##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF
    1934
 For the Fiscal Year Ended December 31, 2006
  Commission file number 0-8828
 OPTELECOM-NKF, INC.
 (Exact name of registrant as
    specified in its charter)
  DELAWARE(State or other
    jurisdiction of
    incorporation or organization)

52-1010850(IRS employer
    identification number)   12920 CLOVERLEAF CENTER DRIVE, GERMANTOWN, MARYLAND 20874
 (Address of principal executive
    offices)(Zip code)
  Registrants telephone number, including area code:
 (301) 444-2200.
  Securities registered pursuant to Section 12(b) of the
    Act:
 None.
  Securities registered pursuant to Section 12(g) of the
    Act:
    Common Stock $0.03 Par Value.
  o þ
  o þ
  þ o
  Form 10-K Form 10-K. o
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



OPTELECOM-NKF,
    INC.
    FISCAL YEAR 2006
    FORM 10-K
    ANNUAL REPORT
    TABLE OF CONTENTS
  PageItem

Description

NumberPART IItem 1

Business


3Item 1A

Risk
    Factors


8Item 1B

Unresolved Staff
    Comments


11Item 2

Properties


11Item 3

Legal
    Proceedings


12Item 4

Submission of
    Matters to a Vote of Security Holders


12PART IIItem 5

Market for
    Registrants Common Stock and Related Stockholder
    Matters & Issuer Purchases of Equity
    Securities


13Item 6

Selected
    Consolidated Financial Data


14Item 7

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


14Item 7A

Quantitative and
    Qualitative Disclosures About Market Risk


20Item 8

Financial
    Statements and Supplementary Data


21Item 9

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


44Item 9A

Controls and
    Procedures


44Item 9B

Other
    Information


44PART IIIItem 10

Directors,
    Executive Officers and Corporate Governance


44Item 11

Executive
    Compensation


45Item 12

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


45Item 13

Certain
    Relationships and Related Transactions and Director
    Independence


45Item 14

Principal
    Accountant Fees and Services


45PART IVItem 15

Exhibits, Financial
    Statement Schedules


45Signatures


47   2




---



##### 



PART I  FORWARD
    LOOKING STATEMENTS
  Form 10-K Form 10-K,
      
    future revenues;
    expected sales levels and cash flows;
    acquisitions or divestitures of businesses;
    debt payments and related interest rates;
    fluctuations in foreign currency amounts and rates;
    performance issues with key suppliers;
    product performance and the successful execution of internal
    plans;
    successful negotiation of major contracts;
    effective tax rates and timing and amounts of tax payments;
    the results of any audit or appeal process with the Internal
    Revenue Service; and
    anticipated costs of capital investments.  Form 10-K Form 10-Q Form 8-K.
  Item 1.
    BUSINESS    HISTORY
   3




---



##### 



Video-Over-IP
    ORGANIZATION,
    MARKETS AND PRODUCTS
      COMMUNICATION
    PRODUCTS SEGMENT (CPS)
         4




---



##### 



IP-video
      Data
    Communications Products
      Uncompressed
    Digital Video Transmission Products
      and/or
 5




---



##### 



CWDM
    (Coarse Wavelength Division Multiplexer)
    Systems
    point-to-point
  High
    Resolution Video Transmission Products
    IP
    -Video Products
    ELECTRO
    OPTICS SEGMENT (EO)
     6




---



##### 



RESEARCH
    AND DEVELOPMENT
      QUALITY
    MANAGEMENT SYSTEM
  out-of-box
  U.S.-based time-to-market work-in-progress
  2002/95/EC.
  COMPETITION
   7




---



##### 



SEASONALITY
    EMPLOYEES
      CORPORATE
  (301) 444-2200. Form 10-K.
  Item 1A.
    RISK
    FACTORS  Fluctuations
    in financial performance could harm our long-term growth
    strategy.
    The
    loss of one or more of our major customers could adversely
    affect our business, financial condition and operating
    results.
   8




---



##### 



We
    face significant competition for our products and any failure to
    remain competitive would harm our operating
    results.
    We
    continue to integrate and face risks in effectively managing the
    integration.
    
    Coordinating manufacturing operations in a rapid and efficient
    manner;
    Combining product offerings and product lines effectively and
    quickly;
    Integrating sales efforts so that customers can do business
    easily with the combined company;
    Bringing together the companies marketing efforts so that
    the industry receives useful information about the merger;
    Coordinating research and development activities to enhance
    introduction of new products and technologies; and
    Persuading employees that Optelecoms and NKFs
    business cultures are compatible.      We
    borrowed $23.1 million of senior and subordinated notes in
    our acquisition of NKF.
   9




---



##### 



Future
    Capital Needs; Uncertainty of Additional Funding
  line-of-credit and/or
  If we
    fail to attract and retain key personnel, our business could
    suffer.
      Our
    common stock price is volatile, we have never paid dividends and
    our stock is subject to future dilution.
  time-to-time period-to-period
    We
    face risks related to our international operations and
    revenue.
   10




