<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                     For the Fiscal Year Ended June 30, 1999

                        Commission File Number 001-10647

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

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

                                22 EAST BROADWAY
                          GARDNER, MASSACHUSETTS 01440
               (Address of principal executive offices) (Zip Code)

                   Issuer's telephone number is (978) 630-1800

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

                                                    Name of each exchange on
    Title of each class                                which registered
    -------------------                                ----------------

COMMON STOCK, $.01 PAR VALUE                                 NONE

Securities registered under Section 12(g) of the Act: None

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X  No
                                                                      ---   ---

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

         The issuer's revenues for its most recent fiscal year were $3,028,600.

         The aggregate market value of the voting stock, consisting solely of
common stock, held by non-affiliates of the issuer computed by reference to the
closing price of such stock was $3,648,314 as of August 31, 1999.

         The number of shares of outstanding common stock of the issuer as of
August 31, 1999 was 7,687,595.


                       DOCUMENTS INCORPORATED BY REFERENCE

         The issuer's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on November 9, 1999 is incorporated into Part III of
this Form 10-KSB.


<PAGE>



                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

BUSINESS DEVELOPMENT.

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

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

BUSINESS OF ISSUER.

         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. The Company's products and
services fall into the following areas: medical products for use by hospitals
and physicians, advanced optical products and thin films and advanced optical
system design and development services.

         PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION

         MEDICAL PRODUCTS. The Company's medical products include endoscopes and
image couplers, beamsplitters and adapters, the latter of which are used as
accessories to endoscopes.

         Since January 1991, the Company has developed and sold endoscopes using
various optical technologies for use in a variety of minimally invasive surgical
and diagnostic procedures throughout the human body. The Company's current line
of specialized endoscopes include arthroscopes (which are used in joint
surgery), laryngoscopes (which are used in the diagnosis of diseases of the
larynx), laparoscopes (which are used in abdominal surgery) and stereo
endoscopes (which are currently being tested for use in cardiac surgery). In
addition to its existing line of endoscopes, the Company is continuing to
develop different types of endoscopes that incorporate varying types of
construction and technology for use in various medical specialties.

         In July 1998, the Company entered into a Manufacturing Services
Agreement with a customer that is in the process of developing a sophisticated
system for computer assisted minimally invasive cardiac surgery that employs
advanced electronics and robotics and an enhanced 3-D visualization system.
Under the Agreement, the Company will be this customer's primary supplier of
stereo endoscopes and cameras, both of which will be used as key components in
the customer's surgical system. The Company has received production orders from
this customer, with deliveries beginning in the quarter ending December 31, 1998
and scheduled through April 2000.

         The Company developed and has manufactured and sold since 1985 a
proprietary product line of state-of-the-art instrumentation to couple
endoscopes to video cameras. Included in this product line are image couplers,
which physically connect the endoscope to the video camera system and transmit
the image viewed through the scope to the video camera. Another product -- the
beamsplitter -- performs the same function while preserving for the viewer an
eyeport for direct, simultaneous viewing through the

                                       -2-

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endoscope. The Company has sold these devices primarily to endoscope and video
camera manufacturers and suppliers for resale under its customers' names.

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

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

         OPTICAL PRODUCTS AND SERVICES. The Company provides on a contract basis
advanced lens design, image analysis, optical system design, structural design
and analysis, prototype production and evaluation, optics testing, and optical
system assembly. Some of the Company's development contracts have led to optical
system production business for the Company, and the Company believes its
prototype development service may lead to new product production from time to
time.

         The Company's recent emphasis in the optical field has been in the
design, development and manufacture of specialty thin film coatings for use in
various optical products. The Company is aggressively pursuing sales, marketing
and technology development opportunities for new optical thin films in the
rapidly growing optical communications and semiconductor industries. During the
last half of fiscal year 1997, the Company began development of prototype
Wavelength Division Multiplexer (WDM) optical filters. WDMs are devices that
allow telecommunications companies to increase the transmission capacity of
fiberoptic lines. The Company has received initial production orders for 100 GHz
and 200 GHz WDM optical filters, and began producing and shipping the 200 GHz
filter during the four months ending June 30, 1999. The Company is currently
supporting product evaluations with several potential customers in the
telecommunications and semiconductor industries.

         The Company has in the past earned significant revenue from the sale
of night vision products which permit users to see in extreme low light. In
recent years, the Company has had increasing difficulty competing for and
winning production contracts for night vision products due to lower prices
offered by foreign manufacturers, Government budget uncertainties and efforts
to lower the federal budget deficit and defense spending. As a result of
these factors, the Company anticipates that revenues derived from its night
vision products and technology will continue to be relatively insignificant
as the Company pursues opportunities in other business segments.

         COMPETITION AND MARKETS

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

                                       -3-

<PAGE>



ability to compete on a price basis in the medical products area particularly
and to the Company's profitability generally, and that the Company's inability
to establish or maintain such production facilities could materially adversely
affect the Company.

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

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

         The Company has marketed and sold its endoscopes to OEM video camera
and video endoscopy suppliers for resale under the purchaser's name. A number of
domestic and foreign competitors also sell endoscopes to such OEM suppliers, and
the Company's share of the endoscope market is nominal. The Company believes
that, while its resources are substantially more limited than these competitors,
the Company may be able to be more responsive to the needs of endoscope users.

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

         While the potential market for thin film coatings is perceived as
growing rapidly, particularly in the telecommunications and semiconductor
industries, the Company's thin film coatings competitors are numerous and have
deep and broad capabilities.

         The Company has had negligible direct export sales to date.

         RESEARCH AND DEVELOPMENT

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

         The Company received approximately $434,000 and $649,000 for the fiscal
years ended June 30, 1999 and 1998, respectively, from customers for
customer-sponsored design and development projects. Levels of customer contract
funded research and development can fluctuate greatly in any given period

                                       -4-

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depending upon the mix between design efforts and hardware development, which is
generally more expensive and time consuming than the design phases. In addition
to customer-sponsored research and development, the Company spent approximately
$941,000 and $897,000 of its own funds during fiscal years 1999 and 1998,
respectively, on the Company's own research and development. The Company expects
to continue making significant Company-funded expenditures for research and
development, particularly in the thin film coatings area.

         RAW MATERIALS AND PRINCIPAL SUPPLIERS

         For all of the Company's products, except for thin film coatings, the
basic raw material is precision grade optical glass, which the Company obtains
from several major suppliers. Outside vendors grind and polish most of the
Company's lenses and prisms. For optical thin film coatings, the basic raw
materials are metals and dielectric compounds, which the Company obtains from a
variety of chemical suppliers. The Company believes that its demand for these
raw materials and services is small relative to the total supply and that
materials and services required for the production of its products are currently
available in sufficient production quantities and will be available for fiscal
year 2000. The Company believes, however, that there are relatively few
suppliers of the high quality lenses and prisms which its endoscopes may
require. The Company has therefore established an in-house optical shop for
producing ultra-high quality prisms, micro-optics and other specialized optics
for a variety of medical and industrial applications. Depending upon the market
acceptance of the Company's endoscopes, the Company may seek to assure itself of
a timely supply of lenses, prisms, or other key materials or components through
the acquisition of an outside supplier or expanded in-house manufacturing
facilities.

         PATENTS AND TRADEMARKS

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

         The Company plans to file for patents, copyrights, and trademarks in
the United States and in appropriate countries to protect its intellectual
property rights to the extent practicable. The Company holds the rights to
several United States and foreign patents and has several patent applications
pending. The Company knows of no infringements of its patents. Although the
Company plans to protect any patents it has from infringement, it may not be
able to pursue such protection for economic reasons. While the Company believes
that its pending applications relate to patentable devices or concepts, there
can be no assurance that patents will be issued or that any patents issued can
be successfully defended or will effectively limit the development of
competitive products and services.

         Although the Company seeks to protect its proprietary information,
there can be no assurance that others will not either develop independently the
same or similar information or gain access to the Company's proprietary
information or that disputes will not arise as to proprietary rights to such
information.


                                       -5-

<PAGE>



         The Company's products may now or in the future infringe upon others'
patents or proprietary technology. The Company's defense of any such claims
could have a material, adverse effect on the Company.

         EMPLOYEES

         As of June 30, 1999, the Company had forty full-time employees and two
part-time employees. There were 23 employees in manufacturing, 9 in engineering,
4 in sales and marketing, and 6 in finance and administration.

         CUSTOMERS

         Sales to the Company's largest customer, in terms of total sales during
fiscal year 1999, were approximately 37%. Sales to the Company's three largest
customers, in terms of total sales during fiscal year 1998, were approximately
22%, 14% and 10%.

