UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-K/A(Amendment No. 1)

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

For the Fiscal Year Ended December 31, 2009

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.

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o

Accelerated filer o

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

Smaller Reporting Company ý


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

At June 30, 2009, shares of the registrant's Common Stock, $0.03 Par Value, held by persons other than "affiliates" of the registrant had an aggregate
market value of $14,034,239 based on the average closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System for such date.

At
March 12, 2010, the registrant had outstanding 3,676,006 shares of Common Stock, $.03 Par Value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III.



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Unless the context indicates otherwise, references in this Amendment No. 1 on Form 10-K/A to the "Company," the "registrant," "we," "our"
and "us" mean Optelecom-NKF, Inc.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A amends the Company's Annual Report on
Form 10-K for the year ended December 31, 2009 (the "10-K"), filed with the Securities and Exchange Commission on March 30, 2010. This Amendment is being
filed solely to correct the date of the report of Grant Thornton, LLP, our former independent registered public accounting firm, included in Item 7 of Part II of the 10-K.
Item 7 has been included in this filing as it contains the financial statements and related footnotes that have been opined on by Grant Thornton.

In
addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal
financial officer are filed as exhibits to this Form 10-K/A under Item 15 of Part IV hereof.

This
Amendment No. 1 does not reflect events occurring after the original filing date of the 10-K or otherwise modify or update the disclosures set forth in the
10-K, including the financial statements and notes to financial statements set forth in the 10-K.

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PART IV

Item 14.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibits.    The
exhibits that are filed with this Amendment No. 1 are set forth in the Index to Exhibits.

2

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Item 7.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Consolidated Financial Statements



PageReports of Independent Registered Public Accounting Firms


26Consolidated Balance Sheets as of December 31, 2009 and
2008


28Consolidated Statements of Operations and Comprehensive Income (Loss) for the two years in the period ended
December 31, 2009


29Consolidated Statements of Stockholders' Equity for the two years in the period ended December 31,
2009


30Consolidated Statements of Cash Flows for the two years in the period ended December 31,
2009


31Notes to Consolidated Financial Statements


32SCHEDULE IISchedule of Valuation and Qualifying Accounts


55


25

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
Optelecom-NKF, Inc.:

We
have audited the accompanying consolidated balance sheet of Optelecom-NKF, Inc. and subsidiaries as of December 31, 2009, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the year ended December 31, 2009. In connection with our audit of the consolidated financial
statements, we have also audited financial statement Schedule II for the year ended December 31, 2009. These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Optelecom-NKF, Inc. and
subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2009, when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

The
accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in
note 13 to the consolidated financial statements, the Company has suffered losses from operations, has substantial debt maturing, and its viability is dependent on the success of its future
operations and ability to obtain future financing. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are
also described in note 13. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLPMcLean, VA
March 30, 2010


26

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and
Stockholders of Optelecom-NKF, Inc.

We
have audited the accompanying consolidated balance sheet of Optelecom-NKF, Inc. and subsidiaries (the Company) as of December 31, 2008, and the related
consolidated statement of operations and comprehensive income (loss), stockholders' equity and cash flows for the year ended December 31, 2008. Our audit of the basic financial statements
included the financial schedule listed in the index appearing under Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.

We
conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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 Optelecom-NKF, Inc. as of
December 31, 2008, and the results of
their operations and their cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/
GRANT THORNTON, LLP

McLean,
Virginia
March 27, 2009

27

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OPTELECOM-NKF, INC.        CONSOLIDATED BALANCE SHEETS        AS OF DECEMBER 31, 2009 AND DECEMBER 31, 2008        (Dollars in Thousands, Except Share
Amounts)

December 31,
2009

December 31,
2008ASSETSCURRENT ASSETSCash and cash equivalents

$
2,344

$
5,671Restricted Cash


1,900


Accounts receivable, net of allowance for doubtful accounts of $386 and $245


8,209


10,290Inventories, net


4,343


5,782Deferred tax assetcurrent


240


205Prepaid expenses and other current assets


893


1,152Total Current Assets


17,929


23,100Property and equipment, less accumulated depreciation of $5,681 and $7,820


1,593


2,063Intangible assets, net of accumulated amortization of $3,609 and $2,870


6,609


7,180Goodwill


14,848


14,603Other assets


209


202TOTAL ASSETS

$
41,188

$
47,148LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESCurrent portion of notes payable and interest payable


1,907


3,468Accounts payable


2,012


3,634Accrued payroll


1,225


1,841Commissions payable


55


198Accrued warranty reserve


422


410Taxes payable





931Other current liabilities


1,233


1,688Total Current Liabilities


6,854


12,170Notes payable


12,818


10,367Deferred tax liabilities


1,513


1,427Interest payable





1,744Other liabilities


188


249Total Liabilities


21,373


25,957STOCKHOLDERS' EQUITYCommon stock, $.03 par value-shares authorized, 15,000,000; issued and outstanding, 3,653,644 and 3,645,084 shares as of December 31, 2009 and
December 31, 2008, respectively


110


109Additional paid-in capital


17,036


16,252Accumulated other comprehensive income


2,769


2,534Treasury stock, 162,672 shares at cost


(1,265
)

(1,265
)Retained earnings


1,165


3,561Total stockholders' equity


19,815


21,191TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
41,188

$
47,148


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

28

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OPTELECOM-NKF, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)        FOR THE YEARS ENDED DECEMBER 31,    
(Dollars in Thousands, Except Share and Per Share Amounts)

2009

2008Revenue

$
36,177

$
45,165Cost of goods sold


15,469


17,938Gross profit


20,708


27,227Operating expenses:Sales and marketing


10,745


11,099Engineering


4,740


6,013General and administrative


6,305


6,923Amortization of intangibles


672


739Total operating expenses


22,462


24,774Income (loss) from operations


(1,754
)

