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 labeled 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. 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 two 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 Third Quarter 2009

During the third quarter of fiscal year 2009, consolidated net sales decreased 13.4% to $14.2 million compared to $16.4 million for the same period last year. Gross profit decreased 27.6% to $4.5 million for the third quarter of fiscal year 2009 compared to $6.2 million for the same period last year. We reported a net loss of $1.1 million, or $0.19 per share, during the third quarter of fiscal year 2009, compared to net income of $482,000, or $0.08 per share, for the comparable period last year.

We experienced a decrease in net sales during the third quarter of fiscal year 2009 in both our commercial markets and our specialty markets compared to the same period last year. The gross profit margin associated with net sales of SMP Data Communications products diluted our consolidated gross profit margin in the third quarter of fiscal year 2009 from an estimated 36.3% related to the sale of our fiber optic cable products pre-consolidation.

For the nine months ended July 31, 2009, net sales increased 4.6% to $44.5 million compared to $42.6 million for the same period last year. Gross profit decreased 13.2% to $15.0 million compared to $17.3 million for the same period last year. We reported a net loss of $1.8 million, or $0.33 per share, during the first nine months of fiscal year 2009, compared to net income of $2.2 million, or $0.37 per share, for the same period last year.

We experienced an increase in net sales during the first nine months 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 offset by a decrease in net sales in certain of our specialty markets for the first nine months of fiscal year 2009. The addition of the net sales of SMP Data Communications products contributed to the increases in net sales in our commercial markets and the increase in net sales overall for the first nine months of fiscal year 2009. However, the gross profit margin associated with those additional net sales of SMP Data Communications diluted our consolidated gross profit margin in the first nine months of fiscal year 2009 from an estimated 38.2% related to the sale of our fiber optic cable products.

Like others in our industry, during fiscal year 2009 we have been experiencing the adverse effects of one of the worst world-wide economic recessions since the Great Depression of the 1930s.

However, we believe we are outperforming industry trends as the relative decrease in our revenues during the third quarter of fiscal 2009 and the nine months ended July 31, 2009, compares favorably to relative decreases in revenues in the industry, based on publicly available data.

As you would expect, Optical Cable Corporation has taken actions to cut expenses as a result of the current economic environment, including reducing our workforce by approximately 10% in aggregate at our manufacturing facilities-which mainly occurred during the third fiscal quarter and the beginning of the fourth fiscal quarter of this year.

We plan to continue to take the actions we believe appropriate to improve our financial performance as quickly as possible, without jeopardizing the execution of our long-term strategy.

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 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. During the quarter ended July 31, 2009, we decided to discontinue marketing our connectivity products under the SMP Data Communications trade name and, as a result, we recognized an impairment charge of $190,000 to eliminate the carrying value of the trade name asset.

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                              Nine Months Ended
                                            July 31,              Percent                   July 31,              Percent
                                     2009              2008       Change             2009              2008       Change
Net sales                        $ 14,207,000      $ 16,415,000     (13.4 ) %    $ 44,509,000      $ 42,572,000       4.6  %
Gross profit                        4,483,000         6,194,000     (27.6 ) %      14,994,000        17,271,000     (13.2 )%
SG&A expenses                       5,387,000         5,481,000      (1.7 ) %      17,009,000        13,867,000      22.7  %
Net income (loss)                  (1,108,000 )         482,000    (330.1 ) %      (1,834,000 )       2,222,000    (182.6 )%

Three Months Ended July 31, 2009 and 2008

Net Sales

Net sales for the third quarter of fiscal year 2009 decreased 13.4% to $14.2 million compared to net sales of $16.4 million for the same period in fiscal year 2008. The decrease in net sales during the third quarter of fiscal year 2009 when compared to the same period last year was attributable to decreases in both our commercial market and our specialty markets as a result of the current global economic recession.