         ENVIRONMENTAL PROTECTION AND THE EFFECT OF EXISTING OR PROBABLE
GOVERNMENT REGULATIONS ON THE BUSINESS

         The Company's operations are subject to a variety of federal, state,
and local laws and regulations relating to the discharge of materials into the
environment or otherwise relative to the protection of the environment. From
time to time the Company uses a small amount of hazardous materials in its
operations. Although the Company believes that it complies with all applicable
environmental laws and regulations, any failure to comply with such laws and
regulations could have a material, adverse effect on its capital expenditures,
earnings, and competitive position.

         NEED FOR GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES AND
EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS

         The Company currently sells and markets several medical products, the
marketing of which may require the permission of the United States Food and Drug
Administration ("FDA"). Pursuant to the Company's notification to the FDA of its
intent to market its laparoscope, additional types of endoscopes which it has
developed and is developing, image coupler, beamsplitter, and adapters, the FDA
has determined that each such device is substantially equivalent to a device
marketed in interstate commerce and that the Company may market such devices,
subject to the general controls provisions of the Food, Drug and Cosmetic Act.
Furthermore, the Company plans to market additional endoscopes and related
medical products that may require the FDA's permission to market such products.
The Company may also develop additional products or seek to sell some of its
current or future medical products in a manner that requires the Company to
obtain the permission of the FDA to market such products, as well as the
regulatory approval or license of other federal, state, and local agencies or
similar agencies in other countries. There can be no assurance that the Company
will be able to maintain the FDA's permission to market its current products or
to obtain such regulatory permission, approvals, or licenses for any of its
other products. Furthermore, potential adverse FDA regulation affecting the
Company which might arise from future legislation or administrative action
cannot be predicted. In addition, FDA regulations may be established that could
prevent or delay regulatory clearances or approval of the Company's products.
The inability of the Company to secure any necessary licenses or regulatory
approvals or permission from the FDA could have a material adverse effect on its
business. The FDA

                                       -6-

<PAGE>



has authority to conduct detailed inspections of manufacturing plants in order
to assure that "good manufacturing practices" are being followed in the
manufacture of medical devices, to require periodic reporting of product defects
to the FDA, and to prohibit the exploitation of devices which do not comply with
law. Failure to comply with applicable regulatory requirements can, among other
things, result in fines, suspensions of regulatory clearances or approvals,
product recalls, operating restrictions, and criminal prosecution.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company conducts its domestic operations at two facilities in
Gardner, Massachusetts. The main Gardner facility is leased from a corporation
owned by an officer-shareholder-director of the Company, and the Company's lease
expires in December 1999. The other Gardner facility is under a five year lease
which commenced on March 1, 1999. The Company rents office space in Hong Kong
for sales, marketing and supplier quality control and liaison activities of its
Hong Kong subsidiary.

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

ITEM 3.  LEGAL PROCEEDINGS

         The Company and its subsidiaries and their property are not party or
subject to any material pending legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal year 1999.



                                       -7-

<PAGE>



                 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

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

<TABLE>
<CAPTION>
                                          Position with the Company
Name                         Age          or Principal Occupation
----                         ---          -----------------------
<S>                          <C>          <C>

Richard E. Forkey            59           President, Treasurer and
                                          Director

Jack P. Dreimiller           51           Senior Vice President,
                                          Finance, Chief Financial
                                          Officer and Clerk

Kumar M. Khajurivala         49           Vice President, Operations

Edward A. Benjamin           61           Director.  Member of Audit Committee.  Mr.
                                          Benjamin is a retired partner in the law firm
                                          of Ropes & Gray, Boston, Massachusetts.

H. Angus Macleod             66           Director.  Dr. Macleod is President of the Thin
                                          Film Center, Inc. of Tucson, Arizona, which
                                          provides software consulting and courses for
                                          design and analysis of thin film optical coatings
                                          and filters.

Austin W. Marxe              59           Director.  Mr. Marxe was appointed
                                          to the Board of Directors in August
                                          1998.  Mr. Marxe is Managing
                                          Director of Special Situations Fund
                                          III, L.P., a registered investment
                                          company based in New York City, and
                                          several other affiliated investment
                                          funds.

Joel R. Pitlor               60           Director.  Member of Audit Committee.  Mr.
                                          Pitlor is president of J.R. Pitlor, a management
                                          consulting firm based in Cambridge,
                                          Massachusetts.

Robert R. Shannon            67           Director.  Member of Audit Committee.  Mr.
                                          Shannon is a professor at the Optical Sciences
                                          Center of the University of Arizona in Tuscon,
                                          Arizona.
</TABLE>



                                       -8-

<PAGE>



                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS

         The Company's common stock is listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) System under the symbol "POCI."
Since January 1992, the NASDAQ SmallCap Market has been the principal market in
which the Company's stock is publicly traded. The high and low sales prices for
the Company's stock for each full quarterly period within the two most recent
fiscal years were as follows:

<TABLE>
<CAPTION>
                           1998                                        1999
                           ----                                        ----
Quarter           High                 Low                  High                 Low
                  --------------------------------------------------------------------
<S>               <C>                 <C>                   <C>                  <C>
First             $3 15/16             $2 11/16             $2 1/4               $1

Second            $4 3/4               $3 1/2               $1 3/8               $5/8

Third             $4 1/8               $2 5/8               $1 9/16              $5/8

Fourth            $3 1/8               $1 47/64             $1 3/4               $1
</TABLE>


         As of August 31, 1999, there were approximately 100 holders of record
of the Company's common stock.

         In August 1999, the Company issued pursuant to Section 4(2) of the
Securities Act of 1933 an aggregate of 1,000,000 shares of its common stock and
warrants exercisable for an additional aggregate of 1,000,000 shares of its
common stock to Special Situations Cayman Fund, L.P., Special Situations Fund
III, Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P., four affiliated private investment funds based in New
York City (the "Special Situations Funds") in exchange for aggregate cash
consideration of $1,062,500.

         The terms of the warrants issued to the Special Situations Funds
provide that the warrants may be exercised at any time at a price per share of
$1.125, subject to adjustment pursuant to customary anti-dilution provisions
triggered by any future below-market issuances of Company common stock. The
warrants provide that they will terminate if not exercised within 10 days of the
Special Situations Funds' receipt of a notice from the Company which may be
delivered at the Company's option in the event that the last sale price of the
Company's common stock on the NASDAQ SmallCap Market equals or exceeds $2.25 on
each of any 20 consecutive trading days.

         In connection with the issuance of common stock and warrants to the
Special Situations Funds, the Company agreed to file with the Securities and
Exchange Commission a registration statement covering the resale of shares of
common stock issued to, or issuable upon the exercise of warrants issued to, the
Special Situations Funds. Pursuant to a Registration Rights Agreement dated
August 5, 1999

                                       -9-

<PAGE>



among the parties, the Company would be obligated to issue additional shares of
common stock and additional warrants to the Special Situations Funds for no
additional consideration in the event such registration statement is not filed
on or before September 30, 1999 or is not declared effective on or prior to
December 31, 1999. The Company has not declared any dividends during the last
two fiscal years. At present, the Company intends to retain its earnings, if
any, to finance research and development and expansion of its business.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

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

LIQUIDITY AND CAPITAL RESOURCES

         For the year ended June 30, 1999, the Company's cash and cash
equivalents decreased by approximately $1,579,000 to $481,000. The decrease in
cash and cash equivalents was due to cash used by operating activities of
approximately $1,074,000, capital expenditures of approximately $379,000,
repayment of debt of approximately $115,000, costs of approximately $54,000
associated with a private placement of common stock in fiscal year 1998, and an
increase in other assets (primarily patents) of $39,000, partially offset by
proceeds received from exercise of stock options and warrants of approximately
$82,000.

         During the year ending June 30, 1999, the Company entered into two
five-year lease obligations for the acquisition of manufacturing equipment
totaling approximately $73,000.

         Subsequent to June 30, 1999, the Company completed a private placement
of 1,000,000 shares of common stock with gross proceeds of approximately
$1,062,000. In conjunction with this offering, the purchasers were issued
warrants to acquire 1,000,000 shares of common stock at an exercise price of
$1.125 per share.


                                      -10-

<PAGE>



         The Company's working capital was approximately $4,488,000, $3,939,000
and $2,874,000 at June 30, 1996, 1997 and 1998, respectively, and decreased
further to approximately $1,103,000 at June 30, 1999. This trend is primarily
the result of losses being generated beginning in fiscal 1997, due primarily to
a reduction in night vision products revenues occurring over the last three
years ending June 1999 and significant investments in internal research and
development and capital expenditures in order to transition the Company into
more profitable business areas such as medical products and optical thin films.