2,453Other expense, net


841


996Income (loss) before income taxes


(2,595
)

1,457Provision (benefit) for income taxes


(199
)

3,213Net (loss) income

$
(2,396
)
$
(1,756
)Basic (loss) income per share

$
(0.66
)
$
(0.48
)Diluted (loss) income per share

$
(0.66
)
$
(0.48
)Weighted average common shares outstandingbasic


3,647,543


3,638,783Weighted average common shares outstandingdiluted


3,647,543


3,638,783Net (loss) income

$
(2,396
)
$
(1,756
)Foreign currency translation


235


(872
)Comprehensive (loss) income

$
(2,161
)
$
(2,628
)


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

29

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OPTELECOM-NKF, INC        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008        (Dollars in
Thousands, Except Share Amounts)

Number of
Shares

Common
Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income

Treasury
Stock

Retained
Earnings

Total
Stockholders'
EquityBALANCE January 1, 2008


3,632,083

$
109

$
15,534

$
3,406

$
(1,265
)
$
5,317

$
23,101Common stock issued from the exercise of options


515





2











2Common stock issued from employee stock purchase plan


6,356





48











48Stock Awards


10,000





74











74Restricted stock forfeited


(3,870
)
















Stock based compensation








594











594Foreign currency translation











(872
)







(872
)Net (loss)

















(1,756
)

(1,756
)BALANCE DECEMBER 31, 2008


3,645,084


109


16,252


2,534


(1,265
)

3,561


21,191Common stock issued from employee stock purchase plan


4,875





16











16Stock Awards


10,625


1


42











43Restricted stock forfeited


(6,940
)




0











0Stock based compensation








726











726Foreign currency translation











235








235Net (Loss)

















(2,396
)

(2,396
)BALANCE DECEMBER 31, 2009


3,653,644

$
110

$
17,036

$
2,769

$
(1,265
)
$
1,165

$
19,815


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

30

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OPTELECOM-NKF, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        FOR THE YEARS ENDED DECEMBER 31,        (Dollars in Thousands)

2009

2008Cash Flows from Operating Activities:Net (Loss) Income

$
(2,396
)
$
(1,756
)Adjustments to reconcile net (loss)income to net cash provided by operating activities:Depreciation and amortization


1,598


1,743Accounts receivable provision


125


27Change in allowance for inventory obsolescence


254


(53
)Accrued warranty reserve


8


3Stock based compensation


769


670Deferred rent


(61
)

(7
)Deferred tax asset


30


2,299Change in assets and liabilities:Accounts and contracts receivable


2,090


(1,102
)Inventories


1,223


(628
)Prepaid expenses and other current assets


267


(86
)Other assets


(4
)

(6
)Accounts payable and other accrued expenses


(2,842
)

2,278Other liabilities


(518
)

347Net cash provided by operating activities


543


3,729Cash Flows from Investing Activities:Capital expenditures


(426
)

(550
)Net cash used in investing activities


(426
)

(550
)Cash Flows from Financing Activities:Net (decrease) increase in bank line of credit





(1,000
)Increase in restricted cash


(1,900
)

Payments on notes payable and capital leases


(1,583
)

(1,515
)Proceeds from employee stock purchase plan


17


46Proceeds from exercise of stock options





2Net cash used in financing activities


(3,466
)

(2,467
)Effect of exchange rates on cash and cash equivalents


22


(84
)Net (decrease) increase in cash and cash equivalents


(3,327
)

628Cash and cash equivalentsbeginning of period


5,671


5,043Cash and cash equivalentsend of period

$
2,344

$
5,671Supplemental Disclosures of Cash Flow Information:Cash paid during the period for interest

$
298

$
251Cash paid during the period for income taxes

$
832

$
31


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

31

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OPTELECOM-NKF, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008        (Dollars in
Thousands, Except Share Amounts)

1. Nature of Business and Summary of Significant Accounting Policies

Nature of BusinessOptelecom-NKF, Inc. (the Company) is a Delaware corporation that was organized in 1972. The Company, developer
of Siqura® advanced video network solutions, is a global supplier of advanced video surveillance solutions, including IP cameras, video servers/codecs, network video recorders, fiber
transmission equipment, video management and video analytics software. We deliver complete solutions for traffic monitoring and security of airports, seaports, casinos, prisons, utilities, public
transit, city centers, hospitals, and corporate campuses. The Optelecom-NKF corporate headquarters is in Germantown, Maryland, USA, with European corporate offices in Gouda, the
Netherlands, and sales or support offices covering the Americas, France, Spain, the UK, Germany, Italy, Dubai, and Singapore.

Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its subsidiaries. All significant
inter-company transactions and balances have been eliminated.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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
revenue and expenses during the reporting period. Actual results could differ from those estimates.

Accounts ReceivableAccounts receivable potentially subjects the Company to concentrations of credit risk. Credit is extended based on evaluation of a
customer's financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from the customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. The Company regularly monitors and assesses its risk of not collecting amounts owed by its customers. This evaluation is based upon
an analysis of amounts current and past due along with relevant history and facts such as collection history, the results of credit inquiries and the impact of credit insurance maintained by the
Company. The Company believes that its allowance for doubtful accounts is adequate to cover any potential losses on its credit risk exposure. The Company writes off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Revenue RecognitionRevenue from commercial sales is recognized when products are shipped and/or title passes pursuant to the terms of the agreement
with the customer, the amount from the customer is fixed, and collectability is reasonably assured.

