0001144204-05-008137.txt : 20060420 0001144204-05-008137.hdr.sgml : 20060420 20050318164816 ACCESSION NUMBER: 0001144204-05-008137 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20050318 DATE AS OF CHANGE: 20050505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECISION OPTICS CORPORATION INC CENTRAL INDEX KEY: 0000867840 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 042795294 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10647 FILM NUMBER: 05692165 BUSINESS ADDRESS: STREET 1: 22 EAST BROADWAY CITY: GARDNER STATE: MA ZIP: 01440-3338 BUSINESS PHONE: 9786301800 FORMER COMPANY: FORMER CONFORMED NAME: PRECISION OPTICS CORP INC DATE OF NAME CHANGE: 19600201 10KSB/A 1 v014603_10ksba.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

__________________________________

FORM 10-KSB/A
(Amendment No. 1)

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2004

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from ____ to ____

Commission File Number 001-10647

PRECISION OPTICS CORPORATION, INC.
(Name of small business issuer in its charter)

MASSACHUSETTS		04-279-5294
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

22 East Broadway
Gardner, Massachusetts 01440
(Address of principal executive offices) (Zip Code)

(978) 630-1800
(Issuer’s telephone number, including area code)

Securities registered under Section 12(b) of the Act:

None

Securities registered under Section 12(g) of the Act:

Common Stock, $.01 par value

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes X No __

Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X

The issuer’s revenues for its most recent fiscal year were $1,464,964.

The aggregate market value of the voting stock, consisting solely of common stock, held by non-affiliates of the issuer computed by reference to the closing price of such stock was $3,325,138 as of August 31, 2004.

The number of shares of outstanding common stock of the issuer as of August 31, 2004 was 7,008,212.

DOCUMENTS INCORPORATED BY REFERENCE

The issuer’s Proxy Statement for the 2004 Annual Meeting of Shareholders to be held on November 9, 2004 is incorporated into Part III of this Form 10-KSB.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-KSB/A is filed by Precision Optics Corporation, Inc. (the “Company”) as an amendment to the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004 (i) to amend Item 8A of the Form 10-KSB, and (ii) to replace Exhibits 31.1 and 31.2 thereto with corrected versions of those Exhibits submitted herewith. The original Exhibits 31.1 and 31.2 contained incorrect introductory language in paragraph 5 due to a production error. This Amendment No. 1 speaks as of the original filing date of the Company’s Annual Report on Form 10-KSB and has not been updated to reflect events occurring subsequent to the original filing date.

PART I

ITEM 1.

DESCRIPTION OF BUSINESS

BUSINESS DEVELOPMENT

Precision Optics Corporation, Inc. (the “Company”) was incorporated in Massachusetts in 1982 and has been publicly owned since November 1990.

References to the Company contained herein include its two wholly-owned subsidiaries, except where the context otherwise requires.

BUSINESS OF ISSUER

Precision Optics Corporation, a developer and manufacturer of advanced optical instruments since 1982, designs and produces high-quality medical instruments, optical thin film coatings, and other advanced optical systems. The Company’s medical instrumentation line includes laparoscopes, arthroscopes and endocouplers and a line of world-class 3-D endoscopes for use in minimally invasive surgical procedures. Precision Optics Corporation is certified to the ISO 9001 Quality Standard, and complies with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for CE Marking of its medical products. The Company’s Internet Website is www.poci.com.

Principal Products and Services and Methods of Distribution.

Medical Products. The Company’s medical products include endoscopes, as well as image couplers, beamsplitters and adapters, all of which are used as accessories to endoscopes.

Since January 1991, the Company has developed and sold endoscopes using various optical technologies for use in a variety of minimally invasive surgical and diagnostic procedures. The Company’s current line of specialized endoscopes include arthroscopes (which are used in joint surgery), laryngoscopes (which are used in the diagnosis of diseases of the larynx), laparoscopes (which are used in abdominal surgery) and stereo endoscopes and cameras (which are used in cardiac and general surgery, and enable surgeons to visualize the surgical field in 3-D imagery, thus facilitating greater finesse and minimizing surgical risk). In addition to its existing line of endoscopes, the Company is continuing to develop different types of endoscopes that incorporate varying types of construction and technology for use in various medical specialties.

In March 2002, the Company shipped the first production lot of autoclavable endoscopes to a major orthopedic equipment supplier. These endoscopes, which are also CE Mark certified for European use, have been designed and tested to withstand sterilization by flash and standard autoclave, as well as all other commonly used medical sterilization means. The major benefits of autoclavable instruments include increased patient safety, quick turnaround, and elimination of hazardous sterilant and by-product materials, all of which provide a much better value to the user. The Company believes its autoclavable endoscope technology will generate opportunities for endoscope revenue growth, particularly in Europe where autoclaving is the preferred method of sterilization.

The Company developed and has manufactured and sold since 1985 a proprietary product line of instrumentation to couple endoscopes to video cameras. Included in this product line are imaging couplers, which physically connect the endoscope to a video camera system and transmit the image viewed through the scope to the video camera. Another product, the beamsplitter, performs the same function while preserving for the viewer an eyeport for direct, simultaneous viewing through the endoscope. The Company has sold these devices primarily to endoscope and video camera manufacturers and suppliers for resale under the Company’s customers’ names.

The Company’s image couplers and beamsplitters can withstand surgery-approved sterilization. The Company also offers autoclavable image couplers, which are able to withstand sterilization in superheated steam under pressure. Autoclavability is a preferred method of sterilization because of its relative speed, safety, and efficiency. The Company believes that it is one of the few companies in the world that produces autoclavable image couplers.

Included in the Company’s medical products sales are sales of image couplers and beamsplitters for video-monitored examination of a variety of industrial cavities and interiors. The Company has developed, and may develop in the future, specialized borescopes for industrial applications.

Optical Thin Films. The Company designs and manufactures various types of high quality thin film coatings for use in a wide range of optical applications. Thin film coatings are produced in-house for the Company’s medical instrumentation and other products. Presently, optical thin film manufacturing not associated with the Company’s medical instruments and other products is limited or very specialized.

Optical System Design and Development Services. The Company provides on a contract basis advanced lens design, imaging analysis, optical system design, structural design and analysis, prototype production and evaluation, optics testing, and optical system assembly. Some of the Company’s development contracts have led to optical system production business for the Company, and the Company believes its prototype development service may lead to new product production from time to time.

Competition and Markets.

The areas in which the Company does business are highly competitive and include both foreign and domestic competitors. Many of the Company’s competitors are larger and have substantially greater resources than the Company. Furthermore, other domestic or foreign companies, some with greater experience in the optics industry and greater financial resources than the Company, may seek to produce products or services that compete with those of the Company. The Company may establish or use production facilities overseas to produce key components for the Company’s business, such as lenses. The Company believes that the cost savings from such production may be essential to the Company’s ability to compete on a price basis in the medical products area particularly and to the Company’s profitability generally.

The Company believes that competition for sales of its medical products and services, which have been principally sold to medical device companies, who incorporate the Company’s products into their systems, is based on performance and other technical features, as well as other factors, such as scheduling and reliability, in addition to competitive price.

The Company has marketed and sold its endoscopes to original equipment manufacturer (OEM) video camera and video endoscopy suppliers for resale under the purchaser’s name. A number of domestic and foreign competitors also sell endoscopes to such OEM suppliers, and the Company’s share of the endoscope market is nominal. The Company believes that, while its resources are substantially more limited than its competitors, the Company can compete successfully in this market on the basis of price and delivery.

The Company currently sells its image couplers, beamsplitters, and adapters to a market that consists of approximately 30 to 35 potential OEM customers. These potential customers sell video cameras, endoscopes, or video-endoscopy systems. The Company has made sales in the past to approximately two thirds of these customers. The Company estimates that it has approximately 20% to 30% of the market share in these products. The Company’s primary competition in this area is the customers’ own in-house capabilities to manufacture such products. The Company believes that these customers typically purchase products from the Company, despite their in-house capabilities, because they choose to devote their own technical resources to their primary products, such as cameras or endoscopes. However, the Company estimates that approximately 50% of the market demand for image couplers, beamsplitters, and adapters is met by “capt ive” or in-house capabilities.

The Company offers advanced optical design and development services not related to thin film coatings to a wide range of potential customers and has numerous competitors. The ability to supply design and development services to such customers is highly dependent upon a company’s and its employees’ reputations and prior experience.

The Company has had negligible direct export sales to date. However, during fiscal year 2002, the Company’s medical products received the CE Mark Certification, which permits sales into the European marketplace.

Research and Development.

The Company believes that its future success depends to a large degree on its ability to continue to conceive and to develop new optical products and services to enhance the performance characteristics and methods of manufacture of existing products. Accordingly, it expects to continue to seek to obtain product-related design and development contracts with customers and to invest its own funds on its research and development. The Company spent approximately $1,319,000 and $1,235,000 of its own funds during fiscal years 2004 and 2003, respectively, on research and development.

The Company continues to explore potential applications of single-molecule technology and nanotechnology.

Raw Materials and Principal Suppliers.

For all of the Company’s products, except for thin film coatings, the basic raw material is precision grade optical glass, which the Company obtains from several major suppliers. Outside vendors grind and polish most of the Company’s lenses and prisms. For optical thin film coatings, the basic raw materials are metals and dielectric compounds, which the Company obtains from a variety of chemical suppliers. Certain of the thin film coatings utilized in the Company’s products are currently procured from an outside supplier, but most thin film coatings are produced in-house. The Company believes that its demand for these raw materials and thin film coating services is small relative to the total supply and that materials and services required for the production of its products are currently available in sufficient production quantities and will be available for fiscal year 2005. The Company believes, however, that there are relatively few s uppliers of the high quality lenses and prisms which its endoscopes require. The Company has therefore established an in-house optical shop for producing ultra-high quality prisms, micro-optics and other specialized optics for a variety of medical and industrial applications.

Patents and Trademarks.

The Company relies, in part, upon patents, trade secrets, and proprietary knowledge as well as personnel policies and employee confidentiality agreements concerning inventions and other creative efforts to develop and to maintain its competitive position. The Company does not believe that its business is dependent upon any patent, patent pending, or license, although it believes that trade secrets and confidential know-how may be important to the Company’s scientific and commercial success.

The Company plans to file for patents, copyrights, and trademarks in the United States and in appropriate countries to protect its intellectual property rights to the extent practicable. The Company holds the rights to several United States and foreign patents and has several patent applications pending. The Company knows of no infringements of its patents. The Company plans to protect its patents from infringement in each instance where it determines that doing so would be economical in light of the expense involved and the level and availability of the Company’s financial resources. While the Company believes that its pending applications relate to patentable devices or concepts, there can be no assurance that patents will be issued or that any patents issued can be successfully defended or will effectively limit the development of competitive products and services.

Employees.

As of June 30, 2004, the Company had 30 full-time employees and 5 part-time employees. There were 17 employees in manufacturing, 11 in engineering, 2 in sales and marketing, and 5 in finance and administration.

Customers.

Revenues from the Company’s largest customers, as a percentage of total revenues, were as follows:

	2004		2003		2002

Customer A	24	%	17	%	18	%
Customer B	22		2		—
Customer C	—		44		—
Customer D	4		5		23
All Others	50		32		59


	100	%	100	%	100	%

No other customer accounted for more than 10% of the Company’s revenues in fiscal years 2004, 2003, and 2002.

Environmental Protection and the Effect of Existing or Probable Government Regulations on the Business.

The Company’s operations are subject to a variety of federal, state, and local laws and regulations relating to the discharge of materials into the environment or otherwise relative to the protection of the environment. From time to time the Company uses a small amount of hazardous materials in its operations. The Company believes that it complies with all applicable environmental laws and regulations.

Need for Government Approval of Principal Products or Services and Effect of Existing or Probable Government Regulations on the Business.

The Company currently sells and markets several medical products, the marketing of which may require the permission of the United States Food and Drug Administration (“FDA”). Pursuant to the Company’s notification to the FDA of its intent to market its endoscopes, image couplers, beamsplitters, and adapters, the FDA has determined that the Company may market such devices, subject to the general controls provisions of the Food, Drug and Cosmetic Act. This FDA permission was obtained without the need to undergo a lengthy and expensive approval process, on account of the FDA’s determination that such devices meet the regulatory standard of being substantially equivalent to an existing approved device. Furthermore, the Company plans to market additional endoscopes and related medical products that may require the FDA’s permission to market such products. The Company may also develop additional products or seek to sell some of its c urrent or future medical products in a manner that requires the Company to obtain the permission of the FDA to market such products, as well as the regulatory approval or license of other federal, state, and local agencies or similar agencies in other countries. The FDA has authority to conduct detailed inspections of manufacturing plants in order to assure that “good manufacturing practices” are being followed in the manufacture of medical devices, to require periodic reporting of product defects to the FDA, and to prohibit the sale of devices which do not comply with law.

ITEM 2.