         The Company intends to continue devoting significant resources to
internally-funded research and development spending on both new products and the
improvement of existing products. The Company also intends to devote resources
to the marketing and product support of its medical and optical thin films
product lines, and the development of new methods of distribution. These
investments may temporarily result in negative cash flow, but the Company
anticipates that the results of these efforts will translate into increased
revenues and profits.

         Furthermore, depending upon the market acceptance of the Company's
products, the Company believes that it may need to acquire new facilities, add
additional manufacturing or research and development equipment, or acquire a
business that has complementary products or manufactures or sells to the Company
components, materials, supplies, or services used in the manufacture, marketing,
distribution, or servicing of the Company's products.

         The Company continues to maintain a secured line of credit of
$500,000 available with a bank at 1/4% over the prime rate. As of June 30,
1999, there were no borrowings outstanding under the line of credit. As a
condition to borrowing under the line of credit, the Company is required to
maintain certain ratios under specified financial covenants (Debt Service
Coverage, Leverage, Current Ratio), and must maintain a minimum cash
liquidity of $1,000,000. The Company was not in compliance with all such
covenants as of June 30, 1999, and there can be no assurance that the Company
will be able to achieve and/or maintain compliance with all of such terms.

         The Company currently has no material unused sources of liquidity other
than its cash and cash equivalents and accounts receivable. If these liquidity
sources, along with revenues from operations, are not sufficient to fund
operations or growth, the Company will require additional financing. The timing
and amount of additional financing requirements depend on a number of factors,
including the status of development and commercialization efforts, the cost of
equipment and personnel to support manufacturing of new and existing products,
and the amount of working capital necessary to start up and maintain operations
supporting new products. The Company may seek additional funds through public or
private equity or debt financing. There can be no assurance that such funds will
be available on satisfactory terms, if at all. Lack of necessary funds may
require the Company to delay, scale back or eliminate some or all of its
development efforts and undertake other cost reduction measures.

         However, the Company believes its sources of liquidity are sufficient
to support working capital and investment needs for the foreseeable future.

FISCAL YEAR 1999 RESULTS OF OPERATIONS

         Total revenues for fiscal year 1999 were approximately $3,029,000, a
decrease of approximately $1,024,000, or 25.3% from fiscal year 1998.

                                      -11-

<PAGE>



         The revenue decrease from the prior year was due to lower sales of
medical products (down 10%) and non-medical products (down 57%). The decrease in
sales of medical products was due primarily to lower sales of non-stereo
endoscopes and endocouplers, partially offset by higher sales of stereo
endoscopes and cameras resulting from initial shipments of these products
beginning in the second quarter of fiscal year 1999. The reduction in
non-medical sales was due to lower sales of night vision products due to
successful completion during the prior fiscal year of several government
contracts, partially offset by initial sales of Wavelength Division Multiplexer
(WDM) optical filters, which began in March 1999.

         Included in total revenues are sales for customer-funded research and
development projects totaling approximately $434,000 and $649,000 for the year
ending June 30, 1999 and 1998, respectively. Levels of customer-funded research
and development can fluctuate greatly in any given period depending upon the
level of customer demand during such period. All other product sales totaled
approximately $2,595,000 and $3,404,000 for the year ending June 30, 1999 and
1998, respectively.

         Revenue from the Company's largest customer were approximately 37% of
total revenues for the year ended June 30, 1999. Revenues from the Company's
three largest customers were approximately 22%, 14% and 10%, respectively, of
total revenues for the year ended June 30, 1998. Revenues from the Company's two
largest customers were approximately 38% and 23%, respectively, of total
revenues for the year ended June 30, 1997. No other customers accounted for more
than 10% of the Company's revenues in any of the three years ended June 30,
1999. Approximately 2%, 25% and 38% of the Company's revenues for the years
ended June 30, 1999, 1998 and 1997, respectively, were derived from sales to
agencies of the U.S. government or customers that supply agencies of the U.S.
government. The Company's current government business is substantially complete
and there can be no assurance that the government will award future contracts or
subcontracts to the Company.

         Gross profit increased by approximately $416,000 in fiscal 1999, and as
a percentage of revenue increased from 11.3% to 28.8% compared to the previous
year. The increase in the gross profit percentage was due primarily to shipments
with a significantly more favorable product mix in the current year and the
benefits of on-going cost reduction efforts, which resulted in proportionately
lower manufacturing costs.

         Research and development expenses increased by approximately $44,000 or
4.9% during fiscal year 1999 compared to the previous year. During both years,
internal research and development expenses consisted primarily of development
efforts related to WDM optical filters used in telecommunications systems that
are discussed further below.

         Selling, general and administrative expenses decreased by approximately
$100,000 or 5.9% in fiscal year 1999 compared to fiscal 1998. The decrease was
due primarily to lower sales and marketing expenses.

         During fiscal year 1998, the Company sold marketable securities and
realized a gain of approximately $157,000. No such sales were made in fiscal
year 1999.

         Interest income decreased by approximately $30,000 in fiscal year 1999
due to the lower base of cash equivalents.


                                      -12-

<PAGE>



         Interest expense relates primarily to capital lease obligations, and
increased by approximately $1,000 in fiscal year 1999 due to the addition of two
new capital leases during the latter part of the current year.

         The income tax provision of approximately $6,000 in fiscal year 1999 is
due primarily to prior year tax adjustments.

FISCAL YEAR 1998 RESULTS OF OPERATIONS

         Total revenues for fiscal year 1998 were approximately $4,053,000, a
decrease of approximately $3,319,000, or 45% from fiscal year 1997.

         The revenue decrease from the prior year was due to lower sales of
night vision products (down 67%), medical products (down 31%), and industrial
and thin film products (down 27%). The reduction in night vision sales was due
to successful completion during the prior fiscal year of two government
development subcontracts, and lower shipments on two government production
subcontracts. The reduction in medical products sales was due to lower shipments
of endocouplers, partially offset by higher sales of endoscopes. The higher
shipments of endocouplers in the prior year were mainly attributable to sales to
one customer representing approximately 23% of total Company revenues for fiscal
1997. No sales were made to this customer in fiscal 1998. The reduction in
industrial and thin film sales was due to lower sales of industrial lenses.

         Included in total revenues are sales for customer-funded research and
development projects totaling approximately $649,000 and $1,186,000 for the year
ending June 30, 1998 and 1997, respectively. Levels of customer-funded research
and development can fluctuate greatly in any given period depending upon the
level of customer demand during such period. All other product sales totaled
approximately $3,404,000 and $6,186,000 for the year ending June 30, 1998 and
1997, respectively.

         Gross profit decreased by approximately $1,305,000 in fiscal 1998, and
as a percentage of revenues decreased from 23.9% to 11.3% compared to the
previous year. The decrease in gross profit was due primarily to lower sales
volume as discussed above.

         Research and development expenses increased by approximately $469,000
or 109.4% in fiscal year 1998 compared to the previous year due primarily to
development efforts related to WDM optical filters used in telecommunications
systems.

         Selling, general and administrative expenses decreased by approximately
$159,000, or 8.5%, due primarily to lower professional services and employee
benefits expenses.

         Interest expense relates primarily to capital lease obligations.

         Interest income decreased by approximately $34,000 in fiscal year 1998
due to the lower investment base of cash equivalents.

         The provision for income taxes in fiscal 1998 represents an adjustment
of the net deferred tax asset to an amount the Company believes is more likely
than not to be realized.

                                      -13-

<PAGE>



YEAR 2000 READINESS

         The Company has determined that it is required to modify portions of
its hardware and software so that its computer systems and other date-sensitive
equipment will properly utilize data beyond December 31, 1999. The Company
believes that with upgrades or modifications to existing software and hardware,
the impact of Year 2000 issues can be mitigated. However, if such upgrades or
modifications are not made, or are not made in a timely manner, Year 2000 issues
could have a material adverse impact on the Company's operations and financial
condition. The Company will utilize primarily external resources to test and/or
replace hardware and software for Year 2000 compliance. The estimated completion
date for implementation of the hardware and software replacements necessitated
by the Year 2000 project is September 30, 1999, with ongoing testing to continue
through December 31, 1999. The Company believes the costs of becoming Year 2000
compliant will not exceed $40,000 (which includes approximately $26,000 for
capital equipment upgrades). These costs do not include time spent by internal
personnel, which is not material. As the Company's ongoing assessment of its
Year 2000 compliance status progresses, the Company will establish such
contingency plans as it deems necessary to address any residual Year 2000 risks.
The Company currently is not aware of any material risks to its business and
operations presented by the Year 2000 compliance status of its customers,
suppliers or service providers.

