Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2008

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 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

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, 2008, 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 $31,962,751 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 11, 2009, the registrant had outstanding 3,677,579 shares of Common Stock, $.03 Par Value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Proxy Statement for the 2009 Annual Meeting of Shareholders are incorporated by reference into Part III.



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OPTELECOM-NKF, INC.
FISCAL YEAR 2008 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS



Item

Description

Page
NumberPART IItem 1

Business

3Item 1A

Risk Factors

8Item 1B

Unresolved Staff Comments

12Item 2

Properties

12Item 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

13Item 6

Selected Consolidated Financial Data

13Item 7

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

14Item 7A

Quantitative and Qualitative Disclosures About Market Risk

23Item 8

Financial Statements Supplementary Date

25Item 9

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

50Item 9A (T)

Controls and Procedures

50Item 9B

Other Information

51PART IIIItem 10

Directors, Executive Officers and Corporate Governance

52Item 11

Executive Compensation

52Item 12

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

52Item 13

Certain Relationships and Related Transactions and Director
Independence

52Item 14

Principal Accountant Fees and Services

52PART IVItem 15

Exhibits and Financial Statement Schedules

53Signatures

54


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PART I

FORWARD LOOKING STATEMENTS

Statements in this Form 10-K that are in the future tense, and all statements accompanied by terms such as
"believe," "project," "expect," "estimate," "assume," "intend," "anticipate," and variations or similar terms are intended to be "forward-looking statements" as defined by federal securities law.
Forward-looking statements are based upon assumptions, expectations, plans and projections that are believed valid when made, but that are subject to the risks and uncertainties identified below and
under the Risk Factors identified in Item 1A of this Form 10-K, that may cause actual results to differ materially from those expressed or implied in the forward-looking
statements.

The
Company intends that all forward-looking statements made will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking
statements are based upon, among other things, the Company's assumptions with respect to:



You
should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in forward-looking statements.
These forward-looking statements speak only as of the date when they are made. The Company does not undertake any obligation to update forward-looking statements to reflect events, circumstances,
changes in expectations, or the occurrence of unanticipated events after the date of those statements. In the future, the Company and its senior management may make forward-looking statements that
involve the risk factors and other matters described in this Form 10-K as well as other risk factors subsequently identified, including those in the Company's filings with the
Securities and Exchange Commission on Form 10-Q and Form 8-K.

Item 1.BUSINESS

Optelecom-NKF, Inc. (NASDAQ: OPTC), developer of Siqura® advanced Internet Protocol (IP) 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.

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Founded
in 1972, Optelecom-NKF is committed to providing its customers with expert technical advice and support in addition to products that are developed and tested for
professional and mission critical applications. All Optelecom-NKF IP surveillance solutions are marketed under the Siqura name.

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
America's, France, Spain, the UK, Germany, Italy, Dubai, and Singapore.

HISTORY

Optelecom-NKF is a Delaware corporation whose business activities began in 1972 under the name Optelecom, Inc. The
Company's early business commenced with the design and delivery of specialized laser systems and fiber optic communications products for the Department of Defense and other defense related agencies of
the Federal government.

During
the mid-1990's we successfully transitioned from having a significant number of military customers to being an industry provider of copper and fiber optic based
communications products for both commercial and government customers. We focused on providing integrated multi-media products for communicating video, audio, and other data over both copper wire and
optical network systems.

In
March 2005, we acquired NKF Electronics B.V. (NKF), a wholly owned subsidiary of Draka Holding N.V. (Draka). NKF was founded in 1981 and had accumulated extensive
expertise in fiber optic and IP/Ethernet network technologies. This expertise enabled NKF to build a broad range of communications products, ranging from fiber optic video modems and multiplexers to
Video-Over-IP network solutions. In April 2005, the Company's name was changed from Optelecom, Inc. to Optelecom-NKF, Inc. to reflect the importance
of this acquisition and new corporate structure.

ORGANIZATION, MARKETS AND PRODUCTS

The Company currently maintains its corporate headquarters in Germantown, Maryland. Our corporate structure globally integrates our
management into one functional group. We maintain operating centers in both the United States and the Netherlands under this integrated management structure, which includes research and development
(R&D), production, sales and logistics in each location.

We
are a global supplier of network video equipment, including video codecs and servers, fiber optic systems, network video recorders, Ethernet switches and video management software. We
are a customer and product focused company with a flexible philosophy based on providing companies and governments across the world with top quality solutions for traffic management and security
surveillance.

Optelecom-NKF
is committed to providing its customers with competitively priced, highly reliable, quality equipment and solutions, along with outstanding technical advice and
support. All products are developed and tested for real applications, particularly those that need to operate in challenging environmental conditions and across large distances between individual
transmission sites. We are ISO 9001:2000 certified and dedicated to the ongoing improvement of our products and processes, applying a high level of quality monitoring to increase customer
satisfaction.

We
sell our products worldwide through direct sales, commercial integrators and resellers. Management expects the primary sales channel to continue to be the commercial integrator. In
addition, several vendors incorporate the Company's products in their product offerings allowing the Company to penetrate markets we do not address directly.

The
Company continues to focus its resources on developing additional IP products, sales and distribution channels. Service and technical support programs are in place to attract and
maintain a

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large
network of integration companies. The Company primarily attracts new customer contacts through participation in trade shows in both the security and traffic markets. Our web site
(www.optelecom-nkf.com) has enabled the convenient and rapid dissemination of information by our distribution channel personnel and other
interested parties to gather information necessary to select our equipment.

The
Company has expanded its focus to identify prospects that have a requirement for complete IP-video solutions including the Company's video codecs, Ethernet network
equipment, network video recorders and video management software as well as a broad range of pre and post sales services such as design, detailed engineering and training. Internal training programs
have been implemented and additional personnel hired to expand the in-depth knowledge of our worldwide sales and support offices.

We
strive to continue improving our position as a leading producer and supplier of powerful, intelligent network video solutions by providing reliable products and services that enable
customers around the world to reduce their total cost of ownership and enhance the effectiveness of their applications. Products for these markets are classified into the two broad categories of Video
over IP and Video over Fiber.

Video
over IP solutions are represented by the Siqura product line. The Siqura product line includes video servers / codecs, IP cameras, Ethernet switches, recording and storage
equipment. Also, to bring together these hardware components, Siqura software solutions help the user consolidate a complete video network under one, easy-to-use management
platform.

The
Video over Fiber product line is comprised of the MC Series and the 9000 Series. The MC Series is designed for most common fiber applications and is recognized for its exceptional
price-performance ratio. The 9000 Series is designed for the more complex and demanding Video over Fiber applications. The availability of 18 different wavelengths and the unique concept of using
"option modules" are the core elements behind the versatility of the 9000 Series. The 9000 Series is about customization: wavelength availability and system functionality facilitate a wide range of
fiber network configuration possibilities.

Video over IP solutions

Siqura's Codecs/Servers for High-quality Video Compression

The Optelecom-NKF line of Siqura video codec/server portfolio ranges from cost-effective, low bandwidth compact
video servers to field-hardened, versatile codec platforms. Our single- and multi-channel codecs/servers are available in MJPEG, MPEG-4, MPEG-2 as well as H.264 video
compression formats.

Optelecom-NKF's
video codec/servers are designed with a strong focus on standardization. Its embedded Open Streaming Architecture (OSA) offers standardized streaming of video and remote
control. All streaming protocols are based on approved standards and tested with different industry vendors. A comprehensive HTTP application programming interface gives access to all controls and
allows integration with third party Video Management Systems.