Product WarrantyIn the ordinary course of business, the Company warrants its products against defect in design, materials, and workmanship over
various time periods generally ranging from one to five years. Warranty reserves and allowances for product returns are established based upon management's best estimates of amounts necessary to
settle future and existing claims on products sold

32

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

through
the balance sheet date. The following is a summary of the Company's warranty obligation for the years ended December 31:

(Dollars in thousands)

2009

2008Balance, beginning of year

$
410

$
418Provision for warranty obligations


211


104Charges against warranty obligations


(199
)

(112
)Balance, end of year

$
422

$
410


InventoriesProduction materials are valued at the lower of cost or market applied on an actual cost basis. Work-in-process
and finished goods inventory includes direct labor, materials and overhead and are valued at the lower of cost or market, cost being determined using actual costs on a specific identification basis.
The Company writes down its inventory for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions as well as historical inventory turnover. If
actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At December 31, 2009 and 2008, the reserve for inventory
obsolescence was $942 thousand and $679 thousand, respectively.

Property, Equipment, and DepreciationProperty and equipment are recorded at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets, which range from 3 to 10 years. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the assets,
whichever is shorter. Expenditures for maintenance and repairs are expensed as incurred.

GoodwillGoodwill acquired in connection with business acquisitions is stated at fair value on the date of purchase. Goodwill is not amortized, but
it, as well as other intangible assets with indeterminate lives, are subject to an annual impairment test. The primary assumptions underlying the impairment test are current and forecasted
profitability and cash flow of the related business. There have been no adjustments to the carrying values of goodwill or intangible assets resulting from these impairment tests during 2009 as the
fair value of the reporting unit is in excess of its carrying value. Goodwill increased from $14.6 million at December 31, 2008, to $14.8 million at December 31, 2009. This
increase is the result of prevailing foreign exchange rates at the respective balance sheet dates.

IntangiblesIntangibles acquired in connection with business combinations are stated at their fair value on the date of purchase. The costs of
intangibles which are subject to amortization are amortized on a straight-line basis over their expected lives of three to eleven years. The recoverability of carrying values of
amortizable intangible assets is evaluated on a recurring basis whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Recovery of assets to be
held and used is measured by comparing the carrying value of these assets with the expected future cash flows generated by the assets. If the assets are considered to be impaired, the impairment is
recognized by the amount which the carrying amount of the assets exceeds their fair value. The changes in intangibles carrying value are the result of foreign exchange fluctuations and amortization.

33

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

As
of December 31, 2009, intangible assets are comprised of the following (in thousands).

Description

Purchase
value

Amortization
Period in
Years

Accumulated
Amortization

Net valueIntangible indefinite life:Tradenames

$
2,293




$


$
2,293Intangible amortizable:Customer Relationships


7,596


11


(3,280
)

4,316Non-Compete Agreement


328


3


(328
)
$
Total Intangibles

$
10,217




$
(3,608
)
$
6,609


The
aggregate amortization expense of intangible assets was $672 thousand and $739 thousand for the years ended December 31, 2009, and 2008, respectively. It is
anticipated that amortization expense for these intangibles will be approximately $3.4 million over the next five years.

Research and Development CostsResearch and development costs are expensed as incurred and included as a component of engineering expense in the
consolidated statements of operations. The Company incurred research and development costs of $4.1 million and $5.5 million for the years ended December 31, 2009 and 2008
respectively.

Income TaxesThe Company accounts for income taxes in accordance with the FASB's guidance which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The FASB's guidance also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

It
is the Company's policy to classify interest and penalties related to uncertain tax positions as a component of income tax expense. For the years ended December 31, 2009 and
2008, there were no interest and penalties associated with uncertain tax provisions.

Stock-Based CompensationThe Company accounts for stock based compensation under FASB Codification 718-10 CompensationStock
Compensation which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors using a fair value based option pricing model.
Compensation expense is recognized for awards that were granted, modified, repurchased or cancelled on or after January 1, 2006. Share-based tax-affected compensation expense
recognized under this method for the years ended December 31, 2009 and 2008 was $769 thousand and $670 thousand, respectively. As of December 31, 2009, total unamortized
compensation expense related to non-vested share-based compensation was $392 thousand and is expected to be recognized over a period of 0.83 years.

Foreign Currency Translation/TransactionsThe functional currency of the Company's international operations is the local currency. The Company
translates the assets and liabilities of its foreign subsidiaries into U.S. dollars at the exchange rates in effect at the end of the year and revenue and

34

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

expense
accounts are translated into U.S. dollars using the average exchange rate for the period. The related translation adjustments are reported as foreign currency translation in the statement of
stockholders' equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in the results of
operations.

Cash and Cash EquivalentsThe Company considers all liquid investments with original maturities of three months or less at the time of purchase to be
cash equivalents. The Company is exposed to a concentration of credit risk as the majority of the Company's cash resides in European banks. Government insurance affords coverage only up to
100 thousand Euros per account holder per bank. On December 14, 2009, we entered into an amended financing agreement with our bank. Pursuant to the Amendment, we agreed to a reduction in
our revolving credit facilities and also agreed to restrict $1.9 million of cash as collateral for the term loan and revolving credit facilities. The cash collateral is restricted pursuant to a
deposit account security agreement.

Fair Value of Financial InstrumentsThe carrying amounts approximate fair value of the Company's cash and short-term financial
instruments. The carrying value of the senior note approximates fair value. It is not practicable to estimate the fair value of the subordinated note, which had a carrying value of
$12.8 million, including accrued interest at December 31, 2009. At December 31, 2009, interest on this note was at 6%, but this was amended to 10% on March 5, 2010, in
accordance with the extension of the due date to March 8, 2011. We are unable to estimate the fair value of the note due to lack of available financing and because the debt is not traded.

Advertising and Promotion ExpensesCosts of advertising are expensed as incurred. Advertising and promotion expenses for the years ended
December 31, 2009 and 2008 were $924 thousand and $949 thousand, respectively.