TRENDS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

         The Company continues to aggressively pursue sales, marketing, and
technology development efforts for optical thin films in the rapidly growing
telecommunications industry. The success of these products depends upon a number
of factors, including the Company's timely completion of development efforts,
ability to meet a set of rigorous customer specifications, and ability to
reliably manufacture such products in sufficient quantity at acceptable yields
to meet anticipated demand. The Company is currently supporting product
evaluation tests with several potential customers. While the Company believes
that these efforts should lead to significant future thin film sales, it remains
uncertain exactly when the Company's manufacturing processes for such products
will satisfy all customer requirements. The emphasis of the Company's
development efforts during the last several quarters has been on addressing
specific product requirements for various environmental properties (such as the
ability to withstand temperature and humidity changes), certain production
specifics (including cutting and packaging), and the quality control procedures
and measurement processes necessary to meet customer requirements in large scale
production. Close customer interaction is continuing regarding all of these
issues.

         In March 1999, the Company announced that it had received orders
totaling over $1.9 million from several customers for 100GHz and 200GHz channel
separation WDM optical filters used in telecommunications systems. Deliveries on
these contracts were approximately $300,000 for the year ending June 30, 1999,
and are scheduled through March 2000. Future deliveries on the remainder of
these new orders are contingent upon the Company's satisfying all customer
requirements.

         During the quarter ending December 31, 1998, the Company commenced
deliveries of stereo endoscopes and cameras to a customer who has developed a
computer-enhanced surgery system. Revenues from this customer were approximately
37% of total revenues for the year ended June 30, 1999. In the fourth quarter of
fiscal year 1999, the Company received a follow-on order from this customer of
approximately $900,000, with deliveries beginning in July 1999. The Company
anticipates

                                      -14-

<PAGE>



additional follow-on orders from this customer, but the magnitude of such future
business depends upon a number of factors, such as the customer's own success in
marketing its computer-enhanced surgery system and the customer's continued
acceptance of the Company's price, performance and product reliability
parameters.

ITEM 7.       CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial
              Statements are filed on pages 16 through 32 of this Form 10-KSB.


                                      -15-

<PAGE>





               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                          AS OF JUNE 30, 1999 AND 1998
                         TOGETHER WITH AUDITORS' REPORT





                                      -16-

<PAGE>





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Precision Optics Corporation, Inc.:

We have audited the accompanying consolidated balance sheets of Precision Optics
Corporation, Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Precision Optics Corporation,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.


                                                        Arthur Andersen LLP


Boston, Massachusetts
July 27, 1999 (except with respect
to matters discussed in Note 9, as
to which the date is August 5, 1999)


                                      -17-

<PAGE>



               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

               CONSOLIDATED BALANCE SHEETS--JUNE 30, 1999 AND 1998


<TABLE>
<CAPTION>
                            ASSETS                                1999                1998
<S>                                                          <C>                 <C>
CURRENT ASSETS:
   Cash and cash equivalents                                 $   480,732         $ 2,060,146
   Accounts receivable (net of allowance for doubtful
     accounts of approximately $85,000 and $42,000 in
     1999 and 1998, respectively)                                210,079             486,070
   Inventories                                                   979,284             949,993
   Deferred tax assets                                                --             145,000
   Prepaid expenses                                               47,996              44,870
                                                             -----------         -----------

         Total current assets                                  1,718,091           3,686,079
                                                             -----------         -----------

PROPERTY AND EQUIPMENT, AT COST:

   Machinery and equipment                                     3,100,760           2,848,555
   Leasehold improvements                                        510,625             468,724
   Furniture and fixtures                                         94,346             109,568
   Vehicles                                                       44,742              44,742
                                                             -----------         -----------
                                                               3,750,473           3,471,589

   Less--Accumulated depreciation and amortization             2,496,949           2,318,380
                                                             -----------         -----------

                                                               1,253,524           1,153,209
                                                             -----------         -----------

OTHER ASSETS:

   Cash surrender value of life insurance policies                45,589              50,156
   Patents, net                                                  237,291             238,034
                                                             -----------         -----------

         Total other assets                                      282,880             288,190
                                                             -----------         -----------

                                                             $ 3,254,495         $ 5,127,478
                                                             -----------         -----------
                                                             -----------         -----------

          LIABILITIES AND STOCKHOLDERS' EQUITY                   1999                1998

CURRENT LIABILITIES:
   Accounts payable                                          $   194,619         $   124,566
   Accrued payroll                                                75,644             121,262
   Accrued profit sharing and bonuses                             25,000              28,798
   Accrued professional services                                  50,283              80,140
   Accrued vacation                                               78,056              88,514
   Accrued warranty expense                                       50,000              50,000
   Accrued income taxes                                              912               4,924
   Other accrued liabilities                                      35,392              91,372
   Customer advances                                                  --             116,841
   Current portion of capital lease obligation                   105,542             105,349
                                                             -----------         -----------

         Total current liabilities                               615,448             811,766
                                                             -----------         -----------

CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION                 166,312             208,684
                                                             -----------         -----------

COMMITMENTS (Note 4)

STOCKHOLDERS' EQUITY:

   Common stock, $.01 par value-
     Authorized--10,000,000 shares
      Issued and outstanding--6,687,595 and 6,618,619             66,876              66,186
       shares at June 30, 1999 and 1998, respectively
   Additional paid-in capital                                  6,206,411           6,172,349
   Accumulated deficit                                        (3,800,552)         (2,131,507)
                                                             -----------         -----------

         Total stockholders' equity                            2,472,735           4,107,028
                                                             -----------         -----------

                                                             $ 3,254,495         $ 5,127,478
                                                             -----------         -----------
                                                             -----------         -----------
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.



                                      -18-

<PAGE>




               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997




<TABLE>
<CAPTION>
                                                          1999                1998               1997
<S>                                                   <C>                 <C>                 <C>
REVENUES                                              $ 3,028,600         $ 4,053,052         $ 7,372,310

COST OF GOODS SOLD                                      2,155,070           3,595,756           5,610,438
                                                      -----------         -----------         -----------

         Gross profit                                     873,530             457,296           1,761,872

RESEARCH AND DEVELOPMENT EXPENSES                         941,234             897,215             428,419

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            1,608,696           1,708,864           1,868,268
                                                      -----------         -----------         -----------

         Total operating expenses                       2,549,930           2,606,079           2,296,687

         Operating loss                                (1,676,400)         (2,148,783)           (534,815)

GAIN ON SALE OF MARKETABLE SECURITIES                          --             157,417                  --

INTEREST INCOME                                            40,151              70,131             104,423

INTEREST EXPENSE                                          (27,154)            (26,254)            (27,241)
                                                      -----------         -----------         -----------

         Loss before provision (benefit) from
           income taxes                                (1,663,403)         (1,947,489)           (457,633)

PROVISION (BENEFIT) FOR INCOME TAXES                        5,642              13,300             (15,000)
                                                      -----------         -----------         -----------

         Net loss                                     $(1,669,045)        $(1,960,789)        $  (442,633)
                                                      -----------         -----------         -----------
                                                      -----------         -----------         -----------
BASIC AND DILUTED LOSS PER SHARE                      $      (.25)        $      (.32)        $      (.07)
                                                      -----------         -----------         -----------
                                                      -----------         -----------         -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING              6,670,308           6,099,347           5,982,210
                                                      -----------         -----------         -----------
                                                      -----------         -----------         -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.



                                      -19-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997




<TABLE>
<CAPTION>
                                             NUMBER            COMMON           ADDITIONAL           RETAINED             TOTAL
                                            OF SHARES           STOCK            PAID-IN             EARNINGS          STOCKHOLDERS'
                                                                                 CAPITAL             (DEFICIT)            EQUITY
<S>                                         <C>              <C>                <C>                 <C>                <C>
BALANCE, JUNE 30, 1996                      5,980,502        $    59,805        $ 5,145,655         $   271,915         $ 5,477,375

   Proceeds from exercise of options           41,000                410             56,903                  --              57,313
   to purchase common stock

   Net loss                                        --                 --                 --            (442,633)           (442,633)
                                            ---------        -----------        -----------         -----------         -----------

BALANCE, JUNE 30, 1997                      6,021,502             60,215          5,202,558            (170,718)          5,092,055

   Proceeds from exercise of options           97,117                971             44,121                  --              45,092
   and warrants to purchase common
   stock

   Net proceeds from private                  500,000              5,000            925,670                  --             930,670
   placement of common stock

   Net loss                                        --                 --                 --          (1,960,789)         (1,960,789)
                                            ---------        -----------        -----------         -----------         -----------

BALANCE, JUNE 30, 1998                      6,618,619             66,186          6,172,349          (2,131,507)          4,107,028

   Proceeds from exercise of options           65,760                658             81,012                  --              81,670
   and warrants to purchase common
   stock

   Common stock issued for                      3,216                 32              7,468                  --               7,500
   payment of royalties

   Costs associated with private                   --                 --            (54,418)                 --             (54,418)
   placement of common stock

   Net loss                                        --                 --                 --          (1,669,045)         (1,669,045)
                                            ---------        -----------        -----------         -----------         -----------

BALANCE, JUNE 30, 1999                      6,687,595        $    66,876        $ 6,206,411         $(3,800,552)        $ 2,472,735
                                            ---------        -----------        -----------         -----------         -----------
                                            ---------        -----------        -----------         -----------         -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.



