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; 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, in our annual report on Form 10-K for the fiscal year ended October 31, 2008, and/or in our other filings.

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. At present, 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 Second Quarter 2009

During the second quarter of fiscal year 2009, consolidated net sales increased 13.7% to $15.3 million compared to $13.5 million for the same period last year. Gross profit was $5.7 million for the second quarters of fiscal years 2009 and 2008. We reported net income of $16,000, or earnings per share of less than $0.01, during the second quarter of fiscal year 2009, compared to net income of $878,000, or $0.15 per share, for the comparable period last year.

We experienced an increase in net sales during the second quarter of fiscal year 2009 in both our commercial markets and our specialty markets compared to the same period last year. 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 second quarter of fiscal year 2009 from an estimated 41.4% related to the sale of our fiber optic cable products pre-consolidation.

For the six months ended April 30, 2009, net sales increased 15.8% to $30.3 million compared to $26.2 million for the same period last year. Gross profit decreased 5.1% to $10.5 million compared to $11.1 million for the same period last year. We reported a net loss of $726,000, or $0.12 per share, during the first half of fiscal year 2009, compared to net income of $1.7 million, or $0.29 per share, for the same period last year.

We experienced an increase in net sales during the first half 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 certain of our specialty markets for the first half of fiscal year 2009. As with the second quarter net sales, 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 for the first half of fiscal year 2009, since SMP Data Communications was acquired on May 30, 2008. However, the gross profit margin associated with those additional net sales of SMP Data Communications diluted our consolidated gross profit margin in the first half of fiscal year 2009 from an estimated 39.0% 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.

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, trade name and customer list acquired in the acquisition of SMP Data Communications in May of 2008. Amortization of intangible assets is calculated using an accelerated 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.

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

                                                                                      Six Months Ended
                                  Three Months Ended April 30,     Percent                April 30,             Percent
                                      2009              2008       Change           2009             2008       Change
Net sales                       $     15,343,000    $ 13,495,000      13.7 %    $ 30,301,000     $ 26,157,000      15.8 %
Gross profit                           5,723,000       5,744,000      (0.4 )%     10,511,000       11,077,000      (5.1 )%
SG&A expenses                          5,812,000       4,396,000      32.2 %      11,622,000        8,386,000      38.6 %
Net income (loss)                         16,000         878,000     (98.2 )%       (726,000 )      1,740,000    (141.7 )%

Three Months Ended April 30, 2009 and 2008

Net Sales

Net sales for the second quarter increased 13.7% to $15.3 million compared to net sales of $13.5 million for the same period in fiscal year 2008. Sequentially, net sales for the second quarter of fiscal year 2009 increased 2.6% compared to net sales of $15.0 million during the first quarter of fiscal 2009.

The increase in net sales during the second quarter of fiscal year 2009 when compared to the same period last year was attributable to increases in both our commercial market and our specialty markets.

Net sales to customers located outside of the United States increased 14.2% in the second quarter of fiscal year 2009 compared to the same period last year, while net sales to customers located in the United States increased 13.5%.

The sale of products historically sold by SMP Data Communications accounted for $2.5 million of our consolidated net sales during the second quarter of fiscal year 2009. Since the acquisition of SMP Data Communications occurred on May 30, 2008, no SMP Data Communications product sales are included in the second quarter of fiscal year 2008.

Exclusive of the net sales generated by products historically associated with SMP Data Communications, net sales to customers located outside of the United States increased 4.6% in the second quarter of fiscal year 2009 compared to the same period last year, while net sales to customers located in the United States decreased 8.7%.

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. Therefore, 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 was $5.7 million for the second quarters of fiscal years 2009 and 2008. Gross profit margin, or gross profit as a percentage of net sales, decreased to 37.3% in the second quarter of fiscal year 2009 from 42.6% in the second quarter of fiscal year 2008. By comparison, gross profit margin was 32.0% in the first quarter of fiscal year 2009.

The primary reason for the decrease when comparing the second quarter of fiscal year 2009 to the second quarter of fiscal year 2008 is the acquisition of SMP Data Communications on May 30, 2008. Specifically, SMP Data Communications has historically 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 16.0% for the second quarter of fiscal year 2009, while the gross profit margin associated with fiber optic cable sales was 41.4% during the second 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 7.3% to $5.3 million for the second quarter of fiscal year 2009, compared to $5.7 million for the same period in fiscal year 2008. Our gross profit margin decreased slightly to 41.4% for the second quarter of fiscal year 2009, compared to 42.6% for the same period last year. 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 to $5.8 million in the second quarter of fiscal year 2009 from $4.4 million for the same period last year. SG&A expenses as a percentage of net sales were 37.9% in the second quarter of 2009 compared to 32.6% in the second quarter of 2008. For comparison, SG&A expenses for the first quarter of fiscal year 2009 were $5.8 million and 38.8% as a percentage of net sales for the first quarter.