Siqura's Cameras

Optelecom-NKF Siqura cameras address the requirements of today's CCTV security systems.
State-of-the-art camera technology in combination with our renowned MPEG-4 compression algorithm results in crystal clear streaming video. The Siqura
portfolio of cameras consists of boxed cameras, fixed dome cameras, mini-dome cameras, and high-speed dome cameras. Available in both analog and IP versions, the Siqura camera
line is easily deployed, reliable, and feature rich.

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Siqura's Software Management Solutions

The Optelecom-NKF software suite ranges from single and multi-server Video Management Systems for small and medium video
surveillance applications to more sophisticated operator solutions (Operator Storage, Operator Office, and MX Viewer Lite) to support more system critical video
surveillance applications. The suite also includes a comprehensive development kit (MX SDK) for integration with third-party software applications. In addition, versatile management and configuration
tools are available for maintenance and service purposes. All components within the software suite interoperate seamlessly with all Siqura components.

Siqura's Network Video Recording (i-NVR)

The Siqura-NVR provides an intelligent network video storage solution designed to support the most demanding video
surveillance applications in which operational availability and reliability are key. Ranging from 8- to 64-channel configurations with full RAID-5 capability, the
Siqura-NVR offers an extended set of features for scheduled continuous recording and event-driven operations (i.e., video motion detection) in support of alarm recording, etc.
Special care has been given to selecting hardware, such as the hard drives and power supply redundancy, to ensure reliable 24/7 operation.

Siqura's Video Network Equipment

Part of Optelecom-NKF's portfolio includes field-hardened network equipment consisting of Gigabit Ethernet switches, Fast Ethernet
switches, and models with built-in video encoders. The switches are both mechanically and electrically compatible with Optelecom-NKF's MC series 19-inch power supply
rack, offering cost-efficient, easy-to-maintain hybrid network solutions.

Video over Fiber Optics

MC Series

The MC series of Optelecom-NKF products is specifically designed for safety, security, and transportation applications.
With its compact design and its carefully selected combinations of video, data, and audio channels, the MC series offers a full range of simple to install, cost-effective priced
point-to-point fiber optic video surveillance solutions.

9000 Series

The 9000 series of Optelecom-NKF products is specifically tailored to support government and transportation applications.
With its modular design and ability to utilize Coarse Wavelength Division Multiplexing (CWDM) drop and insert technology, the 9000 series offers maximum flexibility and scalability by combining any
number of video, data, and audio channels. In addition, all 9000 series system modules are supported by a remote network management capability (9900- NMS), which offers users the ability
to remotely manage optical wavelengths and overall system performance.

Electro Optics Products

In addition to our two primary product categories of Video over IP and Video over Fiber Optics the Company operates an Electro Optics
(EO) group focused on Interferometric Fiber Optic Gyro coils and manufacturing innovative optical devices, primarily to U.S. government and defense industry customers. In EO, emphasis has been placed
on fabrication of precision-wound coils of optical fiber used as the sensing elements of fiber optic gyroscopes. EO also produces precision wound coils for applications ranging from optical fiber
dispensers used in remote vehicle control systems to precision optical fiber coils for communications systems. EO represented 2% of the Company's revenue in 2008.

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RESEARCH AND DEVELOPMENT

In recent years the Company has increased its investments and focused on the development of products being applied to the IP Video
marketplace. These products will permit us to increase our penetration of the markets we serve and expand into new markets. In recent years the Company has increased its research and development
staffing and is utilizing these additional resources to continue expanding its existing IP product lines. Our research and development expense is classified as a component of Engineering in our
financial statements and for the years ended 2008 and 2007 was $5.5 million and $4.3 million respectively.

Although
the Company holds a limited number of patents relating to optical sensor technology and optical fiber networks, our business is not materially dependent upon ownership of any
one patent or group of patents. We do not license any patents from third parties and we assign no value to patents in our financial statements.

QUALITY MANAGEMENT SYSTEM

The Company maintains a Quality Management System fully compliant with ISO9001:2000 and maintains an ongoing certification to this
standard. In keeping with our continuous improvement objectives, we continually implement enhancements to our quality performance metrics which track internal product defects,
out-of-box failures, customer concerns, product repairs and new product introduction issues. With the goal of increasing customer satisfaction, management has continued to
stress the importance of the Quality Management System and continues to utilize numerous quality tools, including a corrective action process, internal quality control audits and senior management
reviews. Additionally, the Quality Management System provides for proper controls, conducts material review meetings, performs Mean Time Between Failure calculations to determine product reliability
and works closely with suppliers to reduce incoming material defects. The U.S. and Netherlands-based facilities synchronize quality processes by standardizing many company-wide procedures.

In
keeping with our Company's commitment to quality products and services we adhere to the following corporate quality policy: Quality is the responsibility of every
Optelecom-NKF employee and focuses on everything we do to maintain our competitive edge. Our commitment to quality includes a customer focus, individual ownership for quality, measurement
and feedback systems, maintaining an ISO 9001:2000 compliant quality management system, and continual review of our quality objectives.

MANUFACTURING

Both the US and the Netherlands-based facilities perform routine and specialized manufacturing, assembly, and product testing
functions. We use equipment to automatically assemble components onto printed circuit boards at high speed, thereby lowering manufacturing costs and reducing the time-to-market
for new product designs. We also maintain a quality assurance function and testing area that performs quality inspections along with optical and electrical testing. Raw materials and supplies used in
our business include sheet metal, optical materials, plastic products, and various electronic components, most of which are available from numerous sources. Although the number of companies from which
we can obtain optical emitters and detectors for use in our circuit assemblies is limited, availability is presently not a significant factor in our ability to provide products. In 2008, we continued
to focus on decreasing the manufacturing defect
rate, making throughput cycle-time improvements, and striving toward work-in-progress (WIP) reductions as the result of embracing lean concepts. This progress is
all part of continuous, long-term improvement efforts.

COMPETITION

We compete with other companies of roughly equal size that have similar resources as well as with much larger companies with greater
resources. Our competitors include many privately held companies

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and
some public corporations. The Company historically competes in two primary market segments, traffic monitoring and security surveillance. The competition in these markets often has established
mature sales channels that allow for continued market penetration in both domestic and international markets. Management believes that the expansion of the Company's IP product offering and increased
sales and distribution channels worldwide will be the basis for sustained growth. We also will consider strategic acquisitions to enhance our planned internal growth.

SEASONALITY

The Company's products are based on communications equipment technology. As such, seasonality affects our revenues to the extent that
normal contracting activities are affected by capital budgets. We are also impacted in areas with colder climates as some outdoor projects are planned to avoid the winter months. This seasonality has
resulted in generally lower levels of revenue in the first half of the year when compared to revenue in the second half of the year.

EMPLOYEES

At December 31, 2008, the Company had 187 full time equivalent employees worldwide, including 57 in manufacturing, 58 in sales
and marketing, 43 in research, development and engineering, 4 in Electro Optics, and 25 in general management, quality management, finance and administration. We expect a limited increase in headcount
over the next 12 months.

Our
U.S. employees are not represented by any collective bargaining organization. The European employees based in the Netherlands are part of a collective bargaining agreement. We
consider our employee relations at both locations to be good.

CORPORATE

The Company's principal executive offices are located at 12920 Cloverleaf Center Drive, Germantown, MD 20874. The Company's telephone
number is (301) 444-2200. Our home page on the Internet iswww.optelecom-nkf.com. The Company makes web site content
available for informational purposes, which is not incorporated by reference into this Form 10-K.

Item 1A.RISK FACTORS

Fluctuations in financial performance could harm our long-term growth strategy.