                                      -20-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                          1999                1998                 1997
<S>                                                                   <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                           $(1,669,045)        $(1,960,789)        $  (442,633)
   Adjustments to reconcile net loss to net cash
   (used in) provided by operating activities-
     Depreciation and amortization                                        395,829             426,976             428,054
     Deferred income taxes                                                145,000              12,300             (38,300)
     Gain on sales of marketable securities                                    --            (157,417)                 --
     Changes in assets and liabilities-
       Accounts receivable                                                275,991             (19,259)            672,993
       Inventories                                                        (29,291)            626,974             286,727
       Prepaid expenses                                                     4,374              (4,597)              4,411
       Refundable income taxes                                                 --              52,970             (22,694)
       Accounts payable                                                    70,053            (147,345)           (557,517)
       Customer advances                                                 (116,841)            116,841                  --
       Accrued expenses                                                  (149,723)             92,319             (41,499)
                                                                      -----------         -----------         -----------

           Net cash (used in) provided by operating activities         (1,073,653)           (961,027)            289,542
                                                                      -----------         -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of marketable securities                                          --                  --             (30,000)
   Proceeds from the sale of marketable securities                             --             187,417                  --
   Purchases of property and equipment                                   (379,266)           (269,402)           (444,914)
   Increase in other assets                                               (38,770)           (116,507)            (58,690)
                                                                      -----------         -----------         -----------

           Net cash used in investing activities                         (418,036)           (198,492)           (533,604)
                                                                      -----------         -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of capital lease obligation                                 (114,977)           (104,479)            (82,682)
   Net (costs) proceeds from private placement of common                  (54,418)            930,670                  --
   stock
   Proceeds from exercise of stock options and warrants                    81,670              45,092              57,313
                                                                      -----------         -----------         -----------

           Net cash (used in) provided by financing activities            (87,725)            871,283             (25,369)
                                                                      -----------         -----------         -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS                              (1,579,414)           (288,236)           (269,431)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                            2,060,146           2,348,382           2,617,813
                                                                      -----------         -----------         -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                $   480,732         $ 2,060,146         $ 2,348,382
                                                                      -----------         -----------         -----------
                                                                      -----------         -----------         -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the year for-
     Interest                                                         $    27,154         $    26,254         $    27,241
                                                                      -----------         -----------         -----------
                                                                      -----------         -----------         -----------
     Income taxes                                                     $       842         $        --         $   101,461
                                                                      -----------         -----------         -----------
                                                                      -----------         -----------         -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
   Capital lease obligation                                           $    72,798         $   139,567         $        --
   Common stock issued for payment of royalties                       $     7,500         $        --         $        --
                                                                      -----------         -----------         -----------
                                                                      -----------         -----------         -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.


                                      -21-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)    NATURE OF BUSINESS

              Precision Optics Corporation, Inc. (the Company) designs,
              manufactures and sells optical systems, components and 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.

              The Company has incurred significant operating losses during the
              last three fiscal years. This trend was primarily the result of
              the loss of two significant customers and the completion of
              several large nonrecurring government contracts. In fiscal 1998,
              the Company began making significant investments in research and
              development and capital purchases for new products. During fiscal
              1999, the Company began commercial shipments of the new optical
              filters used in telecommunications systems. In August 1999, the
              Company raised approximately $1 million of additional cash through
              the issuance of common stock (see Note 9). The Company believes,
              based on its operating and strategic plans along with the cash
              generated from the recent equity financing, that it will have
              sufficient funds to conduct operations through at least the next
              fiscal year.

       (b)    PRINCIPLES OF CONSOLIDATION

              The accompanying consolidated financial statements include the
              accounts of the Company and its two wholly owned subsidiaries. All
              significant intercompany accounts and transactions have been
              eliminated in consolidation.

       (c)    REVENUES

              Revenues for industrial and medical products sold in the normal
              course of business are recognized upon shipment. Contract
              revenues, including revenues from customer-sponsored research and
              development contracts, are recognized under the percentage-of-
              completion method. The percentage of completion is determined by
              computing the percentage of the actual cost of work performed to
              the anticipated total contract costs, or on the basis of units
              shipped. When the estimate on a contract indicates a loss, the
              Company's policy is to record the entire loss in the current
              period. Amounts recorded as revenue under customer-sponsored
              research and development contracts are not refundable if the
              research effort is not successful, and such contracts do not
              include future performance obligations.

       (d)    CASH AND CASH EQUIVALENTS

              The Company includes in cash equivalents all highly liquid
              investments with original maturities of three months or less at
              the time of acquisition. Cash equivalents consist primarily of
              overnight repurchase agreements.


                                      -22-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

       (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 are as follows at June 30, 1999 and
              1998:

<TABLE>
<CAPTION>
                                              1999        1998
               <S>                         <C>          <C>
               Raw material                $ 589,762    $ 585,227
               Work-in-progress              248,085      246,264
               Finished goods                141,437      118,502
                                           ---------    ---------
                                           $ 979,284    $ 949,993
                                           ---------    ---------
                                           ---------    ---------
</TABLE>

       (f)    DEPRECIATION AND AMORTIZATION

              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:


<TABLE>
<CAPTION>
                                                       ESTIMATED
                     ASSET CLASSIFICATION              USEFUL LIFE
               <S>                                     <C>
               Machinery and equipment                 5-7 years
               Leasehold improvements                  Life of lease
               Furniture and fixtures                  5 years
               Vehicles                                3 years
</TABLE>

       (g)    SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

              Statement of Financial Accounting Standards (SFAS) No. 105,
              DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
              OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
              CONCENTRATIONS OF CREDIT RISK, requires disclosure of any
              significant off-balance sheet and credit risk concentrations.
              Financial instruments that subject the Company to credit risk
              consist primarily of cash and cash equivalents and trade accounts
              receivable. The Company places its investments in highly rated
              financial institutions. The Company has not experienced any losses
              on these investments to date. At June 30, 1999 and 1998,
              receivables from the Company's largest customer were approximately
              22% and 36% of the total accounts receivable, respectively. The
              Company has not experienced any material losses related to
              accounts receivable from individual customers.

              Revenues from the Company's largest customer were approximately
              37% of total revenues for the year ended June 30, 1999. Revenues
              from the Company's three largest customers were approximately 22%,
              14% and 10%, respectively, of total revenues for the year ended
              June 30, 1998. Revenues from the Company's two largest customers
              were approximately 38% and 23%, respectively, of total revenues
              for the year ended June 30, 1997. No other customers accounted


                                      -23-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

              for more than 10% of the Company's revenues in any of the three
              years ended June 30, 1999. Approximately 2%, 25% and 38% of the
              Company's revenues for the years ended June 30, 1999, 1998 and
              1997, respectively, were derived from sales to agencies of the
              U.S. government or customers that supply agencies of the U.S.
              government.

       (h)    LOSS PER SHARE

              The Company has adopted SFAS No. 128, EARNINGS PER SHARE,
              effective December 15, 1997. Basic (loss) earnings per share is
              computed by dividing net income (loss) by the weighted average
              number of shares of common stock outstanding during the period.
              For each of the three the years in the period ended June 30, 1999,
              the effect of stock options and warrants was antidilutive;
              therefore, they were not included in the computation of diluted
              (loss) earnings per share. The number of shares that were excluded
              from the computation, as their effect would be antidilutive, were
              1,605,500, 1,864,500 and 1,045,617, during fiscal 1999, 1998 and
              1997, respectively.

       (i)    RESEARCH AND DEVELOPMENT

              Research and development costs, which are charged to operations as
              incurred, include direct costs plus overhead. The Company
              currently has no research and development funding commitments.

       (j)    STOCK-BASED COMPENSATION

              The Company accounts for its stock-based compensation under
              Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
              ISSUED TO EMPLOYEES. In October 1995, the Financial Accounting
              Standards Board (FASB) issued SFAS No. 123, ACCOUNTING FOR
              STOCK-BASED COMPENSATION. SFAS No. 123 establishes a
              fair-value-based method of accounting for stock-based compensation
              plans. The Company has adopted the disclosure-only alternative
              under SFAS No. 123, which requires the disclosure of the pro forma
              effects on earnings and earnings per share as if the accounting
              prescribed by SFAS No. 123 had been adopted, as well as certain
              other information.