DESCRIPTION OF PROPERTY

The Company conducts its domestic operations at two facilities in Gardner, Massachusetts. The main Gardner facility is leased from a corporation owned by an officer-shareholder-director of the Company. The lease terminated in December 1999 and the Company is currently a tenant at will. The other Gardner facility is being rented on a month-to-month basis. The Company rents office space in Hong Kong for sales, marketing and supplier quality control and liaison activities of its Hong Kong subsidiary.

The Company believes these facilities are adequate for its current operations and adequately covered by insurance. Significant increases in production or the addition of significant equipment additions or manufacturing capabilities in connection with the production of the Company’s line of endoscopes, optical thin films, and other products may, however, require the acquisition or lease of additional facilities. The Company may establish production facilities domestically or overseas to produce key assemblies or components, such as lenses, for the Company’s products. Overseas facilities may subject the Company to the political and economic risks associated with overseas operations. The loss of or inability to establish or maintain such additional domestic or overseas facilities could materially adversely affect the Company’s competitive position and profitability.

ITEM 3.

LEGAL PROCEEDINGS

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of fiscal year 2004.

Directors and Executive Officers of the Company

The Company’s executive officers and directors are as follows:

	Position with the Company
Name	or Principal Occupation


Richard E. Forkey	Chairman of the Board, Chief Executive
	Officer, President, Treasurer and
	Director



Jack P. Dreimiller	Senior Vice President, Finance,
	Chief Financial Officer and Clerk


Edward A. Benjamin	Director and Member of Audit Committee. Mr.
	Benjamin is a retired partner in the law firm of
	Ropes & Gray LLP, Boston, Massachusetts.


Joel R. Pitlor	Director. Mr. Pitlor is president of J.R. Pitlor, a
	management consulting firm based in Cambridge,
	Massachusetts.


Robert R. Shannon	Director and Member of Audit Committee. Mr.
	Shannon is a professor at the Optical Sciences
	Center of the University of Arizona in Tucson,
	Arizona.

PART II

ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s common stock is listed on the National Association of Securities Dealers Automated Quotation (NASDAQ) System under the symbol “POCI.” Since January 1992, the NASDAQ SmallCap Market has been the principal market in which the Company’s stock is publicly traded. The high and low sales prices (as adjusted for the 1-for-6 reverse stock split that became effective on January 29, 2003) for the Company’s stock for each full quarterly period within the two most recent fiscal years were as follows as reported by NASDAQ.

	2003				2004

Quarter	High		Low		High		Low

First	$	3.42	$	1.32	$	2.80	$	1.90
Second	$	4.56	$	.96	$	2.67	$	1.71
Third	$	2.40	$	1.30	$	6.99	$	1.96
Fourth	$	3.44	$	1.43	$	5.72	$	1.05

As of August 31, 2004, there were approximately 203 holders of record of the Company’s common stock. Holders of record include nominees who may hold shares on behalf of multiple beneficial owners.

The Company has not declared any dividends during the last two fiscal years. At present, the Company intends to retain its earnings, if any, to finance research and development and expansion of its business.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the Company’s Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of June 30, 2004, including, but not limited to, the 1989 Stock Option Plan and the 1997 Incentive Plan:

	Number of securities
	to be issued upon		Weighted-average	Number of securities remaining
	exercise of		exercise price of	available for future issuance under
	outstanding options,		outstanding options,	equity compensation plans (excluding
	warrants and rights		warrants and rights	securities reflected in first column)

Equity compensation	131,953		$11.79	183,153	(1)
plans approved by
shareholders

Equity compensation	9,168	(2)(3)(4)	$8.08	n/a
plans not approved
by shareholders

Total	141,121		$11.55	183,153

(1) Includes 183,153 shares of Common Stock available for future grants under the Company’s 1997 Incentive Plan. No shares are available for future grants under the Company’s 1989 Stock Option Plan.

(2) Includes 2,500 shares of Common Stock issuable upon exercise of outstanding options granted to Mr. Benjamin in connection with his service on the Board of Directors. These options may be exercised at a price of $8.25 per share and expire on December 15, 2004.

(3) Includes 2,500 shares of Common Stock issuable upon exercise of outstanding options granted to Mr. Shannon in connection with his service on the Board of Directors. These options may be exercised at a price of $8.25 per share and expire on December 15, 2004.

(4) Includes 4,168 shares of Common Stock issuable upon exercise of outstanding options granted to Werner Thiel in connection with his service as a consultant to the Company. Options exercisable for 3,334 shares may be exercised at a price of $7.78125 and expire on July 13, 2005. Options exercisable for 834 shares may be exercised at a price of $8.25 and expire on December 15, 2004.

ITEM 6.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Important Factors Regarding Forward-Looking Statements

When used in this discussion, the words “believes”, “anticipates”, “intends to”, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. These risks and uncertainties, many of which are not within the Company’s control, include, but are not limited to, the uncertainty and timing of the successful development of the Company’s new products, particularly in the optical thin films area, the risks associated with reliance on a few key customers; the Company’s ability to maintain compliance with requirements for continued listing on the Nasdaq SmallCap Market; the Company’s ability to attract and retain personnel with the necessary scientific and technical skills, the timing and completion of significant orders; the timing and amount of the Company 46;s research and development expenditures; the timing and level of market acceptance of customers’ products for which the Company supplies components; performance of the Company’s vendors; the ability of the Company to control costs associated with performance under fixed price contracts; and the continued availability to the Company of essential supplies, materials and services; which are described further in Exhibit 99.1 hereto. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

Precision Optics Corporation, a developer and manufacturer of advanced optical instruments since 1982, designs and produces high-quality optical thin film coatings, medical instruments, and other advanced optical systems. The Company’s medical instrumentation line includes laparoscopes, arthroscopes and endocouplers and a world-class product line of 3-D endoscopes for use in minimally invasive surgical procedures.

The Company is currently developing specialty instruments incorporating its patent-pending LENSLOCK^TMtechnology which ensures lower cost, easier repairability and enhanced durability as well as ultra-small instruments (some with lenses less than one millimeter in diameter) utilizing patent-pending micro-precision^TMlens technology. The Company is also exploring new initiatives in single-molecule technology and nanotechnology for biomedical and other applications.

Precision Optics Corporation is certified to the ISO 9001 Quality Standard, and complies with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for CE Marking of its medical products. The Company’s Internet Website is www.poci.com.

The areas in which the Company does business are highly competitive and include both foreign and domestic competitors. Many of the Company’s competitors are larger and have substantially greater resources than the Company. Furthermore, other domestic or foreign companies, some with greater experience in the optics industry and greater financial resources than the Company, may seek to produce products or services that compete with those of the Company. The Company uses production facilities overseas to produce key components for the Company’s business, such as lenses. The Company believes that the cost savings from such production is essential to the Company’s ability to compete on a price basis in the medical products area particularly and to the Company’s profitability generally.

The Company believes that competition for sales of its medical products and services, which have been principally sold to original equipment manufacturer (OEM) customers, is based on performance and other technical features, as well as other factors, such as scheduling and reliability, in addition to competitive price.

The Company believes that its future success depends to a large degree on its ability to continue to conceive and to develop new optical products and services to enhance the performance characteristics and methods of manufacture of existing products. Accordingly, it expects to continue to seek to obtain product-related design and development contracts with customers and to invest its own funds on research and development, to the extent funds are available.

The Company relies, in part, upon patents, trade secrets and proprietary knowledge as well as personnel policies and employee confidentiality agreements concerning inventions and other creative efforts to develop and to maintain its competitive position. The Company does not believe that its business is dependent upon any particular patent, patent pending, or license, although it believes that trade secrets and confidential know-how may be important to the Company’s scientific and commercial success.

The Company conducts its domestic operations at two leased facilities in Gardner, Massachusetts. The Company rents office space in Hong Kong for sales, marketing and supplier quality control and liaison activities of its Hong Kong subsidiary. The Company believes these facilities are adequate for its current operations. Significant increases in production or the addition of significant equipment or manufacturing capabilities in connection with the production for the Company’s line of endoscopes, optical thin films, and other products may, however, require the acquisition or lease of additional facilities.

Critical Accounting Policies and Estimates

General

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

The Company recognizes revenue in accordance with U.S. GAAP and SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition in Financial Statements. SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectibility of the sales price. The Company assesses credit worthiness of customers based upon prior history with the customer and assessment of financial condition. The Company’s shipping terms are customarily FOB shipping point.

Bad Debt

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Allowances for doubtful accounts are established based upon review of specific account balances and historical experience. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make future payments, additional allowances may be required.

Inventories

The Company provides for estimated obsolescence on unmarketable inventory based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write downs may be required. Inventory, once written down, is not subsequently written back up, as these adjustments are considered permanent adjustments to the carrying value of the inventory.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of through sale are reported at the lower of the carrying amount or fair value less estimated costs to sell.

Fiscal Year 2004 Results of Operations

Total revenues for fiscal year 2004 of approximately $1,465,000 decreased by $934,000, or 38.9%, from fiscal year 2003 revenues of approximately $2,399,000.

The revenue decrease from the prior year was due principally to lower unit volume sales of medical products (down 44%), partially offset by higher unit volume sales of non-medical products (up 50%). Medical sales were lower due primarily to lower sales of stereo endoscope products because of the loss of business from a major stereo endoscope customer, as previously reported. Non-medical sales were higher due primarily to higher sales of couplers for industrial use.

Revenues from the Company’s largest customers, as a percentage of total revenues, were as follows:

2004 2003 2002

Customer A 24 % 17 % 18 %

Customer B 22 2 —

Customer C — 44 —

Customer D 4 5 23

All Others 50 32 59

100 % 100 % 100 %

No other customer accounted for more than 10% of the Company’s revenues in fiscal years 2004, 2003, and 2002.

Gross profit (loss) for fiscal year 2004 reflected an unfavorable change of approximately $925,000 compared to fiscal year 2003. Gross profit as a percentage of revenues decreased from 13.6% in fiscal year 2003 to a negative 40.8% in fiscal year 2004. The unfavorable change in gross profit (loss) was due primarily to lower sales volume and provisions for slow moving and obsolete inventories, partially offset by a lower manufacturing cost structure resulting from restructuring measures implemented in fiscal year 2003.

Research and development expenses increased by approximately $84,000, or 6.8%, during fiscal year 2004 compared to the previous year. The increase was due to a higher level of resources being devoted to product development activities.

Selling, general and administrative expenses decreased by approximately $149,600, or 8.0%, during fiscal year 2004 compared to the previous year. The decrease was due primarily to lower outside consulting and legal expenses and the effects of the workforce reduction in January 2004.

The provision for asset impairment and restructuring in fiscal year 2004 of $52,208 consists of a provision for severance benefits paid in the quarter ended March 31, 2004 related to the January 2004 workforce reduction of 15%, or five employees. The provision for asset impairment and restructuring of $176,642 in fiscal year 2003, consists of a provision for severance benefits of $53,131 paid in the quarter ended December 31, 2002 related to the October 2002 workforce reduction of 16%, or six employees, and a provision for asset impairment of $123,511 recorded in the quarter ended June 30, 2003, representing a further writedown of assets held for sale which reflected the continuing deterioration in the market for used telecommunications equipment.

The following table sets forth the quarterly impacts and cash payments associated with the asset impairment and restructuring provisions:

	Provision For –

	Property &
	Equipment			Patent		Employee			Idle Lease
	Writedown			Writedown		Severance			Space			Total


Provision Balance, June 30, 2002	$	—		$	—	$	—		$	167,971		$	167,971
Quarter Ended –
December 31, 2002					—		53,131			—			53,131
June 30, 2003		123,511			—		—			—			123,511

Total Provision		123,511			—		53,131			—			176,642
Non-cash Charges		(123,511	)		—		—			—			(123,511	)
Cash Payments		—			—		(53,131	)		(167,971	)		(221,102	)


Provision Balance, June 30, 2003	$	—		$	—	$	—		$	—		$	—

Quarter Ended –
March 31, 2004		—			—		52,208			—			52,208

Total Provision		—			—		52,208			—			52,208
Cash Payments		—			—		(52,208	)		—			(52,208	)


Provision Balance, June 30, 2004	$	—		$	—	$	—		$	—		$	—

Interest income decreased by approximately $47,400 or 72.4% during fiscal year 2004 compared to the previous year. The decrease was due to the lower base of cash and cash equivalents.

Interest expense consists of interest on capital lease obligations and decreased due to the liquidation of capital lease obligations during fiscal year 2004.

The income tax provisions in fiscal years 2004 and 2003 represent the minimum statutory state income tax liability.

Fiscal Year 2003 Results of Operations

Total revenues for fiscal year 2003 of approximately $2,399,000 increased by $625,000, or 35.2%, from fiscal year 2002 revenues of $1,774,000.

The revenue increase from the prior year was due principally to higher unit volume sales of medical products (up 57%), partially offset by lower unit volume sales of non-medical products (down 60%). Medical sales were higher due primarily to higher sales of stereo endoscopes and cameras. Non-medical sales were lower due primarily to the discontinuation during the last fiscal year of sales of telecommunication products.