Sales TaxThe Company presents all non-income government-assessed
taxes (sales, use, and value added taxes) collected from its customers and remitted to governmental agencies on a net basis (excluded from revenue) in its financial statements.

Concentration of CustomersFor the twelve months ended December 31, 2009, approximately 20% of our revenues were accounted for by sales to five
commercial customers. In 2008 five commercial customers represented 29% of our revenues.

Earnings Per ShareBasic earnings per share are computed using the weighted average number of common shares outstanding. Diluted earnings per share
are computed using the weighted average number of shares outstanding plus the impact of stock options using the treasury stock method, provided the options are not anti-dilutive. Options
to purchase 469 thousand and 517 thousand weighted average shares of common stock were outstanding during the years ended December 31, 2009 and 2008, respectively, but were not
included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.

35

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

The
computation of basic and diluted loss per share for the years ended December 31, 2009 and 2008, is as follows:

(Dollars in thousands, except share amounts)

2009

2008Basic (loss) income per share:Net (loss) income

$
(2,396
)
$
(1,756
)Weighted average common sharesbasic


3,647,543


3,638,783Basic (loss) income per share

$
(0.66
)
$
(0.48
)Diluted (loss) income per share:Net (loss) income

$
(2,396
)
$
(1,756
)Weighted average common sharesbasic


3,647,543


3,638,783Assumed conversion of:Stock options





Weighted average common sharesdiluted


3,647,543


3,638,783Diluted (loss) income per share

$
(0.66
)
$
(0.48
)


Subsequent Event PolicyWe have evaluated material events and transactions that have occurred after December 31, 2009, and concluded that no
subsequent events, other than those disclosed herein, have occurred that require adjustment to or disclosure in this Form 10-K.

2. Accounts and Contracts Receivable

Accounts and contracts receivable consisted of the following at December 31:

(Dollars in thousands)

2009

2008Accounts and contracts receivable

$
8,595

$
10,535Less: Allowance for doubtful accounts


(386
)

(245
)Total accounts and contract receivable, net

$
8,209

$
10,290


3. Inventories

Inventories consisted of the following at December 31:

(Dollars in thousands)

2009

2008Production materials

$
2,948

$
4,164Work in process


236


745Finished goods


2,101


1,552Allowance for obsolescence


(942
)

(679
)Total inventories, net

$
4,343

$
5,782


36

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

4. Property and Equipment

Property and equipment consisted of the following at December 31:

(Dollars in thousands)

2009

2008Laboratory equipment

$
1,751

$
3,377Office equipment


1,330


2,376Leasehold improvements


1,606


1,575Computer hardware and software


2,587


2,5557,274


9,883Less accumulated depreciation and amortization


(5,681
)

(7,820
)Property and equipment, net

$
1,593

$
2,063


Assets
under capital leases are included in the above categories and consisted of the following:

(Dollars in thousands)

2009

2008Laboratory equipment

$
85

$
85Office equipment


269


269354


354Less accumulated depreciation and amortization


(328
)

(283
)Net property and equipment under capital leases

$
26

$
71


Depreciation
and amortization expense was approximately $1.0 million for each of the years ended December 31, 2009 and 2008. Amortization expense for property and equipment
under capital leases was $45 thousand and $52 thousand for the years ended December 31, 2009 and 2008, respectively, and is reflected in depreciation and amortization expense. We
are evaluating strategic alternatives for our business. It is possible that certain actions taken as a result of this evaluation could result in impairment of long lived assets in 2010.

37

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

5. Other Intangible Assets

As of the dates indicated, other intangible assets are comprised of the following (in thousands):

December 31,2009

2008Description

Purchase
value

Accumulated
Amortization

Net value

Purchase
value

Accumulated
Amortization

Net valueGoodwill:

$
14,848

$
0

$
14,848

$
14,603

$
0

$
14,603Intangible indefinite life:Tradenames

$
2,293

$
0

$
2,293

$
2,256

$
0

$
2,256Intangible amortizable:Customer Relationships

$
7,596

$
3,280

$
4,316

$
7,471

$
2,547

$
4,924Non-Compete Agreement

$
328

$
328

$
0

$
323

$
323

$
0Total Intangibles

$
25,065

$
3,608

$
21,457

$
24,653

$
2,870

$
21,783


The
aggregate amortization expense of intangible assets was $672 thousand and $739 thousand for the years ended December 31, 2009, and 2008, respectively. Changes in
the value of goodwill and indefinite lived intangible assets from the date of acquisition to December 31, 2009, are a result of foreign exchange fluctuations.

Estimated
future aggregate annual amortization expense for intangible assets is as follows (dollars in thousands):

Year ended
December 31,2010

$
6902011


6902012


6902013


6902014


690Thereafter


866TOTAL

$
4,316


6. Income Taxes

The components of income (loss) before income taxes consisted of the following for the years ended December 31:

(Dollars in thousands)

2009

2008U.S. Operations

$
(1,758
)
$
32Non-U.S. Operations


(837
)

1,425$
(2,595
)
$
1,457


38

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

6. Income Taxes (Continued)

The
components of the (benefit) provision for income taxes for the years ended December 31 are summarized as follows:

(Dollars in thousands)

2009

2008Current Expense (Benefit)U.S. Operations

$
(10
)
$
15Non-U.S. Operations


(218
)

1,082$
(228
)
$
1,097Deferred Expense (Benefit)U.S. Operations

$


$
2,921Non-U.S. Operations


29


(805
)$
29

$
2,116Total

$
(199
)
$
3,213


The
difference between the federal income tax expense (benefit) and the amount computed applying the statutory federal income tax rate are summarized as follows for the years ended
December 31:

2009

2008United Sates Federal tax at statutory rates


34.0
%

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


(10.4
)%

(6.9
)%Valuation allowance related to net deferred tax assets


(17.6
)%

189.3
%Impact of foreign operations


9.9
%

7.9
%Business tax credits


(0.2
)%

(1.5
)%Stock option shortfalls


(8.6
)%

0.0
%Permanent differences


(0.3
)%

(1.5
)%Other


0.9
%

(0.8
)%Effective income tax rate


7.7
%

220.5
%


The
impact of foreign operations includes the foreign tax rate differential, the permanent differences related to the foreign subsidiaries and the U.S. tax impact resulting from the
restructuring of the foreign operations.