       (k)    FOREIGN CURRENCY TRANSLATION

              The Company translates certain accounts and financial statements
              of its foreign subsidiary in accordance with SFAS No. 52, FOREIGN
              CURRENCY TRANSLATION. The functional currency of the Company's
              foreign subsidiary is the United States dollar. Accordingly,
              translation gains or losses are reflected in the accompanying
              consolidated statements of operations and have not been
              significant.

       (l)    OTHER ASSETS

              Patents are carried at cost, less accumulated amortization of
              approximately $151,000 and


                                      -24-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

              $107,000 at June 30, 1999 and 1998, respectively. Such costs are
              amortized using the straight-line method over the shorter of their
              legal or estimated useful lives, generally five to ten years.

       (m)    FINANCIAL INSTRUMENTS

              SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
              INSTRUMENTS, requires disclosures about the fair value of
              financial instruments. Financial instruments consist principally
              of accounts receivable, accounts payable, and capital lease
              obligations. The estimated fair value of these financial
              instruments approximates their carrying value.

       (n)    LONG-LIVED ASSETS

              In accordance with the provisions of SFAS No. 121, ACCOUNTING FOR
              IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
              DISPOSED OF, the Company evaluates the realizability of its
              long-lived assets at each reporting period based on projected
              future cash flows. As of June 30, 1999 and 1998, the Company has
              determined that no material adjustment to the carrying value of
              its long-lived assets was required.

       (o)    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. No separately priced extended warranty
              product maintenance contracts are offered to customers.

       (p)    NEW ACCOUNTING STANDARDS

              In June 1997, the FASB issued SFAS No. 130, REPORTING
              COMPREHENSIVE INCOME. SFAS No. 130 requires disclosure of all
              components of comprehensive income on an annual and interim basis.
              Comprehensive income is defined as the change in equity of a
              business enterprise during a period from transactions and other
              events and circumstances from nonowners sources. SFAS No. 130 is
              effective for fiscal years beginning after December 15, 1997. The
              Company adopted SFAS No. 130, effective July 1, 1998. The
              Company's comprehensive loss for the years ended June 30, 1999,
              1998 and 1997 was equal to its net loss for the same periods.

              In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
              DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
              establishes accounting and reporting standards for derivative
              instruments, including certain derivative instruments embedded in
              other contracts (collectively referred to as derivatives) and for
              hedging activities. It requires that an entity recognize all
              derivatives as either assets or liabilities in the statement of
              financial position and measure those instruments at fair value.
              SFAS No. 133 is effective for all fiscal quarters of fiscal years
              beginning after June 15, 2000. This new standard is not
              anticipated to have significant impact on the Company's
              consolidated financial statements based on its current structure
              and operations.


                                      -25-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

       (q)    USE OF ESTIMATES

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

(2)    LINE OF CREDIT

              At June 30, 1999, the Company had available a demand line of
              credit of $500,000 at an interest rate equal to the bank's prime
              rate (7.75% at June 30, 1999) plus 0.25%. Under the line of credit
              agreement, the Company is required to maintain certain financial
              ratios (debt service coverage, leverage, and current ratio) and
              must maintain a minimum cash liquidity of $1,000,000. The Company
              is not in compliance with all such financial covenants at June 30,
              1999. At June 30, 1999, there were no borrowings outstanding under
              this line of credit. Borrowings under this line of credit are
              secured by all assets of the Company. The line of credit expires
              on November 30, 1999.

(3)    CAPITAL LEASE OBLIGATION

              At June 30, 1999, future minimum lease payments under capital
lease obligations are as follows:


<TABLE>
<CAPTION>
         FISCAL YEAR                                                AMOUNT
         <S>                                                      <C>
         2000                                                     $  124,700
         2001                                                         94,364
         2002                                                         51,892
         2003                                                         33,028
         2004                                                          4,859
                                                                  ----------

                  Total minimum lease payments                       308,843

                  Amount representing interest                       (36,989)
                                                                  ----------
                  Present value of minimum lease payments            271,854

                  Less--Current portion                              105,542
                                                                  ----------
                                                                  $  166,312
                                                                  ----------
                                                                  ----------
</TABLE>

       Capital leases are secured by all assets of the Company under a security
       agreement subordinate to the Company's demand line of credit.


                                      -26-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)


(4)    COMMITMENTS

       (a)    RELATED PARTY TRANSACTIONS

              The Company leases one of its facilities from a corporation owned
              by an officer of the Company. The lease terminates in December
              1999 and requires lease payments of $9,000 per month. The Company
              may terminate the lease as of the end of any calendar year during
              the term by providing written notice to the lessor by June 30 of
              such year.

              The Company paid fees to a director of approximately $60,000
              during each of fiscal 1999, 1998 and 1997 for consulting services.
              Another director is a former partner in a law firm that has
              performed legal services for the Company during fiscal 1999, 1998
              and 1997.

       (b)    OPERATING LEASE COMMITMENTS

              Total future minimum rental payments under all operating leases
              for fiscal 2000 are $103,000 and $66,000 thereafter.

              Rent expense on operating leases was approximately $188,000,
              $217,000 and $213,000 for the years ended June 30, 1999, 1998 and
              1997, respectively.

(5)    STOCKHOLDERS' EQUITY

       (a)    WARRANTS

              In conjunction with previous equity offerings, the Company issued
              warrants to acquire a total of 320,000 shares of common stock, of
              which warrants for a total of 218,000 at an exercise price of
              $1.375 per share were outstanding as of June 30, 1998. Warrants
              for 55,760 shares were exercised during fiscal 1999. Warrants for
              162,240 shares expired in approximately equal amounts on August
              21, 1998 and October 23, 1998.

              During fiscal 1998, the Company completed a private placement of
              500,000 shares of common stock with gross proceeds of $1,000,000.
              In conjunction with this offering, the purchasers were issued
              warrants to acquire 500,000 shares of common stock at an exercise
              price of $4.00 per share. The warrants are immediately exercisable
              and expire on June 25, 2003.


                                      -27-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

       (b)    STOCK OPTIONS

              During 1989, the stockholders approved a stock option plan (the
              1989 Plan) for key employees. The Plan, as amended, authorizes the
              grant of options to purchase up to 1,110,000 shares of the
              Company's common stock at an exercise price not less than 100% of
              the fair market value per share at the date of grant. Options
              granted are exercisable for a period determined by the Board of
              Directors, not to exceed 10 years from the date of grant.

              During fiscal 1998, the stockholders approved an incentive plan
              (the 1997 Incentive Plan), which provides eligible participants
              (certain employees, directors, consultants, etc.) the opportunity
              to receive a broad variety of equity based and cash awards. A
              total of 1,200,000 shares of common stock have been reserved for
              issuance under the 1997 Incentive Plan. Upon the adoption of the
              1997 Incentive Plan, no new awards will be granted under the 1989
              Plan. At June 30, 1999, 825,000 shares of common stock were
              available for future grants under the 1997 Incentive Plan.

       The following is a summary of transactions in the plans for the three
years ended June 30, 1999:


<TABLE>
<CAPTION>
                                                      NUMBER           OPTION PRICE         WEIGHTED
                                                        OF              PER SHARE           AVERAGE
                                                      SHARES                               EXERCISE
                                                                                            PRICE
          <S>                                        <C>               <C>                 <C>

          Options outstanding, June 30, 1996         455,000            $ 1.375-1.50        $1.38
            Granted                                  190,000           1.5625-2.1875         1.89
            Exercised                                (41,000)           1.375-1.5625         1.40
                                                     -------           -------------        -----
          Options outstanding, June 30, 1997         604,000           1.375-$2.1875         1.54
            Granted                                  416,000              2.75-3.844         3.72
            Exercised                                (27,500)                  1.375         1.38
                                                     -------           -------------        -----
          Options outstanding, June 30, 1998         992,500          $ 1.375-$3.844         2.46
            Granted                                   25,000                   1.312         1.31
           Canceled                                  (56,000)             3.00-3.844         3.09
                                                     -------           -------------        -----
          Options outstanding, June 30, 1999         961,500          $ 1.312-$3.844        $2.39
                                                     -------           -------------        -----
                                                     -------           -------------        -----
          Options exercisable, June 30, 1999         663,000           $1.312-$3.844        $2.11
                                                     -------           -------------        -----
                                                     -------           -------------        -----
</TABLE>


                                      -28-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

       In addition, the Company has granted options outside the plans, primarily
       to directors and consultants at 100% of the fair market value per share
       at the date of grant. The following is a summary of all transactions
       outside the plans:

<TABLE>
<CAPTION>
                                                     NUMBER OF         OPTION            WEIGHTED
                                                      SHARES          PRICE PER          AVERAGE
                                                                        SHARE            EXERCISE
                                                                                          PRICE
          <S>                                       <C>              <C>                <C>
          Options outstanding, June 30, 1996         221,617         $.07 - 5.69        $      1.02
            Granted                                       --                  --                 --
                                                     -------         -----------        -----------

          Options outstanding, June 30, 1997         221,617          .07 - 5.69               1.02
            Exercised                                (67,617)                .07                .07
                                                     -------         -----------        -----------


          Options outstanding, June 30, 1998         154,000          .50 - 5.69               1.43
            Exercised                                (10,000)                .50                .50
                                                     -------         -----------        -----------


          Options outstanding, June 30, 1999         144,000         $.50 - 5.69        $      1.50
                                                     -------         -----------        -----------
                                                     -------         -----------        -----------
          Options exercisable, June 30, 1999         132,000         $.50 - 5.69        $      1.52
                                                     -------         -----------        -----------
                                                     -------         -----------        -----------
</TABLE>

       For each of the three years ended June 30, 1999, the Company has
       recognized no compensation expense in the accompanying consolidated
       statements of operations, as there were no stock option grants to
       recipients other than employees and directors during such periods.

       The Company has computed the pro forma disclosures required under SFAS
       No. 123 for all stock options granted in fiscal 1999, 1998 and 1997 using
       the Black-Scholes option pricing model prescribed by SFAS No. 123.

       The assumptions used and the weighted average information for each of the
       three years in the period ended June 30, 1999 are as follows:


<TABLE>
<CAPTION>
                                                                               YEARS ENDED
                                                                 1999               1998               1997
         <S>                                                  <C>                <C>                <C>
         Risk-free interest rates                               4.54%              6.06%              6.95%
         Expected dividend yield                                  -                  -                  -
         Expected lives                                        7 years            7 years            7 years
         Expected volatility                                     99%                90%                87%
         Weighted average fair value of grants                  $1.10              $3.02              $1.52
         Weighted-average remaining
           contractual life of options outstanding            7.28 years         8.33 years         8.16 years
</TABLE>



                                      -29-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

       The effect of applying SFAS No. 123 would be as follows:


<TABLE>
<CAPTION>
                                                                 1999              1998         1997
                    <S>                                      <C>              <C>            <C>
                    Net loss-
                      As reported                            $(1,669,045)     $ (1,960,789)  $(442,633)
                      Pro forma                               (2,068,728)       (2,340,964)   (520,373)

                    Net loss per share-
                      As reported, basic and diluted         $      (.25)     $(.32)         $ (.07)
                      Pro forma, basic and diluted                  (.31)      (.38)           (.09)
</TABLE>

(6)    INCOME TAXES

       The Company accounts for income taxes in accordance with SFAS No. 109,
       ACCOUNTING FOR INCOME TAXES, whereby a deferred tax asset or liability is
       measured by currently enacted tax rates applied to any temporary
       differences between the financial statement and tax bases of assets and
       liabilities.

       The provision (benefit) for income taxes in the accompanying consolidated
       statements of operations consists of the following for the three years
       ended June 30, 1999:


<TABLE>
<CAPTION>
                               1999               1998              1997
          <S>               <C>               <C>               <C>
          Current-
             Federal        $(136,346)        $      --         $  26,300
             State                912             1,000             1,000
             Foreign           (3,924)               --            (4,000)
                            ---------         ---------         ---------
                             (139,358)            1,000            23,300
                            ---------         ---------         ---------
          Deferred-
             Federal          123,000            10,500           (34,300)
             State             22,000             1,800            (4,000)
                            ---------         ---------         ---------
                              145,000            12,300           (38,300)
                            ---------         ---------         ---------

                            $   5,642         $  13,300         $ (15,000)
                            ---------         ---------         ---------
                            ---------         ---------         ---------
</TABLE>


                                      -30-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (Continued)

       A reconciliation of the federal statutory rate to the Company's effective
       tax rate for the three years ended June 30, 1999 is as follows:


<TABLE>
<CAPTION>
                                                                1999          1998           1997
          <S>                                                  <C>           <C>           <C>
          Income tax benefit at federal statutory rate         (34.0)%       (34.0)%       (34.0)%

          Increase (decrease) in tax resulting from-
            Temporary items with no tax benefit                  3.1           2.2           6.1
            Change in valuation allowance                       --            32.5          22.9
            Effect of state taxes                               34.7          --            (4.6)
            Prior year tax adjustments                          (3.4)         --             5.2
            Other                                                (.1)         --             1.1
                                                                 ---           ---          ----

               Effective tax rate                                0.3%          0.7%         (3.3)%
                                                                 ---           ---          ----
                                                                 ---           ---          ----
</TABLE>

       The components of the net deferred tax asset at June 30, 1999 and 1998
are approximately as follows:


<TABLE>
<CAPTION>
                                                                             1999                1998
          <S>                                                            <C>                 <C>
          Net operating loss carryforward                                $ 1,034,000         $   622,000
          Reserves and accruals not yet deducted for tax purposes            376,000             316,000
          Other temporary differences                                        (22,000)             18,000
                                                                         -----------         -----------

                                                                           1,388,000             956,000

          Valuation allowance                                             (1,388,000)           (811,000)
                                                                         -----------         -----------

               Net deferred tax asset                                    $        --         $   145,000
                                                                         -----------         -----------
                                                                         -----------         -----------
</TABLE>

       The Company has provided a valuation allowance to reduce the net deferred
       tax asset to an amount the Company believes it is "more likely than not"
       to be realized. The valuation allowance increased in fiscal 1999
       primarily due to the generation of a net operating loss carryforward. As
       of June 30, 1999, the Company has net operating loss carryforwards for
       U.S. federal income taxes of approximately $3,000,000, of which
       approximately $85,000 expires in 2012, approximately $1,500,000 expires
       in 2013, and approximately $1,415,000 expires in 2019.


                                      -31-

<PAGE>



(7)    PROFIT SHARING PLAN

       The Company has a defined contribution profit sharing plan that covers
       all eligible employees. No employer contributions were made in fiscal
       1999, 1998 or 1997.

(8)    SEGMENT REPORTING

       The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
       ENTERPRISE AND RELATED INFORMATION, in the fiscal year ended June 30,
       1999. SFAS No. 131 establishes standards for reporting information
       regarding operating segments in annual financial statements and requires
       selected information for those segments to be presented in interim
       financial reports issued to stockholders. SFAS No. 131 also establishes
       standards for related disclosures about products and services and
       geographic areas. Operating segments are identified as components of an
       enterprise about which separate discrete financial information is
       available for evaluation by the chief operating decision maker, or
       decision making group, in making decisions about how to allocate
       resources and assess performance. The Company's chief decision-maker, as
       defined under SFAS No. 131, is the Chief 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.

(9)    SUBSEQUENT EVENT

       In August 1999, the Company completed a private placement of 1,000,000
       shares of common stock with gross proceeds of $1,062,500. In conjunction
       with this offering, the purchasers were issued warrants to acquire
       1,000,000 shares of common stock at an exercise price of $1.125 per
       share. The warrants are immediately exercisable and expire in August
       2004.

                                      -32-

<PAGE>



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

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH
         SECTION 16(A) OF THE EXCHANGE ACT: The Company will furnish to the
         Securities and Exchange Commission a definitive Proxy Statement (the
         "Proxy Statement") not later than 120 days after the close of its
         fiscal year ended June 30, 1999. The information required by this item
         is incorporated herein by reference to the Proxy Statement.

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

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

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

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

         (a)      EXHIBITS.
                  The exhibits listed below are filed with or incorporated by
                  reference in this report.