Gross profit for fiscal year 2003 reflected a favorable change of approximately $1,676,000, compared to fiscal year 2002. Gross profit as a percentage of revenues increased from a negative 76.0% in fiscal year 2002 to 13.6 % in fiscal year 2003. The favorable change in gross profit was due primarily to (1) a provision for excess and obsolete inventories of DWDM filters and DWDM filter test instrumentation of approximately $540,000 recorded in the quarter ended September 30, 2001; (2) lower fixed manufacturing costs resulting from the cessation of operations in the Company’s optical thin film technology facility and reductions in staff; and (3) the higher overall sales volume.

Research and development expenses decreased by approximately $1,036,000, or 45.6%, during fiscal year 2003 compared to the previous year. During the fiscal year 2002, research and development expenses consisted primarily of development efforts related to DWDM filters used in telecommunications systems. The decrease in the fiscal year 2003 was due to discontinuation of the development of DWDM filters, as reflected in reductions in staff, and the remaining R&D resources being redeployed toward development of new medical products.

Selling, general and administrative expenses decreased by approximately $199,000, or 9.6%, during fiscal year 2003 compared to the previous year. The decrease was due primarily to lower sales and marketing expenses, partially offset by approximately $40,000 in expenses related to effecting a 1-for-6 reverse stock split in the quarter ended March 31, 2003.

The provision for asset impairment and restructuring of $176,642 in fiscal year 2003 consists of a provision for severance benefits of $53,131 paid in the quarter ended December 31, 2002 related to the October 2002 workforce reduction of 16%, or six employees, and a provision for asset impairment of $123,511 recorded in the quarter ended June 30, 2003, representing a further writedown of assets held for sale which reflects the continuing deterioration in the market for used telecommunications equipment. The provision for asset impairment and restructuring of $4,445,021 in fiscal year 2002 consists of (1) a provision for restructuring costs of $402,065, representing the then - present value of future lease payments related to idle space in the Company’s Optical Thin Films Technology Center, and employee severance costs; and (2) a provision for asset impairment of $4,042,956, representing a writedown to the lower of carrying value or fair market va lue less estimated selling costs of certain of the Company’s property and equipment invested in its optical thin films coating product line, and the writeoff of certain patent costs.

The loss on sale of assets held for sale of $19,171 in fiscal year 2003 represents the loss on sales of a portion of the property and equipment held for sale, which formerly was invested in the Company’s telecommunications product line. The Company received net proceeds from these sales of approximately $553,000 in the year ended June 30, 2003.

Interest income decreased by approximately $127,000, or 66.0%, during fiscal year 2003 compared to the previous year. The decrease was due to the lower base of cash and cash equivalents and lower interest rates.

Interest expense consists of interest on capital lease obligations and, for fiscal year 2002, imputed interest on accrued restructuring costs related to the present value of future lease payments on idle space. Interest expense decreased by $13,069, or 65.5%, from fiscal year 2002 due primarily to the elimination of imputed interest on restructuring costs which were paid in early fiscal year 2003.

The income tax provisions in fiscal years 2003 and 2002 represent the minimum statutory state income tax liability.

Liquidity and Capital Resources

The Company has incurred significant operating losses during the last eight fiscal years. This trend was primarily the result of the loss of several significant customers, completion of several large nonrecurring government contracts, and operating losses and provision for asset impairment, restructuring, and inventory write-downs associated with the downturn in demand for optical filters used in telecommunications systems. In fiscal 1998, the Company began making significant investments in research and development and capital purchases for new products. In August 1999 and March 2000, the Company raised gross proceeds of approximately $16 million of additional cash through the issuance of common stock.

In the past three fiscal years, the Company has implemented a number of restructuring and cost saving measures in an effort to align costs with revenues and strengthen financial performance. Full-time employee headcount has been reduced from 78 at June 30, 2001 to 30 at June 30, 2004. The Company has discontinued the development and manufacturing of telecommunications products, canceled the lease on its Optical Thin Films Technology Center, and written down and/or sold certain of the property, equipment and inventories invested in its telecommunications business, and has implemented other cost reduction measures. As a result of these actions, the Company has incurred asset impairment, restructuring and inventory write-down provisions of approximately $4,985,000, $177,000 and $52,000 for the years ended June 30, 2002, 2003, and 2004 respectively, and has received net proceeds from the sale of assets held for sale of approximately $553,000 during the yea r ended June 30, 2003. In addition, the Company will continue its review of other expense areas to determine where additional reductions in discretionary spending can be achieved.

In July 2004, the Company completed a rights offering to stockholders of record at June 7, 2004 by issuing 5,256,159 shares of common stock. Net cash proceeds to the Company (after offering expenses of $177,176) were $5,078,983.

For the year ended June 30, 2004, the Company’s cash and cash equivalents decreased by approximately $3,161,000 to $343,000. The decrease in cash and cash equivalents was due to cash used by operating activities of approximately $3,074,000, capital expenditures of approximately $34,000, repayment of capital lease obligation and other of approximately $4,000, expenditures for other assets (primarily patents) of $31,000 and payment of deferred financing costs of $18,000. The Company believes, based on its operating and strategic plans and the net proceeds received in July 2004 from its rights offering to stockholders, that it will have sufficient funds to conduct operations through at least the next fiscal year.

Contractual cash commitments for the fiscal years subsequent to June 30, 2004 are summarized as follows:

		2005			Thereafter			Total
Operating leases		$	27,454		$	2,183		$	29,637

Trends and Uncertainties That May Affect Future Results

For the quarter ended June 30, 2004, cash and cash equivalents decreased by approximately $602,000 compared to a decrease of approximately $781,000 for the previous quarter ended March 31, 2004. Cash disbursements during the quarter ended March 31, 2004 included approximately $52,000 paid for employee severance costs.

Capital equipment expenditures during the year ended June 30, 2004 were approximately $33,600, up 21% from the $28,000 for fiscal year 2003. Future capital equipment expenditures will be dependent upon future sales and success of on-going research and development efforts.

For the quarter ended June 30, 2004, research and development expenses were approximately $339,000, up 1.8% from the $333,000 for the quarter ended June 30, 2003. It is anticipated that the quarterly level of R&D expenses for the foreseeable future will remain at this lower level, but is ultimately dependent upon the Company’s assessment of new product opportunities.

The Company expects its recent pattern of quarter-to-quarter revenue fluctuations to continue, due to the uncertain timing of orders from customers and their size in relation to total revenues. The Company continues to move forward with new products and technical innovations, in particular, the development of a new generation (patent pending) of its world-class product line of 3-D endoscopes, the development of a new prototype 2.7 mm endoscope, and new instruments utilizing the Company’s new micro-precision^TM lens technology (patent pending) for endoscopes under 1 mm. The Company continues to explore potential applications of single-molecule technology and nanotechnology.

The Company believes that the recent introduction of several new products, along with new and ongoing customer relationships, will generate additional revenues, which are required in order for the Company to achieve profitability. If these additional revenues are not achieved on a timely basis, the Company will be required and is prepared to implement further cost reduction measures, as necessary.

ITEM 7.

CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial Statements are filed on pages 17 through 36 of this Form 10-KSB.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Financial Statements
as of June 30, 2004 and 2003
Together with Independent Registered Public Accounting Firm’s Report

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Precision Optics Corporation, Inc.:

We have audited the accompanying consolidated balance sheets of Precision Optics Corporation, Inc. and subsidiaries as of June 30, 2004 and 2003 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Precision Optics Corporation, Inc. and subsidiaries as of June 30, 2004 and 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Boston, Massachusetts
August 31, 2004

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 2004 and 2003

ASSETS	2004		2003		LIABILITIES AND STOCKHOLDERS' EQUITY	2004			2003
Current Assets:					Current Liabilities:
Cash and cash equivalents	$	343,260	$	3,504,414	Current portion of capital lease obligation	$	—		$	3,826
					Accounts payable		235,050			141,398
Accounts receivable (net of allowance for doubtful accounts of approximately $155,000 in 2004 and 2003).		80,195		191,669	Accrued employee compensation		230,110			213,543
Inventories		917,998		1,257,288	Accrued professional services		75,439			118,284
Prepaid expenses		80,646		91,213	Accrued warranty expense		50,000			50,000
Deferred financing costs		171,885		—	Other accrued liabilities		2,743			6,966
Assets held for sale		—		152,550
					Total current liabilities		593,342			534,017

Total current assets		1,593,984		5,197,134

Property and Equipment, at cost:					Other		—			1,555
Machinery and equipment		3,507,065		3,323,760
Leasehold improvements		553,596		551,796	Commitments (Note 2)
Furniture and fixtures		96,831		95,781
Vehicles		42,343		42,343	Stockholders’ Equity:
					Common stock, $0.01 par value-
		4,199,835		4,013,680	Authorized—20,000,000 shares
Less—Accumulated depreciation and amortization		3,920,593		3,723,350	Issued and outstanding—1,752,053 shares at June 30, 2004 and 2003		17,521			17,521
		279,242		290,330	Additional paid-in capital		27,770,175			27,770,175
					Accumulated deficit		( 26,283,724	)		( 22,599,648	)
Other Assets:
Cash surrender value of life insurance policies		23,032		39,384	Total stockholders’ equity		1,503,972			5,188,048
Patents, net		201,056		196,772

Total other assets		224,088		236,156

	$	2,097,314	$	5,723,620		$	2,097,314		$	5,723,620

The accompanying notes are an integral part of these consolidated financial statements.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

for the Years Ended June 30, 2004, 2003, and 2002

	2004			2003			2002

Revenues	$	1,464,964		$	2,399,217		$	1,774,283

Cost of Goods Sold		2,062,902			2,072,238			3,123,196

Gross profit (loss)		(597,938	)		326,979			(1,348,913	)

Research and Development Expenses		1,319,345			1,235,252			2,270,880

Selling, General and Administrative Expenses		1,731,713			1,881,313			2,079,994

Provision for Asset Impairment and Restructuring		52,208			176,642			4,445,021

Loss on Sale of Assets Held for Sale		—			19,171			—

Total operating expenses		3,103,266			3,312,378			8,795,895

Operating loss		(3,701,204	)		(2,985,399	)		(10,144,808	)

Interest Income		18,089			65,443			192,241

Interest Expense		(49	)		(6,894	)		(19,963	)

Loss before provision for income taxes		(3,683,164	)		(2,926,850	)		(9,972,530	)

Provision for Income Taxes		912			912			912

Net loss	$	(3,684,076	)	$	(2,927,762	)	$	(9,973,442	)

Basic and Diluted Loss per Share	$	(2.10	)	$	(1.67	)	$	(5.69	)

Weighted Average Common Shares Outstanding		1,752,053			1,752,053			1,752,053

The accompanying notes are an integral part of these consolidated financial statements.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

for the Years Ended June 30, 2004, 2003 and 2002

	Number of Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity

Balance, June 30, 2001		1,752,053	$	17,521	$	27,770,175	$	(9,698,444	)	$	18,089,252

Net loss		—		—		—		(9,973,442	)		(9,973,442	)
Balance, June 30, 2002		1,752,053		17,521		27,770,175		(19,671,886	)		8,115,810

Net loss		—		—		—		(2,927,762	)		(2,927,762	)
Balance, June 30, 2003		1,752,053		17,521		27,770,175		(22,599,648	)		5,188, 048
Net loss		—		—		—		(3,684,076	)		(3,684,076	)
Balance, June 30, 2004		1,752,053	$	17,521	$	27,770,175	$	(26,283,724	)	$	1,503,972

The accompanying notes are an integral part of these consolidated financial statements.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows for the

Years Ended June 30, 2004, 2003, and 2002

	2004			2003			2002

Cash Flows from Operating Activities:
Net loss	$	(3,684,076	)	$	(2,927,762	)	$	(9,973,442	)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization		240,846			265,102			593,491
Provision for asset impairment and restructuring		—			176,642			4,445,021
Provision for inventory write-down		500,000			—			540,000
Loss on sale of assets held for sale		—			19,171			—
Other		—			(6,872	)		(25,345	)
Changes in operating assets and liabilities-
Accounts receivable, net		111,474			182,830			628,997
Inventories		(160,710	)		(248,279	)		(24,890	)
Prepaid expenses		10,567			2,361			16,186
Refundable income taxes		—			13,849			(13,849	)
Accounts payable		(59,655	)		22,497			(465,885	)
Accrued restructuring expense		—			(221,102	)		(234,094	)
Customer advances		—			(30,000	)		30,000
Other accrued expenses		(32,055	)		(13,533	)		(29,467	)

Net cash used in operating activities		(3,073,609	)		(2,765,096	)		(4,513,277	)


Cash Flows from Investing Activities:
Purchases of property and equipment		(33,605	)		(27,719	)		(90,818	)
Net proceeds from sale of assets held for sale		—			553,091			—
Increase in other assets		(31,536	)		(48,686	)		(56,798	)

Net cash provided by (used in) investing activities		(65,141	)		476,686			(147,616	)

Cash Flows from Financing Activities:
Repayment of capital lease obligation and other		(3,826	)		(32,777	)		(43,804	)
Payment of deferred financing costs		(18,578	)		—			—
Net cash used in financing activities		(22,404	)		(32,777	)		(43,804	)

Net Decrease in Cash and Cash Equivalents		(3,161,154	)		(2,321,187	)		(4,704,697	)

Cash and Cash Equivalents, beginning of year		3,504,414			5,825,601			10,530,298

Cash and Cash Equivalents, end of year	$	343,260		$	3,504,414		$	5,825,601

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest	$	49		$	6,894		$	19,963
Income taxes	$	—		$	1, 824		$	912

The accompanying notes are an integral part of these consolidated financial statements.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Nature of Business and Liquidity

Precision Optics Corporation, Inc. (the "Company") designs, develops, manufactures and sells specialized optical systems and components and optical thin-film coatings. The Company conducts business in one industry segment only and its customers are primarily domestic. The Company’s products and services fall into two principal areas: (i) medical products for use by hospitals and physicians and (ii) advanced optical system design and development services and products used by industrial customers.

