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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2010oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  toCommission File Number 001-10647


PRECISION OPTICS CORPORATION, INC.(Exact name of registrant as specified in its charter)

Massachusetts(State or other jurisdiction
of incorporation or organization)

04-2795294(I.R.S. Employer
Identification No.)


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

(978) 630-1800(Registrant's telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:    None

Securities
registered pursuant to Section 12(g) of the Act:    Common Stock, $0.01 par value

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes     ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. o Yes     ý No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. ý Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data file required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). o Yes     o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not 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-K or any amendment to this Form 10-K. ý

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes     ý No

State the aggregate market value of the voting and non-voting common equity, held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $264,623 (based on
a total of 240,566 shares of the registrant's common stock held by non-affiliates on December 31, 2009, at the closing price of $1.10 per share).

The
number of shares of outstanding common stock of the registrant as of September 21, 2010 was 1,018,411.

Documents
incorporated by reference:    None.



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Table of Contents

PRECISION OPTICS CORPORATION, INC.
FORM 10-K

TABLE OF CONTENTS



PAGEPART IItem 1.

Business


3Item 1A.

Risk Factors


8Item 2.

Properties


14Item 3.

Legal Proceedings


14Item 4.

(Removed and Reserved)


14PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


14Item 6.

Selected Financial Data


15Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


15Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


22Item 8.

Financial Statements and Supplementary Data


22Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure


42Item 9A.

Controls and Procedures


42Item 9B.

Other Information


43PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


44Item 11.

Executive Compensation


46Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


48Item 13.

Certain Relationships and Related Transactions, and Director Independence


51Item 14.

Principal Accounting Fees and Services


52Item 15.

Exhibits, Financial Statement Schedules


52


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PART I

This annual report contains forward-looking statements as defined under the federal securities laws. All statements other
than statements of historical facts included in this Annual Report on Form 10-K regarding our financial performance, business strategy and plans and objectives of management for
future operations and any other future events are forward-looking statements and based on our beliefs and assumptions. Words such as "may," "will," "expect," "might," "believe," "anticipate,"
"intend," "could," "estimate," "project," "plan," and other similar words are one way to identify such forward-looking statements. Actual results could vary materially from these forward-looking
statements. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties, and assumptions, including, but without limitation, those risks and
uncertainties contained in the Risk Factors section of this Annual Report on Form 10-K and our other filings made with the SEC. Although we believe that our expectations are
reasonable, we can give no assurance that such expectations will prove to be correct. Based upon changing conditions, any one or more of these events described herein as anticipated, believed,
estimated, expected or intended may not occur. All prior and subsequent written and oral forward-looking statements attributable to our Company or persons acting on our behalf are expressly qualified
in their entirety by this cautionary statement.

ITEM 1.    BUSINESS.

HISTORY

We incorporated in Massachusetts in December 1982 and have been publicly-owned since November 1990. References to our Company contained herein
include our two wholly-owned subsidiaries, Precise Medical, Inc. and Wood's Precision Optics Corporation, Limited, except where the context otherwise requires.

OUR BUSINESS

We have been a developer and manufacturer of advanced optical instruments since 1982. We design and produce high-quality medical
instruments, micro-optics with characteristic dimensions less than 1 millimeter, or mm, and other advanced optical systems. Our medical instrumentation line includes laparoscopes, arthroscopes and
endocouplers and a line of world-class 3-D endoscopes for use in minimally invasive surgical procedures. We are registered to the ISO 9001:2008, ISO 13485:2003, and
Canadian Medical Devices Conformity Assessment System, or CMDCAS, Quality Standards and comply with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for CE marking
of our medical products. Our website is www.poci.com. Information contained on our website does not constitute part of this annual report.

Principal Products and Services and Methods of Distribution.

Medical
Products: Endoscopes and Image Couplers. Since 1982, we have manufactured medical products such as endoscopes, as well as image couplers, beamsplitters and adapters, all of which are
used as accessories to endoscopes. We have developed and sold endoscopes incorporating various optical technologies for use in a variety of minimally invasive surgical and diagnostic procedures. Our
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, ENT scopes, which are used for ear, nose and throat procedures, 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.

We
produce autoclavable endoscopes for various applications, which are CE mark certified for European use and have been designed and tested to withstand sterilization by autoclave, which is
sterilization in a superheated steam under pressure, as well as all other commonly used medical

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sterilization
means. The major benefits of instruments that can be autoclaved include increased patient safety, quick turnaround, and elimination of hazardous sterilant and by-product
materials, all of which provide increased value to the user compared to alternative sterilization methods.

Since
1985, we have developed, manufactured and sold a proprietary product line of instrumentation to couple endoscopes to video cameras. Included in this product line are imaging couplers. For
example, the Series 200 Parfocal Zoom Couplers and the Series 950 Universal Couplers physically connect the endoscope to a video camera system and transmit the image viewed through the
scope to the video camera. Our Series 800 Beamsplitters perform the same function while preserving for the viewer an eye port for direct, simultaneous viewing through the endoscope. These
devices are sold primarily to endoscope and video camera manufacturers and suppliers for resale under our customers' names. All of the image couplers and beamsplitters that we manufacture are approved
for surgery-approved sterilization. We believe we are one of only a few manufacturers of autoclavable image couplers worldwide.

Medical
Products: Next Generation Lenslock Endoscopes. We continue to develop and ship our next generation endoscopes that incorporate our leading proprietary Lenslock
technology (patent pending). We have shipped over 800 ENT endoscopes with diameter of 2.7 mm that incorporate Lenslock technology. We have completed prototypes of our 4 mm
Lenslock sinuscope, and 5 mm Lenslock laproscope, and are actively pursuing development of our new 4 mm Lenslock wide field arthroscope. We believe that
Lenslock technology has advantages over competitive products due to the ease of manufacture and repair, superior image quality, significant cost effectiveness and quality of repair.
Further, we believe that incorporating this into our endoscope product line could lead to increased sales of this product.

Medical
Products: Sub-millimeter Optics and Endoscopes. Utilizing developed proprietary techniques, including patent pending micro-precision lens fabrication technology, we
design and manufacture ultra-small lenses, prisms and assemblies with sizes as small as
0.2 mm. Assemblies range in complexity from the combination of two lens elements to entire imaging systems utilizing multiple micro-optical elements in combination with larger, conventional optics.
Developments in medical procedures requiring minimally invasive visualization in very small spaces, in such specialties as spinal surgery, neurosurgery, cardiothoracic surgery, cardiology and
pulmonology, have led to products requiring lenses and endoscopes as small as 0.2 mm in diameter.

Utilizing
our proprietary technology, we currently manufacture a number of products with length and/or diameter less than 1 mm and are actively expanding our product line in this area.

Medical
Products: Custom Design and Device Production. We design and manufacture custom optical medical products to satisfy our customers' specific requirements. During fiscal year 2007, we completed
development and began shipments of an advanced surgical visualization system to a significant new customer. We have received follow-on orders with deliveries continuing into fiscal year
2011. The size and extent of future follow-on orders will depend on market acceptance and other considerations.

Industrial
Products. In addition to our medical products, we also sell components and assemblies such as image couplers and beamsplitters specially designed for industrial use, including the
video-monitored examination of a variety of industrial cavities and interiors, as well as specialized borescopes for industrial applications. Utilizing micro-precision technology, we also
design and manufacture sub-millimeter optical components and assemblies for industrial use.

Night
Vision Optics. We continue to pursue a partnership effort for the proprietary development of a new class of color night vision devices including a new patent-pending eyepiece lens. We expect
that the product incorporating our night vision lenses will be evaluated by the U.S. government in the near future. We cannot control the timing of current evaluations and cannot therefore predict
when, if ever, these night vision lenses might begin to generate revenue.

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Optical
System Design and Development Services. We are able to provide customers with advanced lens design, imaging analysis, optical system design, structural design and analysis, prototype
production and evaluation, optics testing, and optical system assembly. Some of our efforts have led to optical system production business for our Company, and we believe our prototype development
service may lead to new product production from time to time.

Competition and Markets.

We sell our products in a highly competitive market and we compete for business with both foreign and domestic manufacturers. Many of our current
competitors are larger and have substantially greater resources than we do. In addition, there is an ongoing risk that other domestic or foreign companies who do not currently service or manufacture
products for our target markets, some with greater experience in the optics industry and greater financial resources than we have, may seek to produce products or services that compete directly with
ours.

We
believe that competition for sales of our medical products and services, which have been principally sold to medical device companies who incorporate our 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 pricing. We market and sell our endoscopes to customers for
incorporation into their own product lines and for resale under their own name. A number of domestic and foreign competitors also sell endoscopes to these customers and our share of the endoscope
market is nominal. We believe that, while our resources are substantially more limited than those of our competitors, we can compete successfully in this market on the basis of product quality, price,
delivery and innovation.

Marketing.

During the last three years, we have made significant efforts to update our sales and marketing activities. As part of these efforts, we have
generated and continue to generate new marketing materials for recently developed products, including a newly designed website, www.poci.com. Information on our website is not intended to be
integrated into this report. Since initiating these efforts and on an ongoing basis, we have taken a much more comprehensive view of trade show opportunities, targeting those with specific relevance
to recently developed products. We believe these efforts afford us a greater opportunity to reach and follow up a broader customer base than we have previously been able to achieve. These efforts have
contributed to recent year-over-year revenue increases, and continue to generate prospects for our leading technologies including, Lenslock,
micro-precision, and custom applications of our core optical capabilities. This includes renewed interest in some of our well-developed products such as our "classic"
autoclavable endoscopes and endocouplers, as well as new applications with our micro (fiberoptic) endoscopes.

International Business.

We have had negligible direct export sales to date. However, our medical products have received the CE Mark Certification, which permits sales into
the European marketplace. We may establish or use production facilities overseas to produce key components for our business, such as lenses. Since the 1990s we have maintained a Hong Kong subsidiary
to support business and quality control activities as required throughout Asia. We believe that the cost savings from such production may be essential to our ability to compete on a price basis in the
medical products area particularly and to our profitability generally.

Research and Development.

We believe that our future success depends to a large degree on our ability to continue to conceive and develop new optical products and services to
enhance the performance characteristics and methods of

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manufacture
of existing products. Research and development expenses are incurred on our own proprietary products and technology as well as on custom projects on behalf of customers. Accordingly, we
expect to continue to seek to obtain product-related design and development contracts with customers and to invest our own funds on research and development. We spent $529,406 of our own funds net of
reimbursements billed to customers of $374,284 on research and development in fiscal year 2010 and $737,791 of our own funds net of reimbursements billed to customers of $181,105 on research and
development during fiscal year 2009.

We
are currently incorporating our Lenslock technology (patent pending) into our line of endoscopes. This proprietary technology ensures lower cost, easier reparability and enhanced
durability. We are also aggressively pursuing the design, development and manufacture of ultra-small instruments, some with lenses less than 1 mm in diameter, utilizing our
micro-precision lens technology (patent pending).

Raw Materials and Principal Suppliers.

The basic raw material of the majority of our product line is precision grade optical glass, which we obtain from a few suppliers, principally SCHOTT
North America, Inc. and Ohara Corporation. For optical thin film coatings, the basic raw materials we utilize are metals and dielectric compounds, which we obtain from a variety of chemical
suppliers. Certain of the thin film coatings utilized in our products are currently procured from an outside supplier, but most thin film coatings are produced in-house. We believe that
our demand for these raw materials and thin film coating services is small relative to the total supply, and that the materials and services required for the production of our products are currently
available in sufficient production quantities and will be available for fiscal year 2011. We believe, however, that there are relatively few suppliers of the high quality lenses and prisms, which our
endoscopes require. In response, we have established our own 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.

We rely, 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 our competitive position. We do not believe that our business is dependent upon any patent, patent pending or license,
although we believe that trade secrets and confidential know-how may be important to our scientific and commercial success.

We
plan to file for patents, copyrights and trademarks in the United States and in appropriate countries to protect our intellectual property rights to the extent practicable. We hold the rights to
several United States and foreign patents and have several patent applications pending, including those for our new generation of 3-D endoscopes, our Lenslock endoscope
technology and our innovative micro-precision lens technology. These patents have expiration dates ranging from March 2015 to June 2028. We are not aware of any infringements of our
patents. We plan to protect our patents from infringement in each instance where we determine that doing so would be economical in light of the expense involved and the level and availability of our
financial resources. While we believe that our pending applications relate to patentable devices or concepts, these patents may not be issued and we may not be able to successfully defend these
patents or effectively limit the development of competitive products and services.

Employees.

As of June 30, 2010, we had 26 employees, 21 of which were full-time employees. There were 14 employees in manufacturing, 6 in
engineering/research and development, 1 in sales and marketing and

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5
in finance and administration. We are not a party to any collective bargaining agreements. We believe our relations with our employees are good.

Customers.

Revenues from our largest customers, as a percentage of total revenues, for fiscal years 2010 and 2009 were as follows:

2010

2009Customer A


33
%

22
%Customer B


19


20Customer C


17


23Customer D


11


11All Others


20


24100
%

100
%


No
other customer accounted for more than 10% of our revenues in fiscal years 2010 and 2009. At June 30, 2010, receivables from our largest customers were 39%, 23% and 15% of the total accounts
receivable.