         3.1      Articles of Organization of the Company(1)
         3.2      By-laws of Precision Optics Corporation, Inc.(2)
         4.1      Specimen common stock certificate(1)
         4.2      Promissory Note dated December 5, 1991 between the Company and
                  The First National Bank of Boston(3)
         4.3      Agreement Restricting Sale of Stock dated January 15, 1992 by
                  and among Richard E. Forkey, the Company, Kennedy, Mathews,
                  Landis, Healy & Pecora Incorporated, and Equity Securities
                  Trading Co., Inc.(4)
         4.4      Common Stock Purchase Warrant dated June 30, 1998 issued to
                  Special Situations Private Equity Fund, L.P.(5)
         4.5      Common Stock Purchase Warrant dated June 30, 1998 issued to
                  Special Situations Technology Fund, L.P.(5)
         4.6      Registration Rights Agreement dated as of June 30, 1998 by and
                  among the Company, Special Situations Private Equity Fund,
                  L.P. and Special Situations Technology Fund, L.P.(5)
         4.7      Registration Rights Agreement dated as of August 5, 1999 by
                  and among the Company, Special Situations Cayman Funds, L.P.,
                  Special Situations Fund III, L.P., Special Situations Private
                  Equity Fund, L.P. and Special Situations Technology Fund, L.P.
         4.8      Common Stock Purchase Warrant dated August 5, 1999 issued to
                  Special Situations Cayman Fund, L.P.
         4.9      Common Stock Purchase Warrant dated August 5, 1999 issued to
                  Special Situations Fund III, L.P.
         4.10     Common Stock Purchase Warrant dated August 5, 1999 issued to
                  Special Situations Private Equity Fund, L.P.
         4.11     Common Stock Purchase Warrant dated August 5, 1999 issued to
                  Special Situations Technology Fund, L.P.


                                      -33-

<PAGE>



         10.1     Lease dated June 29, 1984 between the Company and Equity,
                  First Amendment to Commercial Lease dated June 25, 1990, and
                  letter agreement dated June 25, 1990 renewing such lease(1)
         10.2     Precision Optics Corporation, Inc. 1989 Stock Option Plan
                  amended to date (the "Plan")(6)
         10.3     Three separate life insurance policies on the life of Richard
                  E. Forkey(1)
         10.4     Master Lease Finance Agreement dated November 3, 1993 between
                  the Company and BancBoston Leasing(6)
         10.5     Second Amendment to Commercial Lease between the Company and
                  Equity dated December 9, 1994(7)
         10.6     Lease dated March 1, 1999, between the Company and Philip A.
                  Wood, as executor of the Estate of Alma L. Wood and as devisee
                  under the Will of Alma L. Wood; Martha A. Mount, devisee under
                  the Will of Alma L. Wood; and Nancy E. Popinchalk, devisee
                  under the Will of Alma L. Wood for 21 Pleasant Street,
                  Gardner, Massachusetts.
         10.7     Precision Optics Corporation, Inc. 1997 Incentive Plan.(5)
         10.8     Stock Subscription Agreement dated as of June 30, 1998 by and
                  among the Company, Special Situations Private Equity Fund,
                  L.P. and Special Situations Technology Fund, L.P.(5)
         10.9     Stock Subscription Agreement dated as of August 5, 1999 by and
                  among the Company, Special Situations Cayman Funds, L.P.,
                  Special Situations Fund III, L.P., Special Situations Private
                  Equity Fund, L.P. and Special Situations Technology Fund, L.P.
         21       Subsidiaries of Precision Optics Corporation, Inc.(7)
         27       Financial Data Schedule.
         99       Important Factors Regarding Forward-Looking Statements(8)

(1)  Incorporated herein by reference to the Company's Registration Statement on
     Form S-18 (No. 33-36710-B).
(2)  Incorporated herein by reference to the Company's 1991 Annual Report on
     Form 10-KSB No. 001-10647.
(3)  Incorporated herein by reference to the Company's Registration Statement on
     Form S-1 (No. 33-43929).
(4)  Incorporated herein by reference to the Company's 1992 Annual Report on
     Form 10-KSB No. 001-10647.
(5)  Incorporated herein by reference to the Company's 1998 Annual Report on
     Form 10-KSB No. 001-10647.
(6)  Incorporated herein by reference to the Company's 1994 Annual Report on
     Form 10-KSB No. 001-10647.
(7)  Incorporated herein by reference to the Company's 1996 Annual Report on
     Form 10-KSB No. 001-10647.
(8)  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-QSB for the quarter ended March 31, 1996 No. 001-10647.


(b)        REPORTS ON FORM 8-K.

           None.


                                      -34-

<PAGE>



                                   SIGNATURES

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

Date:  September 28, 1999                 PRECISION OPTICS CORPORATION, INC.


                                          By:/s/ Richard E. Forkey
                                             ---------------------------------
                                              Richard E. Forkey
                                              Chairman of the Board,
                                              Chief Executive Officer, President
                                              and Treasurer

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


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

Date:  September 28, 1999               Date:  September 28, 1999


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

Date:  September 28, 1999               Date:  September 28, 1999


By: /s/ Robert R. Shannon               By: /s/ H. Angus Macleod
    ----------------------------           -----------------------------------
     Robert R. Shannon                      H. Angus Macleod
     Director                               Director

Date:  September 28, 1999               Date:  September 28, 1999


By: /s/ Austin W. Marxe
    ----------------------------
     Austin W. Marxe
     Director

Date:  September 28, 1999


                                      -35-

<PAGE>



                                INDEX TO EXHIBITS

       3.1    Articles of Organization of the Company(1)
       3.2    By-laws of Precision Optics Corporation, Inc.(2)
       4.1    Specimen common stock certificate(1)
       4.2    Promissory Note dated December 5, 1991 between the Company and The
              First National Bank of Boston(3)
       4.3    Agreement Restricting Sale of Stock dated January 15, 1992 by and
              among Richard E. Forkey, the Company, Kennedy, Mathews, Landis,
              Healy & Pecora Incorporated, and Equity Securities Trading Co.,
              Inc.(4)
       4.4    Common Stock Purchase Warrant dated June 30, 1998 issued to
              Special Situations Private Equity Fund, L.P.(5)
       4.5    Common Stock Purchase Warrant dated June 30, 1998 issued to
              Special Situations Technology Fund, L.P.(5)
       4.6    Registration Rights Agreement dated as of June 30, 1998 by and
              among the Company, Special Situations Private Equity Fund, L.P.
              and Special Situations Technology Fund, L.P.(5)
       4.7    Registration Rights Agreement dated as of August 5, 1999 by and
              among the Company, Special Situations Cayman Funds, L.P., Special
              Situations Fund III, L.P., Special Situations Private Equity Fund,
              L.P. and Special Situations Technology Fund, L.P.
       4.8    Common Stock Purchase Warrant dated August 5, 1999 issued to
              Special Situations Cayman Fund, L.P.
       4.9    Common Stock Purchase Warrant dated August 5, 1999 issued to
              Special Situations Fund III, L.P.
       4.10   Common Stock Purchase Warrant dated August 5, 1999 issued to
              Special Situations Private Equity Fund, L.P.
       4.11   Common Stock Purchase Warrant dated August 5, 1999 issued to
              Special Situations Technology Fund, L.P.
       10.1   Lease dated June 29, 1984 between the Company and Equity, First
              Amendment to Commercial Lease dated June 25, 1990, and letter
              agreement dated June 25, 1990 renewing such lease(1)
       10.2   Precision Optics Corporation, Inc. 1989 Stock Option Plan amended
              to date (the "Plan")(6)
       10.3   Three separate life insurance policies on the life of Richard E.
              Forkey(1)
       10.4   Master Lease Finance Agreement dated November 3, 1993 between the
              Company and BancBoston Leasing(6)
       10.5   Second Amendment to Commercial Lease between the Company and
              Equity dated December 9, 1994(7)
       10.6   Lease dated March 1, 1999, between the Company and Philip A. Wood,
              as executor of the Estate of Alma L. Wood and as devisee under the
              Will of Alma L. Wood; Martha A. Mount, devisee under the Will of
              Alma L. Wood; and Nancy E. Popinchalk, devisee under the Will of
              Alma L. Wood for 21 Pleasant Street, Gardner, Massachusetts.
       10.7   Precision Optics Corporation, Inc. 1997 Incentive Plan.(5)
       10.8   Stock Subscription Agreement dated as of June 30, 1998 by and
              among the Company, Special Situations Private Equity Fund, L.P.
              and Special Situations Technology Fund, L.P.(5)
       10.9   Stock Subscription Agreement dated as of August 5, 1999 by and
              among the Company, Special Situations Cayman Funds, L.P., Special
              Situations Fund III, L.P., Special Situations Private Equity Fund,
              L.P. and Special Situations Technology Fund, L.P.
       21     Subsidiaries of Precision Optics Corporation, Inc.(7)
       27     Financial Data Schedule.
       99     Important Factors Regarding Forward-Looking Statements(8)

(1) Incorporated herein by reference to the Company's Registration Statement on
    Form S-18


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<PAGE>



    (No. 33-36710-B).

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

(3) Incorporated herein by reference to the Company's Registration Statement on
    Form S-1 (No. 33-43929).

(4) Incorporated herein by reference to the Company's 1992 Annual Report on
    Form 10-KSB No. 001-10647.

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

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

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

(8) Incorporated herein by reference to the Company's Quarterly Report on
    Form 10-QSB for the quarter ended March 31, 1996 No. 001-10647.


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