In the past three fiscal years, the Company has implemented a number of restructuring and cost saving measures in an effort to align costs with revenues and strengthen financial performance. Full-time employee headcount has been reduced from 78 at June 30, 2001 to 30 at June 30, 2004. The Company has discontinued the development and manufacturing of telecommunications products, canceled the lease on its Optical Thin Films Technology Center, and written down and/or sold certain of the property, equipment and inventories invested in its telecommunications business. As a result of these actions, the Company has incurred asset impairment, restructuring and inventory write-down provisions of approximately $4,985,000, $177,000 and $52,000 for the years ended June 30, 2002, 2003, and 2004, respectively, and has received net pro ceeds from the sale of assets held for sale of approximately $553,000 during the year ended June 30, 2003. In addition, the Company will continue its review of other expense areas to determine where additional reductions in discretionary spending can be achieved.

The Company’s current sources of liquidity consist of its cash and cash equivalents and accounts receivable. At June 30, 2004 the Company had $343,260 in cash and cash equivalents and $80,195 in accounts receivable. In July 2004, the Company completed a rights offering to stockholders of record at June 7, 2004 by issuing 5,256,159 shares of common stock. Net cash proceeds to the Company (after offering costs of $177,176) were $5,078,983.

The Company expects its recent pattern of quarter-to-quarter revenue fluctuations to continue, due to the uncertain timing of individual orders and their size in relation to total revenues. The Company remains confident in the value of its technology and expertise both in medical and surgical applications and elsewhere. In addition, despite strict controls on R&D spending, the Company continues to move forward with new products and technical innovations.

The Company believes that the recent introduction of several new products, along with new and on-going customer relationships, will generate additional revenues, which are required in order for the Company to achieve profitability. If these additional revenues are not achieved on a timely basis, the Company will be required and is prepared to implement further cost reduction measures, as necessary. The Company believes, based on its operating and strategic plans, that it will have sufficient funds to conduct operations through at least the next fiscal year.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(b) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its two wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All shares and per share data reflect the effects of a 1-for-6 reverse stock split that became effective on January 29, 2003.

(c) Revenues

In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 104 which establishes guidance in applying generally accepted accounting principles to revenue recognition in financial statements and was effective for the Company’s fiscal year 2004. SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. The Company’s shipping terms are customarily FOB shipping point. The Company’s revenue recognition practices comply with the guidance in the bulletin.

Revenues for industrial and medical products sold in the normal course of business are recognized upon shipment when delivery terms are FOB shipping point and all other revenue recognition criteria have been met. Contract revenues including revenues from customer-sponsored research and development contracts, are recognized under the percentage-of-completion method. The percentage of completion is determined by computing the percentage of the actual cost of work performed to the anticipated total contract costs. When the estimate on a contract indicates a loss, the Company’s policy is to record the entire estimated loss in the current period.

(d) Cash and Cash Equivalents

The Company includes in cash equivalents all highly liquid investments with original maturities of three months or less at the time of acquisition. Cash equivalents of $298,837 and $3,394,449 at June 30, 2004 and 2003, respectively, consist primarily of overnight repurchase agreements, money market funds, and United States Treasury bills.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(e) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories at June 30, 2004 and 2003 are as follows:

	2004		2003

Raw material	$	345,483	$	679,647
Work-in-progress		307,522		379,636
Finished goods		264,993		198,005

	$	917,998	$	1,257,288

During fiscal years 2004 and 2002, the Company recorded, in cost of goods sold, pretax non-cash provisions for slow-moving and obsolete inventories of approximately $500,000 and $540,000, respectively.

(f) Property and Equipment

Property and equipment are recorded at cost. Maintenance and repair items are expensed as incurred. The Company provides for depreciation and amortization by charges to operations, using the straight-line and declining-balance methods, which allocate the cost of property and equipment over the following estimated useful lives:

Asset Classification			Estimated Useful Life
Machinery and equipment			3-7 years
Leasehold improvements			Shorter of lease term or estimated useful life
Furniture and fixtures			5 years
Vehicles			3 years

Amortization of assets under capital leases is included in depreciation and amortization expense. Depreciation and amortization expense was $197,242, $228,056, and $552,116 for the years ended June 30, 2004, 2003 and 2002, respectively.

(g) Significant Customers and Concentration of Credit Risk

Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance sheet and credit risk

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

concentrations. Financial instruments that subject the Company to credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its investments in highly rated financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 2004, receivables from the Company’s largest customers were 47%, 18%, 13%, and 12% , respectively of the total accounts receivable. At June 30, 2003, receivables from the Company’s largest customer were approximately 55% of the total accounts receivable. No other customer accounted for more than 10% of the Company’s receivables as of June 30, 2004 and 2003. The Company has not experienced any material losses related to accounts receivable from individual customers. The Company generally does not require c ollateral or other security as a condition of sale rather relying on credit approval, balance limitation and monitoring procedures to control credit risk of trade account financial instruments. Management believes that allowances for doubtful accounts, which are established based upon review of specific account balances and historical experience, are adequate.

Revenues from the Company’s largest customers, as a percentage of total revenues, were as follows:

	2004			2003			2002
Customer A		24	%		17	%		18	%
Customer B		22			2			-
Customer C		-			44			-
Customer D		4			5			23
All Others		50			32			59
		100	%		100	%		100	%

No other customer accounted for more than 10 % of the Company’s revenues in fiscal years 2004, 2003 and 2002.

(h) Loss per Share

The Company calculates earnings per share according to SFAS No. 128, Earnings per Share. Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. For each of the three years in the period ended June 30, 2004, the effect of stock options and warrants was antidilutive; therefore, they were not included in the computation of diluted loss per share. The number of options and warrants that were excluded from the computation, as their effect would be antidilutive, were 218,765, 202,817, and 201,533 during fiscal 2004, 2003, and 2002, respectively.

(i) Stock-Based Compensation

The company accounts for its stock-based compensation using the intrinsic value method provided for under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Under APB No. 25 and related interpretations, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, establishes a fair-value-based method of accounting for stock-based compensation plans. The Company has adopted the disclosure-only alternative under SFAS No. 123, which requires the disclosure of the pro forma effects on net loss and net loss per share as if the fair value accounting prescribed by SFAS No. 123 had been adopted.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

No stock-based employee compensation cost is reflected in net loss, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

	*Year Ended*
	2004			2003			2002

Net loss, as reported	$	(3,684,076	)	$	(2,927,762	)	$	(9,973,442	)
Add: Total stock-based employee compensation expense determined under fair value based method for all awards		( 61,216	)		( 82,304	)		(98,474	)

Pro forma net loss	$	(3,745,292	)	$	(3,010,066	)	$	(10,071,916	)

Net loss per share: As reported - basic and diluted	$	(2.10	)	$	(1.67	)	$	(5.69	)

Pro forma - basic and diluted	$	(2.14	)	$	(1.72	)	$	(5.75	)

(j) Foreign Currency Translation

The Company translates certain accounts and financial statements of its foreign subsidiary in accordance with SFAS No. 52, Foreign Currency Translation. The functional currency of the Company’s foreign subsidiary is the United States dollar. Transaction gains or losses are reflected in the accompanying consolidated statements of operations and have not been significant.

(k) Patents

Patents are carried at cost, less accumulated amortization of approximately $334,000 and $290,000 at June 30, 2004 and 2003, respectively. Such costs are amortized using the straight-line method over the shorter of their legal or estimated useful lives, generally five to ten years. Amortization expense was $43,604, $37,046, and $41,375 for the years ended June 30, 2004, 2003, and 2002, respectively. Amortization expense is expected to be approximately $45,000, $43,000, $36,000, $25,000 and $18,000, respectively for the years ending June 30, 2005 through June 30, 2009.

(l) Financial Instruments

SFAS No. 107, Disclosure About Fair Value of Financial Instruments, requires disclosures about the fair value of financial instruments. Financial instruments consist principally of cash equivalents, accounts receivable, accounts payable, and accrued expenses. The estimated fair value of these financial instruments approximates their carrying value due to the short-term nature of these financial instruments.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(m) Long-Lived Assets

The Company accounts for long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(n) Warranty Costs

The Company does not incur future performance obligations in the normal course of business other than providing a standard one-year warranty on materials and workmanship to its customers. The Company provides for estimated warranty costs at the time product revenue is recognized. Warranty costs for the years ended June 30, 2004, 2003, and 2002 have not been material to the consolidated financial statements. Warranty costs were $15,615, $17,330, and $9,317 for the years ended June 30, 2004, 2003, and 2002, respectively and have been included as a component of cost of goods sold in the accompanying consolidated statements of operations.

(o) Research and Development

Research and development expenses are charged to operations as incurred.

(p) Comprehensive Income

SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowners sources.

The Company’s comprehensive loss for the years ended June 30, 2004, 2003 and 2002 was equal to its net loss for the same periods.

(q) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the likelihood of utilization of existing deferred tax assets, management has considered historical results of operations and the current operating environment.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(r) Segment Reporting

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-maker, as defined under SFAS No. 131, is the Chief Exec utive Officer. To date, the Company has viewed its operations and manages its business as principally one segment. For all periods presented, over 90% of the Company’s sales have been to customers in the United States.

(s) Use of Estimates

The preparation of financial statements in conformity with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(2) COMMITMENTS

(a) Related Party Transactions

The Company leases one of its facilities from a corporation owned by an officer-director-shareholder of the Company. The lease terminated in December 1999 and required lease payments of $9,000 per month. The Company is currently a tenant at will paying rent of $9,000 a month. Total rent expense for related parties included in the accompanying consolidated statements of operations amounted to $108,000 in each of fiscal years 2004, 2003, and 2002.

The Company paid or accrued fees to a director of approximately $24,000 per year for services performed during fiscal 2004, 2003 and 2002. Another director is a former partner in a law firm that has performed legal services for the Company during fiscal 2004, 2003 and 2002 of approximately $170,000, $144,000, and $117,0000, respectively. Another former director is the owner of a company that provided approximately $1,650, $1,700, and $19,000 in software and consulting services to the Company during fiscal 2004, 2003 and 2002, respectively.

(b) Operating Lease Commitments

The Company has entered into operating leases for its office space and equipment that expire at various dates through fiscal year 2005. Total future minimum rental payments under all non-cancelable operating leases are approximately $29,600.

Rent expense on operating leases, excluding the related party rent described above, was approximately $55,600, $51,500, and $70,000 for the years ended June 30, 2004, 2003 and 2002, respectively.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(3) STOCKHOLDER'S EQUITY

(a) Reverse Stock Split

All shares and per share data in the accompanying consolidated financial statements reflect the effects of the 1-for-6 Reverse Stock Split that became effective on January 29, 2003. In addition, capital stock has been decreased by $87,518, with a corresponding increase to paid-in capital to reflect the adjusted number of shares of $.01 par value common stock outstanding as a result of the 1-for-6 Reverse Stock Split.

(b) Warrants

As of June 30, 2004, the Company had 77,644 fully-exercisable warrants to acquire common stock outstanding at a weighted average exercise price of $160.38. The
warrants are immediately exercisable and expire in March 2005.

(c) Stock Options

       During fiscal 1989, the stockholders approved a stock option plan (the "1989 Plan") for key employees. The 1989 Plan, as amended, authorizes the grant of options
      of up to 185,000 shares of the Company’s common stock at an exercise price of not less than 100% of the fair market value per share at the date of grant. Options
      granted vest and are exercisable for periods determined by the Board of Directors, not to exceed 10 years from the date of grant.