39

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

6. Income Taxes (Continued)

Deferred
income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for income tax and financial reporting purposes. The components of
deferred income tax liabilities and assets as of December 31 are as follows (dollars in thousands):

2009

2008Deferred tax assets:Excess book depreciation

$
165

$
84Inventory


212


129Accrued vacation


70


62Deferral of rent expense


66


94Bad debt expense


7


21Tax credits


1,850


1,372Deferred compensation


185


331Unrealized foreign exchange loss


810


670Other


526


653Net operating loss


479


266Gross deferred tax asset


4,370


3,682Valuation allowance


(3,503
)

(3,045
)Deferred tax assets


867


637Deferred tax liabilities:Intangibles


(1,685
)

(1,831
)Unrealized foreign exchange gain


(407
)

Other


(47
)

(28
)Total deferred tax liabilities


(2,139
)

(1,859
)Net deferred tax assets (liabilities)

$
(1,272
)
$
(1,222
)Reported as:Current deferred income tax assets

$
241

$
205Long-term deferred income tax liabilities


(1,513
)

(1,427
)Net deferred income tax (liabilities)

$
(1,272
)
$
(1,222
)


The
exercise of stock options and certain stock grants generated an income tax deduction equal to the excess of the fair market value over the exercise price. The Company will not
recognize a deferred tax asset with respect to the excess stock compensation deductions until those deductions actually reduce our income tax liability. As such, the Company has not recorded a
deferred tax asset related to the net operating losses resulting from the exercise of these stock options in the accompanying financial statements. At such time as the Company utilizes these net
operating losses to reduce income tax payable, the tax benefit will be recorded as an increase in additional paid in capital. As of December 31, 2009, the cumulative amount of the unrecognized
tax benefit related to such option exercises and certain stock grants was $655 thousand.

40

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

6. Income Taxes (Continued)

As
of December 31, 2009 and 2008, the Company had federal and state tax-effected net operating loss carryforwards of approximately $461 thousand and
$277 thousand, respectively, for U.S. income tax purposes. These carryforwards begin to expire in the year 2028. As of December 31, 2009 and 2008, the Company had tax credit
carryforwards of approximately $1.9 million and $1.4 million, respectively, for U.S. income tax purposes. These tax credit carryforwards begin to expire in the year 2018. The use of
these net operating loss and tax credit carryforwards may be subject to limitation under the rules regarding a change of ownership as determined by the Internal Revenue Service. The effects of
potential ownership changes, if any, have not been analyzed by the Company.

As
of December 31, 2009, the Company has recorded a valuation allowance of approximately $3.5 million against the U.S. deferred tax assets. In evaluating the amount of the
valuation allowance as of December 31, 2009, we considered all available positive and negative evidence, including past operating results, the reversal of temporary differences, the forecasts
of future taxable income and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income. Based on
the weight of the positive and negative evidence and the information available, management concluded that it is not more likely than not that its U.S. deferred tax assets will be realized. The Company
established a valuation allowance of $3.2 million in 2008. The change in the valuation allowance from December 31, 2009 to December 31, 2008, was an increase of
$458 thousand related to the valuation allowance recorded against the U.S. net deferred tax assets generated during 2009.

The
Company files tax returns in the U.S. federal jurisdiction, as well as various state and foreign tax jurisdictions in which it has a subsidiary or branch operation. The tax years
2006 to 2009 remain open to examination by U.S. and state tax authorities. However, due to net operating loss and credit carryforwards, the tax authorities can recompute income from a closed year in
order to determine the net operating loss and credit carryforwards allowable in an open year. The tax years 2006 to 2009 also remain open to examination by the foreign tax authorities.

As
of January 1, 2009, the Company had a total unrecognized tax benefit of $720 thousand, of which $56 thousand related to tax positions taken in prior years that
did not meet the more-likely-than-not recognition threshold and $624 thousand related to stock compensation deductions.

The
change in the Company's unrecognized tax benefits are shown in the table below:

(In Thousands)

2009

2008Balance at January 1,

$
765

$
720Additions related to current year windfall tax benefits





45Subtractions related to changes in state tax rates on prior year windfall tax benefits


(54
)Balance at December 31,

$
711

$
765


41

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

7. Notes Payable

Notes payable consist of the following at December 31:

(Dollars in thousands)

2009

2008Senior term loan with a bank due Feb 2010

$
1,907

$
3,432Microsoft note payable


18


54Subordinated note due March 2011(1)


12,818


12,093$
14,743

$
15,579Less: Current Portion


(1,925
)

(3,468
)Total Notes Payable

$
12,818

$
12,111


(1)Includes
$2.3 and $1.7 million of deferred interest payable on the subordinated note for the years ended December 31, 2009 and 2008,
respectively.


In
June 2008, the Company implemented a new European holding company structure in the Netherlands which provides a more flexible corporate structure. The Company established a new Dutch
entity that is a subsidiary of the U.S. parent company and holds all of the Company's international subsidiaries. The new structure is intended to facilitate enhanced management of international
operations and improvements in cash management and income tax planning. The balance and interest rate on the term debt were not changed in the restructuring, however the debt is now included in the
European holding company in place of the U.S. legal entity. The Company made approximately $1.5 million USD principal payments on this loan during both 2008.

