margin in the first quarter of fiscal year 2009 from an estimated 36.2% related to the sale of our fiber optic cable products pre-consolidation.

Results of Operations

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

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

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
                                           January 31
                                                                  Percent
                                      2009             2008       Change
              Net sales           $ 15,000,000     $ 12,700,000     18.1  %
              Gross profit           4,800,000        5,300,000     (10.2 )
              SG&A expenses          5,800,000        4,000,000      45.7
              Net income (loss)       (742,000 )        862,000    (186.1 )

Net Sales

Net sales for the first quarter of fiscal year 2009 increased 18.1% to $15.0 million compared to net sales of $12.7 million for the same period in fiscal 2008. The sale of products historically sold by SMP Data Communications accounted for $3.8 million of our consolidated net sales during the first quarter of fiscal year 2009.

Net sales to customers located outside of the United States decreased 39.7% in the first quarter of fiscal year 2009 compared to the same period last year, while net sales to customers located in the United States increased 5.2%, in each case exclusive of the net sales generated by the products historically associated with SMP Data Communications. The decrease in net sales to customers located outside of the United States is primarily due to the fact that we recognized net sales totaling in the aggregate, approximately $1.8 million as the result of two large international orders in the first quarter of fiscal year 2008 that did not recur in the first quarter of fiscal year 2009.

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.

Gross Profit

Our gross profit decreased 10.2% to $4.8 million in the first quarter of fiscal year 2009, compared to $5.3 million in the first quarter of fiscal year 2008. Gross profit margin, or gross profit as a percentage of net sales, decreased to 32.0% in the first quarter of fiscal year 2009 from 42.1% in the first quarter of fiscal year 2008.

The primary reason for the decrease is that historically, SMP Data Communications has had gross profit margin percentages lower than the historical gross profit margins of Optical Cable Corporation. The gross profit margin associated with the sale of connectivity products was 19.8% for the first quarter of fiscal year 2009, while the gross profit margin associated with fiber optic cable sales was 36.2% during the first quarter of fiscal year 2009.

We believe SMP Data Communications will continue to place downward pressure on our historical gross profit margins in future periods. However, at this time, we are unable to determine if this is a trend or predict the amount by which our future gross profit margins will be impacted.

Exclusive of the impact of SMP Data Communications, gross profit decreased 24.4% to $4.0 million for the first quarter of fiscal year 2009, compared to $5.3 million for the same period in fiscal year 2008. Our gross profit margin decreased to 36.2% for the first quarter of fiscal year 2009, compared to 42.1% for the same period last year. We believe the decrease in our gross profit margin, exclusive of the impact of SMP Data Communications, for the first quarter of 2009 related primarily to the fact that certain fixed manufacturing costs were spread over lower sales volumes. By comparison, our gross profit margin for the second quarter of fiscal year 2007 was 36.5%-a quarter with similar net sales volumes.

Selling, General, and Administrative Expenses

SG&A expenses increased 45.7% to $5.8 million in the first quarter of fiscal year 2009 from $4.0 million for the same period last year. SG&A expenses as a percentage of net sales were 38.8% in the first quarter of fiscal year 2009 compared to 31.5% in the first quarter of fiscal year 2008.

The increase in SG&A expenses was primarily due the acquisition of SMP Data Communications. Excluding the impact of the acquisition of SMP Data Communications, SG&A expenses were $4.0 million for the first quarters of fiscal years 2009 and 2008. SG&A expenses as a percentage of net sales were 35.8% in the first quarter of fiscal year 2009 compared to 31.5% in the first quarter of fiscal year 2008, exclusive of the impact of the acquisition of SMP Data Communications.

Excluding the impact of the acquisition of SMP Data Communications, certain employee related costs have decreased when comparing the first quarter of fiscal year 2009 to the comparable period in fiscal year 2008 due to the financial results during the first quarter of fiscal year 2009. Employee incentives and related payroll taxes decreased $318,000 during the first quarter of fiscal year 2009 compared to the same period last year due to the financial results during the first quarter of fiscal year 2009. This decrease was partially offset by increases in various post-acquisition professional fees totaling $161,000 and other costs associated with the continued integration of SMP Data Communications, including audit fees for fiscal year 2008.