       During fiscal 1998, the stockholders approved an incentive plan (the "1997 Incentive Plan"), which provides eligible participants (certain employees, directors,
      consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. Options granted vest and are exercisable for periods determined by the
       Board of Directors, not to exceed 10 years from the date of grant. A total of 300,000 shares of common stock have been reserved for issuance under the 1997
       Incentive Plan, as amended and restated in fiscal year 2004. Upon the adoption of the 1997 Incentive Plan, no new awards will be granted under the 1989 Plan. At
       June 30, 2004, 183,153 shares of common stock were available for future grants under the 1997 Incentive Plan.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following is a summary of transactions in the plans for the three years ended June 30, 2004:

	Number of Shares			Option Price per Share		Weighted Average Exercise Price
Options outstanding, June 30, 2001		118,669		$	6.00-75.00	$	16.38
Granted		30,084			4.02-7.14	$	4.68
Canceled		(33,984	)		6.00-30.00	$	29.58

Options outstanding, June 30, 2002		114,769			4.02-75.00	$	13.98
Granted		3,336			1.74	$	1.74
Canceled		(2,003	)		4.02-23.064	$	9.54

Options outstanding, June 30, 2003		116,102			1.74-75.00	$	13.68

Granted		18,336		$	1.97	$	1.97
Canceled		(2,485	)	$	4.20-75.00	$	27.70

Options outstanding, June 30, 2004		131,953		$	1.74-75.00	$	11.79

Options exercisable, June 30, 2004		114,807		$	1.74-75.00	$	13.11

Options exercisable, June 30, 2003		103,897		$	1.74-75.00	$	14.34

Options exercisable, June 30, 2002		92,742		$	4.02-75.00	$	15.18

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table summarizes information about stock options outstanding and exercisable at June 30, 2004:

Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Options Exercisable	Weighted Average Exercise Price

$1.74-$4.56	45,096	8.30 years	$3.13	29,033	$3.41
$6.00 - $8.25	31,006	2.25 years	$7.84	29,923	$7.87
$9.38 - $13.13	18,504	2.85 years	$10.93	18,504	$10.93
$16.50	1,042	3.12 years	$16.50	1,042	$16.50
$23.064 - $33.00	34,971	3.95 years	$24.35	34,971	$24.35
$75.00	1,334	6.17 years	$75.00	1,334	$75.00
$1.74 - $75.00	131,953	4.90 years	$11.79	114,807	$13.11

In addition, the Company has granted options outside the plans, primarily to directors and consultants at 100% of the fair market value per share at the date of grant. The weighted average remaining contractual life of the options outside the plans is .66 years as of June 30, 2004. The following is a summary of all transactions outside the plans:

	Number of Shares		Option Price per Share		Weighted Average Exercise Price

Options outstanding and exercisable, June 30, 2002, 2003, and 2004		9,168	$	7.80-8.25	$	8.08

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company has computed the pro forma disclosures required under SFAS No. 123 for fiscal 2004, 2003 and 2002 using the Black-Scholes option pricing model prescribed by SFAS No. 123 (See Note 1(i)).

The assumptions used for each of the three years in the period ended June 30, 2004 are as follows:

	*Year Ended*
	2004			2003			2002

Risk-free interest rates		3.85	%		2.36	%		4.10	%
Expected dividend yield		—			—			—
Expected lives		7 years			7 years			7 years
Expected volatility		120	%		131	%		279	%
Weighted average fair value of grants		$1.77			$1.61			$4.68

(4)

(4) INCOME TAXES

The provision for income taxes in the accompanying consolidated statements of operations consists of the minimum statutory state income tax liability of $912 for each of the three years ended June 30, 2004.

A reconciliation of the federal statutory rate to the Company’s effective tax rate for the three years ended June 30, 2004 is as follows:

	2004			2003			2002

Income tax benefit at federal statutory rate		(34.0	)%		(34.0	)%		(34.0	)%

Increase (decrease) in tax resulting from–
State taxes, net of federal benefit		(6.0	)		(6.0	)		(6.0	)
Tax credits		(1.6	)		(3.9	)		(0.7	)
Change in valuation allowance		30.6			42.0			40.0
Expiration of tax credits		7.3			—			—
Other		3.7			1.9			0.7

Effective tax rate		0.0	%		0.0	%		0.0	%

The components of deferred tax assets and liabilities at June 30, 2004 and 2003 are approximately as follows:

	2004			2003

Deferred tax assets:
Net operating loss carryforwards	$	8,745,000		$	7,638,000
Tax credit carryforwards		497,000			709,000
Reserves and accruals not yet deducted for tax purposes		3,849,000			3,551,000
Total deferred tax assets		13,091,000			11,898,000
Valuation allowance		(11,943,000	)		(10,818,000	)
Subtotal		1,148,000			1,080,000
Deferred tax liabilities:
Accumulated depreciation		(1,148,000	)		(1,080,000	)

Net deferred taxes	$	—		$	—

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company has provided a valuation allowance to reduce the net deferred tax asset to an amount the Company believes is "more likely than not" to be realized. The valuation allowance increased in fiscal 2004 by approximately $1,125,000. Approximately $2,241,000 of the valuation allowance at June 30, 2004 related to the exercise of stock options will be allocated to stockholders’ equity when recognized. As of June 30, 2004, the Company has net operating loss carryforwards for U.S. federal and state income taxes of approximately $22,208,000 and $19,908,000, respectively. The U.S. federal net operating loss carryforwards expire approximately as follows: $697,000 in 2013, $1,511,000 in 2019, $7,154,000 in 2020, $5,554,000 in 2022, $4,054,000 in 2023 and $3,238,000 in 2024. The state net operating loss carryforwards expire approximately as follows: $7,121,000 in 2005, $5,520,000 in 2007, $4,029,000 in 2008 and $3,238,000 in 2009. The tax credit carryforwards expire in 2005 through 2024. Pursuant to the Tax Reform Act of 1986, the utilization of net operating loss carryforwards for tax purposes may be subject to an annual limitation if a cumulative change of ownership of more than 50% occurs over a three-year period. As a result of the Company’s stock offerings in fiscal years 1998, 2000, and 2005 (see Note 8), such a change in ownership may have occurred. In the event that the Company has had a change in ownership, as defined, the utilization of substantially all of the Company’s net operating loss carryforwards will be significantly restricted.

(5) PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING

A Asset Impairment:

In June 2002, certain property and equipment previously invested in the Company’s telecommunications product line (whose fair value less cost to sell was estimated at approximately $848,000 at that time) was reclassified to the category of "Assets Held for Sale" in the Company’s consolidated balance sheet. During fiscal year 2003, the Company received net proceeds of approximately $553,000 from the sale of a portion of these assets and incurred an impairment charge of approximately $123,500 based on an updated independent appraisal of fair market value for the remaining assets. As a cost saving measure, during the quarter ended December 31, 2003, the Company deployed $21,400 of assets held for sale and invested $6,300, largely to refurbish certain equipment used to produce optical thin films for its medical inst rument product line.

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company has reclassified the residual unsold portion of these assets (whose fair value less cost to sell was estimated at $131,150 as of December 31, 2003) to property and equipment at December 31, 2003 in the accompanying consolidated balance sheets. The Company has resumed providing depreciation on these assets beginning in January 2004, using the straight-line method and estimated life of two years, and is continuing its efforts to sell such assets.

Restructuring:

In January 2004, the Company reduced its full-time workforce by approximately 15%, or five employees. As a result of this action, the Company recorded a pretax charge to earnings in the quarter ended March 31, 2004 of $52,208 for employee severance benefits that were paid in the quarter ended March 31, 2004.

In October 2002, the Company reduced its full-time workforce by approximately 16%, or six employees. As a result of this action, the Company recorded a pretax charge to earnings in the quarter ended December 31, 2002 of $53,131 for employee severance benefits that were paid in the quarter ended December 31, 2002.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table sets forth the quarterly impacts and cash payments associated with the asset impairment and restructuring provisions:

	Provision For –
	Property & Equipment Writedown			Patent Writedown			Employee Severance			Idle Lease Space			Total

Provision Balance, June 30, 2001	$	—		$	—		$	—		$	—		$	—
Quarter Ended -
September 30, 2001		3,444,378			—			—			—			3,444,378
December 31, 2001		—			—			186,250			482,000			668,250
June 30, 2002		541,000			57,578			—			(266,185	)		332,393
Total Provision		3,985,378			57,578			186,250			215,815			4,445,021
Non-cash Charges		(3,985,378	)		(57,578	)		—			—			(4,042,956	)
Cash Payments		—			—			(186,250	)		(47,844	)		(234,094	)

Provision Balance, June 30, 2002	$	—		$	—		$	—		$	167,971		$	167,971

Quarter Ended -
December 31, 2002		—			—			53,131			—			53,131
June 30, 2003		123,511			—			—			—			123,511
Total Provision		123,511			—			53,131			—			176,642
Non-cash Charges		(123,511	)		—			—			—			(123,511	)
Cash Payments		—			—			(53,131	)		(167,971	)		(221,102	)

Provision Balance, June 30, 2003	$	—		$	—		$	—		$	—		$	—

Quarter Ended -
March 31, 2004		—			—			52,208			—			52,208
Total Provision		—			—			52,208			—			52,208
Cash Payments		—			—			(52,208	)		—			(52,208	)

Provision Balance, June 30, 2004	$	—		$	—		$	—		$	—		$	—

(6) PROVISION FOR INVENTORY WRITE-DOWN

The Company determined that certain inventories of telecommunications and medical products would not be sold within the Company’s business cycle or the products’ life cycle. Consequently, the Company recorded, in cost of goods sold, a provision for excess and obsolete inventory of approximately $540,000 in fiscal year 2002, and approximately $500,000 in fiscal year 2004.

(7) PROFIT SHARING PLAN

The Company has a defined contribution 401K profit sharing plan. Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing contributions were made to the plan in fiscal years 2004, 2003, or 2002. Employer matching contributions to the plan amounted to $29,972, $34,608, and $32,354 for fiscal years 2004, 2003 and 2002, respectively.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8) SUBSEQUENT EVENT

In July 2004, the Company completed a rights offering to stockholders of record at June 7, 2004 by issuing 5,256,159 shares of common stock at a price of $1.00 per share. Net cash proceeds to the Company (after offering costs of $177,176) were $5,078,983.

The costs of the rights offering estimated to have been incurred through June 30, 2004 of $171,885, have been deferred and are included in the caption "deferred financing costs" in the accompanying consolidated balance sheets as of June 30, 2004.

As of June 30, 2004, the Company’s stockholders’ equity was $1,503,972, which was less than the minimum level of stockholders’ equity required under Nasdaq Marketplace Rules for companies listed on the Nasdaq SmallCap Market. After receipt of net proceeds of $5,078,983 from the rights offering in July, the Company believes it has regained compliance with the stockholders’ equity requirement.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None.

ITEM 8A. CONTROLS AND PROCEDURES: As of the end of the period covered by this annual report, the Company’s Chief Executive Officer and Principal Financial Officer have conducted an evaluation of the Company’s disclosure controls and procedures. Based on their evaluation, the Company’s Chief Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The Company will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the "Proxy Statement") not later than 120 days after the close of its fiscal year ended June 30, 2004. The information required by this item, other than with respect to the Company’s Corporate Code of Ethics and Conduct, is incorporated herein by reference to the Proxy Statement.

A copy of the Company’s Corporate Code of Ethics and Conduct applicable to all employees, officers and directors of the Company is being filed with the Securities and Exchange Commission as Exhibit 14.1 to this report and can be obtained free of charge by contacting the Company’s Clerk, c/o Precision Optics Corporation, 22 East Broadway, Gardner, Massachusetts 01440.

ITEM 10. EXECUTIVE COMPENSATION: The information required by this item is incorporated herein by reference to the Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information required by this item is incorporated herein by reference to the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The information required by this item is incorporated herein by reference to the Proxy
Statement.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K:

(a)

Exhibits.

The exhibits listed below are filed with or incorporated by reference in this report.

3.1

Articles of Organization of the Company, as amended and corrected¹

3.2

By-laws of Precision Optics Corporation, Inc.²

4.1

Specimen common stock certificate³

4.2

Registration Rights Agreement dated as of March 17, 2000 by and among the Company and the Initial Investors as defined therein⁴

4.3

Registration Rights Agreement dated as of June 30, 1998 by and among the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P.⁵

4.4

Registration Rights Agreement dated as of August 5, 1999 by and among the Company, Special Situations Cayman Funds, L.P., Special Situations Fund III, L.P., Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P.⁶

4.5

Form of Stock Purchase Warrant dated March 17, 2000 issued to each investor in March 17, 2000 private placement transaction⁴

4.6

Warrant No. 1 dated March 17, 2000 issued to First Security Van Kasper⁴

4.7

Warrant No. 2 dated March 17, 2000 issued to First Security Van Kasper⁴

10.1

Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date⁷

10.2

Three separate life insurance policies on the life of Richard E. Forkey.³

10.3

Master Lease Finance Agreement dated November 3, 1993 between the Company and BancBoston Leasing⁷

10.4

Lease dated March 1, 1999, between the Company and Philip A. Wood, as executor of the Estate of Alma L. Wood and as devisee under the Will of Alma L. Wood; Martha A. Mount, devisee under the Will of Alma L. Wood; and Nancy E. Popinchalk, devisee under the Will of Alma L. Wood for 21 Pleasant Street, Gardner, Massachusetts⁶

10.5

Amended and Restated Precision Optics Corporation, Inc. 1997 Incentive Plan.⁹

10.6

Securities Purchase Agreement dated as of March 13, 2000 by and among the Company and the Purchasers as defined therein (excluding exhibits)⁴

14.1

Corporate Code of Ethics and Conduct

Subsidiaries of Precision Optics Corporation, Inc.⁸

Consent of KPMG LLP.