The
balance of the senior term loan at December 31, 2009, was $1.9 million. The term loan carries interest at the rate of LIBOR plus a margin that can range from 2.25% to
3.25% depending on the Company's leverage position. At the recent quarter end the interest rate on this term loan was 4.2%. There is $1.9 million of restricted cash that supports the senior
term loan.

The
June 2008 restructuring included the transfer of our Dutch operating subsidiary (Optelecom-NKF B.V.) from the U.S. parent company to the new European holding
company. Consideration for the transfer included an intercompany note receivable to the U.S. parent and a corresponding note payable from the European holding company. The intercompany note is in U.S.
Dollars and totaled $15.0 million with a balance of $8.6 million on December 31, 2009. The impact from the fluctuations in foreign exchange on the intercompany note payable is
included in Other Income (Expense), net in our Consolidated Statement of Operations.

On
March 8, 2005, the Company completed the acquisition of NKF Electronics B.V. from Draka Holding, N.V. ("Draka") and issued a Euro based Subordinated Note to Draka
for a portion of the acquisition price. The principal balance of the Subordinated Note to Draka was $10.5 million at December 31, 2009. The Subordinated Note is denominated in Euros and
the liability increased $697 thousand since issuance in March 2005 due to the impact of the exchange rate changes. The note is due in March 2011. Upon completion of the previously discussed
restructuring the impact from the change in foreign exchange rates on the Subordinated Note is included in the Other Income (Expense), net on our Consolidated Statements of Operations. Prior to the
restructuring, it was included in

42

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

7. Notes Payable (Continued)

Comprehensive
Income as it was considered to be a hedge in the net investment of our NKF subsidiary.

At
December 31, 2009, the Subordinated Note accrues interest at a rate of 6% per annum. $2.3 million of deferred interest payable has been accrued from the acquisition date
through December 31, 2009. The impact from the change in foreign exchange on the accrued interest payable is included in the Other Income (Expense), net on our Consolidated Statements of
Operations.

At
December 31, 2009, the Company had $500 thousand available on its bank line of credit and had no outstanding balance on this line of credit as of such date. At
December 31, 2008, the Company had up to $5.0 million available on its bank line of credit and had no outstanding balance. The Company terminated its bank line of credit facilities in
March 2010.

On
March 5, 2010, the Company entered into an amended and restated Subordinated Note issued to Draka (the "Note") and Draka agreed to extend the term of the Note to
March 8, 2011. The current principal amount under the Note is €9.1 million Euros ($12.5 million at March 5, 2010). In consideration of Draka's agreement to
extend the term of the Note, the Company agreed to pay Draka €155 thousand Euros ($222 thousand at December 31, 2009) under the Note and to make quarterly interest
payments on the Note at an annual interest rate of 10%. Additionally, the Company agreed that if it has cash on hand in excess of $2.5 million at the end of any calendar quarter, it will pay
such excess cash to Draka as a prepayment on the Note. The Company's obligations under the Note are secured by the assets of the Company and a pledge of 65% of the shares of Optelecom-NKF
Holding B.V., the Company's holding company in The Netherlands. Fair value of this 65% interest approximates $14.0 million at December 31, 2009. The terms of the amended and
restated Subordinated Note prohibit the Company from paying dividends to stockholders. The Company is permitted under the Note to obtain up to a $750 thousand revolving line of credit that will
be senior in priority to the Note and the Company's operating subsidiary in The Netherlands is permitted to obtain up to a $250 thousand revolving line of credit. Immediately prior to the
amendment and restatement of the Note, the Company paid in full its senior term loan and terminated line of credit.

For
the years ended December 31, 2009 and 2008, the Company recorded $808 thousand and $858 thousand respectively of interest expense.

Scheduled
maturities on notes payable are as follows for each of the next five years:

Year ended December 31, (Dollars in thousands):2010

$
1,9252011


12,818
(1)2012 and thereafter


$
14,743


(1)Includes
$2.3 million of deferred interest payable related to the Subordinated Note.


43

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

8. Commitments and Contingencies

Operating LeasesIn March 2003, the Company began to occupy its corporate office and manufacturing facility located in Germantown, Maryland. As an
inducement to enter this operating lease, the Company received certain incentives such as rent abatement. Additionally, the lease provides for scheduled rent increases. These lease incentives are
being amortized over the lease period. Rent expense is being recognized on a straight-line basis.

We
have a lease for office facilities located in the Netherlands that expires in March 2015, in France that expires in June 2012, in Dubai that expires December 2012, in Singapore that
expires December 2010 and Spain which expires in April 2011.

As
of December 31, 2009, future net minimum rental payments required under capital and operating leases that have initial or remaining non-cancelable terms in excess
of one year are as follows:

Year ended December 31, (Dollars in thousands):

Operating

Capital

Total2010

$
1,404,130

$


$
1,404,1302011


1,289,193





1,289,1932012


1,213,434





1,213,4342013


980,066





980,0662014


568,736





568,736Thereafter


142,184





142,184Gross Payments

$
5,597,743

$


$
5,597,743Less Amounts Representing Interst








Net Minimum Rental Payments

$
5,597,743

$


$
5,597,743


Rent
expense was $1.2 million and $1.1 million for the years ended December 31, 2009 and 2008, respectively.

Legal ProceedingsOptelecom-NKF is not involved in legal proceedings or litigation at this time.

9. Restructuring Charge

In September of 2009, the Company recorded pre-tax severance charges of approximately $127 thousand related to a reduction in force in the U.S. and Europe as a result
of a review of its operations. The majority of these charges were paid out in 2009. During the fourth quarter of 2008, the Company adopted a restructuring plan ("2008 Restructuring"), and recorded a
restructuring charge of $525 thousand for severance related costs. The Company paid this accrual out in its entirety in 2009. The Company included both the 2009 and 2008 severance charges in
engineering, sales and general and administrative expenses.