---



##### 




    our ability to comply with customs, import/export and other
    trade compliance regulations of the countries in which we do
    business, together with any unexpected changes in such
    regulations;
    difficulties in establishing and enforcing our intellectual
    property rights;
    tariffs and other trade barriers;
    political, legal and economic instability in foreign markets,
    particularly in those markets in which we maintain manufacturing
    and research facilities;
    difficulties in staffing and management;
    language and cultural barriers;
    seasonal reductions in business activities in the countries
    where our international customers are located;
    integration of foreign operations;
    longer payment cycles;
    greater difficulty in accounts receivable collection;
    currency fluctuations; and
    potential adverse tax consequences.    If we
    fail to manage our exposure to worldwide financial markets
    successfully, our operating results could suffer.
    Item 1B.
    UNRESOLVED
    STAFF COMMENTS    Item 2.
    PROPERTIES     11




---



##### 



Item 3.
    LEGAL
    PROCEEDINGS    Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   12




---



##### 



PART II  Item 5.
    MARKET
    FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
    MATTERS    Bid PriceQuarter Ended

High


LowDecember 31, 2006

$
11.24


$
9.84September 30, 2006


13.66



7.90June 30, 2006


29.16



13.33March 31, 2006


25.34



13.36December 31, 2005


14.50



12.31September 30, 2005


14.40



9.79June 30, 2005


11.00



9.42March 31, 2005


11.50



8.50         Number of SecuritiesRemaining Available forFuture Issuance UnderNumber of Securities to


Weighted


Equity Compensationbe Issued Upon


Average


Plans (ExcludingExercise of Outstanding


Exercise Price of


Securities Reflected inOptions


Outstanding Options


Column (a)Plan Category

(a)


(b)


(c)Equity compensation plans approved
    by security holders


350,404


$
10.45



301,854Equity compensation plans not
    approved by security holders










Totals


350,404


$
10.45



301,854  13




---



##### 



Item 6.
    SELECTED
    CONSOLIDATED FINANCIAL DATA    Year Ended December 31,

2006(a)


2005(a)


2004


2003


2002Revenues, net

$
39,484,021


$
33,865,310


$
19,395,147


$
17,119,658


$
14,908,554Net income


1,554,102



2,681,915



1,594,612



3,553,266



1,644,120Basic earnings per common share


0.45



0.83



0.50



1.18



0.58Diluted earnings per common share


0.44



0.80



0.49



1.11



0.56As of December 31,Total assets


46,273,920



38,867,907



12,366,409



10,431,897



6,627,223Long-term obligations


17,832,610



18,786,548



242,944



164,020



Stockholders equity


17,943,073



11,753,693



9,934,283



7,956,476



3,667,833     (a)
    
    The results for 2006 and 2005 include the operations of NKF as
    of March 8, 2005.  Item 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  OVERVIEW
               14




---



##### 



RESULTS
    OF OPERATIONS
      Operating
    Segments
    COMMUNICATION
    PRODUCTS SEGMENT
  Communication Products Segment

2006


2005


2004Net Sales

$
38,480,524


$
32,895,781


$
17,952,579Gross Profit


23,089,849



20,099,989



10,553,077Total Operating Expense


20,413,149



15,685,049



8,622,432Operating Income

$
2,676,700


$
4,414,940


$
1,930,645          15




---



##### 



tm
          ELECTRO-OPTICS
    SEGMENT
  2006


2005


2004Net Sales

$
1,003,497


$
969,529


$
1,442,568Gross Profit


342,652



270,953



575,247Total Operating Expense


97,772



91,751



235,917Operating Income

$
244,880


$
179,202


$
339,330     OTHER
    INCOME (EXPENSE)
  2006


2005


2004Interest expense  line
    of credit

$
(25,570
)

$
(7,251
)

$
Interest expense  long
    term notes / other


(1,193,129
)


(1,105,150
)


(4,453
)Interest / other income


32,230



37,787



24,768Total other income (expense)

$
(1,186,469
)

$
(1,074,614
)

$
20,315     INCOME
    TAXES
   16




---



##### 



Impact
    of Inflation
    FINANCIAL
    CONDITION
        2006


2005


2004Production Materials

$
3,430,687


$
2,573,578


$
1,604,605Work in Process


785,472



498,885



192,145Finished Goods


2,050,134



1,574,360



1,164,264Allowance for Obsolescence


(507,327
)


(434,171
)


(93,132
)TOTAL

$
5,758,966


$
4,212,652


$
2,867,882     LIQUIDITY
    AND CAPITAL RESOURCES
         17




---



##### 



line-of-credit. line-of-credit
    line-of-credit.
    Less Than 1








More Than 5Total


Year


1-3 Years


4-5 Years


YearsLong-term debt obligations(1)

$
16,198,041


$
1,547,978


$
14,650,063


$



$
Capitalized lease obligations


115,880



71,170



44,710







Operating lease obligations(2)