Royalty Income, Net

We recognized royalty income, net of related expenses, totaling $162,000 during the three months ended January 31, 2009. We earn royalty income on licenses associated with patents acquired in the acquisition of SMP Data Communications; therefore, there was no royalty income recognized during the first quarter of fiscal year 2008.

Amortization of Intangible Assets

We recognized $210,000 of amortization expense, associated with intangible assets, for the first quarter of fiscal year 2009. The intangible assets were purchased in the acquisition of SMP Data Communications on May 30, 2008 and, therefore, there was no similar amortization recognized in the first quarter of fiscal year 2008.

Other Income (Expense), Net

We recognized other expense, net in the first quarter of fiscal year 2009 of $142,000 compared to other income, net of $25,000 in the first quarter of fiscal year 2008. Other income (expense), net is comprised of interest income of $8,000, interest expense totaling $174,000 related to monies borrowed in connection with the acquisition of SMP Data Communications, and other miscellaneous items which may fluctuate from period to period.

Income (Loss) Before Income Taxes

We reported a loss before income taxes of $1.2 million for the first quarter of fiscal year 2009 compared to income before income tax expense of $1.4 million for the first quarter of fiscal year 2008. This change was primarily due to the decrease in gross profit of $544,000 in the first quarter of fiscal year 2009 compared to the same period in 2008, and the $1.8 million increase in SG&A expenses.

Income Tax Expense (Benefit)

Income tax benefit totaled $469,000 in the first quarter of fiscal year 2009 compared to income tax expense of $507,000 for the same period in fiscal year 2008. Our effective tax rate for the first quarter of fiscal year 2009 was 38.7% compared to 37.0% for the first quarter of fiscal year 2008. Generally, fluctuations in our effective tax rates are primarily due to the amount and timing of various tax deductions and benefits.

Net Income (Loss)

Net loss for the first quarter of fiscal year 2009 was $742,000 compared to net income of $862,000 for the first quarter of fiscal year 2008. This change was due primarily to the loss before taxes experienced in the first quarter of fiscal year 2009 compared to income before taxes for the comparable period last year, partially offset by the recognition of a tax benefit in the first quarter of fiscal year 2009 compared to tax expense in the first quarter of fiscal year 2008.

Financial Condition

Total assets decreased $1.7 million, or 3.0%, to $53.2 million at January 31, 2009, from $54.8 million at October 31, 2008. This decrease was primarily due to a $2.0 million decrease in accounts receivable, net partially offset by a $658,000 increase in cash and cash equivalents. Further detail regarding the increase in cash is provided in our discussion of "Liquidity and Capital Resources." The decrease in accounts receivable, net largely resulted from the decrease in net sales in the first quarter of fiscal year 2009 when compared to the fourth quarter of fiscal year 2008, coupled with the timing of receipt of payments during the quarter and continued efforts to improve collections.

Total liabilities decreased $772,000, or 3.9%, to $19.2 million at January 31, 2009, from $20.0 million at October 31, 2008. This decrease was primarily due to a $732,000 decrease in accounts payable and accrued expenses (including accrued compensation and payroll taxes), largely due to the timing of related payments when comparing the two periods.

Total shareholders' equity at January 31, 2009 decreased $889,000 in the first quarter of fiscal year 2009. The decrease resulted from the net loss of $742,000 and the repurchase and retirement of 107,424 shares of our common stock for $325,000.

Liquidity and Capital Resources

Our primary capital needs during the first quarter of fiscal year 2009 have been to fund working capital requirements and capital expenditures as well as the repurchase and retirement of our common stock. Our primary source of capital for these purposes has been existing cash and cash equivalents, cash provided by operations and our bank credit facilities. As of January 31, 2009 and October 31, 2008, we had outstanding loan balances under three of our credit facilities totaling $10.9 million and $11.0 million, respectively.

Our cash totaled $4.6 million as of January 31, 2009, an increase of $658,000, compared to $3.9 million as of October 31, 2008. The increase in cash for the quarter ended January 31, 2009 primarily resulted from net cash provided by operating activities of $1.6 million, partially offset by capital expenditures totaling $284,000 and the repurchase and retirement of 107,424 shares of our common stock for $325,000.