We have experienced and may continue to experience fluctuations in our quarterly and annual operating results. Factors that may cause
operating results to vary include, but are not limited to, changing technology, new product transitions, delays in new product introductions, competition, shortages of system components, changes in
the mix of products and services sold, economic factors, and timing of planned expenditures in additional personnel, facilities and research and development. The current economic environment is marked
by significant instability and continued economic weakness is expected for the near future. As a result of the impact of these and other factors, past financial performance should not be considered to
be a reliable indicator of the future performance in any particular fiscal period. We are somewhat limited in our ability to reduce expenses quickly in response to any revenue shortfalls. Therefore,
our business, financial condition, and operating results could be adversely affected if increased revenues are not achieved. If we fail to manage or anticipate future growth effectively our business
will suffer.

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The loss of one or more of our major customers could adversely affect our business, financial condition and operating results.

For the twelve months ended December 31, 2008, approximately 29% of our revenues were accounted for by sales to five commercial
customers. This is similar to the prior year when five customers represented 23% of our revenues. In the event of a reduction, delay or cancellation of orders from one or more significant customers or
if one or more significant customers selects products from one of our competitors for inclusion in future projects, our business, financial condition and operating results could be materially and
adversely affected. There can be no assurance that current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we
will be able to obtain orders from new customers. The loss of one or more of our current significant customers could materially and adversely affect our business, financial condition and operating
results.

We face significant competition for our products and any failure to remain competitive would harm our operating results.

The markets in which we sell our products are highly competitive and characterized by rapidly changing technologies. We face
significant competition from a large number of domestic and international competitors, some of which are larger and have larger product development, research and sales staffs. To remain competitive in
both the current and future business climates, we believe we must maintain a substantial commitment to research and development. Our future success will depend in part upon our ability to enhance our
current products and to develop and introduce new products that keep pace with technological developments and emerging industry standards that address the increasingly sophisticated needs of our
customers. There can be no assurance that we will be successful in developing and marketing such products or producing enhancements that meet these changing demands, or that we will not experience
difficulties that could delay or prevent the successful development, introduction and marketing of these products or that our new products and product enhancements will adequately meet the demands of
the marketplace and achieve market acceptance. Our inability to develop and introduce new products or product enhancements in a timely manner or our failure to achieve market acceptance of new
products could have a material adverse effect on our business, financial condition and operating results and our efforts to remain competitive.

We continue to integrate our global management structure.

In March 2007, we updated our corporate structure to globally integrate the management functions into one group to address the
continually changing technology trends within the industry. The Company was previously established as individually and separately-managed units at our U.S. global headquarters and European operating
facilities. We continue the integration process, including product development, manufacturing, sales processes, finance and information technology. The challenges involved in this integration include
the following:



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Also,
we cannot assure you that the growth rate of the Company will equal the historical growth rates.

Optelecom borrowed $23.1 million of senior and subordinated notes in connection with its acquisition of NKF.

In connection with the acquisition of NKF, we borrowed $23.1 million of senior and subordinated notes. The issuance of these
notes substantially increased our principal payment obligations and we may not have enough cash to repay the notes when due. By incurring indebtedness, the related risks that we face intensify. The
degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more
vulnerable to industry downturns and competitive pressures. The current economic environment is marked by limited availability of credit in the business sector and we may be required to pursue equity
or other financing to refinance the acquisition debt on less than favorable terms. At December 31, 2008, we have an outstanding balance of $15.5 million on this debt. Final maturity of
the senior and subordinated notes is September 2009 and March 2010, respectively.

Future Capital Needs; Uncertainty of Additional Funding.

We believe that our current capital resources, including an existing bank line-of-credit and future operating
cash flows, will generate the funds needed for our long-term cash requirements. However, if our growth rate does not meet expectations, or if we should fail to generate the anticipated
operating cash flows, we would be required to seek additional funding. In those circumstances, we would look to increase our line of credit and/or pursue equity financing. There can be no assurance
that additional financing will be available in a timely manner or on acceptable terms. If issuing equity securities raises additional funds, further dilution to existing stockholders will result. If
adequate funds are not available when needed, we may be required to delay, scale back or eliminate product development, sales and marketing, and overhead costs.

If we fail to attract and retain key personnel, our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel. We may not be able to hire and retain personnel at
levels consistent with our existing compensation and salary structure. Our future also depends on the continued contributions of our executive management team and other key management, and technical
personnel, many of whom could be difficult to replace. The loss of service from these or other executive officers or key personnel or the inability to attract qualified personnel could have a material
adverse effect on our business.

Our common stock price is volatile, we have never paid dividends and our stock is subject to future dilution.

Our Common Stock currently trades on the NASDAQ Global Market. The securities markets have from time-to-time
experienced significant price and volume fluctuations that were unrelated to our operating performance. In addition, the market prices of the common stock of many publicly traded technology companies
have in the past been, and may in the future be, especially volatile. Announcements of technological innovations or new products of the Company or our competitors, developments or disputes concerning
proprietary rights, publicity regarding products under development by the Company or our competitors, regulatory developments in both the United States and foreign countries, and economic and other
external factors, as well as period-to-period fluctuations in our operating and product development results, may have a significant impact on the market price of our Common
Stock.

We
have not paid any cash dividends since our inception and we do not anticipate paying any cash dividends in the foreseeable future. In addition, dilution will occur upon the exercise
of outstanding

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stock
options or issuance of additional stock. Further dilution could be significant if we experience additional requirements to fund operations and decide to complete a future equity financing.

We face a number of risks related to the ongoing financial crisis and severe tightening in the global credit markets.

The ongoing global financial crisis affecting the banking system and financial markets has resulted in a severe tightening in the
worldwide credit markets, a low level of liquidity in many financial markets and extreme volatility in credit and equity markets. This financial crisis could impact the Company's business in a number
of ways, including:



We face risks related to our international operations and revenue.

Our customers are located throughout the world. In addition, with the acquisition of NKF, we have significant international operations
including manufacturing, product
development, sales and customer support operations. Our operations outside North America are primarily located in the Netherlands. Our international presence exposes us to certain risks, including the
following:



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Net
revenue from International and U.S. based business accounted for 67% and 33% of the Company's total revenue in 2008. Within the U.S. based business sales to customers in Canada,
South America and Latin America were 9% in 2008. We expect that revenue from customers outside the United States will continue to account for a significant portion of our total net revenue.

If we fail to manage our exposure to worldwide financial markets successfully, our operating results could suffer.

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We do not use
derivative financial instruments to manage these risks. A portion of our net revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, our European operations conduct
a substantial portion of their activities in other currencies, primarily Euros. A significant change in interest rates or movement in the Euro compared to the U.S. Dollar impacts our operations and
financial position.

If we are unable to generate new sales and maintain profitability, our business and our financial condition and results of operations will be adversely impacted.

Our lack of profitability in certain periods may impact our ability to attract customers, employees, investors and creditors. Our
ability to sustain profitability in future periods will depend in large part on our ability to maintain current customers and generate new sales, to maintain or improve our rate of manufacturing
utilization, and to manage sales, product development, and general and administrative expenses in proportion to our revenue. We cannot be certain that we will generate profits in the future and a
failure to do so would have a material adverse effect on our business. Our profitability and cash flow constraints are particularly emphasized in our U.S. operations where our recent sales levels
underscore the need to succeed with the implementation of product advancements and sales improvements and maintain cost controls.

Item 1B.UNRESOLVED STAFF COMMENTS

The Company has no unresolved comments from the Securities and Exchange Commission.