Environmental Matters.

Our 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, we use a small amount of hazardous materials in our operations. We believe that we comply with all applicable
environmental laws and regulations.

Government Regulations on the Business.

Domestic
Regulation. We currently develop, manufacture and sell several medical products, the marketing of which is subject to governmental regulation in the United States. Medical devices are
regulated in the United States by the Food and Drug Administration, or FDA, and, in some cases, by certain state agencies. The FDA regulates the research, testing, manufacture, safety, effectiveness,
labeling, promotion and distribution of medical devices in the United States. Generally, medical devices require clearance or approval prior to commercial distribution. Additionally, certain material
changes to, and changes in intended use of, medical devices also are subject to FDA review and clearance or approval. Non-compliance with applicable requirements can result in failure of
the FDA to grant pre-market clearance or approval, withdrawal or suspension of approval, suspension of production, or the imposition of various other penalties.

We
notified the FDA of our intent to market our endoscopes, image couplers, beamsplitters, adapters and video ophthalmoscopes, and the FDA has determined that we may market such devices, subject to
the general controls provisions of the Food, Drug and Cosmetic Act. We obtained this FDA permission without the need to undergo a lengthy and expensive approval process due to the FDA's determination
that such devices meet the regulatory standard of being substantially equivalent to an existing approved device.

In
the future, we plan to market additional endoscopes and related medical products that may require the FDA's permission to market such products. We may also develop additional products or seek to
sell some of our current or future medical products in a manner that requires us 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

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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.

Foreign
Requirements. Sales of medical device products outside the United States are subject to foreign regulatory requirements that may vary from country to country. Our failure to comply with
foreign regulatory requirements would jeopardize our ability to market our products in foreign jurisdictions. The regulatory environment in the European Union for medical device products differs from
that in the United States. Medical devices sold in the European Economic Area must bear the
CE mark. Devices are classified by manufacturers according to the risks they represent, with a classification of Class III representing the highest risk devices and Class I representing
the lowest risk devices. Once a device has been classified, the manufacturer can follow one of a series of conformity assessment routes, typically through a registered quality system, and demonstrate
compliance to a "European Notified Body." The CE mark may then be applied to the device. Maintenance of the system is ensured through annual on-site audits by the notified body and a
post-market surveillance system requiring the manufacturer to submit serious complaints to the appropriate governmental authority. All of our medical products are CE mark certified.

ITEM 1A.    RISK FACTORS.

RISKS RELATED TO OUR BUSINESS

An investment in our common stock involves a high degree of risk. Before making an investment decision, you should give careful consideration to the
following risk factors, in addition to the other information included in this annual report. If any of the following risks actually occur, our business, financial condition or results of operations
could be materially and adversely affected and you may lose some or all of your investment.

Our independent auditors have issued a going concern opinion and, if we do not generate enough cash from operations to sustain our business, we may have to liquidate assets
or curtail our operations.

The accompanying financial statements have been prepared assuming we will continue as a going concern. During the year ended June 30, 2010, we
incurred net losses of $660,882 and during the year ended June 30, 2009, we incurred net losses of $992,135. Our auditors have issued a going concern qualification in their report related to
our financial statements for the year ended June 30, 2010. This report is based on our history of operating losses, negative cash flows from operations and our cash position as of
June 30, 2010.

Conditions
exist which raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern depends on our ability to generate sufficient cash flows to
meet
our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, we may not be able to obtain additional financing or
achieve profitable operations or sufficient cash flows in the future.

Our existing and future debt obligations could impair our liquidity and financial condition.

Effective June 25, 2008, we completed a financing in which we issued 10% Senior Secured Convertible Notes and Warrants. As of June 30,
2010, we had outstanding notes payable of $600,000, with accrued interest as of June 30, 2010 of $120,833. Pursuant to agreements executed with holders of our 10% Senior Secured Convertible
Notes, the holders of the Notes agreed to extend the stated maturity date of the Notes to October 15, 2010. While we believe the holders of the Notes will continue to work with us to reach a
positive outcome on the repayment of the Notes, if we are not able to do so we may have to curtail our operations or liquidate our assets.

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We
may need to incur additional debt in the future to fund all or part of our capital requirements. Our outstanding debt and future debt obligations could impair our liquidity and
could:



It
is highly unlikely that we will be able to generate enough cash from our operations to pay our outstanding debt on the specified due date. If we were to fail in the future to make any required
payment under agreements governing indebtedness, or equity issues, or fail to comply with the financial and operating covenants contained in those agreements, we would be in default in regards to that
financing transaction. A debt default could significantly diminish the market value and marketability of our common stock. Our lenders would have the ability to require that we immediately pay all
outstanding indebtedness, and we might not have sufficient assets to satisfy their demands. In this event, we may be forced to seek protection under bankruptcy laws, which could harm our future
operations and overall financial condition.

The current worldwide economic downturn could have a negative impact on our business, operating results and financial condition.

If the economic downturn continues, our customers may delay, reduce or cancel their purchases of our products, particularly if they or their
customers have difficulty obtaining credit, which could reduce our revenues. The economic downturn could increase competition which could have the effect of reducing our prices. We could incur losses
if a customer's business fails and is unable to pay us, or pay us on a timely basis. Likewise, if our suppliers have difficulty in obtaining credit or in operating their businesses, they may not be
able to provide us with the materials we use to manufacture our products. These actions could result in reduced revenues and higher operating costs, and have an adverse effect on our results of
operations and financial condition.

We rely on a small number of customers who may not consistently purchase our products in the future and if we lose any one of these customers, our revenues may decline.

In the fiscal year ended June 30, 2010, our four largest customers represented approximately 33%, 19%, 17% and 11%, respectively, of our total
revenues. In the fiscal year ended June 30, 2009, our four largest customers represented approximately 22%, 20%, 23% and 11%, respectively, of our total revenues. No other customer accounted
for more than 10% of our revenues during those periods. At June 30, 2010, receivables from our three largest customers were 39%, 23% and 15%, respectively, of the total accounts receivable.

In
the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. These customers may not consistently purchase our products at a
particular rate over any subsequent period. A loss of any of these customers could adversely affect our revenues.

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Negative economic conditions increase the risk that we could suffer unrecoverable losses on our customers' accounts receivable which would adversely affect our financial
results.

At June 30, 2010, receivables from our three largest customers were 39%, 23% and 15%, respectively, of the total accounts receivable. While we
believe we have a varied customer base and have experienced strong collections in the past, if current economic conditions fail to improve we may experience change in our customer base, including
reductions in their purchasing commitments to us, which could also have a material adverse effect on our revenues and liquidity. We have not purchased insurance on our accounts receivable balances.

We rely heavily upon the talents of our Chief Executive Officer and Chief Scientific Officer, 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. The loss of Mr. Forkey's services could severely damage
our business.

Additionally,
Dr. Joseph N. Forkey, our Executive Vice President and Chief Scientific Officer, provides highly valuable contributions to our capabilities in optical instrument development, in
management of new technology and in potentially significant longer-term initiatives in biophysics and biomedical instrumentation. The loss of Dr. Forkey's management and scientific
contributions could severely damage our business.

We must continue to be able to attract employees with the scientific and technical skills that our business requires and 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. If we cannot attract such
individuals, we may not be able to produce our products and our business could be damaged.

We are subject to a high degree of regulatory oversight and, if we do not continue to receive the necessary regulatory approvals, our revenues may decline.

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
may not continue to receive the FDA's permission to market our current products or may not 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. If we lose the FDA's permission to market
our current products or we do not obtain regulatory permission to market our future products, our revenues may decline and our business may be harmed.

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We face risks inherent in product development and production under fixed price purchase orders and these purchase orders may not be profitable over time.

A portion of our business has been devoted to research, development and production under fixed price purchase orders. For our purposes, a fixed price
purchase order is any purchase order under which we will provide products or services for a fixed price over an extended period of time, usually six months or longer. Fixed price purchase orders
represented approximately 25% to 50% of our total revenues during the last several years. We expect that revenues from fixed price purchase orders 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 purchase orders. Therefore, we can never be sure at the
time we enter into any single fixed price purchase order that such purchase order will be profitable for us.

Third parties may infringe on our patents and 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. If our competitors or other third parties infringe on our patents, our
business may be harmed.

Third parties may claim that we have infringed on their patents and 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 use the technology that was the subject of the claim, or sell products embodying such
technology. If we engage in litigation, our expenses may increase and our business may be harmed. If we are prohibited from using a particular technology in our products, our revenues may decline and
our business may be harmed.

We depend on the availability of certain key supplies and services that are available from only a few sources and if we experience difficulty with a supplier, we may have
difficulty finding alternative sources of these supplies or services.

We require certain key supplies for our products, particularly precision grade optical glass, that 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, subcontractors may produce certain of our products for us, and our business is subject to the risk that these subcontractors fail to make timely delivery. Our products and services
are

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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. If this occurs, we may not be able to deliver our products on a timely
basis and our revenues may decline.

Our customers may claim that the products we sold them were defective and 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 as of September 21, 2010, no such claims have been asserted or threatened against us. However, our insurance may not be sufficient to
cover all possible future product liabilities.

We would be liable if our business operations harmed the environment and a 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.

Our quarterly financial results vary quarter to quarter and depend on factors which may adversely affect our stock price. 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:



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

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.

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RISKS RELATED TO OUR STOCK

Trading in our common stock is limited and the price of our common stock may be subject to substantial
volatility.

Our
common stock was delisted from the NASDAQ Capital Market at the opening of business on December 27, 2005, and is now traded on the Over-The-Counter Bulletin Board,
or OTCBB, under the ticker symbol "PEYE.OB," where we expect our common stock to remain for the foreseeable future. Broker-dealers often decline to trade in OTCBB stocks given the market for such
securities is often limited, the stocks are more volatile and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential
investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.

Additionally,
the price of our common stock may be volatile as a result of a number of factors, including, but not limited to, the following:



"Penny stock" rules may make buying or selling our securities difficult which may make our stock less liquid and make it harder for investors to buy and sell our securities.

Trading in our securities is subject to the SEC's "penny stock" rules and it is anticipated that trading in our securities will continue to be
subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00
per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the
sale, make a special written suitability determination for the purchaser and receive the purchaser's written agreement to execute the transaction. Unless an exception is available, the regulations
require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In
addition, broker-dealers must disclose commissions payable to both the broker- dealer and the registered representative and current quotations for the securities they offer. The additional burdens
imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and
consequently adversely affect the market price for our securities.

We are contractually obligated to issue shares in the future, diluting your interest in us.

As of June 30, 2010, there were approximately 94,378 shares of our common stock issuable upon exercise of stock options outstanding, at a
weighted average exercise price of $15.98 per share. An additional 134,698 shares of our common stock are reserved for issuance under our 2006 Equity Incentive Plan as of June 30, 2010. Also
outstanding as of June 30, 2010 are warrants for the issuance of an additional 898,621 shares of our common stock, at a weighted average exercise price of $4.18 per

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share.
The foregoing information gives effect to a 1 for 25 reverse stock split effective December 11, 2008. Moreover, we expect to issue additional shares and options to purchase shares of our
common stock to compensate employees, consultants and directors, and we may issue additional shares to raise capital. Any such issuances will have the effect of further diluting the interest of the
holders of our securities.

ITEM 2.    PROPERTIES.

We conduct our domestic operations at two facilities in Gardner, Massachusetts. The main Gardner facility is leased from a corporation owned by an
individual who is one of our officers and serves on our board of directors. The lease terminated in December 1999 and we are currently a tenant-at-will. We rent the other
Gardner facility on a month-to-month basis. We rent office space in Hong Kong for sales, marketing and supplier quality control and liaison activities of our Hong Kong
subsidiary.

We
believe these facilities are adequate for our 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 our line of endoscopes and other products may, however, require the acquisition or lease of additional facilities. We may establish
production facilities domestically or overseas to produce key assemblies or components, such as lenses, for our products. Overseas facilities may subject us 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 our competitive position and
profitability.

ITEM 3.    LEGAL PROCEEDINGS.

We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our
operations or finances. We are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations
or finances.

ITEM 4.    (REMOVED AND RESERVED).



PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is quoted on the Over-The-Counter Bulletin Board, or OTCBB, under the symbol "PEYE.OB." The following table
sets forth the high and low bid prices for our common stock for each quarter during the last two fiscal years as quoted on the OTCBB. Such OTCBB market quotations reflect inter- dealer prices, without
retail markup, markdown or commissions and may not necessarily

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represent
actual transactions. All prices have been adjusted to reflect a 1 for 25 reverse stock split, effective December 11, 2008.