10. Stockholders' Equity

Common StockDuring 2008 proceeds from the exercise of stock options for the purchase of 500 shares of common stock were $2 thousand. There
were no exercises of stock options during 2009.

44

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

10. Stockholders' Equity (Continued)

Stock Purchase PlanThe Company's Stock Purchase Plan is intended to give employees a convenient means of purchasing shares of Common Stock through
payroll deductions. Each participating employee's contributions will be used to purchase shares for the employee's share account as promptly as practicable after each calendar quarter. The cost per
share will be 15% of the lower of the closing price of the Company's Common Stock as reported by NASDAQ on the first or the last day of the calendar quarter. The Company has reserved 200,000 shares of
Common Stock for issuance under the Stock Purchase Plan. As of December 31, 2009, 89,996 shares have been issued under the Stock Purchase Plan.

Director's Stock CompensationAs of July 1, 2006, each non-employee Director is granted 625 shares of restricted common stock at
the closing price on the first day of each calendar quarter. The Company issued 10,625 and 10,000 shares of common stock to directors in 2009 and 2008, respectively.

Stock OptionsThe Company has two stock-based compensation plans; the 2001 Nonqualified Director Stock Option Plan ("2001 Plan") and the
Optelecom-NKF, Inc. 2008 Stock Incentive Plan ("2008 Plan").

The
2001 Plan provides for up to 178,500 shares available for grant. The plan provides for the grant of stock options and restricted stock. Options under this plan are granted to
non-employee directors at fair market value on the date of the grant are exercisable upon grant and expire five years thereafter. Restricted stock under this plan is restricted from sale
for a period of two years. There were 70,798 awards available for future grant at December 31, 2009.

Effective
June 1, 2008, the Company adopted the 2008 Plan (the "2008 Plan"), which replaced the Optelecom, Inc. 2002 Stock Option Plan (the "2002 Plan"). Awards under the
2008 Plan are available only to employees. The 2008 Plan provides for the grant of up to 500,000 shares of common stock to participants, plus 70,000 remaining shares carried over from the 2002 Plan.
The 2008 Plan provides for the grant of stock options, restricted stock, restricted stock units, or performance awards. The exercise price of each option is the market value of the stock at the grant
date. Options issued in 2009 and 2008 are 100% exercisable two years from the grant date. Options expire between five and ten years from the date of grant and, in most cases, upon termination of
employment.

It
is the practice of the Company to satisfy awards and options granted under these plans through the issuance of new shares. During the years ended December 31, 2009 and 2008,
the Company recognized compensation expense of $726 thousand and $670 thousand, respectively. In each of the periods described above, compensation expense related to these plans was
recorded in the Consolidated Statements of Operations. At the years ended December 31, 2009 and 2008, the Company had $17 thousand and $21 thousand of share-based compensation
expense capitalized in inventory. The Company did not realize any income tax benefits from stock-based payment plans during the year ended December 31, 2009, as discussed in Note 6.

The
Company recognizes the fair value of service based options as stock compensation expense on a straight line basis over the requisite service period. The fair value of each stock
option award was

45

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

10. Stockholders' Equity (Continued)

estimated
on the date of grant using a Black Scholes option-pricing model based on the following weighted average assumptions:

3/9/2009

6/5/2008

3/5/2008Expected Dividend yield


0.00
%

0.00
%

0.00
%Expected volatility


65.29
%

52.00
%

56.00
%Risk-free interest rate


2.30
%

2.52
%

2.19
%Expected term


7.00


7.00


3.26


A
summary of the status of the Company's aggregate stock option awards under its Plans during the years ended December 31, 2009 and 2008 is presented below:

Shares

Weighted-
Average
Exercise Price

Weighted-
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value (in
thousands)Outstanding, December 31, 2008


541,043

$
9.73


3.53

$
Granted


63,449


3.10Excercised





Forfeited


(8,144
)

5.90Expired


(127,003
)

9.93Outstanding, December 31, 2009


469,345

$
8.84


4.16

$
Vested and expected to vest,December 31, 2009


466,048

$
8.86


4.13

$
Excercisable, December 31, 2009


290,858

$
10.15


1.75

$



The
following table summarizes information about all stock options outstanding at December 31, 2009.

Range of Exercise Prices

Number
Outstanding

Weighted-
Average
Remaining Life
in Years

Weighted-
Average
Exercise Price

Number
Exercisable

Weighted
Average
Exercise
Price$3.10 to $6.96


78,671


7.76

$
4.02


9,000

$
3.10$6.97 to $11.98


328,935


3.87


8.88


220,119


9.13$11.99 to $18.65


54,489


1.14


13.92


54,489


13.92$18.67 to $27.77


7,250


1.26


21.66


7,250


21.66469,345


4.16

$
8.84


290,858

$
10.15


The
weighted average fair values of each stock option granted by the Company during the years ended December 31, 2009 and 2008 was $1.99 and $4.37, respectively. The total
intrinsic value on the date of exercise of stock option awards exercised during the year ended December 31, 2008 was

46

---



OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

10. Stockholders' Equity (Continued)

$2 thousand.
There were no stock option awards exercised during the year ended December 31, 2009. The total fair value of awards that vested during the years ended December 31,
2009 and 2008 was $393 thousand and $106 thousand, respectively. As of December 31, 2009, there was $204 thousand of total unrecognized compensation cost related to stock
option awards granted under the plans. The weighted-average period over which the compensation expense for these awards is expected to be recognized is 0.64 years.