Item 2.PROPERTIES

The Company's corporate headquarters and domestic manufacturing facility is located at 12920 Cloverleaf Center Drive,
Germantown, Maryland, where it leases 30,000 square feet of space, all of which is occupied by the Company. The lease expires in August of 2013. We maintain a corporate office and manufacturing
facility in Gouda, the Netherlands where we lease approximately 36,000 feet of space, all of which we fully occupy. This lease expires in March of 2015.

The
Company also maintains office space in England, Spain, France, Singapore and Dubai. Management believes that our facilities, which have been specifically designed and fitted to
accommodate our requirements, are sufficient to meet our current and anticipated near-term growth needs.

Item 3.LEGAL PROCEEDINGS

None.

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

No matter was submitted for a vote of our shareholders during the fourth quarter of 2008.

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PART II

Item 5.MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock, representing its only class of publicly traded securities, is traded on the NASDAQ Global Market under the
symbol OPTC. The following are the highest and lowest closing bid prices for the Common Stock as reported by NASDAQ during each quarter for the two years ended December 31, 2008 and 2007,
respectively. These quotations may not necessarily reflect actual transactions:

Bid PriceQuarter Ended

High

LowDecember 31, 2008

$
6.75

$
3.76September 30, 2008


8.85


6.30June 30, 2008


8.96


6.60March 31, 2008


8.33


6.57December 31, 2007


8.87


6.56September 30, 2007


8.11


6.22June 30, 2007


8.70


5.98March 31, 2007


12.35


8.16


At
March 11, 2009, the closing price of our Common Stock was $3.45.

There
were 3,677,579 shares of Common Stock outstanding as of March 11, 2009, and 469 record holders as of such date. The Company has never declared or paid any cash dividends on
its Common Stock and does not expect to do so in the foreseeable future. The Company intends to use any future earnings to finance its operations, repay its debt obligations and fund growth of the
business.

The
following is information on the Company's equity compensation plans as of December 31, 2008.

Plan Category

Number of Securities
to be Issued Upon
Exercise of Outstanding
Options
(a)

Weighted Average
Exercise Price of
Outstanding Options
(b)

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
(c)Equity compensation plans approved by security holders


541,043

$
9.73


546,381Equity compensation plans not approved by security holders








Totals


541,043

$
9.73


546,381


Item 6.SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected historic consolidated financial data for the periods and dates indicated. This information is
derived from the Company's audited consolidated financial statements, which have been audited by the Company's independent registered public accounting firm. The information set forth below is
qualified in its entirety by, and should be read in conjunction with, the

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consolidated
financial statements, the related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations.

Year Ended December 31,

2008(a)

2007(a)

2006(a)

2005(a)

2004(Dollars in Thousands, Except Share Amounts)Revenues, net


45,165


42,503


39,484


33,865


19,395Net (Loss) income


(1,756
)

1,281


1,554


2,682


1,595Basic (loss) earnings per common share


(0.48
)

0.37


0.45


0.83


0.50Diluted (loss) earnings per common share


(0.48
)

0.37


0.44


0.80


0.49As of December 31,Total assets


47,148


49,963


46,274


38,868


12,366Long-term obligations


13,787


17,749


17,833


18,787


243Stockholders' equity


21,191


23,101


17,943


11,754


9,934






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

Optelecom-NKF, Inc., developer of Siqura® advanced Internet Protocol (IP) 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.

Optelecom-NKF
is committed to providing its customers with expert technical advice and support in addition to products that are developed and tested for professional and
mission critical applications. All Optelecom-NKF IP surveillance solutions are marketed under the Siqura® name.

Our
corporate headquarters is in Germantown, Maryland, USA, with European corporate offices in Gouda, the Netherlands, and sales offices or support covering Latin America, France, Spain,
the UK, Germany, Italy, Dubai, and Singapore.

Optelecom-NKF
provides competitively priced, highly reliable, top quality equipment and solutions, along with technical advice and support. All products are developed and
tested for real applications, particularly those that need to operate in challenging environmental conditions and across large distances between individual transmission sites. We are
ISO 9001:2000 certified and dedicated to the ongoing improvement of our products and processes, applying a high level of quality monitoring to increase customer satisfaction.

We
sell our products worldwide through direct sales, commercial integrators and resellers. Management expects the primary sales channel to continue to be commercial integrators. In
addition, several vendors incorporate the Company's products in their product offerings allowing the Company to penetrate markets we do not address directly.

The
Company continues to focus its resources on developing additional IP products, sales and distribution channels. Service and technical support programs are in place to attract and
maintain a large network of integration companies. The Company primarily attracts new customer contacts through participation in trade shows in both the security and traffic markets. Our web site
(www.optelecom-nkf.com) has enabled the convenient and rapid dissemination of information required by our distribution channel personnel and
other interested parties to gather information necessary to select our equipment.

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The
Company has expanded its focus to identify prospects that have a requirement for complete IP-video solutions including the Company's video codecs, Ethernet network
equipment, network video recorders and video management software as well as a broad range of pre and post sales services such as design, detailed engineering and training. Internal training programs
have been implemented and additional personnel hired to expand the in-depth knowledge of our worldwide sales and support offices.

We
strive to continue improving our position as a leading producer and supplier of powerful, intelligent network video solutions by providing reliable and profitable products and
services that enable customers around the world to reduce their total cost of ownership and enhance the effectiveness of their applications. Products for these markets are classified into the two
broad categories of Video over IP and Video over Fiber.

Video
over IP solutions are represented by the Siqura product line. The Siqura product line includes video servers / codecs, IP cameras, Ethernet switches, recording and storage
equipment. Also, to bring together all these hardware components, Siqura software solutions, Operator Office and
the Optelecom-NKF SDK, help the user consolidate a complete video network under one, easy-to-use management platform.

The
Video over Fiber product line is comprised of the MC Series and the 9000 Series. The MC Series is designed for most common fiber applications and is recognized for its exceptional
price-performance ratio. The 9000 Series is designed for the more complex and demanding Video over Fiber applications. The availability of 18 different wavelengths (CWDM technology) and the unique
concept of using "option modules" are the core elements behind the versatility of the 9000 Series. The 9000 Series is about customization: wavelength availability and system functionality facilitate a
wide range of fiber network configuration possibilities.

In
addition to our two primary product categories of IP and Fiber Optics the Company operates an Electro Optics (EO) group focused on Interferometric Fiber Optic Gyro coils and
manufacturing innovative optical devices under contract, primarily to government and defense industry customers.

Effect of Recent Market Conditions and Uncertain Macroeconomic Environment on our Business

Through the first nine months of fiscal 2008, our financial performance included higher levels of revenue and gross profit compared to
the first nine months of 2007. We achieved 13% revenue growth during the first nine months of 2007 while gross profit increased from $17.5 million to $20.3. During the later part of 2008,
however, our business began to experience the effects of worsening macroeconomic conditions, further aggravated by customer specific challenges and disruptions in the financial and credit markets
globally. As economic conditions worsen globally, the effects on our business spread across our customer segments and geographies. Revenue was $11.8 million for the fourth quarter of 2008,
representing a 10% decrease from our results in the fourth quarter of 2007.

Significant
uncertainty around current macroeconomic and industry conditions persists, particularly the effect these conditions and any sustained lack of liquidity in the capital markets
may have upon the capital spending of our customers. We are uncertain of the impact this may have on the spending or financial position of our customers. We can not be certain how long these
conditions will continue and the magnitude of their effects on our business and results of operations. Consequently, these conditions have negatively affected our business and made our forecasting and
planning more difficult. While we expect the near term market conditions to be challenging, we continue to believe in our longer term market opportunities. As a result, we intend to continue to invest
in our business, prioritizing spending related to product development and sales efforts.