High

LowFor the Fiscal Year Ended June 30, 2010First Quarter ended September 30, 2009

$
2.00

$
1.10Second Quarter ended December 31, 2009

$
1.75

$
1.10Third Quarter ended March 31, 2010

$
2.00

$
0.85Fourth Quarter ended June 30, 2010

$
3.10

$
0.01For the Fiscal Year Ended June 30, 2009First Quarter ended September 30, 2008

$
3.25

$
1.00Second Quarter ended December 31, 2008

$
2.25

$
0.10Third Quarter ended March 31, 2009

$
1.01

$
0.16Fourth Quarter ended June 30, 2009

$
5.00

$
0.25


Holders

As of September 15, 2010, we had approximately 100 holders of record of our common stock. Holders of record include nominees who may hold
shares on behalf of multiple owners.

Dividends

We have not declared any dividends during the last two fiscal years. At present, we intend to retain our earnings, if any, to finance research and
development and expansion of our business.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

ITEM 6.    SELECTED FINANCIAL DATA.

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of
Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Important Factors Regarding Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties. All statements other
than statements of historical facts included in this Annual Report on Form 10-K regarding our financial performance, business strategy and plans and objectives of management for
future operations and any other future events are forward-looking statements and based on our beliefs and assumptions. Words such as "may," "will," "expect," "might," "believe," "anticipate,"
"intend," "could," "estimate," "project," "plan," and other similar words are one way to identify such forward-looking statements. Such statements reflect our current view with respect to future
events and are subject to certain risks, uncertainties, and assumptions, including, but without limitation, those risks and uncertainties contained in the Risk Factors section of this Annual Report on
Form 10-K. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many
reasons, including the risks described in this report and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking
statements are reasonable, they relate only to events as of the date on which the statements are made.

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We
do not intend to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations, except as
required by law.

The
following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this annual report on
Form 10-K.

Overview

We have been a developer and manufacturer of advanced optical instruments since 1982. We design and produce high-quality micro-optics,
medical instruments and other advanced optical systems. Our 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.

We
are currently developing specialty instruments incorporating our Lenslock technology (patent pending) that ensures lower cost, easier reparability and enhanced durability as compared
to other design approaches used in the industry. We are also aggressively pursuing ultra-small instruments, some with lenses less than 1 mm in diameter, utilizing micro-precision lens
technology (patent pending).

We
are registered to the ISO 9001:2008, ISO 13485:2003, and Canadian Medical Devices Conformity Assessment System, or CMDCAS, Quality Standards and comply with the FDA Good Manufacturing
Practices and the European Union Medical Device Directive for CE marking of our medical products. Our internet website is www.poci.com. Information on our website is not intended to be integrated into
this report.

The
areas in which we do business are highly competitive and include both foreign and domestic competitors. Many of our competitors are larger and have substantially greater resources than we do.
Furthermore, other domestic or foreign companies, some with greater financial resources than we have, may seek to produce products or services that compete with ours. We routinely outsource
specialized production efforts as required, both domestic and offshore, to obtain the most cost effective production. Over the years, we have achieved extensive experience with other optical
specialists worldwide.

Since
the 1990s, we have maintained a Hong Kong subsidiary to support business and quality control activities as required throughout Asia. We believe that the cost savings from such production is
essential to our ability to compete on a price basis in the medical products area particularly and to our profitability in general.

We
believe that competition for sales of our medical products and services, which have been principally sold to original equipment manufacturer, or 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.

We
believe that our future success depends to a large degree on our 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, we expect to continue to seek to obtain product-related design and development contracts with customers and to invest our own funds on
research and development, to the extent funds are available.

Critical Accounting Policies and Estimates

General

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America, referred to as U.S. GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the

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reported
amounts of assets, liabilities, revenues and expenses. We base our 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.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when four basic criteria are met: (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) collectability is reasonably assured. Determination of criteria (3) and (4) is based on management's judgments regarding the fixed nature
of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. We assess credit worthiness of customers based upon prior history with the customer
and assessment of financial condition. Our shipping terms are customarily Free On Board, or FOB, shipping point.

Bad Debt

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our 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 our customers was to deteriorate, resulting in an
impairment of their ability to make future payments, additional allowances may be required.

Inventories

We provide 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

Long-lived assets and certain identifiable intangibles are 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 are reported at the lower of the carrying amount or fair value less estimated costs to sell.

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 carry
forwards. 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.

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

Stock-Based Compensation

The measurement and recognition of all compensation costs for all stock based awards made to employees and the Board of Directors is based upon fair
value over the requisite service period for awards expected to vest.

We
estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option-pricing model.

Results of Operations for the Fiscal Year Ended June 30, 2010 Compared to the Fiscal Year Ended June 30, 2009

During the latter part of fiscal year 2008, we implemented plans to reduce costs, including workforce reductions, and to streamline operations in an
effort to reduce net losses. This has resulted in an increase in gross profit and simultaneous decreases in operating expenses, thereby reducing losses, beginning in the third and fourth quarters of
fiscal year 2008 and continuing through fiscal year 2010. We anticipate continuing measures taken to contain costs, and to continue our review of other expense areas to determine where additional
reductions in discretionary spending can be achieved.

Total
revenues for fiscal year 2010 were $3,094,437, a decrease of $434,073, or 12.3%, from fiscal year 2009 revenues of $3,528,510. The decrease in revenues was due to lower unit volume sales of
couplers, optical components, endoscopes and fiber scopes utilizing our micro-precision lens and prism technology, partially offset by higher unit volume sales of an advanced surgical
visualization system. The reduction in unit volume sales was partially offset by increases in average product prices totaling approximately $50,000. The increase in our product pricing is the result
of several factors including product redesigns and improvements, reengineering of our products to meet customer specifications, changes in prices from vendors and the application of volume pricing
based on order size of specific products. Because we design the majority of our products based on customer specification, our products sold year-to-year vary in cost and
complexity which affects our pricing.

Revenues
from our largest customers, as a percentage of total revenues, were as follows:

2010

2009Customer A


33
%

22
%Customer B


19


20Customer C


17


23Customer D


11


11All Others


20


24100
%

100
%


No
other customer accounted for more than 10% of our revenues in fiscal years 2010 and 2009.

Gross
profit for fiscal year 2010 of $1,297,238 reflected an unfavorable change of $298,436, compared to fiscal year 2009 gross profit of $1,595,674. Gross profit as a percentage of revenues decreased
from 45.2% in fiscal year 2009 to 41.9% in fiscal year 2010. The unfavorable change in our gross profit percentage was due primarily to lower overall sales volume and higher provisions for
slow-moving and obsolete inventories in fiscal year 2010 compared to fiscal year 2009.

Research
and development expenses, net were $529,406 for fiscal year 2010 compared to $737,791 for fiscal year 2009. The decrease of $208,385, or 28.2%, was due primarily to higher reimbursements of
related costs from customers, which increased by $193,179, or 106.7%, in fiscal year 2010 compared to

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fiscal
year 2009. Research and development expenses depend on our assessment of new product opportunities and available resources. Research and development expenses were net of reimbursement of
related costs of $374,284 during fiscal year 2010 and $181,105 during fiscal year 2009.

Selling,
general and administrative expenses decreased by $256,470, or 17.7%, to $1,192,800 for fiscal year 2010 compared to $1,449,270 for fiscal year 2009. The decrease was primarily attributable to
lower legal, accounting, and transfer agent fees amounting to approximately $102,000 related to the preparation and filing of a registration statement and implementation of a
1-for-25 reverse stock split in December 2008, and lower insurance and stock option compensation expenses.

The
gain on sale of assets in fiscal year 2010 represents the sale of previously written off assets for proceeds of $20,826.

Interest
income decreased by $4,311 during fiscal year 2010 compared to the previous year. The decrease was due to a lower base of cash and cash equivalents.

Interest
expense decreased by $197,071 during fiscal year 2010 to $256,729 compared to the previous year total of $453,800. The decrease was due primarily to lower amortization of debt discount on the
10% Senior Secured Convertible Notes issued on June 25, 2008.

The
income tax provisions in fiscal years 2010 and 2009 represent the minimum statutory state income tax liability.

Liquidity and Capital Resources

We compete in a highly technical, very competitive, and in most cases, price driven segment of the medical instrument marketplace where products can
take years to develop and introduce to distributors and end users. Furthermore, research and development, manufacturing,
marketing and distribution activities are strictly regulated by the FDA, ISO and other regulatory bodies that, while intended to enhance the ultimate quality and functionality of products produced,
can contribute to the significant cost and time needed to maintain existing products and develop and introduce product enhancements and new product innovations.

We
have traditionally funded working capital needs through product sales, management of working capital components of our business, and by cash received from public and private offerings of our common
stock, warrants to purchase shares of our common stock and convertible notes. We have incurred quarter to quarter operating losses during our efforts to develop current products including endoscopes,
image couplers, beamsplitters, night vision and micro-optic lenses, prisms and assemblies for various applications utilizing a number of proprietary and patent-pending technologies including
Lenslock endoscope and micro-precision lens technologies. Our management expects that such operating losses will continue until sales increase to breakeven and profitable
levels. Our management also believes that the opportunities represented by these products have the potential to generate sales increases to achieve breakeven and profitable results.

Our
current financial condition may raise doubt among potential equity investors, customers and suppliers regarding our ability to continue as a going concern, as referenced by the Report of
Independent Registered Public Accounting Firm on our financial statements for the year ended June 30, 2010, included in this annual report. We may not be able to obtain working capital funds
necessary in the time frame needed and at satisfactory terms to correct the going concern issue.

As
of June 30, 2010, cash and cash equivalents were $416,040, accounts receivable were $505,200 and current liabilities were $2,092,948. We anticipate that deferred officers' salaries and
director consulting expenses accrued at June 30, 2010 will be settled by issuing restricted common stock rather than by cash payments. These deferred amounts included in current liabilities at
June 30, 2010 total approximately $574,000. We believe that the introduction of several new products during the last four

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fiscal
years, along with new and on-going customer relationships, will continue to generate additional revenues, which are required in order for us to achieve profitability. If these
additional revenues are not achieved on a timely basis, we will be required and are prepared to implement further cost reduction measures, as necessary.

Capital
equipment expenditures during fiscal year 2010 were $3,334, compared to $0 for fiscal year 2009. Future capital equipment expenditures will be dependent upon future sales and success of
on-going research and development efforts.

Contractual
cash commitments for the fiscal years subsequent to June 30, 2010 are summarized as follows:

2011

2012

Thereafter

TotalOperating Leases

$
24,153

$
776

$
388

$
25,317Principal & Interest (1)


720,833








720,833Totals

$
744,986

$
776

$
388

$
746,150


---

We
have contractual cash commitments related to open purchase orders for fiscal year 2011 of approximately $78,000.

Trends and Uncertainties That May Affect Future Results

We expect our pattern of quarter-to-quarter revenue fluctuations to continue, due to the introductory stage of many of our
products and the unpredictable timing of orders from customers and the size of those orders in relation to total revenues. Contingent on available funding, we intend to continue to develop and
commercialize new products and technical innovations, in particular:



However,
if we do not have sufficient capital to develop and commercialize these products, our future revenues may decline if we cannot offer the innovative products the market is seeking. Over the
past few years, we have implemented significant changes in new product and technology development by shifting the emphasis of research and development efforts from developing underlying technologies
to commercialization of the applications of these new technologies. These have already been realized to some degree in a number of areas. Over the past two to three years our efforts have produced
revenues from our new micro-precision lens products and new Lenslock endoscopes. Recent initiatives in the area of micro-precision lenses address specific
customer opportunities in different medical specialty applications. In endoscope technologies, we continue new product offerings in our Lenslock product line. We have shipped over 600 ENT
endoscopes with diameter of 2.7 mm that incorporate Lenslock technology. We recently completed prototypes of our 4 mm Lenslock sinuscope, and 5 mm Lenslock
laproscope, and are actively pursuing development of our new 4 mm Lenslock wide field arthroscope. We believe that our Lenslock technology has advantages over competitive
products due to ease of manufacture and repair, superior image quality, significant cost

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effectiveness
and quality of repair. We anticipate that further incorporating this technology into our endoscope product line will lead to increased sales.

The
$600,000 principal and $120,883 interest, as of June 30, 2010, on the 10% Senior Secured Convertible Notes are due October 15, 2010. This amount may be reduced to the extent the
holders of the Notes elect to convert some or all of the principal on the Notes into our common stock. Should the holders not elect to convert all or a substantial amount of the balances due on the
Notes into our common stock, it is highly unlikely that we will be able to generate enough cash from our operations to pay these balances in full on the specified due date. Therefore, we may
renegotiate terms with existing holders or refinance this debt and, in either case, if available, the terms may be more burdensome. We are currently exploring the possibility of obtaining additional
funding sources to satisfy this repayment obligation.

In
the event the holders do not elect to convert all or a substantial amount of the balances due on the Notes into our common stock, or if we are not able to renegotiate the terms or obtain financing
on terms satisfactory to us, or at all, we may ultimately be unable to meet our payment obligations under the Notes. In such event, all unpaid principal and interest will become immediately due and
payable and the holders may pursue any other available remedies. The Notes are secured by a pledge of our assets pursuant to a pledge and security agreement and the security documents ancillary
thereto, and in the event we are unable to meet our payment obligations, the holders would have the ability to require that we immediately pay all outstanding indebtedness, and we might not have
sufficient assets to satisfy their demands. While we believe that this eventuality is unlikely, it is possible that in this event, we may be forced to seek protection under bankruptcy laws, which
could harm our future operations and overall financial condition. Additionally, a debt default could significantly diminish the market value and marketability of our common stock.