Restricted
Stock UnitsA restricted stock unit is a stock award that entitles the holder to receive shares of the Company's common stock as the unit vests. The Company's
outstanding restricted stock unit awards are subject to service-based vesting conditions. Awards subject to service-based conditions typically cliff vest at the end of two years. The Company
recognizes the fair value of service based awards as stock compensation expense on a straight line basis over the requisite service period. The fair value of each restricted stock unit award is the
closing price of the Company's Common Stock as reported by NASDAQ as of the date of issuance.

The
following table is a summary of the Company's restricted stock unit activity for the periods indicated:

Restricted Stock
Units Outstanding

Weighted
Average Grant
Date Fair Value
Per shareBalance as of December 31, 2008


86,108


8.91Granted


97,579


3.10Vested


(82,643
)

7.99Forfeited


(474
)

8.36Balance as of December 31, 2009


100,570


4.03


The
total fair value of restricted stock units that vested and were converted into common stock during fiscal 2009 and 2008 was $661 thousand and $116 thousand, respectively.

11. Employee Benefit Plans

The Company sponsors a 401(k) defined contribution plan in which most U.S. employees are eligible to participate. The Company matches employee contributions to the plan up to a maximum
of 2.5%. Total matching contributions were $124 thousand for each of the years ended December 31, 2009 and 2008.

In
the Netherlands, pension contributions from employer and employees are subject to the Taxation of Pensions Act approved by Parliament in 1999 as well as the Pension and Savings Fund
Act. For the years ended December 31, 2009, and 2008, the Company made total contributions (mandatory and voluntary) of $1.1 million each year.

In
December 2007 the Company amended its Employment Agreement with Edmund Ludwig, its former Chief Executive Officer. The amended employment agreement increased the amount
Mr. Ludwig would receive if he terminated his employment by retirement in accordance with the

47

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

11. Employee Benefit Plans (Continued)

Employment
Agreement. Mr. Ludwig retired on December 31, 2009, and is entitled to a retirement payment of $672 thousand that was fully accrued at December 31, 2009. In
December 2009, the Compensation Committee of the Board of Directors of the Company approved amendments to two restricted stock grants previously awarded to Edmund Ludwig, Chairman of the Board. These
restricted stock grants were made in June 2008 for 2,467 shares and March 2009 for 14,839 shares and were each subject to a two year vesting period. Due to Mr. Ludwig's retirement as an
employee, the Compensation Committee approved amendments to the Grants to provide they will fully vest effective upon Mr. Ludwig's retirement.

12. Quarterly Information (UnauditedSee accompanying accountant's report)

The following unaudited information sets forth our results of operations on a quarterly basis for the two years ended December 31, 2009 and 2008:

(Amounts in thousands except per share data)

March 31

June 30,

September 30,

December 31,2009:Revenue

$
8,587

$
10,010

$
8,307

$
9,273Gross profit


4,715


6,049


4,593


5,351Operating (loss) income


(949
)

258


(957
)

(106
)Net (loss) income


(766
)

(127
)

(1,269
)

(234
)(Loss) earnings per share-basic

$
(0.21
)
$
(0.03
)
$
(0.35
)
$
(0.06
)(Loss) earnings per share-diluted

$
(0.21
)
$
(0.03
)
$
(0.35
)
$
(0.06
)2008:Revenue

$
10,535

$
11,338

$
11,541

$
11,751Gross profit


6,459


6,670


7,209


6,889Operating income (loss)


512


(111
)

879


1,173Net income (loss)


148


25


1,029


(2,958
)Earnings (loss) per share-basic

$
0.04

$
0.01

$
0.28

$
(0.81
)Earnings (loss) per share-diluted

$
0.04

$
0.01

$
0.28

$
(0.81
)


13. Liquidity

Through the twelve months ended December 31, 2009, our financial performance included lower levels of revenue and operating cash flows and increased operating losses compared to the year
ended December 31, 2008. The principal amount due in March 2011 on our subordinated note is €9.1 million Euros ($12.5 million on March 5, 2010). Prior to the
maturity date, management intends to attempt to repay this debt from the proceeds of new debt and/or equity financings, or seek additional extensions of the maturity date from the current lender.
However, there can be no assurance that adequate additional financing will be available to the Company to repay the subordinated debt or that the current lender will be willing to provide additional
extensions of the maturity date, and therefore that we will be able to continue as a going concern.

48

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SIGNATURES

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

OPTELECOM-NKF, INC.By:

/s/ DAVID PATTERSON David Patterson President and CEO


Date:
May 3, 2010

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

OPTELECOM-NKF, INC.By

/s/ DAVID PATTERSON David Patterson President and CEO

Date: May 3, 2010By

/s/ THOMAS OVERWIJN Thomas Overwijn Director and Executive VP,
Chief Operating Officer

Date: May 3, 2010By

/s/ STEVEN TAMBURO Steven Tamburo Executive VP and CFO

Date: May 3, 2010By

/s/ EDMUND LUDWIG Edmund Ludwig Chairman of the Board

Date: May 3, 2010By

/s/ DAVID LIPINSKI David Lipinski Director

Date: May 3, 2010


3

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OPTELECOM-NKF, INC.By

/s/ CARL RUBBO, JR. Carl Rubbo, Jr. Director

Date: May 3, 2010By

/s/ WALTER FATZINGER, JR. Walter Fatzinger, Jr. Director

Date: May 3, 2010By

/s/ JOHN MARCELLO John Marcello Director

Date: May 3, 2010By

/s/ SANDRA BUSHUE Sandra Bushue Director

Date: May 3, 2010


4

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INDEX TO EXHIBITS

to Amendment No. 1 to the Annual Report on Form 10-K/A
for the Year Ended December 31, 2009

Exhibit
Number

Description of Exhibit31.1

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 2002


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