7,750,235



1,144,642



3,104,992



2,085,319



1,415,282Other long-term liabilities


3,137,837







788,532







2,349,305Totals

$
27,201,993


$
2,763,790


$
18,588,297


$
2,085,319


$
3,764,587     (1)
    
    As described above, in connection with the acquisition of NKF,
    the Company entered into new acquisition related debt
    instruments.(2)
    
    Operating leases include our office space in the U.S.,
    Netherlands, Spain, France and the U.K. Total rental expense
    under these leases was $1,023,446 and $994,771 for fiscal years
    2006 and 2005 respectively.    NEW
    ACCOUNTING STANDARDS
     18




---



##### 



CRITICAL
    ACCOUNTING POLICIES
    Form 10-K.
  Revenue Recognition percentage-of-completion time-and-materials
  Impairment of Long Lived Assets
  Allowance for Doubtful Accounts
 19




---



##### 



Inventories Work-in-process
  Income Taxes
  Item 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS  Market
    Risk
    Foreign
    Currency Risk
    Interest
    Rate Risk
     20




---



##### 



Item 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  Index
    to the Consolidated Financial Statements
  PageReport of
    Independent Registered Public Accounting Firm


22Consolidated
    Balance Sheets as of December 31, 2006 and 2005


23Consolidated
    Statements of Operations and Comprehensive Income for the three
    years in the period ended December 31, 2006


24Consolidated
    Statements of Cash Flows for the three years in the period ended
    December 31, 2006


25Consolidated
    Statements of Stockholders Equity for the three years in
    the period ended December 31, 2006


26Notes to
    Consolidated Financial Statements


27SCHEDULE II 
    Schedule of Valuation and Qualifying Accounts


48  21




---



##### 



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                   22




---



##### 



OPTELECOM-NKF,
    INC.
  CONSOLIDATED
    BALANCE SHEETS
 AS OF
    DECEMBER 31
  2006


2005ASSETSCURRENT ASSETSCash and cash equivalents

$
3,571,380


$
3,046,353Accounts and contracts receivable,
    net of allowance for doubtful accounts of $624,925 and $554,469


9,221,646



6,731,373Inventories, net


5,758,966



4,212,652Deferred tax asset 
    current


904,955



820,830Prepaid expenses and other current
    assets


1,046,473



640,050Total current assets


20,503,420



15,451,258Property and equipment, less
    accumulated depreciation of $6,377,285 and $5,338,966


2,488,243



2,677,865Deferred tax asset 
    non-current


1,284,272



589,010Intangible assets, net of
    accumulated amortization of $1,288,104 and $623,705


8,124,315



7,719,737Goodwill


13,677,830



12,430,037Other assets


195,840



TOTAL ASSETS

$
46,273,920


$
38,867,907LIABILITIES AND
    STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable

$
3,370,834


$
2,235,665Accrued payroll


2,104,753



1,616,988Commissions payable


220,615



539,352Current portion of capitalized
    leases


71,170



72,021Bank line of credit


800,000



Current portion of notes payable


1,547,978



1,592,978Accrued warranty reserve


430,592



308,570Taxes payable


576,690



568,147Other current liabilities


1,375,605



1,393,945Total current liabilities


10,498,237



8,327,666Notes payable


14,650,063



15,794,050Deferred tax liability


2,101,671



2,353,500Interest Payable


788,532



235,399Capitalized leases


44,710



115,880Other liabilities


247,634



287,719Total liabilities


28,330,847



27,114,214COMMITMENTS AND CONTINGENCIES






STOCKHOLDERS EQUITYCommon stock, $.03 par
    value  shares authorized, 15,000,000; issued and
    outstanding, 3,495,382 and 3,301,414 shares as of
    December 31, 2006 and December 31, 2005, respectively


104,861



99,042Additional paid-in capital


14,497,358



12,255,978Accumulated other comprehensive
    income (loss)


569,730



(1,818,350
)Treasury stock,162,672 shares, at cost


(1,265,047
)


(1,265,047
)Retained earnings


4,036,171



2,482,070Total stockholders equity


17,943,073



11,753,693TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
46,273,920


$
38,867,907    23




---



##### 



OPTELECOM-NKF,
    INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 FOR THE
    YEARS ENDED DECEMBER 31,
  2006


2005


2004Revenues

$
39,484,021


$
33,865,310


$
19,395,147Cost of goods sold


16,051,521



13,494,368



8,266,823Gross profit


23,432,500



20,370,942



11,128,324Operating expenses:Engineering


4,606,611



3,576,178



1,593,174Selling and marketing


8,268,656



6,583,980



3,522,709General and administrative


7,006,010



4,992,937



3,742,466Amortization of intangible assets


629,644



623,705



Total operating expenses


20,510,921



15,776,800



8,858,349Income from operations


2,921,579



4,594,142



2,269,975Other (expense) income:Interest (expense) income, net


(1,186,469
)


(1,074,614
)


20,315Income before income taxes


1,735,110



3,519,528



2,290,290(Provision) for income taxes


(181,008
)


(837,613
)