During
the last two quarters of 2008 and continuing through fiscal year 2010, we implemented certain cost containment plans which included focusing on a limited number of products and technologies
expected to provide near term revenues, streamlining operations, workforce reductions and deferring certain development initiatives. These measures reduced our overhead expenses.

Going
forward, we intend to focus our development efforts on products we believe offer the best prospects to increase our near-term revenues. An example beyond the new instruments
mentioned above includes the lenses we developed for a new color Night Vision system. During the quarter ended December 31, 2009, we shipped first article pre-production lens
systems. These are for use in the new color Night Vision system, and utilize an improved design that offers lower cost and lighter weight.

For
the quarter ended June 30, 2010, our cash and cash equivalents increased by $105,798, and our operating profit for the quarter was $9,659, the first positive quarterly operating profit
since the quarter ended December 31, 1997. For the year ended June 30, 2010, our cash and cash equivalents increased by $31,447 compared to the year ended June 30, 2009. If our
cash reserves decrease in the future, we will be required to seek additional funding for operations. We predict that we may not have sufficient cash to continue operations through the next twelve
months. We are actively pursuing several options to manage cash flow and raise capital including issuing debt, equity or entering into a strategic alliance. The sale of additional equity or
convertible debt securities would result in additional dilution to our stockholders, and debt financing, if available, may involve restrictive covenants that could restrict our operations or finances.
Financing may not be available in amounts or on terms acceptable to us, if at all. If we cannot raise funds on acceptable terms or achieve positive cash flow, we may not be able to continue to conduct
operations, develop new products, grow market share, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which would negatively impact our
business, operating results and financial condition. If we are not successful in increasing our revenues, reducing our expenses or raising additional equity capital to generate sufficient

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cash
flows to meet our obligations as they come due, we may not be able to continue as a going concern.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of
Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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Report of Independent Registered Public Accounting Firm

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

We
have audited the accompanying consolidated balance sheets of Precision Optics Corporation, Inc. and subsidiaries (the Company) as of June 30, 2010 and 2009 and the related
consolidated statements of operations, stockholders' equity and cash flows for the years then ended. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls
over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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, 2010 and 2009 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring net losses and negative cash flows from operations, which raises substantial doubt about its ability to continue as a going concern. Management's plans
concerning these matters are described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/
Stowe & Degon LLC

Westborough,
Massachusetts
September 15, 2010

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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets at June 30, 2010 and 2009

2010

2009ASSETSCurrent Assets:Cash and cash equivalents

$
416,040

$
384,593Accounts receivable (net of allowance for doubtful accounts of $11,446 in 2010 and $7,400 in 2009)


505,200


511,807Inventories


684,321


709,155Prepaid expenses


33,499


42,617Total current assets


1,639,060


1,648,172Fixed Assets:Machinery and equipment


2,355,968


2,352,634Leasehold improvements


553,596


553,596Furniture and fixtures


148,303


148,303Vehicles


19,674


42,3433,077,541


3,096,876LessAccumulated depreciation and amortization


2,991,441


2,968,503Net fixed assets


86,100


128,373Patents, net


203,539


198,643$
1,928,699

$
1,975,188LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:10% Senior secured convertible notes

$
720,833

$
464,104Accounts payable


448,894


428,282Customer advances


101,068


12,393Accrued employee compensation


730,241


504,187Accrued professional services


66,000


58,000Accrued warranty expense


25,000


25,000Other accrued liabilities


912


912Total current liabilities


2,092,948


1,492,878Commitments (Note 3)Stockholders' Equity (Deficit):Common stock, $0.01 par value-Authorized50,000,000 shares; issued and outstanding1,018,411 shares at June 30, 2010 and June 30,
2009


10,184


10,184Additional paid-in capital


38,236,325


38,222,002Accumulated deficit


(38,410,758
)

(37,749,876
)Total stockholders' equity (deficit)


(164,249
)

482,310$
1,928,699

$
1,975,188


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

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Table of Contents

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations for the
Years Ended June 30, 2010 and 2009

2010

2009Revenues

$
3,094,437

$
3,528,510Cost of Goods Sold


1,797,199


1,932,836Gross profit


1,297,238


1,595,674Research and Development Expenses, net


529,406


737,791Selling, General and Administrative Expenses


1,192,800


1,449,270Gain on Sale of Assets


(20,826
)

(48,752
)Total operating expenses


1,701,380


2,138,309Operating loss


(404,142
)

(542,635
)Interest Income


901


5,212Interest Expense


(256,729
)

(453,800
)Loss before provision for income taxes


(659,970
)

(991,223
)Provision for Income Taxes


912


912Net loss

$
(660,882
)
$
(992,135
)Loss per ShareBasic and Diluted

$
(0.65
)
$
(0.97
)Weighted Average Common Shares OutstandingBasic and Diluted


1,018,411


1,018,411


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

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Table of Contents

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 2010 and 2009

Number
of Shares

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
Equity (Deficit)Balance, July 1, 2008


1,018,411

$
10,184

$
38,149,655

$
(36,757,741
)
$
1,402,098Stock-based compensation








72,347





72,347Net loss











(992,135
)

(992,135
)Balance, June 30, 2009


1,018,411

$
10,184

$
38,222,002

$
(37,749,876
)
$
482,310Stock-based compensation








14,323





14,323Net loss











(660,882
)

(660,882
)Balance, June 30, 2010


1,018,411

$
10,184

$
38,236,325

$
(38,410,758
)
$
(164,249
)


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

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Table of Contents

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2010 and 2009

2010

2009Cash Flows from Operating Activities:Net loss

$
(660,882
)
$
(992,135
)Adjustments to reconcile net loss to net cash used in operating activities-Depreciation and amortization


79,039


62,195Gain on sale of assets


(20,826
)

(48,752
)Gain on cash surrender value of life insurance policies





(8,752
)Provision for inventory write-down


80,087


45,419Stock-based compensation expense


14,323


72,347Non-cash interest expense


256,729


453,800Changes in operating assets and liabilities-Accounts receivable, net


6,607


(124,583
)Inventories


(55,253
)

(146,143
)Prepaid expenses


9,118


(5,868
)Accounts payable


20,612


63,873Customer advances


88,675


(78,712
)Accrued expenses and other


234,054


174,657Net cash provided by (used in) in operating activities


52,283


(532,654
)Cash Flows from Investing Activities:Purchases of property and equipment


(3,334
)

Proceeds from sale of assets


20,826


48,752Proceeds from cash surrender value of life insurance policies





14,217Additional patent costs


(38,328
)

(31,710
)Net cash provided by (used in) investing activities


(20,836
)

31,259Net increase (decrease) in cash and cash equivalents


31,447


(501,395
)Cash and cash equivalents, beginning of year


384,593


885,988Cash and cash equivalents, end of year

$
416,040

$
384,593Supplemental Disclosure of Cash Flow Information:Cash paid during the year for income taxes

$
912

$
912


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

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Table of Contents

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.

The
Company has sustained recurring net losses for several years. During the year ended June 30, 2010, the Company incurred a net loss of $660,882 and generated cash from operations of $52,283.
As of June 30, 2010, cash and cash equivalents were $416,040, accounts receivable were $505,200 current liabilities were $2,092,948. The Company anticipates that deferred officers' salaries and
director consulting expenses accrued at June 30, 2010 will be settled by issuing restricted common stock rather than by cash payments. These deferred amounts included in current liabilities at
June 30, 2010 total approximately $574,000. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. During the latter part of fiscal year 2008, the Company implemented plans to reduce costs and to streamline operations in an effort to
reduce net losses. 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 has incurred quarter to quarter operating losses during its recent efforts to develop current products including endoscopes, image couplers, beamsplitters, night vision and micro-optic
lenses, prisms and assemblies for various applications and utilizing a number of proprietary and
patent-pending technologies including Lenslock endoscope and micro-precision lens technologies. Management expects that such operating losses will continue through fiscal
year 2011, and until sales increase to breakeven and profitable levels. Management also believes that the opportunities represented by these products have the potential to generate sales increases to
achieve breakeven and profitable results. The Company will continue its review of other expense areas to determine where additional reductions in discretionary spending can be achieved. There can be
no assurance that the Company's operating plans will be successful, and if so required, that the Company will be successful in obtaining the capital necessary to continue ongoing operations.

In
June 2008, the Company issued senior secured convertible notes and warrants, raising cash proceeds of $600,000.

During
the past year, the introduction of several new products, along with new and on-going customer relationships, has resulted in significant revenue growth. The Company believes that
with continued promotion, these opportunities have the potential to continue the general trend of increasing revenues, which, along with enhanced operations are required in order for the Company to
achieve profitability.

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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 inter-company accounts and transactions have
been eliminated in consolidation. All shares and per share data reflect the effects of a 1-for-25 reverse stock split that became effective on December 11, 2008.

(c)   Revenues

The Company recognizes revenue when four basic criteria are met: (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) collectability is reasonably assured. The Company's shipping terms are customarily FOB shipping point.

The
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 that would raise
questions as to whether the sales price is fixed or determinable. The Company assesses credit worthiness of customers based upon prior history with the customer and assessment of financial condition.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for that portion of accounts receivable considered
to be uncollectible, based upon historical experience and management's evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off against the allowance when
identified.

The
Company's revenue transactions typically do not contain multiple deliverable elements for future performance obligations to customers, other than a standard one-year warranty on
materials and workmanship, the estimated costs for which are provided for at the time revenue is recognized.

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. Gross shipping charges reimbursable from customers, to deliver product, are insignificant and are included in Revenues, while shipping costs are classified as the Selling, General and
Administrative Expenses section of the Consolidated Statement of Operations.

(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 and cash equivalents of
$416,040 and $384,593 at June 30, 2010 and 2009, respectively, consist primarily of cash at banks and money market funds. The Company maintains its cash and cash equivalents in bank deposit
accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash
and cash equivalents.

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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, 2010 and 2009 are as follows:

2010

2009Raw material

$
335,093

$
492,712Work-in-progress


275,340


116,605Finished goods


73,888


99,838$
684,321

$
709,155


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.

During
fiscal years 2010 and 2009, the Company recorded pre-tax non-cash provisions for slow-moving and obsolete inventories of $80,087 and $45,419, 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 LifeMachinery and equipment

2-7 yearsLeasehold improvements

Shorter of lease term or estimated useful lifeFurniture and fixtures

5 yearsVehicles

3 years


Depreciation
expense was $45,607 and $33,737 for the years ended June 30, 2010 and 2009, respectively.

(g)   Significant Customers and Concentration of Credit Risk

Financial instruments that subject the Company to credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its investments with
highly rated financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 2010, receivables from the Company's largest customers were 38%, 23%
and 15% of the total accounts receivable. At June 30, 2009, receivables from the Company's largest customers were 32%, 21%, 19% and 13% of the total accounts receivable. No other customer
accounted for more than 10% of the Company's receivables as of June 30, 2010 and 2009. The Company has not experienced any material losses related to accounts receivable from individual
customers. The Company generally does not require collateral 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.

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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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:

2010

2009Customer A


33
%

22
%Customer B


19


20Customer C


17


23Customer D


11


11All Others


20


24100
%

100
%


No
other customer accounted for more than 10% of the Company's revenues in fiscal years 2010 and 2009.

(h)   Loss 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 two years in the
periods ended June 30, 2010 and 2009, the effect of stock options and warrants was anti-dilutive; therefore, they were not included in the computation of diluted loss per share. The
number of shares issuable upon the exercise of outstanding stock options and warrants that were excluded from the computation, as their effect would be anti-dilutive, was approximately
993,000 and 992,000 during fiscal 2010 and 2009, respectively.

(i)    Stock-Based Compensation

The measurement and recognition of all compensation costs for all stock-based awards made to employees and the Board of Directors based upon fair value over the requisite
service period for awards expected to vest. The Company estimates the fair value of share-based awards on the date of grant using an the Black-Scholes option-pricing model. Stock-based compensation
costs recognized for the year ended June 30, 2010 and 2009 amounted to $72,347 and $108,242, respectively.

(j)    Foreign Currency Translation

The Company translates certain accounts and financial statements of its foreign subsidiary. 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 $684,952 and $651,520 at June 30, 2010 and 2009, respectively. Such costs amortized using the
straight-line method over the shorter of their legal or estimated useful lives, generally five to ten years. Amortization expense was $33,432 and $28,458 for the years ended
June 30, 2010 and 2009, respectively. Amortization expense is expected to be approximately $33,000, $32,000, $32,000, $32,000 and $29,000, respectively, for the years ending June 30,
2011 through June 30, 2015, respectively.

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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(l)    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.