During
this period of uncertainty, we plan to balance our strategy of continued investment for the long-term and manage our workforce and operating costs carefully to ensure
that they are aligned with our business and market opportunities. To that end, during the fourth quarter of fiscal 2008, we

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effected
a targeted staff reduction which resulted in a restructuring charge of approximately $525 thousand in severance costs.

RESULTS OF OPERATIONS

Revenue for 2008 was $45.2 million, an increase of 6% when compared to 2007. Information regarding the Company's U.S. and
international based operations is included in the following table. For the purposes of this table and the following discussion, revenue classified as U.S. based includes Canada, Mexico, Latin America,
and South America:

2008

2007(Dollars in thousands)

U.S.

International

Total

U.S.

International

TotalRevenue

$
14,854

$
30,311

$
45,165

$
15,427

$
27,076

$
42,503Less: Cost of Goods Sold


6,471


11,467


17,938


6,527


10,925


17,452Gross Profit

$
8,383

$
18,844

$
27,227

$
8,900

$
16,151

$
25,051Less: Operating Expenses


9,627


15,147


24,774


9,341


12,805


22,146(Loss) Income from Operations

$
(1,244
)
$
3,697

$
2,453

$
(441
)
$
3,346

$
2,905


Our
international operations include the impact from foreign currency translation. On average, the Dollar was weaker in 2008 compared to 2007. The result of a weakening Dollar as it
relates to our consolidated financial results is that we translated Euro and Pound Sterling sales and related expenses at proportionally higher U.S. Dollar equivalents.

Overall,
2008 revenue and profits were driven by our international business. Revenue in our European based operations increased 12% to $30.3 million while international operating
expenses increased 18% during the year. This results in an 11% increase in international operating profits which totaled $3.7 million in 2008. After considering the impact of foreign exchange
rates the international revenue increase would have been 5% while the operating expenses would have increased 11%. Our strongest region is Northern Europe representing almost 37% of the Company's
worldwide revenue.

Revenue
in our U.S. based operations was down slightly at $14.9 million in 2008. U.S. operating expenses increased 3% during the year. The result is an increased U.S. loss from
operations in 2008 totaling $1.2 million. In the U.S., the largest portion of our business is on the East coast. The Mid-Atlantic, Northeast and Southeast collectively represent
about 68% of the total U.S. business.

Revenue
by product category in the recent two year period was:

(Dollars in thousands)

2008

2007Fiber Optic

$
29,891

$
31,107IP Video


14,539


10,305Electro Optics


735


1,091Total Revenue

$
45,165

$
42,503


The
Company made significant progress in a transition to accommodate an industry-wide shift from video transmission over fiber optics to video over IP/Ethernet based
solutions. Fiber Optic products sales in 2008 were down 4% to $29.9 million. This decline is attributed to the market shift away from Fiber Optic and toward IP Video products which accelerated
toward the end of 2008. In recent years, the Company has invested heavily in IP Video products. The result is an increase of 41% in IP related revenue in 2008 over 2007. This includes strong demand
and growth in sales of our Codecs, Cameras, and NVR's.

Gross
profit in 2008 was $27.2 million and 60% of sales. After considering the impact of foreign exchange rates this is an increase of $1.0 million versus 2007 when gross
profit margins were slightly

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lower
at 59%. The current year increase is directly attributable to the growth in revenues in our international operations and efficiency realized in our manufacturing process.

Our
operating expense increased during 2008 to $24.8 million from $22.1 million in 2007. The current year increase of $2.6 million includes additional personnel and
costs in the sales and marketing function totaling $1.3 million and in the engineering function totaling $863 thousand. These increased costs are part of the Company's effort to
transition its products and related sales effort toward the IP Video market, specifically the Siqura product suite. The increase in operating expenses in 2008 also includes a $525 thousand
fourth quarter charge for severance accruals as we completed a reduction in force at year-end. The reduction was initiated to eliminate costs in mature product areas while continuing to
allow for critical investments in our growing Video over IP products.

OTHER INCOME (EXPENSE)

Other expense declined in 2008 to $1.0 million compared to a total of $1.2 million in 2007. Substantially all of our
other expense is from interest expense and foreign exchange losses. Interest expense on long term notes was $734 thousand in 2008 and $1.1 million in 2007 as we paid down our bank term
debt and interest rates declined during the recent year. Our foreign exchange loss in 2008 was $262 thousand compared to $108 thousand in 2007 as a result of larger than normal foreign
exchange rate fluctuations in the past year.

In
June 2008, the Company implemented a new European holding company structure in the Netherlands. The 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 noted receivable to the U.S. parent
and a corresponding note payable from the European holding company. The impact from the fluctuations in foreign exchange on the intercompany note payable is included in other income (expense).

Additionally,
there is an impact from the fluctuations in foreign exchange on both the 7.3 million Euro-based Subordinated Note and related accrued interest residing
on the U.S. parent company's books issued to Draka Holding, N.V. as part of the consideration during the acquisition of NKF. Prior to the aforementioned restructuring, the foreign exchange
impact was included in comprehensive income (loss) as the note was identified as a hedge against the investment in NKF. As a result of that investment being transferred to the European holding
company, the impact from the change in foreign exchange on the Subordinated Note and related accrued interest is now included in other income (expense).

INCOME TAXES

The provision for income taxes in 2008 was $3.2 million compared to $388 thousand in 2007. The higher tax expense in 2008
was attributed primarily to the Company's decision to record a full valuation allowance of our U.S. deferred tax assets. In evaluating the Company's ability to recover its deferred tax assets, 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 US deferred tax assets will be realized and therefore recorded a valuation allowance of $3.0 million
as of December 31, 2008. This one time charge does not impact the Company's liquidity, cash or core operations in the fourth quarter of 2008. The valuation allowance recorded against the
deferred tax assets was $3.0 million and resulted from tax assets accumulated over a period of years in our U.S. operations. These deferred tax assets are still available for tax purposes to
offset potential U.S. tax expense in the future. As a result of the write-down of deferred tax assets, we will no longer record income tax credits against potential U.S. operating losses
beginning January 1, 2009. Excluding the

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write-down
our tax expense for 2008 was $347 thousand and comparable to the $388 thousand recorded in 2007. The effective tax rate excluding this charge is 24% in 2008
compared to 23% in 2007.

Impact of Inflation

Inflation did not have a significant effect on the operations of the Company during 2008 or 2007, and we do not expect it to have a
significant effect during 2009.

FINANCIAL CONDITION

Total assets were $47.1 million at December 31, 2008, a decrease of $2.8 million from year-end 2007.
The decline is primarily from the write-down of deferred tax assets of $3.0 million. At December 31, 2008, the Company had cash on hand of $5.7 million. The cash is
held in our international business in Euros and the amount reported is impacted by changes in foreign exchange rates. The increase in cash was $628 thousand as compared to December 31,
2007, and primarily resulted from our international operations generating positive cash flow from operations.

Inventory
balances increased during 2008 with increased sales in our IP Video product line. Also, the Company continued to keep additional inventory on hand which was used to provide
greater in-stock items to meet the delivery needs of our customers. The following shows the composition of inventory for the past two years:

(Dollars in thousands)

2008

2007Production materials

$
4,164

$
3,187Work in process


745


801Finished goods


1,552


1,976Allowance for obsolescence


(679
)

(750
)Total inventories, net

$
5,782

$
5,214


Total
liabilities at year-end 2008 were $26.0 million, a $905 thousand decline from year-end 2007. The decline is primarily driven by a reduction in
debt of $2.5 million offset by smaller increases in several areas including accounts payable, other current liabilities and taxes payable. This decrease in debt is primarily from a decline in
our bank line of credit subsequent to our financial restructuring at June 30, 2008, combined with reductions in notes payable as we continued to make monthly principal payments during the year
on our bank term debt.