(695,678
)Net income

$
1,554,102


$
2,681,915


$
1,594,612Basic earnings per share

$
0.45


$
0.83


$
0.50Diluted earnings per share

$
0.44


$
0.80


$
0.49Weighted average common shares
    outstanding  basic


3,436,696



3,250,097



3,159,285Weighted average common shares
    outstanding  diluted


3,561,635



3,355,623



3,264,807Net income

$
1,554,102


$
2,681,915


$
1,594,612Foreign currency translation


2,388,080



(1,803,184
)


(15,166
)Comprehensive income

$
3,942,182


$
878,731


$
1,579,446    24




---



##### 



OPTELECOM-NKF,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 FOR THE
    YEARS ENDED DECEMBER 31,
  2006


2005


2004Cash Flows From Operating
    ActivitiesNet income

$
1,554,102


$
2,681,915


$
1,594,612Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


1,394,414



1,359,019



430,180Accounts receivable provision


(45,699
)


45,162



41,111Inventory provision


41,683







(186,859
)Stock based compensation


949,331



39,308



24,900Stock issued for payment of
    interest






213,626



Deferred rent


23,393



37,824



123,924Deferred tax asset (benefit)


(1,212,693
)


(727,958
)


553,816Other


98,293



168,600



103,540Change in assets and liabilities:Accounts and contracts receivable


(3,538,971
)


(97,031
)


(221,742
)Inventories


(1,347,615
)


1,084,381



(20,023
)Prepaid expenses and other assets


(354,324
)


20,724



(179,416
)Other assets


(186,335
)


(9,882
)


Accounts payable


952,075



631,775



(253,445
)Decrease in restricted certificate
    of deposit










129,368Other current liabilities


2,029,853



2,353, 322



153,726Net cash provided by operating
    activities


357,507



7,800,785



2,293,692Cash Flows (used in) Investing
    ActivitiesInvestment in NKF Electronics
    B.V., net cash acquired






(16,267,291
)


Capital expenditures


(493,961
)


(401,065
)


(948,363
)Net cash used in investing
    activities


(493,961
)


(16,668,356
)


(948,363
)Cash Flows From Financing
    Activities Borrowings on bank
    line-of-credit
    payable


800,000







Borrowing on notes payable






14,607,080



Payments on notes payable and
    capital leases


(2,307,537
)


(5,997,023
)


(67,500
)Proceeds from issuance of common
    stock


49,599



65,818



59,569Proceeds from exercise of stock
    options


1,248,269



453,327



190,680Net cash (used in) provided by
    financing activities


(209,669
)


9,129,202



182,749Effect of exchange rates on cash
    and cash equivalents


871,150



(134,237
)


3,015Net increase in cash and cash
    equivalents


525,027



127,394



1,531,093Cash and cash
    equivalents  beginning of period


3,046,353



2,918,959



1,387,866Cash and cash
    equivalents  end of period

$
3,571,380


$
3,046,353


$
2,918,959Supplemental Disclosures of Cash
    Flow Information:Cash paid during the year for
    interest

$
1,186,469


$
652,330


$
5,445Cash paid during the year for
    income taxes

$
1,122,462


$
772,953


$
57,564Supplemental information on
    non-cash investing and financing activities:Notes and capital lease
    obligations incurred for new equipment

$



$
205,475


$
    25




---



##### 



OPTELECOM-NKF,
    INC
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
  Accumu-latedOther





TotalDeferred





Compre-





Stock-Number


Common


Additional


Compen-


Accumulated


hensive


Treasury


holdersof Shares


Stock


Paid-in Capital


sation


Deficit


Income


Stock


EquityBALANCE, JANUARY 1, 2004


3,114,898


$
93,446


$
10,957,061


$
(14,855
)

$
(1,794,457
)

$
(19,672
)

$
(1,265,047
)

$
7,956,476Common stock issued from exercise
    of options


52,545



1,577



189,103



















190,680Common stock issued from employee
    stock purchase plan


7,666



230



59,339



















59,569Foreign currency translation


4,000



120



43,040



(43,160
)














Stock based compensation














24,900















24,900Write off discount on stock






















(10,246
)






(10,246
)Net income










103,540











14,752







118,292















1,594,612











1,594,612BALANCE, DECEMBER 31, 2004


3,179,109



95,373



11,352,083



(33,115
)


(199,845
)


(15,166
)


(1,265,047
)


9,934,283Common stock issued from exercise
    of options


83,199



2,495



450,832



















453,327Common stock issued from employee
    stock purchase plan


8,679



261



65,557



















65,818Issuance of common stock


30,427



913



252,713



(40,000
)














213,626Stock based compensation














39,308















39,308Foreign currency translation






















(1,803,184
)






(1,803,184
)Tax benefit from exercise of options










168,600



















168,600Net income


















2,681,915











2,681,915BALANCE, DECEMBER 31, 2005


3,301,414



99,042



12,289,785



(33,807
)


2,482,069



(1,818,350
)


(1,265,047
)