(m)  Long-Lived Assets

Long-lived assets and certain identifiable intangibles are 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 undiscounted 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 have been included as a component of cost of goods sold in the
accompanying consolidated statements of operations. The following tables summarize warranty reserve activity for the years ended June 30, 2010 and 2009:

2010

2009Balance at beginning of period

$
25,000

$
25,000Provision (credit) for warranty claims


1,156


9,569Warranty claims incurred


(1,156
)

(9,569
)Balance at end of period

$
25,000

$
25,000


(o)   Research and Development

Research and development expenses are charged to operations as incurred. The Company groups development and prototype costs and related reimbursements in research and
development. For the years ended June 30, 2010 and 2009, research and development expense is shown net of reimbursements of $374,284 and $181,105, respectively, in the accompanying statements
of operations.

(p)   Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from
non-owners sources. The Company's comprehensive loss for the years ended June 30, 2010 and 2009 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

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Notes to Consolidated Financial Statements

loss
and tax credit carry-forwards. 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.

(r)   Segment Reporting

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 is its Chief Executive 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.

(t)    Recent Accounting Pronouncements

In July 2010, the Financial Accounting Standards Boards, or FASB issued new guidance under ASC TopicReceivablesDisclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses"also known as ASU 2010-20. The guidance requires entities
to provide disclosures designed to facilitate financial statement users' evaluation of (i) the nature of credit risk inherent in the entity's portfolio of financing receivables, (ii) how
that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be
disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is
generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified,
impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 will be effective for the Company's financial statements as of December 31, 2010, as
it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Company's financial statements that
include periods beginning on or after January 1, 2011. This guidance is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash
flows.

In
February 2010, the FASB, issued Accounting Standards Update, or ASU, No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements, as an amendment to FASB
Accounting Standards Codification, or ASC, Topic 855, Subsequent Events. As a result of ASU No. 2010-09, SEC registrants are no longer required to disclose the date through which
management evaluated subsequent events in the financial statements. ASU No. 2010-09 is effective March 31, 2010 for our consolidated financial statements. The adopted
provisions of ASU No. 2010-09 are limited to disclosures and did not have any effect on the Company's consolidated financial position, results of operations or cash flows.

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Notes to Consolidated Financial Statements

In
January 2010, the FASB issued new guidance under ASC Topic 820Fair Value Measurements and Disclosures, also known as ASU 2010-06, to
improve disclosures about fair value measurements. The guidance requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the same. It also requires Level 3 reconciliation to be presented on a gross basis disclosing purchases, sales, issuances and settlements separately.
The guidance is effective for interim and annual financial periods beginning after December 15, 2009 except for gross basis presentation for Level 3 reconciliation, which is effective
for interim and annual periods beginning after December 15, 2010. This guidance is not expected to have a material effect on the Company's consolidated financial position, results of operations
or cash flows.

In
October 2009, the FASB issued ASU No. 2009-13, "Revenue Recognition, Multiple-Deliverable Revenue Arrangements," an amendment to its accounting guidance on revenue arrangements
with multiple deliverables. This new accounting guidance addresses the unit of accounting for arrangements involving multiple deliverables and how consideration should be allocated to separate units
of accounting, when applicable. In the same month, the FASB also issued ASU No. 2009-14, "Software, Certain Revenue Arrangements That Include Software
Elements," which changes revenue recognition for tangible products containing software and hardware elements. This update excludes from software revenue recognition all tangible products containing
both software and non-software components that function together to deliver the product's essential functionality and includes such products in the multiple-deliverable revenue guidance
discussed above. This guidance will be effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. All guidance contained within these updates must be adopted
in the same period. This guidance is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows.

In
June 2009, the FASB issued new guidance under ASC Topic 810Consolidation, also known as ASU 2009-17 for guidance on the consolidation of
variable interest entities. This amends the original guidance, to require an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests give it a
controlling financial interest in a variable interest entity ("VIE"). This analysis identifies the primary beneficiary of a VIE as the enterprise that has both (a) the power to direct the
activities of a VIE that most significantly impact the entity's economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE.
Additionally, this new guidance requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining it has the power to
direct the activities of the VIE that most significantly impact the entity's economic performance. This guidance is effective at the beginning of a reporting entity's first fiscal year that begins
after November 15, 2009. This guidance is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows.

In
June 2009, the FASB issued new guidance under ASC Topic 860Transfers and Servicing, also known as Accounting Standards Update ("ASU")
2009-16, for guidance on the transfer and servicing of financial assets. This guidance eliminates the concept of a "qualifying special-purpose entity" from the original accounting guidance
and removes the exception from applying FASB guidance on consolidation of variable interest entities, to qualifying special-purpose entities. This guidance is effective at the beginning of a reporting
entity's first fiscal year that begins after November 15, 2009. This guidance is not expected to have a material effect on the Company's consolidated financial position, results of operations
or cash flows.

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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements

(2)   10% SENIOR SECURED CONVERTIBLE NOTES

On June 25, 2008, the Company entered into a Purchase Agreement with institutional and other accredited investors (the "Investors") pursuant to which it sold a total of
$600,000 of 10% Senior Secured Convertible Notes (the "Notes") that are convertible at the Investor's option into a total of 480,000 shares of the Company's common stock at a conversion rate of $1.25.
The Company also issued warrants to purchase a total of 316,800 shares of its common stock at an exercise price of $1.75 per share (the "Warrants"). Interest accrues on the Notes at a rate of 10% per
year and is payable in cash upon the earlier of conversion or maturity of the Notes. The original maturity of the Notes was June 25, 2010 and the Warrants expire on June 25, 2015,
subject to extension. On September 15, 2010, by mutual agreement with the Company, the holders of the Notes extended the maturity date to October 15, 2010. The conversion price of the
Notes and the exercise price of the Warrants may be adjusted downward in the event the Company issues shares of common stock or securities convertible into common stock at a price lower than the
conversion price of the Notes or exercise price of the Warrants at the time of issuance.

Pursuant
to the Purchase Agreement, the Notes and Warrants were not convertible or exercisable until the Company implemented a 1 for 6 reverse stock split, which required the approval of its
stockholders. On November 25, 2008, the Company entered into a Side Letter Agreement in which the Investors agreed to change the ratio of the reverse split from 1 for 6 to 1 for 25. On
December 11, 2008, the Company effected a 1 for 25 reverse split of its common stock.

Pursuant
to a Registration Rights Agreement entered into with the Investors on June 25, 2008, the Company agreed to file a registration statement with the Securities and Exchange
Commission by the earlier of (i) two days following the effectiveness of the amendment to implement a reverse stock split and (ii) December 15, 2008, to register the resale of the
common stock issuable upon the conversion of the Notes and the exercise of the Warrants. The Company agreed to keep the registration statement effective until the earlier of (i) the date on
which all the securities covered by the registration statement, as amended from time to time, have been sold and (ii) the date on which all the securities covered by such registration statement
may be sold without restriction pursuant to Rule 144 of the Securities Act of 1933.

The
Notes contain covenants binding on the Company and certain events of default, including but not limited, to:



If
an event of default occurs and is uncured within the allowable grace period, if any, the Investors may declare all amounts under the Notes immediately due and payable and may pursue any other
available remedies.

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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The
Notes consist of the following:

June 30,
2010

June 30,
200910% Senior Secured Convertible Notes issued on June 25, 2009, convertible into common stock at $1.25 per share, bearing interest at 10% per annum.
Outstanding principal and accrued interest are due at maturity, June 25, 2010

$
600,000

$
600,000Accrued interest10% coupon


120,833


60,833Unamortized discount





(196,729
)$
720,833

$
464,104


Upon
issuance of the Notes and Warrants, the proceeds of $600,000 were allocated between the Notes and Warrants based on relative fair values. The value of the Warrants was recorded as a discount to
the Notes, with a corresponding increase to additional paid-in capital. The fair value of the Warrants was determined using the Black-Scholes method, with the following assumptions:

Expected life


7 yearsRisk-free rate


4.84
%Expected Dividends


0.00
%Volatility factor


154
%


In
accordance with EITF 00-27,Application of EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios,"the proceeds from the issuance of the Notes were first allocated between the Notes and the Warrants. The value of the
conversion feature was then calculated, which resulted in an effective conversion ratio that was less than the market price of the Company's common stock. The intrinsic value of this beneficial
conversion feature was recorded as a further discount to the Notes, equal to the difference between the effective conversion ratio and the market price of the Company's common stock, with a
corresponding increase to additional paid-in capital.

The
following summarizes the discount on the Notes as of June 30:

2010

2009Discountbeginning balance

$
196,729

$
590,529Less: amortization of discount


(196,729
)

(393,800
)Discountending balance

$


$
196,729


(3)   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 Company is currently a
tenant-at-will, paying rent of $9,000 per month. Total rent expense paid to related parties was $108,000 in each of fiscal years 2010 and 2009, and is included in the
accompanying consolidated statements of operations.

The
Company paid or accrued fees to a director of $60,000 in each of fiscal years 2010 and 2009 for consulting services.

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Table of Contents

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(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 2013. Total future minimum rental payments
under all non-cancelable operating leases are $24,153 in fiscal 2011 and $1,164 thereafter.

Rent
expense on operating leases, excluding the related party rent described above, was approximately $47,468 and $46,844 for the years ended June 30, 2010 and 2009, respectively.

(4)   STOCKHOLDERS' EQUITY

(a)   Stock Options

Stock-based compensation costs recognized for the year ended June 30, 2010 and 2009, included compensation costs for awards granted prior to, but not yet vested as of
July 1, 2006 (adoption date), as well as any new grants issued after July 1, 2006. Total costs recognized during the year ended June 30, 2010 and 2009 amounted to $14,323 and
$72,347, respectively, and were included in the accompanying consolidated statements of operations in: selling, general and administrative expenses (2010  $1,619;
2009  $55,340), cost of goods sold (2010  $12,704; 2009  $14,252), and research and development expenses, net
(2010  $0; 2009  $2,755). No compensation has been capitalized because such amounts would have been immaterial. There was no net income tax
benefit recognized related to such compensation for the years ended June 30, 2010 or 2009, as the Company is currently in a loss position. The total number of options granted during the year
ended June 30, 2010 was 1,200.

As
of June 30, 2010, the unrecognized compensation costs related to options vesting will be primarily recognized over a period of approximately 1 year:

OPTIONS

2011

TOTALCompensation Expense

$
12,703

$
25,406


The
Company uses the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value for the stock awards. The Black-Scholes method of valuation requires
several assumptions: (1) the expected term of the stock award; (2) the expected future stock volatility over the expected term; and (3) risk-free interest rate. The
expected term represents the expected period of time the Company believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are based
on the historic volatility of the Company's common stock and the risk free interest rate is based on the U.S. Zero-Bond rate. The Company utilizes a forfeiture rate based on an analysis of
the Company's actual experience. The fair value of options at date of grant was estimated with the following assumptions:

Years EndedJune 30,
2010

June 30,
2009Assumptions:Option life


5.3 years


5.3 yearsRisk-free interest rate


2.06
%

2.06
%Stock volatility


295
%

179
%Dividend yield


0


0Weighted average fair value of grants

$
1.35

$
1.25


37

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Table of Contents

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Stock Option and Other Compensation Plans:

The type of share-based payments currently utilized by the Company is stock options.

The
Company has various stock option and other compensation plans for directors, officers, and employees. The Company has the following stock option plans outstanding as of June 30, 2010:
Amended and Restated 1997 Incentive Plan (the "1997 Incentive Plan") and the 2006 Equity Incentive Plan. Vesting periods are at the discretion of the Board of Directors and typically average five
years. Options under these plans are granted at fair market value and have a term of ten years from the date of grant.

The
2006 Equity 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 139,898 shares of common stock have been
reserved for issuance under the 2006 Incentive Plan. At June 30, 2010, a total of 5,200 stock options are outstanding and 134,698 shares of common stock were available for future grants under
the 2006 Incentive Plan.

The
1997 Incentive Plan, which provided 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. Options for a total of 94,432 shares of common stock were
outstanding at June 30, 2009 under the 1997 Incentive Plan, as amended and restated in fiscal year 2006. Prior to the adoption of the 2006 Incentive Plan, 9,000 stock options were granted in
fiscal year 2007 under the 1997 Incentive Plan. Upon the adoption of the 2006 Incentive Plan, no new awards were granted under the 1997 Incentive Plan. No shares are available for future grants under
the Company's 1997 Incentive Plan.