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 Company and its bank also agreed on an extension of the due date on the senior term facility from March 2009 to September
2009 with an opportunity for an additional extension through March 2011 if certain criteria are met by the Company. 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 rather than the U.S. parent company.

The
Company's stockholders' equity decreased from $23.1 million at December 31, 2007, to $21.2 million at December 31, 2008, a decline of 8%. This decrease is
from a net loss of $1.8 million in 2008 driven by the full valuation allowance recorded against its deferred tax assets during the fourth quarter of 2008. The full valuation allowance against
total deferred tax assets was somewhat offset by operating profits during the year. Within our stockholders equity, the additional paid-in capital increased by $718 thousand as a
result of stock compensation expense while the accumulated other comprehensive gain declined $872 thousand from unrecognized foreign exchange loss between the Euro and U.S. Dollar during 2008.

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LIQUIDITY AND CAPITAL RESOURCES

The Company's operating activities provided positive cash flow of $3.7 million in 2008. This is because $1.8 million net
loss during 2008 was more than offset by approximately $4.7 million in non cash expenses and a net increase in changes in assets and liabilities of $803 thousand. The $4.7 million
in non cash expenses includes $1.7 million in depreciation and amortization, $670 thousand in stock based compensation expense and a $2.3 million decline in the balance of
deferred tax assets in 2008. The $803 thousand of changes in assets and liabilities is due to an increase in the balance of accounts payable and other accrued expenses which is somewhat offset
by increased balances in accounts receivable and inventory at year-end 2008.

Cash
used in investing activities consists predominately of capital expenditures. In 2008 the Company decreased its spending for capital expenditures by $550 thousand compared to
an increase in capital expenditures of $1.0 million during 2007. The Company's capital expenditures include a portion which is discretionary in the short term. This portion generally relates to
technology systems, expanding product capabilities and improving infrastructure.

During
2008, cash used in financing activities was $2.5 million compared to $1.3 million used in 2007. The current year use of cash is from $1.5 million of payments
on our notes payable and $1.0 million of payments against our line of credit in the U.S. The reduction of our line of credit was immediately subsequent to our June 2008 corporate restructuring.

Under
its current banking facility, the Company has the ability to borrow up to $5.0 million, provided there are sufficient accounts receivable and inventory. This facility allows
the Company to borrow in either U.S. Dollars or Euros. The borrowing base under the facility is between 60% - 85% of the eligible commercial billed accounts receivable and 30% of eligible
related inventory. The revolving line of credit carries interest at the rate of LIBOR plus a margin that can range from 1.75% to 2.75% depending on the Company's leverage position. As of
December 31, 2008, the Company had no outstanding borrowings on its bank line-of-credit, which is a $1.0 million decrease from the prior year-end. The
largest amount outstanding on this bank line-of-credit during the year ended December 31, 2008, was $1.7 million. The Company is required by the bank to comply
with certain financial covenants, including maintaining a maximum senior debt coverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with the financial covenants at
December 31, 2008. Failure to meet the financial and other restrictive covenants contained in our debt facilities could limit our ability to engage in activities that may be in our
long-term best interests, and our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our
debt.

We
plan to finance our future working capital needs with our operating cash flow and use of our line-of-credit as needed. In the event these sources become
insufficient to meet funding needs, the Company may be required to scale back sales and marketing expenses, product research and development costs, and overhead costs. Additionally, the Company would
pursue an increase in its line of credit, additional debt or equity financing, and/or make dividend payments from its European operations. Dividends from international operations could result in an
increased tax liability and tax expense to the Company.

The
current economic environment is marked by significant instability with limited availability of credit in the business sector. With a global slowdown and reduced spending, continued
weakness is expected as the job markets weaken and consumer confidence is low. Businesses are reporting declines in orders as a result of stricter lending standards. The manufacturing index reported a
meaningful drop as the current year progressed and manufacturers reduced orders. This level indicates a contraction in the manufacturing sector that is consistent with a recession.

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The
Company experienced a net loss in 2008 and if losses were to continue the liquidity of our business could be adversely impacted. This may result in a reduction in our ability to
secure additional financing
opportunities. If we are able to secure additional financing under these circumstances the cost could be prohibitive. Our net operating losses were primarily from U.S. operations, which have
experienced negative operating cash flow in certain recent periods.

We
continue to work toward refinancing our senior and subordinated debt obligations which come due in September 2009 and March 2010, respectively. The Company is actively pursuing a
senior credit facility from a Bank to finance some or all of this outstanding debt. However, there is no guarantee that senior bank financing will be available for all or part of our outstanding debt.
As a result, the Company may need to pursue non-Bank financing which could result in significantly higher financing costs going forward.

NEW ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board issued Statement 141 (revised 2007), Business Combinations (Statement 141R)
to change how an entity accounts for the acquisition of a business. Statement 141R replaces existing Statement 141 in its entirety. Statement 141R carries forward the existing requirements to account
for all business combinations using the acquisition method (formerly called the purchase method). In general, Statement 141R requires acquisition-date fair value measurement of
identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree. Statement 141R eliminates the current cost-based purchase method under Statement 141.
Statement 141R is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The Company adopted
Statement 141R effective January 1, 2009 and will apply its provisions prospectively. The adoption of Statement 141R will have no material impact on the Company's financial
statements.

Statement
141R amends the goodwill impairment test requirements in Statement 142. For a goodwill impairment test as of a date after the effective date of Statement 141R, the value of the
reporting unit and the amount of implied goodwill, calculated in the second step of the test, will be determined in accordance with the measurement and recognition guidance on accounting for business
combinations under Statement 141R. This change could effect the determination of what amount, if any, should be recognized as an impairment loss for goodwill recorded before the effective date of
Statement 141R. This accounting will be required when Statement 141R becomes effective (January 1, 2009 for the Company) and applies to goodwill related to acquisitions accounted for originally
under Statement 141 as well as those accounted for under Statement 141R.

The
Company has $14.6 million of goodwill at December 31, 2008, related to a previous business combination. The Company has not determined what effect, if any, Statement
141R will have on the results of its impairment testing subsequent to December 31, 2008.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. As the Company has no noncontrolling interest in a subsidiary, it does not believe the adoption of this statement will have a
material effect on its financial condition, results of operations and cash flows.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity's derivative instruments and hedging activities. SFAS 161 is effective for
fiscal years beginning after November 15, 2008. As the Company has no derivative instruments and does not currently participate in any hedging activities, it does not

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believe
the adoption of this statement will have a material effect on its financial condition, results of operations and cash flows.

In
June 2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP) EITF 03-6-1, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities," to clarify that all outstanding unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents, whether paid or unpaid, are participating securities. An entity must include participating securities in its calculation of basic and diluted earnings per share (EPS) pursuant to the
two-class method, as described in FASB Statement 128,Earnings per Share.FSP EITF 03-6-1 is effective
for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company intends to adopt FSP EITF 03-6-1 effective
January 1, 2009. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

In
December 2007, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-1, "Accounting for
Collaborative Arrangements." The guidance in EITF Issue 07-1 defines collaborative arrangements and establishes presentation and disclosure requirements for transactions within a
collaborative arrangement (both with third parties and between participants in the arrangement). The consensus in EITF Issue 07-1 is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2008. The consensus requires retrospective application to all collaborative arrangements existing as of the effective date, unless retrospective
application is impracticable. The impracticability evaluation and exception should be performed on an arrangement-by-arrangement basis. As the Company has no collaborative
arrangements, it does not believe the adoption of this statement will have a material effect on its financial condition, results of operations and cash flows.