11,753,692Common stock issued from exercise
    of options and warrants


180,691



5,421



1,242,848



















1,248,469Common stock issued from employee
    stock purchase plan


4,277



128



49,471



















49,599Reclassification of unamortized
    deferred compensation










(33,807
)


33,807















Stock awards


9,000



270



388,639



















388,639Stock based compensation










560,692



















560,692Foreign currency translation






















2,388,080







2,388,080Net income


















1,554,102











1,554,102BALANCE, DECEMBER 31, 2006


3,495,382


$
104,861


$
14,497,358


$



$
4,036,171


$
569,730


$
(1,265,047
)

$
17,943,073    26




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
  1.
    NATURE OF
    BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES  Nature of Business
  Principles of Consolidation
  Use of Estimates
  Accounts Receivable
  Revenue Recognition percentage-of-completion time-and-materials
  Product Warranty
  2006


2005Balance, beginning of year

$
308,570


$
130,084Provision for warranty obligations


182,338



242,585Charges of warranty obligations


(60,316
)


(64,099
)Balance, end of year

$
430,592


$
308,570   Inventories Work-in-process
 27




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    Property, Equipment, and Depreciation
  Intangibles and goodwill
  Research and Development Costs
  Income Taxes
  Stock-Based Compensation  Share-based Payments
  Accounting for Stock Issued to
    Employees
 28




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
  Accounting for Stock-Based
    Compensation Accounting for Stock-Based
    Compensation-Transition and Disclosure
    Dec. 31


Dec. 312005


2004Net Income

$
2,681,915


$
1,594,612Less Stock-based compensation
    costs, net of income tax, as if fair value method had been
    applied


(682,770
)


(657,538
)Net income, pro forma

$
1,999,145


$
937,074Basic earnings per share:As reported

$
0.83


$
0.50Pro forma

$
0.62


$
0.30Diluted Earnings per Share:As reported

$
0.80


$
0.49Pro forma

$
0.59


$
0.29   Foreign Currency Translation 
  Cash and Cash Equivalents 
  Fair Value of Financial Instruments 
  Earnings Per Share
 29




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
     2006


2005


2004Basic Earnings Per Share:Earning available to common
    stockholders

$
1,554,102


$
2,681,915


$
1,594,612Weighted average common shares
    outstanding


3,436,696



3,250,097



3,159,285Basic earnings per share

$
0.45


$
0.83


$
0.50Diluted Earnings Per Share:Earning available to common
    stockholders

$
1,554,102


$
2,681,915


$
1,594,612Weighted average common shares
    outstanding


3,436,696



3,250,097



3,159,285Effect of stock options and
    warrants


124,939



105,526



105,522Diluted Shares


3,561,635



3,355,623



3,264,807Diluted earnings per share

$
0.44


$
0.80


$
0.49   Comprehensive Income
    2006


2005


2004Net Income

$
1,554,102


$
2,681,915


$
1,594,612Other comprehensive income:Foreign currency translation
    adjustment


2,388,080



(1,803,184
)Other










(15,166
)Comprehensive income

$
3,942,182


$
878,731


$
1,579,446   Recent Accounting Pronouncements
   30




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
     2.
    Acquisition
    of NKF Electronics       31




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    Cash paid at closing to Seller

$
14,607,080Note tendered at closing to Seller


9,794,362Direct acquisition costs


2,028,059Total purchase price

$
26,429,501Fair value of identified assets
    acquired and liabilities assumed:Cash

$
367,848Accounts receivable, net


4,176,080Inventory


2,707,358Other current assets


170,777Fixed assets


1,109,467Intangible assets


9,511,512Goodwill


13,921,322Total Assets Acquired


31,964,364Liabilities assumed


(2,515,783
)Deferred tax liability


(3,019,080
)Net Assets Acquired

$
26,429,501     Estimated Fair


Weighted AverageValue


Amortization Period (Year)Customer Relationships

$
7,071,260



11Employment Agreement


305,532



3Total Intangibles subject to
    amortization


7,376,792



10.7Tradename and
    trademark  not subject to amortization


2,134,720



N/ATotal

$
9,511,512



10.7     Year

Amount2007


744,6852008


659,8152009


642,8412010


642,8412011


642,841Thereafter


2,675,378  32




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    December 31,


December 31,2005


2004Proforma revenues ($000s)

$
36,599


$
38,430Proforma net income ($000s)


2,924



3,501Proforma earnings per
    share  basic


0.89



1.11Proforma earning per
    share  diluted


0.87



1.07     3.
    ACCOUNTS
    AND CONTRACTS RECEIVABLE    2006


2005Accounts and contracts receivable

$
9,846,571


$
7,285,842Less: Allowance for doubtful
    accounts


(624,925
)


(554,469
)$
9,221,646


$
6,731,373   4.
    INVENTORIES    2006


2005Production materials

$
3,430,687


$
2,573,578Work in process


785,472



498,885Finished goods


2,050,134



1,574,360Allowance for obsolescence


(507,327
)