The
following tables summarize stock option activity for the two years ended June 30, 2010:

Options OutstandingNumber of
Shares

Weighted Average
Exercise Price

Weighted Average
Contractual LifeOutstanding at July 1, 2008


97,232

$
15.75

7.56 yearsGrants


1,200


1.25Exercises


Cancellations


(5,254
)

6.61Outstanding at June 30, 2009


93,178

$
16.17

6.56 yearsGrants


1,200


1.35Exercises


Cancellations


Outstanding at June 30, 2010


94,378

$
15.98

5.49 years


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Table of Contents

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Information
related to the stock options outstanding as of June 30, 2010 is as follows:

Range of Exercise Prices

Number of
Shares

Weighted-Average
Remaining
Contractual
Life (years)

Weighted-Average
Exercise Price

Exercisable
Number
of Shares

Exercisable
Weighted-Average
Exercise Price$1.35


1,200


9.41

$
1.35


1,200

$
1.35$1.25


1,200


8.41


1.25


1,200


1.25$6.25


1,600


6.42


6.25


1,600


6.25$7.75


1,200


7.42


7.75


1,200


7.75$11.50


800


5.42


11.50


800


11.50$13.75


51,018


5.86


13.75


49,685


13.75$20.75


37,360


4.96


20.75


37,360


20.75$1.25$20.75


94,378


5.49

$
15.98


93,045

$
16.00


The
aggregate intrinsic value of the Company's "in-the-money" outstanding and exercisable options as of June 30, 2010 was $0 and $0, respectively.

(b)   Registration Statement

On December 18, 2008, the Company filed a registration statement on Form S-1 to register 1,074,621 shares of common stock, which included 480,000
shares underlying Senior Secured Convertible Notes, 96,000 shares underlying potential interest due on the Notes and 498,621 shares underlying warrants. The Company filed an amendment to the
Form S-1 on April 6, 2009, reducing the number of shares being registered to 960,439 shares, which included 480,000 shares underlying the Notes and 480,439 shares underlying
warrants. The Company will not receive any
proceeds from the sale or other disposition of common stock by the selling stockholders. The Company may receive proceeds from the exercise of warrants. On June 29, 2009, the registration
statement was declared effective by the U.S. Securities and Exchange Commission.

(c)   Reverse Stock Split

Effective as of the open of business on December 11, 2008, the Company effected a reverse stock split of its common stock, par value $0.01 per share. Every 25 shares of
common stock were reclassified and combined into one share of common stock, and the Company's stock ticker symbol on the OTCBB was changed from POCI.OB to PEYE.OB. No fractional shares were issued as
a result of the reverse stock split. Instead, each resulting fractional share of common stock was rounded up to one whole share. The reverse stock split reduced the number of shares of common stock
outstanding from 25,458,212 to 1,018,411. The total number of authorized shares of common stock continued to be 50,000,000 and the par value per share of the common stock continued to be $0.01.

All
shares and per share data in the accompanying consolidated financial statements reflect the effects of the 1-for-25 reverse stock split that became effective on
December 11, 2008. In addition, capital stock has been decreased by $244,398, with a corresponding increase to paid-in capital to reflect the adjusted number of shares of $0.01 par
value common stock outstanding as a result of the 1-for-25 reverse stock split.

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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(d)   Warrants

In conjunction with the sale of the 10% Senior Secured Convertible Notes on June 25, 2008 mentioned above, the Company issued warrants to purchase an aggregate of
316,800 shares of common stock at an exercise price of $1.75 per share. The warrants expire on June 25, 2015.

In
February 2007, the Company completed a private placement with institutional and other accredited investors pursuant to which it sold an aggregate of 400,000 shares of common stock, at a price of
$6.25 per share and warrants to purchase an aggregate of 400,000 shares of common stock at an exercise price of $8.00 per share. In conjunction with the issuance by the Company of the 10% Senior
Secured Convertible Notes and warrants on June 25, 2008, certain anti-dilution provisions of the existing warrants were triggered. As a result, the number of existing warrants was
increased from
400,000 to 581,821 and the related exercise price was decreased from $8.00 per share to $5.50 per share. The warrants expire on February 1, 2012.

(5)   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 and $912 for the
years ended June 30, 2010 and 2009, respectively.

A
reconciliation of the federal statutory rate to the Company's effective tax rate for the two years ended June 30 is as follows:

2010

2009Income tax benefit at federal statutory rate


(34.0
)%

(34.0
)%Increase (decrease) in tax resulting from- State taxes, net of federal benefit


(6.3
)

(6.3
)Change in valuation allowance


30.5


66.9Nondeductible items


1.4


0.7Prior-year tax adjustments


4.7


(23.9
)Other


3.8


(3.3
)Effective tax rate


0.1
%

0.1
%


The
components of deferred tax assets and liabilities at June 30, 2010 and 2009 are approximately as follows:

2010

2009Deferred tax assets:Net operating loss carry forwards

$
2,575,000

$
2,403,000Tax credit carry forwards


345,000


370,000Reserves and accruals not yet deducted for tax purposes


227,000


173,000Total deferred tax assets


3,147,000


2,946,000Valuation allowance


(3,147,000
)

(2,946,000
)Net deferred tax asset

$


$



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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 2010 by approximately $201,000.

At
June 30, 2010, the Company had federal and state net operating loss carry forwards of approximately $5,700,000 and $5,300,000, respectively, which will, if not used, expire at various dates
from 2011 through 2029. In addition, the Company had net operating loss carry forwards from its Hong Kong operations of approximately $1,700,000, which carry forward indefinitely.

(6)   PROFIT SHARING PLAN

The Company has a defined contribution 401(k) profit sharing plan. Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing
or matching contributions were made to the plan in fiscal years 2010 and 2009.

(7)   SALE OF ASSETS

The Company sold equipment that was previously written off and a fully-depreciated vehicle with an original cost of $22,669 for proceeds totaling $20,826 and recorded a gain of
$20,826, which is included within operating expenses in the accompanying consolidated statements of operations.

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Table of Contents

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this annual report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures, including internal control over financial reporting, were not effective as of June 30, 2010, to ensure that information we are required to disclose in reports that we
file or submit under the Securities Exchange Act of 1934, as amended (i) is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission
rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Our disclosure controls and procedures are intended to be designed to provide reasonable assurance that such information is accumulated and communicated to our
management.

Management's Annual Report on Internal Control Over Financial Reporting

Our disclosure controls and procedures include components of our internal control over financial reporting. In designing and evaluating our
disclosure controls and procedures management recognizes that any controls, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud, if any, with our Company have been detected.

A
"material weakness" is defined as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. A "significant deficiency" is a control deficiency, or a combination of control deficiencies, that adversely affects a company's ability
to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a
misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected.

Under
the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting as of June 30, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) inInternal ControlIntegrated Framework.Based on our evaluation, our
management concluded that our internal control over financial reporting was not effective as of June 30, 2010.

The
following is a description of two material weaknesses in our internal control over financial reporting:

Segregation
of Duties: As previously disclosed in our annual report on Form 10-K for the fiscal year ended June 30, 2008, our management identified a control deficiency
during the 2008 fiscal year because we lacked sufficient staff to segregate accounting duties. We believe the control deficiency resulted primarily because we have the equivalent of one and
one-half persons performing all accounting-related on-site duties. As a result, we did not maintain adequate segregation of duties within our critical financial reporting
applications, the related modules and financial reporting processes. This

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Table of Contents

control
deficiency could result in a misstatement of balance sheet and income statement accounts in our interim or annual consolidated financial statements that would not be detected. Accordingly,
management has determined that this control deficiency constitutes a material weakness. No audit adjustments to our audited financial statements as of June 30, 2009 or 2010 were necessary as a
result of this condition.

To
address and remediate the material weakness in internal control over financial reporting described above, beginning with the quarter ended September 30, 2008, we instituted a procedure
whereby our President, our Executive Vice President and other members of our Board of Directors perform a higher level review of the quarterly and annual reports on Form 10-Q and
Form 10-K prior to filing.

We
believe that the step outlined above strengthens our internal control over financial reporting and mitigates the material weakness described above. As part of our 2010 assessment of internal
control over financial reporting, our management has evaluated this additional control and has determined that it is operating effectively.

Inventory
Valuation: As previously disclosed in our annual report on Form 10-K for the fiscal year ended June 30, 2009, we reported a material weakness with respect to the
valuation of our inventories. Specifically, the amounts used to value our inventory at June 30, 2009 with respect to overhead rates and purchased items were often not consistent with the
supporting documentation, due to year-to-year changes in overhead rates and costs of purchased items that were not properly reflected in inventory valuation. Accordingly,
management had determined that this control deficiency constituted a material weakness as of June 30, 2009. No audit adjustments to our audited financial statements as of June 30, 2009
were necessary as a result of this condition.

To
address and remediate the material weakness in internal control over financial reporting described above, beginning in the quarter ended September 30, 2009 and continuing through the year
ended
June 30, 2010, we implemented procedures to improve our inventory controls and documentation surrounding inventory valuation for overhead rates, and performed procedures to ensure that the
pricing of inventory items was consistent with the supporting documentation. No audit adjustments to our audited financial statements as of June 30, 2010 were necessary as a result of this
condition. We believe that the step outlined above strengthens our internal control over financial reporting and mitigates the material weakness described above.

We
intend to continue to remediate material weaknesses and enhance our internal controls but cannot guarantee that our efforts will result in remediation of our material weaknesses or that new issues
will not be exposed in this process.

This
annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fourth quarter of our fiscal year covered by this
annual report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION.

On June 25, 2008, we entered into a Purchase Agreement, as amended on December 11, 2008, June 25, 2010 and July 26, 2010,
with certain accredited investors pursuant to which we sold an aggregate of $600,000 of 10% Senior Secured Convertible Notes. On September 15, 2010, the investors amended the Notes to extend
the "Stated Maturity Date" to October 15, 2010. We believe the investors will continue to work with us to reach a positive outcome on the repayment of the Senior Secured Convertible Notes.

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PART III



ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Set forth below is certain information with respect to the individuals who are our directors and executive officers as of June 30, 2010.

Name

Age

Position(s) or Office(s) Held (1)Richard E. Forkey


70

Director, President, Chief Executive Officer and TreasurerJoseph N. Forkey


42

Director, Executive Vice President and Chief Scientific OfficerJack P. Dreimiller


62

Senior Vice President, Chief Financial Officer and ClerkJoel R. Pitlor


72

DirectorDonald A. Major


49

DirectorRichard Miles


67

Director


(1)Our
Board of Directors is divided into three classes that are as nearly equal in number as possible, with staggered terms of office. Only one class is
elected each year. Each director serves a three year term and until his or her successor has been duly elected and qualified. Our directors in Class III, Joseph N. Forkey and Richard Miles,
will hold office until the annual meeting of stockholders in 2011 and until their successors have been duly elected and qualified. Our Class II directors, Joel R. Pitlor and Donald A.
Major, will hold office until the annual meeting of stockholders in 2010 and until their successors have been duly elected and qualified. The director in Class I, Richard E. Forkey, will hold
office until the annual meeting of stockholders in 2012 and until his successor has been duly elected and qualified.


Mr. Richard
E. Forkey has been the President, Chief Executive Officer, Treasurer, and a director of our Company since he founded the Company in 1982. He was the Clerk of the Company from May
1983 to June 1990.

Dr. Joseph
N. Forkey, son of Richard E. Forkey, has been our Executive Vice President and Chief Scientific Officer since April 2006 and was our Chief Scientist from September 2003 to April
2006. Dr. Forkey has been a director since 2006. Since joining us, he has been involved in general technical and management activities of our Company, as well as investigations of opportunities
that leverage our newly developed technologies. Dr. Forkey holds B.A. degrees in Mathematics and Physics from Cornell University, and a Ph.D. in Mechanical and Aerospace Engineering from
Princeton University. Prior to joining us, Dr. Forkey spent seven years at the University of Pennsylvania Medical School as a postdoctoral fellow and research staff member.

Mr. Jack
P. Dreimiller has been our Senior Vice President, Finance, Chief Financial Officer and Clerk since August 15, 2008 and also served as our Senior Vice President, Finance and
Chief Financial Officer from April 1992 until June 2005 and our Clerk from January 1998 until June 2005. Since June 2005, he has served as an independent consultant serving various roles as
financial/accounting executive, including interim Chief Financial Officer, for a number of companies. From June 2005 to December 2005, he was an independent consultant to our Company.

Mr. Joel
R. Pitlor has, since 1979, been President of J.R. Pitlor, a management consulting firm which he founded that provides strategic business planning. Mr. Pitlor has provided
business planning consultation to us since 1983.

Mr. Donald
A. Major has since October 2007 been an independent consultant where he most recently is providing companies with interim management, turnaround, restructuring and reorganization
services, and previously represented a private equity firm in the identification, evaluation and implementation of corporate investment opportunities. From October 2006 to May 2007, Mr. Major
served as Vice

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Table of Contents

President
of Corporate Development of Advanced Duplication Services LLC. From February 2002 to late 2008, Mr. Major served as Vice President and Treasurer of Anderson
Entertainment, LLC (formerly Digital Excellence LLC).

Professor
Richard Miles has since 1972 been a member of the faculty at Princeton University, and serves as the Director of the Applied Physics Group in Princeton University's Mechanical and Aerospace
Engineering Department.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who own more than 10% of a
registered class of our securities to file with the Securities Exchange Commission, or SEC, reports of ownership and changes in ownership of common stock and other equity securities of ours. Officers,
directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. During the last calendar year, the following
directors filed the following reports late: Mr. Pitlor was late in filing a Form 4 representing one transaction, Mr. Major was late in filing a Form 4 representing one
transaction, and Mr. Miles was late in filing a Form 4 representing one transaction.