On January 31, 2009, we had working capital of $23.3 million compared to $23.8 million on October 31, 2008. The ratio of current assets to current liabilities as of January 31, 2009, was 4.1 to 1, compared to 3.9 to 1 as of October 31, 2008. The decrease in working capital when comparing the periods was primarily caused by the $2.0 million decrease in accounts receivable, net, partially offset by the $732,000 decrease in accounts payable and accrued expenses (including accrued compensation and payroll taxes) and the $658,000 increase in cash and cash equivalents.

Net Cash

Net cash provided by operating activities was $1.6 million in the first quarter of fiscal year 2009, compared to net cash provided by operating activities of $1.5 million in the first quarter of fiscal year 2008. Net cash provided by operating activities during the first quarter 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 $768,000 and share-based compensation expense of $230,000. Additionally, the decrease in accounts receivable in the amount of $2.0 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 a net loss totaling $742,000 and a decrease in accounts payable and accrued expenses (including accrued compensation and payroll taxes) totaling $407,000. Net

cash provided by operating activities during the first quarter of fiscal year 2008 primarily resulted from net income of $862,000, plus net adjustments to reconcile net income to net cash provided by operating activities, including depreciation and amortization of $356,000 and share-based compensation expense of $135,000. Additionally, a decrease in accounts receivable in the amount of $487,000 and an increase in accounts payable and accrued expenses of $620,000, 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 inventories of $713,000.

Net cash used in investing activities totaled $284,000 and $527,000 in the first quarters of fiscal years 2009 and 2008, respectively. Net cash used in investing activities during the first quarter of fiscal year 2009 resulted from purchases of property and equipment. Net cash used in investing activities during the first quarter of fiscal year 2008 resulted primarily from purchases of property and equipment and advances made to a start-up connector company described further herein.

Net cash used in financing activities totaled $693,000 and $26,147 in the first quarter of fiscal year 2009 and 2008, respectively. Net cash used in financing activities during the first quarter of fiscal year 2009 resulted primarily from the repurchase and retirement of 107,424 shares of our common stock and the reversal of outstanding checks in excess of funds on deposit.

AOS Loan

On April 22, 2005, we agreed to extend a loan to a start-up connector company, Applied Optical Systems, Inc., (the "Borrower"), specializing in the design, manufacture and sale of connectors and cable assemblies for certain niche markets including military and other harsh environment applications. The Borrower offers complementary products to our product offering and was incorporated in December 2003. The Borrower currently has limited revenues and assets and is incurring net losses. As of January 31, 2009 and October 31, 2008, total assets of the Borrower, based on unaudited financial information, was equivalent to approximately 5.8% and 5.4%, respectively, of our consolidated total assets. Total revenue of the Borrower, based on unaudited financial information, was equivalent to approximately 11.1% and 7.9%, respectively, of our net sales for the three month periods ended January 31, 2009 and 2008.

Our loan to, and the related transactions with, the Borrower was and is part of a strategy to preserve future options for us with respect to (i) expansion of our product line offering for certain niche markets, (ii) additional channels to market for military and harsh environment fiber optic cable products, and
(iii) responding to potential changes to existing strategic partnerships as deemed necessary or appropriate by management in reaction to changes in the competitive landscape (specifically with respect to fiber optic cable products for the military and harsh environment applications).

Through January 31, 2009 and October 31, 2008, we advanced a total of $4.3 million, net (including accrued interest and accounts receivable from product sales through January 31, 2007, previously added to the principal balance of the note). The note receivable, which has an extended maturity date of May 1, 2009, is collateralized by all of the Borrower's tangible and intangible property and bears interest at six percent (6%) per annum. Two of the founders of the Borrower have also personally guaranteed amounts up to two-thirds of the principal balance outstanding on the note receivable plus two-thirds of any accrued interest related to the note receivable. In connection with the loan, we were issued a warrant by the Borrower which, as amended, gives us the right to purchase a fifty-six percent (56%) equity interest in the Borrower on a fully . . .