(434,171
)Net

$
5,758,966


$
4,212,652  33




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
  5.
    PROPERTY
    AND EQUIPMENT    2006


2005Laboratory equipment

$
3,484,756


$
3,216,911Office equipment


2,569,467



2,285,767Furniture and fixtures


226,204



204,054Leasehold improvements


1,459,440



1,309,660Computer hardware and software


1,125,660



1,000,4398,865,527



8,016,831Less accumulated depreciation and
    amortization


(6,377,284
)


(5,338,966
)Net property and equipment

$
2,488,243


$
2,677,865     2006


2005Laboratory equipment

$
85,171


$
85,171Office equipment


268,447



268,447353,618



353,618Less accumulated amortization


(178,047
)


(124,979
)Net assets under capital leases

$
175,571


$
228,639     6.
    INCOME
    TAXES    2006


2005


2004U.S. Operations

$
(1,838,904
)

$
(609,691
)

$
2,111,653Non-U.S. Operations


3,574,014



4,129,219



178,637$
1,735,110


$
3,519,528


$
2,290,290  34




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    Current Expense (Benefit)

2006


2005


2004U.S. Operations

$
1,683


$
(2,850
)

$
29,299Non-U.S. Operations


1,067,339



1,568,421



1,069,022



1,565,571



29,299Deferred Expense
    (Benefit)U.S. Operations


(586,541
)


(322,873
)


605,189Non-U.S. Operations


(301,473
)


(405,085
)


61,190(888,014
)


(727,958
)


666,379Total

$
181,008


$
837,613


$
695,678     2006


2005


2004United States Federal tax at
    statutory rates


34.0
%


34.0
%


34.0
%(Reduction) increase of taxes:State taxes, net of federal benefit


(2.1
)


(0.3
)


3.3Valuation allowance related to net
    deferred tax assets










Foreign rate differential


(8.5
)


(2.7
)


Business tax credits


(4.7
)


(2.0
)


(6.9
)Change in tax rates


(17.4
)


(4.8
)


Permanent differences


7.3Other


1.9



(0.4
)


(0.1
)Effective income tax rate


10.5
%


23.8
%


30.3
%  35




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    2006


2005Gross deferred tax assets:Excess book depreciation

$



$
3,761Inventory


264,009



207,944Accrued vacation


72,698



69,731Deferral of rent expense


90,734



82,162Bad debt reserve


101,141



125,338Tax credits


624,032



546,213Other


212,917



153,666Net operating loss 
    non-US






170,495Net operating loss


994,972



672,649Deferred tax assets


2,360,503



2,031,959Gross deferred tax liabilities:Intangibles


(2,071,710
)


(2,314,587
)Excess tax depreciation


(108,890
)


(190,762
)Unrealized exchange gain


(37,387
)


(402,923Other


(54,960
)


(67,347
)Deferred tax liabilities


(2,272,947
)


(2,975,619
)Net deferred tax liabilities

$
(87,556
)

$
(943,660
)          36




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    7.
    NOTES PAYABLE    December 31,


December 31,2006


2005Senior term facility with a bank
    due February 2009

$
6,483,220


$
8,624,848Subordinated note due March 2010


9,692,322



8,694,680Other


22,500



67,50016,198,042



17,387,028Less Current Portion


(1,547,978
)


(1,592,978
)$
15,650,064


$
15,794,050         line-of-credit
  line-of-credit
   37




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
        Year Ended December 31:2007


1,547,9782008


1,525,4782009


3,432,2632010


9,692,3222011


$
16,198,042   8.
    COMMITMENTS
    AND CONTINGENCIES  Operating Leases 
      Year Ended December 31:

Operating


Capital


Total2007

$
1,152,383


$
78,979


$
1,231,3622008


1,115,217



46,283



1,161,5002009


1,097,710







1,097,7102010


1,070,776







1,070,7762011


1,070,755







1,070,755Thereafter


2,552,454







2,552,454Gross Payments


8,059,295



125,262



8,184,557Less Amounts Representing Interest






9,382



9,382Net Minimum Rental Payments

$
8,059,295


$
115,880


$
8,175,175    38




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
   Legal Proceedings
  9.
    STOCKHOLDERS
    EQUITY  Common Stock 
  Stock Purchase Plan 
  Sales of Unregistered Securities
  Directors Stock Compensation 
  Stock Options
     39




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
     Years Ended December 31,2006


2005


2004Expected Dividend yield


0%



0%



0%Expected volatility


55.75%



56.28%



71.65%Risk-free interest rate


4.6%



4.39%



3.21%Expected term


3



3



3     Weighted-AverageRemaining


Aggregate IntrinsicWeighted-Average


Contractual Term


ValueShares


Exercise Price


(Years)


(in thousands)Outstanding, January 1, 2004


243,050


$
4.88



2.93


$
1,109Granted


172,091



9.44Exercised


(52,545
)


3.63Forfeited, cancelled or expired


(5,270
)


10.59Outstanding December 31, 2004


357,326



7.17



2.85



860Granted


203,272



9.73Exercised


(82,495
)