The increase in SG&A expenses during the second quarter of fiscal year 2009 compared to the same period last year was due primarily to the acquisition of SMP Data Communications and the expenses associated with our start-up business acquired on August 1, 2008 to provide turnkey cabling and connectivity solutions for the datacenter market.

Royalty Income, Net

We recognized royalty income, net of related expenses, totaling $220,000 during the three months ended April 30, 2009. We earn royalty income on licenses associated with patents acquired in the acquisition of SMP Data Communications on May 30, 2008 and, therefore, there was no royalty income recognized during the second quarter of fiscal year 2008.

Amortization of Intangible Assets

We recognized $209,000 of amortization expense, associated with intangible assets, during the three months ended April 30, 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 second quarter of fiscal year 2008.

Other Income (Expense), Net

We recognized other expense, net, in the second quarter of fiscal year 2008 of $167,000 compared to other income, net, of $28,000 in the second quarter of fiscal year 2008. Other income (expense), net is comprised of interest income, interest expense and other miscellaneous items.

Income Before Income Taxes

We reported a loss before income taxes of $244,000 for the second quarter of fiscal year 2009 compared to income before income taxes of $1.4 million for the second quarter of fiscal year 2008. This decrease was primarily due to the increase in SG&A expenses of $1.4 million in the second quarter of fiscal year 2009 compared to the same period in 2008.

Income Tax Expense (Benefit)

Income tax benefit totaled $260,000 for the second quarter of fiscal year 2009 compared to income tax expense of $497,000 for the same period in fiscal year 2008. Our effective tax rate for the second quarter of fiscal year 2009 was 106.6% compared to 36.1% in the second quarter of fiscal year 2008. Our effective tax rate for the second quarter of fiscal year 2009 is significantly higher than the statutory tax rate as a result of differences in the GAAP and tax accounting treatment of certain expenses relative to our projected income before taxes for the year. Generally, fluctuations in our effective tax rates are primarily due to 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 differences in GAAP and tax accounting treatment have a disproportional impact on our projected effective tax rate.

Net Income

Net income for the second quarter of fiscal year 2009 was $16,000 compared to net income of $878,000 for the second quarter of fiscal year 2008. This decrease was due primarily to the decrease in income before income taxes of $1.6 million when comparing the second quarter of fiscal year 2009 with the same period in 2008, partially offset by the recognition of a tax benefit in the second quarter of fiscal year 2009 compared to tax expense in the second quarter of fiscal year 2008.

Six Months Ended April 30, 2009 and 2008

Net Sales

Net sales for the first half of fiscal year 2009 increased 15.8% to $30.3 million compared to net sales of $26.2 million for the same period in fiscal year 2008.

We experienced an increase in net sales during the first half 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 certain of our specialty markets for the first half of fiscal year 2009.

Net sales to customers located outside of the United States decreased 2.3% in the first half of fiscal year 2009 compared to the same period last year, while net sales to customers located in the United States increased 25.4%.

The sale of products historically sold by SMP Data Communications accounted for $6.3 million of our consolidated net sales during the first half of fiscal year 2009. Since the acquisition of SMP Data Communications occurred on May 30, 2008, no SMP Data Communications product sales are included in the first half of fiscal year 2008.

Exclusive of the net sales generated by products historically associated with SMP Data Communications, net sales to customers located outside of the United States decreased 19.4% in the first half of fiscal year 2009 compared to the same period last year, and net sales to customers located in the United States decreased 2.4%. 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 half of fiscal year 2008 that did not recur in the first half 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 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 5.1% to $10.5 million for the first half of fiscal 2009 from $11.1 million for the same period in fiscal year 2008. Gross profit margin, or gross profit as a percentage of net sales, decreased to 34.7% for the first half of fiscal year 2009 from 42.3% for the same period last year.

The primary reason for the decrease is the acquisition of SMP Data Communications on May 30, 2008. Specifically, SMP Data Communications has historically 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 18.3% for the first half of fiscal year 2009, while the gross profit margin associated with fiber optic cable sales was 39.0% during the first half 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 15.5% to $9.4 million for the first half of fiscal year 2009, compared to $11.1 million for the same period in fiscal year 2008. Our gross profit margin decreased to 39.0% for the first half of fiscal year 2009, compared to 42.3% 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 half of fiscal year 2009 related primarily to the fact certain fixed manufacturing costs were spread over lower sales volumes. 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 38.6% to $11.6 million in the first half of 2009 from $8.4 million for the same period last year. SG&A expenses as a percentage of net sales were 38.4% for the six months ended April 30, 2009 compared to 32.1% for the same period in 2008.

The increase in SG&A expenses during the first half of 2009 compared to the same period last year was due primarily to the acquisition of SMP Data Communications and the expenses associated with our start-up business acquired on August 1, . . .