31.1

Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a)

31.2

Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a)

32.1

Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C. 1350.

99.1

Important Factors Regarding Forward-Looking Statements.

¹ Incorporated herein by reference to the Company’s Quarterly Report for the quarter ended December 31, 2002 on Form 10-QSB (No. 001-10647).

² Incorporated herein by reference to the Company’s 1991 Annual Report on Form 10-KSB (No. 001-10647).

³ Incorporated herein by reference to the Company’s Registration Statement on Form S-18 (No. 33-36710-B).

⁴ Incorporated herein by reference to the Company’s Registration Statement on Form S-3 (No. 333-35884).

⁵ Incorporated herein by reference to the Company’s 1998 Annual Report on Form 10-KSB (No. 001-10647).

⁶ Incorporated herein by reference to the Company’s 1999 Annual Report on Form 10-KSB (No. 001-10647).

⁷Incorporated herein by reference to the Company’s 1994 Annual Report on Form 10-KSB (No. 001-10647).

⁸Incorporated herein by reference to the Company’s 1996 Annual Report on Form 10-KSB (No. 001-10647).

⁹Incorporated herein by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003 (No. 001-10647).

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

(b) Reports on Form 8-K.

The Company filed four Current Reports on Form 8-K during the quarter ended June 30, 2004 as follows - On May 12, 2004, under Items 7 and 12, the Company reported a press release issued May 12, 2004, reporting its operating results for the quarter and nine months ended March 31, 2004. On May 12, 2004, under Items 5 and 7, the Company reported a press release issued May 12, 2004 announcing the filing of a registration statement on Form S-3 for a rights offering to stockholders. On May 25, 2004, under Items 5 and 7, the Company reported a press release issued May 24, 2004 announcing the record date for its rights offering to stockholders. On June 15, 2004, under Items 5 and 7, the Company reported a press release issued on June 14, 2004 announcing the effectiveness of the Company’s registration statement on Form S-3 in connection with a rights offering to stockholders.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	PRECISION OPTICS CORPORATION, INC.

Date: March 18, 2005	By:	/s/ Richard E. Forkey
		Richard E. Forkey
		Chairman of the Board, Chief Executive Officer, President and Treasurer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By: /s/ Richard E. Forkey		By:/s/ Jack P. Dreimiller
Richard E. Forkey		Jack P. Dreimiller
President, Treasurer and Director (principal		Senior Vice President, Finance,
executive officer)		Chief Financial Officer and Clerk
		(principal financial and accounting officer)

Date: March 18, 2005		Date: March 18, 2005

By: /s/ Joel R. Pitlor		By: /s/ Edward A. Benjamin
Joel R. Pitlor		Edward A. Benjamin
Director		Director

Date: March 18, 2005		Date: March 18, 2005

By: /s/ Robert R. Shannon
Robert R. Shannon
Director

Date: March 18, 2005

EX-14.1 2 v014603_ex14-1.htm

EXHIBIT 14.1

Precision Optics Corporation, Inc.

Corporate Code of Ethics and Conduct

1. General Policy

It is the policy of Precision Optics Corporation, Inc. ("Precision Optics" or the "Company") to conduct business in compliance with all applicable laws, rules and regulations. Further, it is our policy to conduct business with integrity. We make this commitment to our customers, to our partners, to our stockholders, to our community, to those government agencies that regulate Precision Optics, and to ourselves.

Each Precision Optics employee, officer and director must work to comply with the policies set forth in this Code of Ethics and Conduct (the "Code"). All employees, officers and directors should review this Code and related materials, including the Company’s Employee Manual dated May 1, 2001 (the "Employee Manual"), portions of which are referred to in this Code, and make sure that these policies guide their actions. Because of the complex and changing nature of legal requirements, each member of Precision Optics must be constantly vigilant to ensure that their conduct complies with the Code. If any employee, officer or director becomes aware of an issue of legal compliance which is not adequately addressed in this Code, you should notify your supervisor or the Chief Financial Officer.

Precision Optics takes compliance with laws, regulations, rules and the Code seriously. Any violation of such will result in disciplinary action. Such action may include an oral or written warning, disciplinary probation, suspension, reduction in salary, demotion or dismissal from employment. These disciplinary actions also may apply to an employee’s supervisor who directs or approves the employee’s improper actions or is aware of those actions, but does not act appropriately to correct them or fails to exercise appropriate supervision.

If a question arises as to whether any action complies with Precision Optics’ policies or applicable law, an employee, officer or director should present that question directly to the Company’s Chief Financial Officer (the "Compliance Officer"). The Compliance Officer’s telephone number is (978) 630-1800 ext. 117. Concerns about violations of any part of this Code made to the telephone number may be made anonymously. Any calls, detailed notes and/or emails will be dealt with confidentially. In raising an issue, you may remain anonymous, although you are encouraged to identify yourself. Should you choose to identify yourself, your identity will be kept confidential to the extent feasible or permissible under the law. All employees, officers and directors of Precision Optics have the commitment of Precision Optics and of the Audit Committee of Precision Optics’ Board of Directors that they will be protected from retaliation. However, Precision Optics reserves the right to discipline anyone who knowingly makes a false accusation, provides false information to the Company or has acted improperly. Failure to report known or suspected wrongdoing of which any member of Precision Optics has knowledge may, by itself, subject that person to disciplinary action.

This Code generally highlights some of the more important legal principles with which employees, officers and directors are expected to be familiar. The fact that this Code does not specifically reference other applicable laws (some of which may be covered in other Precision Optics policies) does not diminish their importance or application.

2. Compliance with the Law

Precision Optics seeks to comply with all applicable government laws, rules and regulations. We need the cooperation of all employees, officers and directors to do so and to bring lapses or violations to light. While some regulatory schemes may not carry criminal penalties, they may control the licenses and certifications that allow Precision Optics to conduct its business. Precision Optics’ continued ability to operate depends upon your help for compliance.

Some of the regulatory programs which employees may deal with in the course of their duties include, but are not limited to, the following:

o	Labor laws,

o	Occupational safety and health regulation,

o	Building, safety and fire codes,

o	Wage and hour laws, and

o	Applicable U.S. Food and Drug Administration regulations.

The Compliance Officer can provide employees with information on these rules, and can direct questions or concerns to the proper person.

3. Stock

Because our stock is a publicly-traded security, certain activities of Precision Optics are subject to certain provisions of the federal securities laws. These laws govern the dissemination or use of information about the affairs of Precision Optics or its subsidiaries or affiliates, and other information which might be of interest to persons considering the purchase or sale of our stock. Violations of the federal securities laws could subject you and the Company to stiff criminal and civil penalties. Accordingly, Precision Optics does not sanction and will not tolerate any conduct that risks a violation of these laws.

a. Disclosure of Transactions in Company’s Securities

The Securities and Exchange Commission ("SEC") requires continuing disclosure of transactions in the Company’s publicly traded securities by the Company, its directors, officers, major stockholders and other affiliated persons. We are committed to complying with obligations related to this disclosure.

b. Insider Trading

It is illegal for any person, either personally or on behalf of others, (i) to buy or sell securities while in possession of material non-public information, or (ii) to communicate (to "tip") material non-public information to another person who trades in the securities on the basis of the information or who in turn passes the information on to someone who trades. All directors, officers, employees and temporary insiders, such as accountants and lawyers, must comply with these "insider trading" restrictions. For more information, please see the section entitled "Trades in Public Securities by Company Personnel" set forth in the Employee Manual, a copy of which has been previously provided to you but which may also be obtained upon request to the Compliance Officer.

4. Confidential Information

You may be entrusted with Precision Optics’ confidential business information. You are required to safeguard and use such information only for Precision Optics’ purposes. Confidential information includes all non-public information that might be of use to competitors or harmful to Precision Optics or its customers, if disclosed. You are expected to maintain the confidentiality of any and all such information entrusted to you by Precision Optics or our customers or partners. Examples of confidential business information include, but are not limited to: the Company’s trade secrets, business trends, information on product development programs, detailed sales and cost figures, new product or marketing plans, research and development ideas or information, manufacturing processes, and information about potential acquisitions, divestitures and investments. Failure to observe this duty of confidentiality may compromise our competitive advantage over competitors and may additionally result in a violation of securities, antitrust or employment laws. It may also violate agreements providing for the protection of such confidential information. You should not discuss confidential Company information outside the Company, even with your own family.

You may also possess sensitive, privileged information about our customers or partners. These parties properly expect that this information will be kept confidential. Precision Optics takes very seriously any violation of a customer’s or partner’s confidentiality and will not tolerate such conduct.

For more information, please see the section entitled "Confidentiality of Company Information" set forth in the Employee Manual.

5. Special Ethical Obligations For Employees With Public Reporting Responsibilities

As a public company, we are also committed to carrying out all continuing disclosure obligations in a full, fair, accurate, timely and understandable manner. Depending on their position with Precision Optics, employees, officers or directors may be called upon to provide information to assure that the Company’s public reports are complete, fair and understandable. Precision Optics expects all of its personnel to take this responsibility very seriously and to provide prompt and accurate answers to inquiries related to the Company’s public disclosure requirements.

The Accounting Department bears a special responsibility for promoting integrity throughout the organization, with responsibilities to stockholders both inside and outside of Precision Optics. The Chief Executive Officer, the Chief Financial Officer and other Accounting Department personnel have a special role both to adhere to these principles themselves and also to ensure that a culture exists throughout the company as a whole that ensures the fair and timely reporting of Precision Optics’ financial results and condition.

Employees, officers and directors should promptly report to the Compliance Officer and/or the Audit Committee any conduct that the individual believes to be a violation of law or business ethics or of any provision of the Code, including any transaction or relationship that reasonably could be expected to give rise to such a conflict. Violations, including failures to report potential violations by others, will be viewed as a severe disciplinary matter that may result in personnel action, including termination of employment.

6. Continuing Disclosure Obligations and Accuracy of Business Records

In order to support all our disclosure obligations, it is our policy to record and report our factual information honestly and accurately. Failure to do so is a grave offense and will subject an individual to severe discipline by the Company, as well as possible criminal and civil penalties.

Compliance with established accounting procedures, Precision Optics’ system of internal controls, and generally accepted accounting principles is necessary at all times. In order to achieve such compliance, the Company’s records, books and documents must accurately reflect the transactions and provide a full account of Precision Optics’ assets, liabilities, revenues and expenses. Knowingly entering inaccurate or fraudulent information into Precision Optics’ accounting system is unacceptable and may be illegal. Any individual that has knowledge that an entry or process is false and material are expected to consult the Compliance Officer. In addition, it is the responsibility of each member of Precision Optics to give their cooperation to the Company’s auditors.

Every individual should also be aware that almost all business records of the Company may become subject to public disclosure in the course of litigation or governmental investigation. Records are also often obtained by outside parties or the media. Employees should therefore attempt to be as clear, concise, truthful and accurate as possible when recording any information. They must refrain from making legal conclusions or commenting on legal positions taken by the Company or others. They must also avoid exaggeration, colorful language, and derogatory characterizations of people and their motives. Precision Optics will not tolerate any conduct that creates an inaccurate impression of Precision Optics’ business operations.

7. Protection and Proper Use of Company Assets

Employees, officers and directors should protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability. All Company assets should be used for legitimate business purposes. Individual supervisors are responsible for ensuring Company resources are used productively or to enhance employees’ skills and job performance.

Everyone who works with the Company’s computer-based resources is responsible for their appropriate use and protection from theft, damage or loss. Employees should take care to understand the risks and protect and ensure that the security features of the computer-based resources are not compromised. Information created, transmitted or accessed on Company networks is Company property and Precision Optics reserves the right to monitor or restrict access to it. The same level of care should be taken when using Precision Optics’ e-mail, internet and voice mail systems as is used in written documents. For example, confidential information about Precision Optics should not be disclosed on electronic bulletin boards, in chat rooms or posted on an internet website. For more information, please see the section entitled "Use of Computers" set forth in the Employee Manual.

8. Corporate Opportunities

Employees, officers and directors are prohibited from (a) taking for yourself personally opportunities that you discover through the use of Company property, information or position, (b) using Company property, information or position for personal gain and (c) competing with the Company. An employee, officer or director owes a duty to the Company to advance its legitimate interests when the opportunity to do so arises.

9. Fair Dealing

Employees, officers and directors should endeavor to deal fairly with the Company’s customers, partners, suppliers, competitors and employees. You should not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practices.

10. Conflicts of Interest

Precision Optics’ employees, officers and directors should avoid all potential conflicts of interest or situations that give the appearance of a conflict of interest. A conflict of interest occurs when the private interest of a Precision Optics employee or director (or an immediate family or household member or someone with whom you have an intimate relationship) interferes, in any way -- or even appears to interfere -- with the duties performed by the Precision Optics employee or director or with the interests of the Company as a whole. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest also arise when an employee, officer or director, or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company. Loans to, or guarantees of obligations of, such persons are of special concern.