Net sales to customers located outside of the United States decreased 35.3% in the third quarter of fiscal year 2009 compared to the same period last year, and net sales to customers located in the United States decreased 4.1%. We believe the primary reason for the decrease in net sales to customers located outside of the United States is related to the negative impact of the global economic downturn, particularly in areas of the world where the effect of the downturn is more profound such as Latin America and certain parts of the Asia-Pacific region.

The sale of SMP Data Communications products accounted for $3.4 million of our consolidated net sales during the third quarter of fiscal year 2009, compared to $3.3 million for the two months after the acquisition included in our consolidated results during the same period last year.

Exclusive of the net sales generated by SMP Data Communications products, net sales of our fiber optic cable products decreased 17.4% during the third quarter of fiscal year 2009, compared to the same period last year.

Like others in our industry, during our third fiscal quarter of 2009 we experienced the adverse effects of one of the worst world-wide economic recessions since the Great Depression of the 1930s.

However, we believe we are outperforming industry trends as the relative decrease in our revenues during the third quarter of fiscal 2009 compares favorably to relative decreases in revenues in the industry, based on publicly available data.

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. During the third quarter of fiscal year 2009, by way of example, we believe global economic weakness has negatively impacted the seasonal increase we typically experience during the second half of our fiscal year and this trend may continue into the fourth quarter of fiscal year 2009.

Gross Profit

Our gross profit decreased 27.6% to $4.5 million in the third quarter of fiscal year 2009, compared to $6.2 million in the third quarter of fiscal year 2008. Gross profit margin, or gross profit as a percentage of net sales, decreased to 31.6% in the third quarter of fiscal year 2009 from 37.7% in the third quarter of fiscal year 2008. By comparison, gross profit margin was 32.0% and 37.3%, respectively, in the first and second quarters of fiscal year 2009.

The primary reason for the decrease when comparing the third quarter of fiscal year 2009 to the third quarter of fiscal year 2008 is that certain fixed manufacturing costs were spread over lower sales volumes at our manufacturing facilities in Roanoke, Virginia and near Asheville, North Carolina in the third quarter of fiscal year 2009 than in the third quarter of fiscal year 2008.

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 decreased to $5.4 million in the third quarter of fiscal year 2009 from $5.5 million for the same period last year. SG&A expenses as a percentage of net sales were 37.9% in the third quarter of 2009 compared to 33.4% in the third quarter of 2008. By comparison, SG&A expenses were $5.8 million and 38.8% as a percentage of net sales for the first quarter, and $5.8 million and 37.9% as a percentage of net sales for the second quarter of fiscal year 2009.

The decrease in SG&A expenses during the third quarter of fiscal year 2009 compared to the same period last year was primarily due to decreased employee compensation costs. Compensation costs have decreased when comparing the third quarter of fiscal year 2009 to the comparable period in fiscal year 2008 largely as a result of a decrease in amounts accrued for potential employee performance-based incentives based on our financial results during the third quarter of fiscal year 2009 compared to the same period last year. The decrease in employee compensation costs was partially offset by the acquisition of SMP Data Communications, and the SG&A expenses of approximately $365,000 associated with our acquisition on August 1, 2008 of a majority interest in a start-up business to provide turnkey cabling and connectivity solutions for the datacenter market.

Our results have also been negatively impacted by the costs associated with the implementation of certain provisions of Sarbanes-Oxley at our subsidiaries and the on-going costs associated with compliance with the requirements of Sarbanes-Oxley.

Royalty Income, Net

We recognized royalty income, net of related expenses, totaling $297,000 during the three months ended July 31, 2009, compared to royalty income, net of related expenses totaling $283,000 during the three months ended July 31, 2008. This income is largely offset by the expense of the amortization of intangible assets associated with our royalty income, net (as further described below), resulting from the required write-up of intangible assets to fair value when acquired as part of the acquisition of SMP Data Communications on May 30, 2008.