5.43Forfeited, cancelled or expired


(12,847
)


11.87Outstanding December 31, 2005


464,806



8.48



2.98



2,293Granted


70,721



14.25Exercised


(180,691
)


6.91Forfeited, cancelled or expired


(4,432
)


8.36Outstanding, December 31, 2006


350,404



10.45



3.01



376Vested and expected to vest,
    December 31, 2006


344,663



10.43



3.00



372Exercisable, December 31, 2006


263,925


$
10.06



2.76


$
314  40




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    Options Outstanding


Options ExercisableWeighted








WeightedAverage


Weighted





AverageNumber


Remaining


Average


Number


ExerciseRange of Exercise Prices

Outstanding


Life in Years


Exercise Price


Exercisable


Price$2.66 to $9.05


107,048



2.81


$
8.31



77,566


$
8.12$9.16 to $9.48


109,441



2.58



9.30



97,904



9.28$9.50 to $13.87


100,908



3.12



12.00



73,257



11.48$13.89 to $27.77


33,007



4.25



16.46



15,198



18.07350,404



2.96


$
10.45



263,925


$
10.06     10.
    EMPLOYEE
    BENEFIT PLANS    11.
    BUSINESS
    SEGMENT INFORMATION  Description
    of the Types of Products from which each Segment Derives its
    Revenues
    Measurement
    of Segment Profit of Loss and Segment Assets
    Factors
    Management Used to Identify the Companys Reportable
    Segments
   41




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
    Year Ended December 31, 2006Communication


Electro-Products Segment


Optics Segment


TotalRevenues

$
38,480,524


$
1,003,497


$
39,484,021Depreciation and amortization


1,503,047







1,503,047Income from operations


2,578,928



342,651



2,921,579Assets


46,043,720



230,200



46,273,920Capital expenditures


493,961







493,961   Year Ended December 31, 2005Communication


Electro-Products Segment


Optics Segment


TotalRevenues

$
32,895,781


$
969,529


$
33,865,310Depreciation and amortization


1,359,019







1,359,019Income from operations


4,440,996



153,146



4,594,14,2Assets


38,637,707



230,200



39,266,907Capital expenditures


606,540







606,540   Year Ended December 31, 2004Communication


Electro-Products Segment


Optics Segment


TotalRevenues

$
17,952,579



1,442,568


$
19,395,147Depreciation and amortization


430,180







430,180Income from operations


1,930,645



339,330



2,269,975Assets


12,157,605



208,804



12,366,409Capital expenditures


948,363







948,363     2006


2005


2004Operating income (loss) by segment

$
2,921,579


$
4,594,142


$
2,269,975Interest expense  line
    of credit


(25,570
)






Interest expense  long
    term notes


(1,155,956
)


(1,112,401
)


(5,445
)Other income (expense)


(4,943
)


37,787



25,760Total other income (expense)


(1,186,469
)


(1,074,614
)


20,315Income (loss) before provision for
    income taxes

$
1,735,110


$
3,519,528


$
2,290,290    42




---



##### 



OPTELECOM-NKF,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004  (Continued)
   Significant
    Customers and Foreign Exports
      2006


2005


2004Long Lived





Long Lived





Long LivedSales


Assets


Sales


Assets


Sales


AssetsUnited States

$
15,447


$
2,881


$
14,913


$
2,319


$
16,707


$
2,260Netherlands


16,758



22,802



14,122



21,049







Spain


2,288



42



1,828



33







United Kingdom


2,841



2



2,388



2



2,688



17Other


2,150



44



664



17







$
39,484


$
25,771


$
33,865


$
23,416


$
19,395


$
2,277   12.
    QUARTERLY
    INFORMATION (UNAUDITED)    March 31


June 30


September 30


December 31(Amounts in thousands except per share data)2006:Revenues, net

$
9,515


$
8,987


$
10,146


$
10,836Gross profit


5,651



4,828



6,087



6,867Operating income


1,169



14



963



776Net income


564



(176
)


396



770Earnings per share 
    basic

$
0.17


$
(0.05
)

$
0.11


$
0.22Earnings per share 
    diluted

$
0.16


$
(0.05
)

$
0.11


$
0.222005:Revenues, net

$
5,487


$
9,018


$
9,359


$
10,002Gross profit


3,001



5,475



5,525



6,370Operating income


310



1,025



1,449



1,810Net income


151



488



774



1,269Earnings per share 
    basic

$
0.05


$
0.15


$
0.24


$
0.38Earnings per share 
    diluted

$
0.05


$
0.15


$
0.23


$
0.37  43




---



##### 



Item 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    Item 9A.
    CONTROLS
    AND PROCEDURES  Rule 13a-15
    Item 9B.
    OTHER
    INFORMATION   PART III  Item 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    www.optelecom-nkf.com Form 8-K
 44




---



##### 



Item 11.
    EXECUTIVE
    COMPENSATION    Item 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    Item 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE   Item 14. PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   PART IV Item 15. EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  Number