To this end, Precision Optics’ employees, officers or directors may not be employed by, act as a consultant to, or have an independent business relationship with any of Precision Optics’ customers, competitors or suppliers. Nor may employees, officers or directors invest in any customer, supplier, or competitor (other than through mutual funds or through holdings of less than 2 percent of the outstanding shares of publicly traded securities) unless they first obtain written permission from the Chief Executive Officer. Employees, officers or directors may not divulge or use Precision Optics’ confidential information - -- such as financial data, customer information, and computer programs -- for their own personal or business purposes.

Any personal or business activities by an employee, officer or director that may raise concerns along these lines must be disclosed to and approved in advance by the Compliance Officer. For more information, please see the section entitled "Conflict of Interest" set forth in the Employee Manual.

11. Gifts, Meals and Entertainment

a. Entertainment and Gifts

Precision Optics recognizes that in some instances, gifts and entertainment can provide an appropriate means of furthering a business relationship. However, no employee, officer or director should accept or provide gifts of more than $50 in connection with their business dealings. The offer or receipt of any such gift over $50 should be reported immediately to the Compliance Officer. Normal business courtesies involving no more than ordinary amenities (such as lunch, dinner, a spectator event or a golf game) are permitted, as are token non-cash gifts of nominal value. The guiding principle and spirit of this code is that no gift, favor or entertainment, whether a single event or a pattern of behavior, should be accepted or provided if it will obligate, or appear to obligate, the recipient. If you are uncertain about the propriety of a gift, you should contact the Compliance Officer for guidance.

b. Relationships with Government Personnel

Separate and more stringent gift, meals, and entertainment rules apply to dealings with government officials. Federal and state anti-kickback laws prohibit Precision Optics and its representatives from knowingly and willfully offering, paying, requesting, or receiving any money or other benefit, directly or indirectly, in return for obtaining or rewarding favorable treatment in connection with the award of a government contract. Any employee who becomes aware of any such conduct should immediately report it to the Compliance Officer.

The anti-kickback laws must be considered whenever something of value is given or received by Precision Optics or its representatives or affiliates that is in any way connected to work performed for the government. There are many transactions that may violate the anti-kickback rules. As a result, no one acting on behalf of Precision Optics may offer or accept gifts, loans, rebates, services, or payment of any kind to or from government suppliers and vendors without first consulting the Compliance Officer.

c. Business Dealings in Foreign Countries

Federal law prohibits U.S. companies, and those acting on their behalf, from bribing foreign officials to obtain or retain business. Foreign officials include officers and employees of a foreign government or of a foreign governmental department or agency. Indirect payments including those to agents or third parties with the knowledge that at least a portion of the payment will be given to a foreign official for an illegal purpose are prohibited. Precision Optics will not tolerate any conduct that violates this law.

12. Interacting with the Government

Precision Optics values its good relations with local, state, federal and foreign governments. We are committed to being a "good corporate citizen" and are proud of the contributions we have made to help the communities where we do business.

The Company’s policy is to deal honestly and fairly with government representatives and agents and to comply with valid and reasonable governmental requests and processes. Be truthful and straightforward in your dealings with governmental representatives and do not direct or encourage another Precision Optics employee (or someone else) to provide false or misleading information to any government agent or representative. Do not direct or encourage anyone to destroy records relevant to a fact-finding process.

13. Employee Relations

The Company recognizes and understands the importance of balancing work and family life. Even though an employee’s non-work-related activities outside of the Company are considered personal business, employees should always remember that they are a representative of the Company.

All employees, officers and directors should review the Company’s policies regarding discrimination, workplace harassment (including sexual harassment), health and safety and related matters, which are set forth in the Employee Manual.

14. Purchasing

Purchasing decisions must be made in accordance with applicable Precision Optics policy. In addition, the prohibitions discussed in Section 11 of this Code, entitled "Gifts, Meals and Entertainment" apply to purchasing decisions made on behalf of Precision Optics. Purchasing decisions must in all instances be made free from any conflicts of interest that could affect the outcome. Precision Optics is committed to a fair and objective procurement system which results in the acquisition of quality goods and services for Precision Optics at a fair price.

15. Exports and Imports

There are many U.S. laws governing international trade and commerce which serve to limit the export of certain products to certain countries. Precision Optics is committed to complying with those laws. Under no circumstances will Precision Optics make sales contrary to U.S. export laws. Because these regulations are complicated and change periodically, employees seeking to make a sale to a customer in a foreign country must first confirm the legal trade status of that country. If an employee is uncertain about whether a foreign sale complies with U.S. export laws, he or she must contact the Compliance Officer for guidance. Precision Optics’ employees should be aware that there are also many U.S. laws that govern the import of items into the United States. Among other things, these laws control what can be imported into the United States, how the articles should be marked, and the amount of duty to be paid. Precision Optics complies with all U.S. import laws. If an employee is uncertain about whether a transaction involving the importation of items into the United States complies with these laws, he or she must contact the Compliance Officer for guidance.

16. Media/Public Relations and Governmental Inquiries

When Precision Optics provides information to the news media, securities analysts and stockholders, it has an obligation to do so accurately and completely. In order to ensure that Precision Optics complies with its obligations, employees receiving inquiries regarding Precision Optics’ activities, results, plans or position on public issues should refer the request to the Company’s Chief Executive Officer, Chief Financial Officer or the designated corporate spokesperson. Precision Optics’ employees may not speak publicly for the Company unless specifically authorized by senior management.

Although unlikely, a government representative may seek to interview an employee regarding Precision Optics’ business activities or an employee’s work at the Company. If an employee is contacted by a government agent or representative and asked to provide information, contact the Chief Financial Officer at (978) 630-1800 ext. 117.

Occasionally, someone will arrive unexpectedly or a government representative may seek to inspect Company property. If this happens, an employee should immediately notify his or her manager or supervisor and contact the Chief Financial Officer at (978) 630-1800 ext. 117.

17. Response to Investigations or Government Inquiries

Numerous state and federal agencies have broad legal authority to investigate Precision Optics and review its records. Precision Optics will comply with subpoenas and respond to governmental investigations as required by law. The Compliance Officer is responsible for coordinating Precision Optics’ response to investigations and the release of any information.

If an employee, director or officer receives an investigative demand, subpoena, or search warrant involving Precision Optics, it should be brought immediately to the Compliance Officer. No documents should be released or copied without authorization from the Compliance Officer or Precision Optics’ legal counsel. If an investigator, agent or government auditor comes to Precision Optics’ corporate headquarters, the Chief Executive Officer should be contacted immediately. In the absence of the Chief Executive Officer, contact Precision Optics’ Compliance Officer. Ask the investigator to wait until the contacted individual arrives before reviewing any documents or conducting any interviews. The Compliance Officer, his designee, or Company’s legal counsel is responsible for assisting with any interviews. If Precision Optics’ employees are approached by government investigators and agents while they are away from Precision Optics’ premises and asked to discuss Company affairs, the employee has the right to insist on being interviewed during business hours with a supervisor or counsel present. Alternatively, any employee may choose to be interviewed or not to be interviewed at all. The Company recognizes the choice of how to proceed in these circumstances is left entirely to the employee. If an employee chooses to speak with government personnel, it is essential that the employee be truthful. Questions may be directed to the Compliance Officer.

Precision Optics’ employees are not permitted to alter, remove, or destroy documents or records of Precision Optics except in accordance with regular document retention and destruction practices.

18. Disciplinary Action

It is essential that all employees accept personal responsibility for maintaining high standards of conduct and job performance, including the observance of the Code and other Company rules and policies. The Company shall consistently enforce the Code through appropriate means of discipline. Violations of the Code shall be promptly reported to the Compliance Officer and the Audit Committee. The Audit Committee shall determine whether violations of the Code have occurred and, if so, shall determine the disciplinary measures to be taken against any employee of the Company who has so violated the Code. Disciplinary measures, which may be invoked at the discretion of the Audit Committee, include, but are not limited to, oral or written warnings, disciplinary probation, suspension, reductions in salary, demotion or termination of employment. The purpose of disciplinary measures short of termination is corrective, to encourage employees to improve their conduct or performance so that they may continue their employment with the Company. These corrective disciplinary measures will not apply in the event of a serious offense that warrants immediate termination or in other circumstances when the Audit Committee determines that corrective measures would be inappropriate.

19. Amendments and Waivers

This Code applies to all of Precision Optics’ employees, officers and directors. There shall be no substantive amendment or waiver of any part of the Code affecting the directors, senior financial officers, or executives officers, except by a vote of the Board of Directors, which will ascertain whether an amendment or waiver is appropriate and ensure that the amendment or waiver is accompanied by appropriate controls designed to protect Precision Optics.

In the event that any substantive amendment is made or any waiver is granted, the substantive amendment or waiver will be filed with the SEC on a Current Report on Form 8-K (or such other form as may be prescribed by the SEC), thereby allowing the Precision Optics stockholders to evaluate the merits of the particular substantive amendment or waiver.

EX-23 3 v014603_ex23.htm

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the registration statements, numbers 333-35884, 333-87977 and 333-66297 on Form S-3 and numbers 333-89989, 333-94125, 33-72108, 333-97525 and 333-110946 on Form S-8 of Precision Optics Corporation, Inc. of our report dated August 31, 2004, with respect to the consolidated balance sheets of Precision Optics Corporation, Inc. and Subsidiaries, as of June 30, 2004 and 2003 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2004, which report appears in the June 30, 2004, annual report on Form 10-KSB of Precision Optics Corporation, Inc.

/s/ KPMG LLP

Boston, Massachusetts

September 16, 2004

EX-31.1 4 v014603_ex31-1.htm

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Exhibit 31.1

Certification of Chief Executive Officer Required by Rule 13a-14(a)/15d-14(a)

CERTIFICATIONS

I, Richard E. Forkey, certify that:

I have reviewed this Annual Report on Form 10-KSB of Precision Optics Corporation, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.


Date: March 18, 2005		/s/ Richard E. Forkey
		Richard E. Forkey
		Chief Executive Officer

EX-31.2 5 v014603_ex31-2.htm

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Exhibit 31.2

Certification of Chief Financial Officer Required by Rule 13a-14(a)/15d-14(a)

CERTIFICATIONS

I, Jack P. Dreimiller, certify that:

I have reviewed this Annual Report on Form 10-KSB of Precision Optics Corporation, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.


Date: March 18, 2005		/s/ Jack P. Dreimiller
		Jack P. Dreimiller
		Chief Financial Officer

EX-32.1 6 v014603_ex32-1.htm

EXHIBIT 32.1

PRECISION OPTICS CORPORATION, INC.

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

We, Richard E. Forkey, Chief Executive Officer and Jack P. Dreimiller, Chief Financial Officer of Precision Optics Corporation, Inc. (the "Company"), certify, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Annual Report on Form 10-KSB of the Company for the year ended June 30, 2004 (The "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78 m or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

DATE: March 18, 2005

/s/ Richard E. Forkey______________________

Richard E. Forkey, Chairman of the Board, Chief

Executive Officer, President and Treasurer

/s/ Jack P. Dreimiller______________________

Jack P. Dreimiller, Senior Vice President Finance,

Chief Financial Officer and Clerk

EX-99.1 7 v014603_ex99-1.htm

EXHIBIT 99.1

PRECISION OPTICS CORPORATION, INC.

Important Factors Regarding Forward-Looking Statements

In our annual report on Form 10-KSB for the fiscal year ended June 30, 2004 and from time to time in public statements made by our management, we have made and will continue to make forward-looking statements about our business, including predictions about our future financial performance. Our actual results may differ significantly from the results predicted in our annual report and in future public statements. Factors that might cause such a difference include, but are not limited to, the factors discussed below:

Our Quarterly Financial Results Depend on a Large Number of Factors and Therefore May Vary Quarter to Quarter--As a Result, We Cannot Predict with a High Degree of Certainty Our Operating Results in Any Particular Fiscal Quarter.

Our quarterly operating results may vary significantly depending upon factors such as:

the timing of completion of significant orders

the timing and amount of our research and development expenditures

the costs of initial product production in connection with new products

the timing of new product introductions -- both by us and by our competitors

the timing and level of market acceptance of new products or enhanced versions of our existing products

our ability to retain existing customers and customers’ continued demand for our products and services

our customers’ inventory levels, and levels of demand for our customers’ products and services

competitive pricing pressures

We cannot be certain whether we will be able to grow or sustain revenues or achieve or maintain profitability on a quarterly or annual basis or that levels of revenue and/or profitability may not vary from one such period to another.

We May Need to Raise Additional Funds in The Future - If We Cannot Obtain Adequate Financing on Acceptable Terms When Required, Our Business Will Be Adversely Affected.