Amortization of Intangible Assets

We recognized $208,000 of amortization expense, associated with intangible assets, during the three months ended July 31, 2009, compared to amortization expense of $161,000 during the three months ended July 31, 2008. The increase in amortization expense when comparing the third quarter of fiscal year 2009 to the third quarter of fiscal year 2008 relates to the fact that only two months of amortization expense were recorded in the third quarter of fiscal year 2008 as a result of the timing of the acquisition of our subsidiary.

Loss on Impairment of Intangible Assets

During the quarter ended July 31, 2009, we decided to discontinue marketing our connectivity products under the SMP Data Communications trade name and to begin to market these products under the names Optical Cable Corporation and OCC. As a result, we determined the trade name asset was impaired and recorded a non-cash, non-recurring impairment charge in the amount of $190,000 during the third quarter of fiscal year 2009.

Other Expense, Net

We recognized other expense, net in the third quarter of fiscal year 2009 of $170,000 compared to other expense, net of $87,000 in the third quarter of fiscal year 2008. Other expense, net is comprised of interest income, interest expense and other miscellaneous items.

Income (Loss) Before Income Taxes

We reported a loss before income taxes of $1.2 million for the third quarter of fiscal year 2009 compared to income before income taxes of $748,000 for the third quarter of fiscal year 2008. This change was primarily due to the decrease in gross profit of $1.7 million in the third quarter of fiscal year 2009 compared to the same period in fiscal year 2008.

Income Tax Expense (Benefit)

Income tax benefit totaled $68,000 for the third quarter of fiscal year 2009 compared to income tax expense of $266,000 for the same period in fiscal year 2008. Our effective tax rate for the third quarter of fiscal year 2009 was 5.8% which is significantly lower than the statutory rate due primarily to a change in our projected results for the year, when considering actual results through the third quarter, and the resulting impact to the tax rate of our unfavorable permanent difference items. Our effective tax rate was 35.6% in the third quarter of fiscal year 2008.

Net Income (Loss)

Net loss for the third quarter of fiscal year 2009 was $1.1 million compared to net income of $482,000 for the third quarter of fiscal year 2008. This change was due primarily to the loss before taxes experienced in the third quarter of fiscal year 2009 compared to income before taxes for the comparable period last year, as well as a lower effective tax rate (and related tax benefit) during the quarter.

Nine Months Ended July 31, 2009 and 2008

Net Sales

Net sales for the nine months of fiscal year 2009 increased 4.6% to $44.5 million compared to net sales of $42.6 million for the same period in fiscal year 2008.

We experienced an increase in net sales during the first nine months 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 nine months of fiscal year 2009.

Net sales to customers located outside of the United States decreased 13.9% in the first nine months of fiscal year 2009 compared to the same period last year, while net sales to customers located in the United States increased 13.6%.

The sale of SMP Data Communications products accounted for $9.7 million of our consolidated net sales during the first nine months of fiscal year 2009, and accounted for $3.3 million of our consolidated net sales during the first nine months of fiscal year 2008 (after the acquisition of SMP Data Communications on May 30, 2008).

Exclusive of the net sales generated by SMP Data Communications products, net sales of our fiber optic cable products decreased 11.3% during the first nine months of fiscal year 2009, compared to the same period last year. Exclusive of the net sales generated by SMP Data Communications products, net sales to customers located outside of the United States decreased 24.4% in the first nine months of fiscal year 2009 compared to the same period last year, and net sales to customers located in the United States decreased 4.8%. 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 nine months of fiscal year 2008 that did not recur in the first nine months of fiscal year 2009. Additionally, the global economic downturn has contributed to the decrease in net sales to customers located outside of the United States, particularly in areas of the world where the effect of the downturn is more profound such as Latin America and certain parts of the Asia-Pacific region.

Like others in our industry, during the first nine months of fiscal year 2009 we experienced the adverse effects of one of the worst world-wide economic recessions since the Great Depression of the 1930s.

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 . . .