In
September 2006, the FASB issued SFAS 157, "Fair Value Measurements". SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods
used for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157."
This staff position delays the effective date of SFAS 157 for all non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FASB Staff Position 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active." This staff position clarifies the application of SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for the financial asset is not active. The Company plans to adopt SFAS
No. 157 on January 1, 2009. The Company does not currently expect the adoption of SFAS 157 to have a material impact on its results of operations and financial condition.

In
April 2008, the FASB issues FASB Staff Position No. FSP 142-3, "Determination of the Useful Life of Intangible Assets," which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets." This
pronouncement requires enhanced disclosures concerning a company's treatment of costs incurred to renew or extend the term of a recognized intangible. FSP 142-3 is effective for fiscal
years beginning after December 15, 2008. The Company does not currently expect the adoption of FSP 142-3 to have a material impact on its results of operations and financial
condition.

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CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, income taxes, financing operations, warranty obligations, and
contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We
consider certain accounting policies related to revenue recognition, impairment of long lived assets, valuation of accounts receivable, inventory, income taxes and foreign currency
exchange to be critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed
discussion on the application of these and other accounting policies, see Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

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. In the ordinary course of business, the Company warrants its products against defect in design,
materials, and workmanship over various time periods. Warranty reserve and allowance for product returns is established based upon management's best estimates of amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. Management evaluates the warranty reserve on at least a quarterly basis.

Impairment of Long Lived AssetsIn connection with our acquisition of NKF during 2005, the Company's long-lived assets increased
significantly primarily related to acquired goodwill and other intangibles. With respect to acquired goodwill and intangibles with indefinite lives that are not amortized, we are required to perform
an impairment test annually under SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 requires us to make certain difficult, subjective and complex judgments on a number of
matters, including assumptions and estimates used to determine the fair value of our reporting units. We measure fair value primarily on the basis of discounted expected future cash flows. Our
estimates are based upon our historical experience, our current knowledge from our commercial relationships, and available external information about future trends. For long-lived assets
with definite lives that are subject to amortization, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires us to exercise judgment in assessing
whether an event of impairment has occurred by comparing the carrying value of these assets with the expected future cash flows generated by the assets. As of December 31, 2008, no such
impairments have occurred.

Allowance for Doubtful AccountsThe Company maintains allowances 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 particular to the customer such as collection history and the results of credit inquiries. If the financial

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condition
of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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.

Income TaxesThe Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" 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. SFAS No. 109 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.

Foreign Currency Effect on Cash FlowsThe Company prepares its statement of cash flows in accordance with SFAS 95, "Statement of Cash Flows".
As such the Company computes the foreign currency impact on cash flows by first computing the statement of cash flows for its foreign subsidiaries using the functional currency for that subsidiary
followed by a translation of these foreign currency cash flows, using the current exchange rate at the time of the cash flows into U.S. dollars. The effect of exchange rate changes on these cash flows
is reported as a separate item in the reconciliation of the beginning and ending balances of cash and cash equivalents.

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Market Risk

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of
financial instruments. We are exposed to financial market risks, primarily related to changes in foreign currency exchange rates. We currently do not have any derivative financial instruments to
protect against adverse currency movements. We manage our exposure to market risks related to operations through regular operating and financing activities. All of the potential impacts noted below
are based on a sensitivity analysis performed as of December 31, 2008. Actual results may differ materially.

Foreign Currency Risk

We are exposed to the fluctuations in foreign currency exchange rates. Such fluctuations impact the recorded values of our investments
in foreign subsidiaries in our consolidated balance sheet, and our foreign currency translation adjustment, a component of other comprehensive income. For the year ended December 31, 2008, a
10% change in average exchange rates would have changed our reported currency translation adjustment of $2.6 million by approximately $1.7 million. Additionally, fluctuations result in
the remeasuring of non functional currency liabilities at reported balance sheet dates. The impact from the fluctuations in foreign exchange on these liabilities is included in other income (expense).
We currently do not have any derivative financial instruments to protect against adverse currency movements. We manage our exposure to market risks related to operations through regular operating and
financing activities.

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Interest Rate Risk

At December 31, 2008, we have interest rate risk to the extent that interest rate changes expose our fixed rate
long-term debt to changes in fair value. As of December 31, 2008, we had $10.3 million of fixed rate long-term debt. In addition, the Company accrues deferred
interest on the fixed rate debt which totals $1.7 million at December 31, 2008. This debt is denominated in Euros and results from our acquisition of NKF in March 2005. The debt is based
on current rates at which the Company could borrow funds with similar remaining maturities. The carrying value of the Company's senior note payable and subordinated note payable approximates fair
value.

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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Consolidated Financial Statements



PageReport of Independent Registered Public Accounting Firm

26Consolidated Balance Sheets as of December 31, 2008 and 2007

27Consolidated Statements of Operations and Comprehensive Income for the two years in the period ended December 31,
2008

28Consolidated Statements of Stockholders' Equity for the two years in the period ended December 31,
2008

29Consolidated Statements of Cash Flows for the two years in the period ended December 31, 2008

30Notes to Consolidated Financial Statements

31SCHEDULE IISchedule of Valuation and Qualifying Accounts

56


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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 sheets of Optelecom-NKF, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the
related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2008. Our audits 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 audits.

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 audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Optelecom-NKF, Inc. as of
December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period 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

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

2008

2007ASSETSCURRENT ASSETSCash & cash equivalents

$
5,671

$
5,043Accounts receivable and contracts receivable, net of allowance for doubtful accounts of $245 and $249


10,290


9,575Inventories, net


5,782


5,214Deferred tax assetcurrent


205


732Prepaid expenses and other current assets


1,152


816Total Current Assets


23,100


21,380Property & equipment, less accumulated depreciation of $7,820 and $7,634


2,063


2,594Deferred tax assetnon-current





2,284Intangible assets, net of accumulated amortization of $2,870 and $2,259


7,180


8,241Goodwill


14,603


15,259Other assets


202


205TOTAL ASSETS


47,148


49,963LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable


3,634


2,623Accrued payroll


1,841


2,165Commissions payable


198


198Bank line of credit





1,000Current portion of notes payable


3,468


1,525Accrued warranty reserve


410


418Taxes payable


931


49Other current liabilities


1,688


1,135Total Current Liabilities


12,170


9,113Notes payable


10,367


14,245Deferred tax liabilities


1,427


2,037Interest payable


1,744


1,210Other liabilities


249


257Total Liabilities


25,957


26,862STOCKHOLDERS' EQUITYCommon Stock, $.03 par value-shares authorized, 15,000,000; issued and outstanding, 3,645,084 and 3,632,083 shares as of December 31, 2008, and
December 31, 2007, respectively


109


109Additional paid-in capital


16,252


15,534Accumulated other comprehensive income


2,534


3,406Treasury stock, 162,672 shares at cost


(1,265
)

(1,265
)Retained earnings


3,561


5,317Total stockholders' equity


21,191


23,101TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
47,148

$
49,963


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

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

2008

2007Revenue

$
45,165

$
42,503Cost of goods sold


17,938


17,452Gross profit


27,227


25,051Operating expenses:Sales and marketing


11,099


9,794Engineering


6,013


5,150General and administrative


6,923


6,437Amortization of intangibles


739


765Total operating expenses


24,774


22,146Income from operations


2,453


2,905Other expense, net


996


1,236Income before income taxes


1,457


1,669Provision for income taxes


3,213


388Net (Loss) Income

$
(1,756
)
$
1,281Basic (Loss) Income per share

$
(0.48
)
$
0.37Diluted (Loss) Income per share

$
(0.48
)
$
0.37Weighted average common shares outstandingbasic


3,638,783


3,497,430Weighted average common shares outstandingdiluted


3,638,783


3,502,765Net (Loss) Income

$
(1,756
)
$
1,281Foreign currency translation


(872
)