Code of Ethics

A copy of our Corporate Code of Ethics and Conduct applicable to all employees, officers and directors of our Company, including our principal
executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions can be obtained free of charge by contacting our Clerk, c/o
Precision Optics Corporation, 22 East Broadway, Gardner, Massachusetts 01440.

Audit Committee

The Audit Committee of the Board of Directors is currently composed of Messrs. Major and Miles. The Audit Committee has adopted a charter
which was included as Exhibit C to the Company's proxy statement for the 2006 Annual Meeting of Stockholders. The Audit Committee's primary function is to assist the Board of Directors in
monitoring the integrity of our financial statements, systems of internal control and the independence and performance of the independent registered public accounting firm. The Audit Committee's
specifically enumerated powers and responsibilities include hiring and terminating the independent registered public accounting firm and pre-approving any engagements of the independent
registered public accounting firm for audit and all permitted non-audit services. The Audit Committee held four
meetings during the fiscal year ended June 30, 2010. Each of the Audit Committee members attended 100% of the meetings of the Audit Committee held during the fiscal year ended June 30,
2010.

The
Board of Directors has made a determination that Donald A. Major, Chair of the Audit Committee, qualifies as an audit committee financial expert meeting the criteria set forth in
Item 407(d)(5) of Regulation S-K. Mr. Major has an understanding of generally accepted accounting principles and financial statements and has the ability to assess the
general application of such principles in connection with the accounting for estimates, accruals and reserves. He also has over seven years of experience, including five years in a supervisory
capacity, auditing, analyzing and evaluating financial statements that had a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues
that can reasonably be expected to be raised by our financial statements. Additionally, Mr. Major served as the Chief Financial Officer to several public and private companies over a span of
18 years where he was responsible for preparing financial statements. He has an understanding of internal controls over financial reporting and an

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understanding
of audit committee functions. Mr. Major earned his B.A. in Accounting in 1984 from Michigan State University.

A
copy of our Corporate Code of Ethics and Conduct applicable to all employees, officers and directors of our Company, including our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions can be obtained free of charge by contacting our Clerk, c/o Precision Optics Corporation, 22 East Broadway, Gardner,
Massachusetts 01440.

ITEM 11.    EXECUTIVE COMPENSATION.

Executive and Director Compensation

Summary Compensation

The following table sets forth all compensation for the last two completed fiscal years ended June 30, 2010 and 2009 awarded to, earned by, or
paid to our Principal Executive Officer, Vice President and Chief Scientific Officer and one of the Company's employees, referred to herein as the "Named Executive Officers." No other executive
officer or employee earned over $100,000 in the last completed fiscal year.

Summary Compensation Table for the Fiscal Years Ended June 30, 2010 and 2009

Name and principal position (a)

Year June 30, (b)

Salary
($) (c)

Bonus
($) (d)

All other
compensation
($) (i)

Total
($) (j)Richard E. Forkey


2010


195,000
(1)

-0-


24,724
(2)(3)

219,724President, Principal Executive


2009


195,000
(1)

-0-


22,162
(2)(3)

217,162Officer & TreasurerJoseph N. Forkey


2010


120,000
(1)

-0-


-0-


120,000Executive Vice President and Chief


2009


120,000
(1)

-0-


-0-


120,000Scientific OfficerRichard G. Cyr


2010


124,000


10,500


-0-


134,500Optical Shop Manager


2009


119,025


-0-


-0-


119,025


(1)Based
on compensation arrangements approved by the Board of Directors on April 15, 2008 for the President and for the Chief Scientific Officer,
$342,800 and $24,000, respectively, of these amounts were deferred. The Company intends to pay these deferred amounts in the form of restricted stock that will be subject to future performance based
vesting.(2)Includes
car expense of $800 for 2010 and $2,100 for 2009.(3)Includes
premiums for a life insurance policy and a disability insurance policy of $22,024 for 2010 and $18,162 for 2009.


Employment Contracts and Termination of Employment Arrangements

We have no employment contracts in place with any Named Executive Officer. We have no compensatory plan or arrangement with respect to any Named
Executive Officer where such plan or arrangement will result in payments to such Named Executive Officer upon or following his resignation, or other termination of employment with us and our
subsidiaries, or as a result of a change-in-control of our Company or a change in the Named Executive Officers' responsibilities following a
change-in-control.

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Outstanding Equity Awards at Fiscal Year-End Table for the Fiscal Year Ended June 30, 2010

The following table shows grants of options outstanding on June 30, 2010, the last day of our fiscal year, to each of the Named Executive
Officers named in the Summary Compensation Table.

Option awards

Name (a)

Number of securities
underlying unexercised
options exercisable
(#) (b)

Number of securities
underlying unexercised
options unexercisable
(#) (c)

Option
exercise
price ($) (e)

Option
expiration
date (f)Richard E. Forkey


14,944


0


13.75


5/9/201614,944


0


20.75


6/13/2015Joseph N. Forkey


600


0


13.75


5/9/201611,208


0


13.75


6/13/201522,416


0


20.75


6/13/2015Richard G. Cyr


8,867


1,333
(1)

13.75


5/9/2016


(1)These
options will become exercisable on May 9, 2011.


Option Grants in Last Fiscal Year

There were no individual grants of stock options made by us during the fiscal year ended June 30, 2010 to our Named Executive Officers.

Long Term Incentive Plans; Awards in Last Fiscal Year

We made no awards under any long-term incentive plan in the fiscal year ended June 30, 2010.

Profit Sharing and 401(k) Plan

We have a defined contribution 401(k) 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 2010 and 2009. No employer matching contributions were made to the plan in fiscal years 2010 and 2009.

Director Compensation

The following table sets forth all compensation paid to non-executive and non-employee directors during the fiscal year ended
June 30, 2010:

Director Compensation Table for the Fiscal Year Ended June 30, 2010

Name (1) (a)

Fees earned or
paid in cash
($) (b)

Stock awards
($) (c)

Option awards
($) (d)

All other
compensation
($) (g)

Total
($) (h)Joel R. Pitlor


1,500
(2)

0


540
(4)(5)

60,000
(8)

62,040Donald A. Major


7,500
(2)(3)

0


540
(4)(6)

0


8,040Richard B. Miles


1,500
(2)

0


540
(4)(7)

0


2,040


(1)This
table does not include employee directors whose compensation is reflected in the summary compensation table.


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(2)We
pay each director who is not also an employee of our Company $250 per board or committee meeting that the director attends and reimburse the director for
travel expenses.(3)For
his service to our Company, in his capacity as Chair of the Audit Committee, Mr. Major receives compensation of $500 per month, which is in
addition to the standard compensation received by all members of the board of directors for their services.(4)Each
of Messrs. Major, Miles and Pitlor were issued options to purchase 400 shares of our common stock at our annual meeting in November 2009. These
options were immediately exercisable at a price per share of $1.35, which was the closing price of our common stock on the Over-the-Counter Bulletin Board on the date of grant.
These options will remain exercisable following a director's departure from service and expire on November 24, 2019. The amounts shown reflect the dollar amounts computed for financial
statement reporting purposes for fiscal 2010 in accordance with the requirements of SFAS 123(R), excluding an estimate of forfeitures. Refer to Note 4, "Stockholders' Equity-Stock
Options," in the Notes to the Consolidated Financial Statements included in our financial statements for the fiscal year ended June 30, 2010, for the relevant assumptions used to determine the
valuation of option awards.(5)As
of June 30, 2010, Mr. Pitlor held a total of 2,378 options to purchase shares of our common stock.(6)As
of June 30, 2010, Mr. Major held a total of 2,400 options to purchase shares of our common stock.(7)As
of June 30, 2010, Mr. Miles held a total of 2,000 options to purchase shares of our common stock.(8)Mr. Pitlor
is paid $60,000 per year, or $5,000 per month, for his services as a consultant to our Company. $145,000 of this amount has been deferred,
and Mr. Pitlor has agreed that such fees may be paid in the form of our restricted common stock.




ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

2006 Equity Incentive Plan

On November 28, 2006, our stockholders approved our 2006 Equity Incentive Plan, referred to as the 2006 Incentive Plan, which succeeds our
Amended and Restated 1997 Equity Incentive Plan, referred to as the 1997 Incentive Plan. No further awards have been or will be granted under the 1997 Incentive Plan. Our Board of Directors had
previously approved the 2006 Incentive Plan, subject to the approval of the stockholders. The 2006 Incentive Plan allows for the grant of stock options to selected employees, directors and other
persons who provide services to us or our affiliates.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the our common stock owned as of the close of business on September 20, 2010 by the
following persons: (i) each person who is known by us to own beneficially more than 5% of our common stock, (ii) each our directors who beneficially owns our common stock,
(iii) each of our Named Executive Officers who beneficially own our common stock and (iv) all executive officers and directors, as a group, who beneficially own our common stock. The

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information
on beneficial ownership in the table and footnotes thereto is based upon data furnished to us by, or on behalf of, the persons listed in the table.

Name and Address of Beneficial Owner

Amount and Nature of
Beneficial Ownership (1)

Percent of Class (2)AIGH Investment Partners, LLC
6006 Berkeley Avenue, Baltimore, MD 21209


190,208
(3)

18.7
%Austin W. Marxe
c/o Special Situations Funds
527 Madison Avenue, Suite 2600, New York, NY 10022


1,591,337
(4)

71.9
%David M. Greenhouse
c/o Special Situations Funds
527 Madison Avenue, Suite 2600, New York, NY 10022


1,591,133
(5)

71.9
%Arnold Schumsky
145 East 27th Street
New York, New York 10016


138,406
(6)

12.4
%Directors and Named Executive OfficersJoseph N. Forkey
c/o Precision Optics Corporation, Inc.
22 East Broadway, Gardner, MA 01440


34,712
(7)

3.3
%Richard E. Forkey
c/o Precision Optics Corporation, Inc.
22 East Broadway, Gardner, MA 01440


42,504
(8)

4.1
%Donald A. Major
c/o Precision Optics Corporation, Inc.
22 East Broadway, Gardner, MA 01440


6,400
(9)

*Richard B. Miles
c/o Precision Optics Corporation, Inc.
22 East Broadway, Gardner, MA 01440


6,000
(10)

*Joel R. Pitlor
c/o Precision Optics Corporation, Inc.
22 East Broadway, Gardner, MA 01440


194,137
(11)

18.0
%Richard G. Cyr
c/o Precision Optics Corporation, Inc.
22 East Broadway, Gardner, MA 01440


7,534
(12)

*All executive officers and directors as a group, including those named above (6 persons)


291,287


25.2
%


*Less
than 1%(1)Represents
shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of
options, warrants, conversion privileges or other rights exercisable within sixty days, sole voting and investment power. Amounts listed have been adjusted to reflect a
1-for-25 reverse split, effective December 11, 2008.


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(2)As
of September 20, 2010, we had 1,018,411 shares of our common stock issued and outstanding. Percentages are calculated on the basis of the amount
of issued and outstanding common stock plus, for each person or group, any securities that such person or group has the right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights.(3)Holdings
as of April 13, 2006, as reported on Schedule 13D filed with the SEC on May 3, 2006 by Orin Hirschman. AIGH Investment
Partners LLC and Orin Hirschman, managing member of AIGH, have shared voting and dispositive control over the shares.(4)Represents
(i) 1,097 shares of common stock owned of record by Special Situations Cayman Fund, L.P., or SSCF, (ii) 4,181 shares of
common stock owned of record by Special Situations Fund III, L.P., or SSF III, (iii) 207,699 shares of common stock owned of record by Special Situations Fund III QP, L.P., or SSF
III QP, (iv) 232,728 shares that may be acquired under an outstanding warrant held by SSF III QP, which is immediately exercisable, (v) 145,200 shares that may be acquired under an
outstanding warrant held by SSF III QP, which is immediately exercisable, (vi) 220,000 shares that may be acquired upon conversion of a convertible promissory note held by SSF III QP,
(vii) 160,000 shares of common stock owned of record by Special Situations Private Equity Fund, L.P., or SSPEF, (viii) 145,200 shares that may be acquired under an outstanding
warrant held by SSPEF, which is immediately exercisable, (ix) 220,000 shares that may be acquired upon conversion of a convertible promissory note held by SSPEF, (x) 232,728 shares that
may be acquired under an outstanding warrant held by SSPEF, which is immediately exercisable, (xi) 22,300 shares of common stock owned by Special Situations Technology Fund II, L.P., or
SSTF II, and (xii) 204 shares that may be acquired by Mr. Marxe upon the exercise of outstanding stock options. SSCF, SSF III, SSF III QP, SSPEF and SSTF II are affiliated funds.
MGP
is the general partner of the SSF III QP and the general partner of and investment adviser to SSF III. AWM is the general partner of MGP, the general partner of and investment adviser to SSFCF and
the investment adviser to SSF III QP, SSCF, SSFTF II and SSPEF. Messrs. Marxe and Greenhouse are the principal owners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxe
and Greenhouse share voting and dispositive control over the portfolio securities of each of the funds listed above.(5)Represents
(i) 1,097 shares of common stock owned of record by Special Situations Cayman Fund, L.P., or SSCF, (ii) 4,181 shares of
common stock owned of record by Special Situations Fund III, L.P., or SSF III, (iii) 207,699 shares of common stock owned of record by Special Situations Fund III QP, L.P., or SSF
III QP, (iv) 232,728 shares that may be acquired under an outstanding warrant held by SSF III QP, which is immediately exercisable, (v) 145,200 shares that may be acquired under an
outstanding warrant held by SSF III QP, which is immediately exercisable, (vi) 220,000 shares that may be acquired upon conversion of a convertible promissory note held by SSF III QP,
(vii) 160,000 shares of common stock owned of record by Special Situations Private Equity Fund, L.P., or SSPEF, (viii) 145,200 shares that may be acquired under an outstanding
warrant held by SSPEF, which is immediately exercisable, (ix) 220,000 shares that may be acquired upon conversion of a convertible promissory note held by SSPEF, (x) 232,728 shares that
may be acquired under an outstanding warrant held by SSPEF, which is immediately exercisable, and (xi) 22,300 shares of common stock owned by Special Situations Technology Fund II, L.P.,
or SSTF II. SSCF, SSF III, SSF III QP, SSPEF and SSTF II are affiliated funds.
MGP
is the general partner of the SSF III QP and the general partner of and investment adviser to SSF III. AWM is the general partner of MGP, the general partner of and investment adviser to SSFCF and
the investment adviser to SSF III QP, SSCF, SSFTF II and SSPEF. Messrs. Marxe and Greenhouse are the principal owners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxe
and Greenhouse share voting and dispositive control over the portfolio securities of each of the funds listed above.