DescriptionThe following documents are filed
    as a part of this report:(1)


All financial statements;(2)


The consolidated financial
    statements of the Company and its subsidiaries on pages 23
    through 26 hereof, and the reports thereon of Grant Thornton LLP
    appearing on page 22 hereof. Financial Statement ScheduleSchedule II for the years
    ended December 31, 2006, 2005 and 2004 and the report
    thereon of Grant Thornton LLP appearing on page 50 hereof.
    All other schedules have been omitted because they are not
    applicable or are not required. All other required schedules are
    included in the Consolidated Financial Statements or notes
    therein.(3)


Exhibits   3.1

Certificate of Incorporation, as
    amended (incorporated by reference from
    Form 10-K
    filed March 31, 1998 and
    Form 8-K
    filed April 19, 2005)3.2

By-Laws (incorporated by reference
    from
    Form 10-K
    filed March 31, 1998)10.1

Employment Agreement of Edmund
    Ludwig as amended (incorporated by reference from
    Form 10-K
    filed March 31, 2006 and
    Form 8-K
    filed December 20,2006)10.2

Employment Agreement of James
    Armstrong (incorporated by reference from
    Form 10-K
    filed March 31, 2006)10.3

Employment Agreement of Thomas
    Overwijn (incorporated by reference from
    Form 10-K
    filed March 31, 2006 and
    Form 8-K
    filed December 20,2006)10.4

Subordinated Promissory Note dated
    March 8, 2005 (incorporated by reference from
    8-K filed
    March 11, 2005)10.5

Financing and Security Agreement
    date March 8, 2005 by and among Optelecom, Europe Limited,
    NKF B.V., and Inc., Optelecom UK Electronics I bena
    Manufacturers and Limited, Optelecom S.L., NKF Traders
    Trust Electronics, Company (incorporated by reference from
    8-K filed
    March 11, 2005) 45




---



##### 



10.6

Employee Stock Purchase Plan
    (incorporated by reference from Exhibit A to the Proxy
    Statement on Form 14A file April 4, 2000)10.7

2002 Stock Option Plan
    (incorporated by reference from Exhibit B to the Proxy
    Statement on Form 14A filed March 25, 2002)10.8

2001 Directors Stock Option Plan
    (incorporated by reference from Exhibit D to the Proxy
    Statement on Form 14A filed March 31, 2006)10.9

Employment Agreement of Steven
    Tamburo (incorporated by reference from the
    Form 8-K
    filed August 18, 2006)21

List of Subsidiaries23.1

Consent of Grant Thornton
    LLP  Independent Registered Public Accounting Firm31.1

Certification of Chief Executive
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200231.2

Certification of Chief Financial
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200232

Certification Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002  46




---



##### 



SIGNATURES    OPTELECOM-NKF, INC.
  By:
    /s/  Edmund
    Ludwig   Director and President and CEO
      OPTELECOM-NKF, INC.By

/s/  Edmund
    LudwigEdmund
    LudwigDirector and President and CEO

Date: April 2, 2007By

/s/  James
    ArmstrongJames
    ArmstrongDirector and Executive VP, Chief Operating Officer North
    American Operations

Date: April 2, 2007By

/s/  Thomas
    OverwijnThomas
    OverwijnDirector and Executive VP, Chief Operating Officer European
    Operations

Date: April 2, 2007By

/s/  Steven
    TamburoSteven
    TamburoChief Financial Officer

Date: April 2, 2007By

/s/  Carl
    Rubbo, Jr.Carl
    Rubbo, Jr. Director

Date: April 2, 2007By

/s/  David
    R.
    LipinskiDavid
    R. LipinskiDirector

Date: April 2, 2007By

/s/  Robert
    UrsoRobert
    UrsoDirector

Date: April 2, 2007By

/s/  Walter
    R. Fatzinger,
    Jr.Walter
    R. Fatzinger, Jr.Director

Date: April 2, 2007  47




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##### 



SCHEDULE II  OPTELECOM-NKF,
    INC.
  SCHEDULE OF
    VALUATION AND QUALIFYING ACCOUNTS
    FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004
  Balanceat


Charges to





BalanceBeginning


Costs and





at Endof Period


Expenses


Deductions


of PeriodYear Ended December 31, 2006:Reserves and allowances deducted
    from asset accounts:Obsolescence reserve for inventory

$
434,171



73,136






$
507,327Allowance for uncollectible
    accounts receivable


554,469



70,456







624,925Year Ended December 31, 2005:Reserves and allowances deducted
    from asset accounts:Obsolescence reserve for inventory

$
93,132


$
341,039


$



$
434,171Allowance for uncollectible
    accounts receivable


143,194



411,275







554,469Year Ended December 31, 2004:Reserves and allowances deducted
    from asset accounts:Obsolescence reserve for inventory

$
279,991


$
120,079


$
(306,938
)1

$
93,132Allowance for uncollectible
    accounts receivable


102,084



41,110







143,194   1
    
    Represents the disposal of obsolete inventory 48