We believe that our existing cash and cash equivalents are sufficient to support our working capital and investment needs through at least fiscal year 2005, however, we may need to raise additional capital in the future. We may seek funding through additional pubic or private equity offerings or debt financings. Our ability to raise additional capital, however, will be heavily influenced by the investment market. Additional financing may not be available when needed, or, if available, may not be available on favorable terms. If we cannot obtain adequate financing on acceptable terms when such financing is required, our business will be adversely affected.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

If We Cannot Maintain Compliance with the Requirements for Continued Listing on the Nasdaq SmallCap Market, Our Common Stock Could Be Delisted—As a Result, the Market Price and Liquidity of Our Common Stock Might Decline and Our Ability to Raise Capital Might Be Impaired.

Effective as of the opening of business on January 29, 2003, we effected a reverse stock split of our Common Stock. The purpose of the reverse stock split was to increase the per share price of our Common Stock in order to comply with the minimum bid price listing of Nasdaq. We had previously been notified that we were not in compliance with the $1.00 minimum share price requirement for continued listing on the Nasdaq SmallCap Market. In order to regain compliance, the bid price of our Common Stock had to close at or above $1.00 per share for a minimum of 10 consecutive trading days. On each of the 10 consecutive trading days including and following January 29, 2003, the bid price of our Common Stock closed at or above $1.00 per share. Accordingly, we regained compliance with the minimum share price requirement for continued listing on the Nasdaq SmallCap Market. There can be no assurance, however, that the market price of our Common Stock will not subsequently decrease to a level that causes us to again face de-listing, or that our market capitalization will not subsequently be less than our market capitalization before the reverse stock split. The delisting of our Common Stock from the Nasdaq SmallCap Market may materially impair your ability to buy and sell shares of our Common Stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our Common Stock. In addition, the delisting of our Common Stock could significantly impair our ability to raise capital should we desire to do so in the future. There is no assurance that we will continue to comply with the minimum bid or other continuing listing requirements of the Nasdaq SmallCap Market.

We Rely on a Small Number of Customers and Cannot Be Certain They Will Consistently Purchase Our Products in the Future.

In the fiscal year ended June 30, 2004, our two largest customers represented approximately 24% and 22%, respectively, of our total revenues. In the fiscal year ended June 30, 2003, our two largest customers represented approximately 44% and 17%, respectively, of our total revenues. In the fiscal year ended June 30, 2002, our largest customers represented approximately 23% and 18%, respectively, of our total revenues. No other customer accounted for more than 10% of our revenues during those periods.

In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. We cannot be certain that such customers will consistently purchase our products at any particular rate over any subsequent period.

We Rely Heavily Upon the Talents of Our Chief Executive Officer and Chief Scientist, The Loss of Whom Could Severely Damage Our Business.

Our performance depends to a large extent on a small number of key scientific, technical, managerial, and marketing personnel. In particular, we believe our success is highly dependent upon the services and reputation of our Chief Executive Officer, Mr. Richard E. Forkey. Loss of Mr. Forkey’s services could severely damage our business.

Additionally, Dr. Joseph N. Forkey was appointed our Chief Scientist in September 2003. Dr. Forkey’s appointment is expected to provide us with significant additional capabilities in optical instrument development, in management of new technology and in potentially significant longer-term initiatives in Biophysics and Biomedical instrumentation, as well as new photonics-based market opportunities. Dr. Forkey, in his capacity as Chief Scientist, expects to continue to explore the development and application of optical-based microscopic single-molecule technologies. The loss of Dr. Forkey’s scientific contributions could severely damage our business.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

We Must Continue to be Able to Attract Employees With the Scientific and Technical Skills That our Business Requires--If We Are Unable to Attract and Retain Such Individuals, Our Business Could Be Severely Damaged.

Our ability to attract employees with a high degree of scientific and technical talent is crucial to the success of our business. There is intense competition for the services of such persons, and we cannot guarantee that we will be able to attract and retain individuals possessing the necessary qualifications.

We Have a Number of Large, Well-Financed Competitors Who Have Research and Marketing Capabilities That Are Superior to Ours.

The industries in which we compete are highly competitive. Many of our existing and potential competitors have greater financial resources and manufacturing capabilities, more established and larger marketing and sales organizations and larger technical staffs than we have. Other companies, some with greater experience in the telecommunications, optics, semiconductor or medical products industries, are seeking to produce products and services that compete with our products and services.

We Are Subject to a High Degree of Regulatory Oversight--We Cannot Be Certain That We Will Continue to Receive the Necessary Regulatory Approvals.

The FDA has allowed us to market the medical products we currently sell in the United States. However, prior FDA approval may be required before we can market additional medical products that we may develop in the future. We may also seek to sell current or future medical products in a manner that requires us to obtain FDA permission to market such products. We may also require the regulatory approval or license of other federal, state or local agencies or comparable agencies in other countries.

We cannot be certain that we will continue to receive the FDA’s permission to market our current products or obtain the necessary regulatory permission, approvals or licenses for the marketing of any of our future products. Also, we cannot predict the impact on our business of FDA regulations or determinations arising from future legislation or administrative action.

We Face Risks Inherent in Product Development and Production Under Fixed Price Contracts--We Cannot Be Sure That These Contracts Will Be Profitable over Time.

A significant portion of our business has been devoted to research, development and production under fixed price contracts. For our purposes, a fixed price contract is any contract under which we will provide products or services for a fixed price over an extended period of time (usually six months or longer). In our 2004, 2003, and 2002 fiscal years, fixed price contracts represented approximately 29%, 64% and 58%, respectively, of our total revenues. We expect that revenues from fixed price contracts will continue to represent a significant portion of our total revenues in future fiscal years.

Because they involve performance over time, we cannot predict with certainty the expenses involved in meeting our obligations under fixed price contracts. Therefore, we can never be sure at the time we enter into any single fixed price contract that such contract will be profitable for us.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Third Parties May Infringe on Our Patents--As a Result, We Could Incur Significant Expense in Protecting Our Patents or Not Have Sufficient Resources to Protect Them.

We hold a number of patents that are important to our business. Although we are not currently aware of any past or present infringements of our patents, we plan to protect these patents from infringement and obtain additional patents whenever feasible. To this end, we have obtained confidentiality agreements from our employees and consultants and others who have access to the design of our products and other proprietary information. Protecting and obtaining patents, however, is both time consuming and expensive. We therefore may not have the resources necessary to assert all potential patent infringement claims or pursue all patents that might be available to us.

Third Parties May Claim that We Have Infringed on Their Patents--As a Result, We Could Be Prohibited from Using All or Part of Any Technology Used in Our Products.

Should third parties claim a proprietary right to all or part of any technology that we use in our products, such a claim, regardless of its merit, could involve us in costly litigation. If successful, such a claim could also result in us being unable to freely to use the technology that was the subject of the claim, or sell products embodying such technology.

We Depend on the Availability of Certain Key Supplies and Services That Are Available From Only a Few Sources--If We Experience Difficulty with a Supplier, We May Have Difficulty Finding Alternative Sources of Supply.

Certain key supplies used in our products, particularly precision grade optical glass, are available from only a few sources, each of which is located outside the United States. Also, outside vendors grind and polish certain of our lenses and other optical components, such as prisms and windows. Based upon our ordering experience to date, we believe the materials and services required for the production of our products are currently available in sufficient quantities. Our requirements are small relative to the total supply, and we are not currently encountering problems with availability. However, this does not mean that we will continue to have timely access to adequate supplies of essential materials and services in the future or that supplies of these materials and services will be available on satisfactory terms when the need arises. Our business could be severely damaged if we become unable to procure essential materials and services in adequate quantities and at acceptable prices.

From time to time, certain of our products may be produced for us by subcontractors, and our business is subject to the risk that these subcontractors fail to make timely delivery. Our products and services are also from time to time used as components of the products and services of other manufacturers. We are therefore subject to the risk that manufacturers that integrate our products or services into their own products or services are unable to acquire essential supplies and services from third parties in a timely fashion.

Our Customers May Claim that the Products We Sold Them Were Defective--If Our Insurance Is Not Sufficient to Cover a Claim, We Would Be Liable for the Excess.

Like any manufacturer, we are and always have been exposed to liability claims resulting from the use of our products. We maintain product liability insurance to cover us in the event of liability claims, and no such claims have been asserted or threatened against us to date. However, we cannot be certain that our insurance will be sufficient to cover all possible future product liabilities.

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

We Would Be Liable If Our Business Operations Harmed the Environment--Failure to Maintain Compliance with Environmental Laws Could Severely Damage Our Business.

Our operations are subject to a variety of federal, state and local laws and regulations relating to the protection of the environment. From time to time, we use hazardous materials in our operations. Although we believe that we are in compliance with all applicable environmental laws and regulations, our business could be severely damaged by any failure to maintain such compliance.

CORRESP 8 filename8.htm

[Letterhead of Precision Optics Corporation, Inc.]

March 18, 2005
POC:25-0106

Mr. Daniel L. Gordon

Branch Chief

Division of Corporation Finance

United States Securities and Exchange Commission

Washington, DC 20549

Re:	Precision Optics Corporation, Inc.
	Form 10-KSB for the Year Ended June 30, 2004

Dear Mr. Gordon:

In connection with our response to the comments in your letter of March 7, 2005, Precision Optics Corporation, Inc. (the “Company”) acknowledges that:

·	The Company is responsible for the adequacy and accuracy of the disclosure in the filings;

·	Staff comments or changes to disclosure in response to staff comments in the filings reviewed by the staff do not foreclose the Commission from taking any action with respect to the filing; and

·	The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

Following are the Company’s responses to your comments:

Comment:

1.	We noted on page 3 that you sell certain services to your customers in addition to products. Supplementally, and in future filings, expand your revenue recognition policy to:

·	Tell us how you recognize revenue for services. Include in your discussion how the company considers each of the criteria in SAB Topic 13.A.1.

·	Provide details of whether any of your revenue transactions have multiple deliverables.

Response:

The services that the Company provides to customers consist of repairs and engineering design and development. Revenues from services are typically a small percentage of total revenues, and for the years ended June 30, 2004, 2003 and 2002 were approximately 3.9%, 2.0% and 2.7%, respectively, of total revenues.

Recognition of service revenue occurs after consideration of the following criteria:

a.	Determination that a purchase order or sales contract properly executed by the customer has been received and accepted, and which specifies the type of service to be performed.

b.	Delivery to the customer of the repaired product has occurred, or in the case of engineering design and development services, that the design or a prototype instrument has been delivered to the customer.

c.	Determination that the price specified in the customer’s purchase order or sales contract is fixed or determinable, and is not subject to refund or adjustment.

d.	Determination that collectibility of amounts to be billed are reasonably assured based on past experience with the customer or, in the case of new customers, review of customer credit references, D&B reports, etc.

None of the Company’s revenue transactions have multiple deliverables.

Comment:

Please also tell us at what point the sales price of products and services sold are fixed and determinable. We noted your comment included in your critical accounting policies and estimates whereby you state that the “determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered …” Tell us how you considered SAB Topic 13.A.4.

Response:

Sales price of products and services sold is fixed and determinable after receipt and acceptance of a customer’s purchase order or properly executed sales contract, typically before any work is performed. Management reviews each customer purchase order or sales contract to determine that the work to be performed is specified and there are no unusual terms and conditions which would raise questions as to whether the sales price is fixed or determinable. The Company does not have a history of issuing any significant or unusual adjustments to customers on our sales transactions. Management’s judgment is used to determine if collectibility is reasonably assured. The Company does not have a history of experiencing significant collection issues on amounts billed for products or services.

In future filings, the Company will expand its revenue recognition policy, as appropriate, with respect to your comments.

Comment:

We note your disclosures that “the company’s Chief Executive Officer and Principal Financial Officer have conducted an evaluation of the Company’s disclosure controls and procedures and based on this evaluation, the CEO and PFO have concluded that the company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms.” Amend your 10-KSB to clarify, if true, that your officers concluded that your disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that you file or submit under the Exchange Act is accumulated and communicated to your management, including your chief executive officer and principal financial officer, to allow timely decisions regarding required disclosure. See Exchange Act Rule 13a-15(e).

Response: The requested clarification has been made in the Company’s Form 10-KSB/A filed contemporaneously herewith.

Comment:

We noted that the certifications filed as Exhibits 31.1 and 31.2 were not in the proper form. The required certifications must be in the exact form prescribed; the wording of the required certifications may not be changed in any respect, except for the modifications temporarily permitted to be made to the fourth paragraph of the certification required to be filed as Exhibit 31.1 pursuant to Part III.E of Release No. 8238. Accordingly, please file an amendment to your Form 10-KSB that includes the entire filing together with the certifications of each of your current CEO and CFO in the form currently set forth in Item 601(b)(31) of Regulation S-B.

Response: The incorrect language contained in paragraph 5 of each of Exhibit 31.1 and Exhibit 31.2 was due to a production error at the Company’s financial printer. Exhibits 31.1 and 31.2 to the Company’s Form 10-KSB/A filed contemporaneously herewith contain the correct language.

If you have additional questions or comments, please do not hesitate to contact me.


	Very truly yours,

	By:	/s/ Jack P. Dreimiller
		Jack P. Dreimiller
		Chief Financial Officer

JPD:pg