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(6)Includes
(i) 37,096 shares of common stock owned of record by Mr. Schumsky, (ii) 34,910 shares that may be acquired upon exercise of an
outstanding warrant which is immediately exercisable, (iii) 26,400 shares that may be acquired upon exercise of an outstanding warrant which is immediately exercisable and (iv) 40,000
shares that may be acquired upon conversion of a convertible promissory note.(7)Represents
34,224 shares which may be acquired within 60 days upon the exercise of outstanding stock options and 488 shares owned by
Dr. Forkey and his wife, Heather C. Forkey, with whom he shares voting and dispositive control.(8)Represents
12,616 shares of common stock owned by Mr. Forkey and 29,888 shares which may be acquired within 60 days upon the exercise
of outstanding stock options.(9)Represents
4,000 shares of common stock owned by Mr. Major and 2,400 shares which may be acquired within 60 days upon the
exercise of outstanding stock options.(10)Represents
4,000 shares of common stock owned by Mr. Miles and 2,000 shares which may be acquired within 60 days upon the
exercise of outstanding stock options.(11)Represents
(i) 133,577 shares of common stock owned by Mr. Pitlor, (ii) 2,378 shares which may be acquired within
60 days upon the exercise of outstanding stock options, and (iii) 58,182 shares that may be acquired upon exercise of an outstanding warrant, which is immediately exercisable.(12)Represents
7,534 shares which may be acquired within 60 days upon the exercise of outstanding stock options.




ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Certain Relationships and Related Transactions

We have an arrangement with J.R. Pitlor, a company wholly-owned by Mr. Joel R. Pitlor, a director of our Company, under which
Mr. Pitlor provides consulting services to us for a fee currently not to exceed $5,000 a month. These consulting services consist primarily of advice regarding marketing, strategic planning and
other general business issues. Either party may terminate this arrangement at will. We paid or accrued to J.R. Pitlor for consulting services aggregate fees of $60,000, or $5,000 per month, for each
of the fiscal years 2010 and 2009. $120,000 of this amount has been deferred, and Mr. Pitlor has agreed that such fees may be paid in the form of our restricted common stock.

We
lease our facility in Gardner, Massachusetts from Equity Assets, Inc., a company wholly-owned by Mr. Richard E. Forkey, our President, Chief Executive Officer, Treasurer and director.
We are currently a tenant-at-will, paying rent of $9,000 per month, or an aggregate of $108,000 per year, for each of fiscal years 2009 and 2008.

Director Independence

During the fiscal year ended June 30, 2010, the individuals named in the table above served as members of our Board of Directors. Of those
individuals, Messrs. Pitlor, Major and Miles are "independent" as defined in Rule 4200(a)(15) of the NASDAQ Marketplace Rules. Our Common Stock is traded on the
Over-The-Counter Bulletin Board, referred to herein as the OTCBB. The OTCBB does not have a requirement that we have a majority of Independent Directors on its Board.

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ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES.

Independent Registered Public Accounting Firm Fees

Our principal and only independent registered public accountant for the fiscal years ending June 30, 2010 and 2009 is Stowe & Degon, or
Stowe. The following table presents fees for professional audit services and other services rendered by Stowe and Caturano & Company, or Caturano, for the fiscal years ended June 30,
2010 and 2009:

2010

2009Audit Fees (1)

$
72,974

$
94,407Audit-Related Fees (2)





Total Audit and Audit-Related Fees


72,974


94,407Tax Fees (3)


7,750


7,500All Other Fees (4)





Total Fees

$
80,724

$
101,907


(1)Audit
fees for fiscal 2010 are comprised of fees for professional services performed for the audit of our annual financial statements (Stowe) and review of
the Company's quarterly financial statements (Stowe) of $72,974, including direct out-of-pocket expenses in the amount of $1,724.
Audit
fees for fiscal 2009 are comprised of: (i) fees for professional services performed by Stowe for the audit of our annual financial statements and review of our quarterly financial
statements of $68,519, including direct out-of-pocket expenses in the amount of $519 and (ii) fees for attestation services performed by Stowe and Caturano in connection
with the filing of our registration statement on Form S-1 of $25,888.(2)Audit-related
fees are comprised of fees for assurance and related attestation services that are reasonably related to the performance of the audit of the
Company's annual financial statements or the review thereof and fees for due diligence services.(3)Tax
fees for fiscal 2010 and 2009 by Stowe are comprised of fees for professional services performed with respect to corporate tax compliance, tax planning
and tax advice.(4)We
did not incur any other fees during fiscal 2010 or 2009 for products and services provided by Stowe or Caturano other than those disclosed above.




ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

The
following documents are filed in Part II, Item 8 of this annual report on Form 10-K:

Report
of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at June 30, 2010 and 2009
Consolidated Statements of Operations for the years ended June 30, 2010 and 2009
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended June 30, 2010 and 2009
Notes to Consolidated Financial Statements

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All
financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.

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

Exhibit

Description2.1

Asset Purchase Agreement between the Company and Optometrics Corporation, dated January 18, 2008 (included as Exhibit 2.1 to the Form 8-K filed January 25, 2008 and incorporated herein by
reference).3.1

Articles of Organization of the Company, as amended (included as Exhibit 3.1 to the Form SB-2 filed March 16, 2007 and incorporated herein by reference).3.2

By-laws of Precision Optics Corporation (included as Exhibit 3.2 to the Form S-1 filed on December 18, 2008 and incorporated herein by reference).3.3

Articles of Amendment, dated December 11, 2008 (included as Exhibit 3.1 to the Form 8-K filed December 11, 2008 and incorporated herein by reference).4.1

Registration Rights Agreement, dated March 17, 2000 (included as Exhibit 4.4 to the Form S-3 filed April 28, 2000 and incorporated herein by reference).4.2

Registration Rights Agreement, dated June 30, 1998 (included as Exhibit 4.9 to the Form 10-KSB filed September 29, 1998 and incorporated herein by reference).4.3

Registration Rights Agreement, dated August 5, 1999 (included as Exhibit 4.7 to the Form 10-KSB filed September 28, 1999 and incorporated herein by reference).4.4

Registration Rights Agreement, dated February 1, 2007 (included as Exhibit 4.1 to the Form 8-K filed February 2, 2007 and incorporated herein by reference).4.5

Form of Warrant to Purchase Shares of Common Stock (included as Exhibit 4.2 to the Form 8-K filed February 2, 2007 and incorporated herein by reference).4.6

Registration Rights Agreement by and among the Company and each investor named therein, dated June 25, 2008 (included as Exhibit 4.1 to the Form 8-K filed June 27, 2008 and incorporated herein by
reference).4.7

Form of Warrant, dated June 25, 2008 (included as Exhibit 4.2 to the Form 8-K filed June 27, 2008 and incorporated herein by reference).4.8

Form of 10% Senior Secured Convertible Note, dated June 25, 2008 (included as Exhibit 4.3 to the Form 8-K filed June 27, 2008 and incorporated herein by reference).10.1

Precision Optics Corporation, Inc. 1997 Incentive Plan, as amended and restated (included as Exhibit 10.1 to the Form 10-QSB filed November 13, 2003 and incorporated herein by
reference).10.2

Securities Purchase Agreement between the Company and investors, dated March 13, 2000 (included as Exhibit 2.1 to the Form S-3 filed April 28, 2000 and incorporated herein by
reference).10.3

Form of Securities Purchase Agreement between the Company and investors (included as Exhibit 10.1 to the Form 8-K filed April 19, 2006 and incorporated herein by reference).


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10.4

Employment Offer Letter from the Company to Michael T. Pieniazek, dated September 15, 2006 (included as Exhibit 10.1 to the Form 8-K filed September 21, 2006 and incorporated herein by
reference).10.5

Precision Optics Corporation, Inc. 2006 Equity Incentive Plan (included as Exhibit 99.1 to the Form 8-K filed December 4, 2006 and incorporated herein by reference).10.6

Purchase Agreement between the Company and investors, dated February 1, 2007 (included as Exhibit 10.1 to the Form 8-K filed February 2, 2007 and incorporated herein by reference).10.7

Form of Incentive Stock Option Certificate (included as Exhibit 10.1 to the Form 10-QSB filed February 14, 2007 and incorporated herein by reference).10.8

Form of Nonstatutory Stock Option Certificate (included as Exhibit 10.2 to the Form 10-QSB filed February 14, 2007 and incorporated herein by reference).10.9

Purchase Agreement by and among the Company and each investor named therein, dated June 25, 2008 (included as Exhibit 10.1 to the Form 8-K filed June 27, 2008 and incorporated herein by
reference).10.10

Pledge and Security Agreement by and among the Company and each investor named therein, dated June 25, 2008 (included as Exhibit 10.2 to the Form 8-K filed June 27, 2008 and incorporated herein by
reference).10.11

Consulting Agreement between the Company and Jack P. Dreimiller, dated August 15, 2008 (included as Exhibit 10.1 to the Form 8-K filed August 18, 2008 and incorporated herein by
reference).10.12

Side Letter Agreement between the Company and the investors signatory to the Purchase Agreement, dated June 25, 2008, dated November 25, 2008 (included as Exhibit 10.1 to the Form 8-K filed
December 11, 2008 and incorporated herein by reference).10.13

Side Letter Agreement between the Company and the holders signatory to the 10% Senior Secured Convertible Note, dated December 11, 2008 (included as Exhibit 10.15 to the Form S-1 filed December 18,
2008 and incorporated herein by reference).10.14

Side Letter Agreement between the Company and the holders signatory to the 10% Senior Secured Convertible Note, dated April 2, 2009 (included as Exhibit 10.16 to the Form S-1/A filed April 6, 2009
and incorporated herein by reference).10.15

Endorsement to 10% Senior Secured Convertible Note by the Company, dated September 15, 2010, and accepted by Special Situations Private Equity Fund, L.P. (filed herewith).10.16

Endorsement to 10% Senior Secured Convertible Note by the Company, dated September 15, 2010, and accepted by Special Situations Fund III QP, L.P. (filed herewith).10.17

Endorsement to 10% Senior Secured Convertible Note by the Company, dated September 15, 2010, and accepted by Arnold Schumsky (filed herewith).14.1

Precision Optics Corporation, Inc. Corporate Code of Ethics and Conduct (included as Exhibit 14.1 to the Form 10-K filed September 28, 2008 and incorporated herein by reference).21.1

Subsidiaries of the Registrant (included as Exhibit 21.1 to the Form 10-K filed September 26, 2008 and incorporated herein by reference).23.1

Consent of Independent Registered Public Accounting Firm (filed herewith).31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1

Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: September 21, 2010

PRECISION OPTICS CORPORATION, INC.By:

/s/ Richard E. Forkey Richard E. Forkey
Chairman of the Board,
Chief Executive Officer (Principal
Executive Officer),
President and Treasurer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

Signature

Title

Date/s/ Richard E. Forkey Richard E. Forkey

Chairman of the Board, Chief Executive Officer, President and Treasurer (Principal Executive Officer)

September 21, 2010/s/ Joseph N. Forkey Joseph N. Forkey

Executive Vice President, Chief Scientific Officer and Director

September 21, 2010/s/ Donald A. Major Donald A. Major

Director

September 21, 2010/s/ Richard B. Miles Richard Miles

Director

September 21, 2010/s/ Joel R. Pitlor Joel R. Pitlor

Director

September 21, 2010/s/ Jack P. Dreimiller Jack P. Dreimiller

Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

September 21, 2010


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