2,836Comprehensive (Loss) income

$
(2,628
)
$
4,117


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

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OPTELECOM-NKF, INC        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007        (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, 2007


3,495,382

$
105

$
14,497

$
570

$
(1,265
)
$
4,036

$
17,943Common stock issued from the exercise of options


12,300





57











57Common stock issued from employee stock purchase plan


5,006





42











42Stock Awards


10,000


1


82











83Vested portion of restricted stock


109,395


3


(3
)










Stock based compensation








859











859Foreign currency translation











2,836








2,836Net Income

















1,281


1,281BALANCE DECEMBER 31, 2007


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

$
21,191


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

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

2008

2007Cash Flows from Operating Activities:Net (Loss) Income

$
(1,756
)
$
1,281Adjustments to reconcile net (loss)income to net cash provided by operating activities:Depreciation and amortization


1,743


1,830Accounts receivable provision


27


(434
)Change in allowance for inventory obsolescence


(53
)

207Accrued warranty reserve


3


Stock based compensation


670


942Deferred rent


(7
)

9Deferred tax asset


2,299


(804
)Other





Change in assets and liabilities:Accounts and contracts receivable


(1,102
)

827Inventories


(628
)

667Prepaid expenses and other current assets


(86
)

301Other assets


(6
)

17Accounts payable and other accrued expenses


2,278


(979
)Other current liabilities


347


(1,055
)Net cash provided by operating activities


3,729


2,809Cash Flows from Investing Activities:Capital expenditures


(550
)

(1,010
)Net cash used in investing activities


(550
)

(1,010
)Cash Flows from Financing Activities:Net (decrease) increase in bank line of credit


(1,000
)

200Payments on notes payable and capital leases


(1,515
)

(1,619
)Proceeds from employee stock purchase plan


46


42Proceeds from exercise of stock options


2


57Net cash used in financing activities


(2,467
)

(1,320
)Effect of exchange rates on cash and cash equivalents


(84
)

993Net increase in cash and cash equivalents


628


1,472Cash and cash equivalentsbeginning of period


5,043


3,571Cash and cash equivalentsend of period

$
5,671

$
5,043Supplemental Disclosures of Cash Flow Information:Cash paid during the period for interest

$
251

$
630Cash paid during the period for income taxes

$
31

$
1,707


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

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OPTELECOM-NKF, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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 Internet Protocol (IP) 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.

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 allowances 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 allowances 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. In the ordinary course of business, the Company warrants its products against defect in design,
materials, and workmanship over various time periods. Warranty reserve and allowance for product returns is established based upon management's best estimates of amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. Management evaluates the warranty reserve on at least a quarterly basis.

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

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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

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

2008

2007(Dollars in thousands)Balance, beginning of year

$
418

$
431Provision for warranty obligations


104


144Charges against warranty obligations


(112
)

(157
)Balance, end of year

$
410

$
418


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, 2008 and 2007, the reserve for inventory
obsolescence was $679 thousand and $750 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 is
subject to an annual impairment test, pursuant to the provision of FAS No. 142: Goodwill and Other Intangible Assets. The primary indicators 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 2008. Goodwill decreased from
$15.3 million at December 31, 2007, to $14.6 million at December 31, 2008. This decrease is the result of foreign exchange fluctuations.

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.

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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

As
of December 31, 2008, intangible assets are comprised of the following (in thousands):

Description

Purchase
value

Amortization
Period
in Years

Accumulated
Amortization

Net
valueIntangible indefinite life:Tradenames

$
2,256


0

$


$
2,256Intangible amortizable:Customer Relationships


7,471


11


(2,547
)

4,924Non-Compete Agreement


323


3


(323
)
$
(0
)Total Intangibles

$
10,050




$
(2,870
)
$
7,180


The
aggregate amortization expense of intangible assets was $739 thousand and $765 thousand for the years ended December 31, 2008, and 2007, respectively. It is
anticipated that amortization expense for these intangibles will be approximately $3 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 $5.5 million and $4.3 million for the years ended December 31, 2008 and 2007
respectively.

Income TaxesThe Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" 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. SFAS No. 109 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, 2008 and
2007, there were no interest and penalties associated with uncertain tax provisions.

Stock-Based CompensationThe Company accounts for stock based compensation under Statement of Financial Accounting Standards No. 123 (revised
2001),Share-based Payments("SFAS 123R"), 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 are granted, modified, repurchased or cancelled on or after
January 1, 2006. Share-based tax-affected compensation expense recognized under SFAS 123R for the year ending December 31, 2008 and 2007 was $0.7 million and
$0.9 million respectively. As of December 31, 2008, total unamortized compensation expense related to non-vested share-based compensation was $0.7 million and is
expected to be recognized over a period of 0.96 years. At December 31, 2007, unamortized compensation expense related to non-vested share-based compensation was
$1.0 million and was expected to be recognized over a period of 1.08 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

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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

subsidiaries
into U.S. dollars at the exchange rates in effect at the end of the year and revenue and 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 one European bank. Government insurance affords coverage only up to
100 thousand Euros per account holder per bank.

Fair Value of Financial InstrumentsThe carrying amounts approximate fair value of the Company's cash and short-term financial
instruments. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities. The Company believes the carrying value
of its notes payable approximate fair value.

Advertising and Promotion ExpensesCosts of advertising are expensed as incurred. Advertising and promotion expenses for the years ended
December 31, 2008 and 2007 were $375 thousand and $288 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, 2008, approximately 29% of our revenues were accounted for by sales to five
commercial customers. This is similar to the prior year when five customers represented 23% 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 computation method, provided the options are not
anti-dilutive. The following is a reconciliation of the basic and diluted earnings per share. Options to purchase 517 thousand and 410 thousand weighted average shares of
common stock were outstanding during the years ended December 31, 2008 and 2007, respectively but were not included in the computation of diluted earnings per share because their inclusion
would be anti-dilutive.

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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

The
computation of basic and diluted (loss) earnings per share for the years ended December 31, 2008 and 2007, is as follows:

2008

2007(Dollars in thousands, except share amounts)Basic (loss) income per share:Net (loss) income

$
(1,756
)
$
1,281Weighted average common sharesbasic


3,638,783


3,497,430Basic (loss) income per share

$
(0.48
)
$
0.37Diluted (loss) income per share:Net (loss) income

$
(1,756
)
$
1,281Weighted average common sharesbasic


3,638,783


3,497,430Assumed conversion of:Stock options





5,335Weighted average common sharesdiluted


3,638,783


3,502,765Diluted (loss) income per share

$
(0.48
)
$
0.37


Recent Accounting PronouncementsIn December 2007, the Financial Accounting Standards Board issued Statement 141 (revised 2007), Business Combinations
(Statement 141R) to change how an entity accounts for the acquisition of a business. Statement 141R replaces existing Statement 141 in its entirety. Statement 141R carries forward the existing
requirements to account for all business combinations using the acquisition method (formerly called the purchase method). In general, Statement 141R requires acquisition-date fair value
measurement of identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree. Statement 141R eliminates the current cost-based purchase method under Statement 141.
Statement 141R is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008.
Early adoption is prohibited. The Company adopted Statement 141R effective January 1, 2009 and will apply its provisions prospectively. The adoption of Statement 141R will have no material
impact on the Company's financial statements.

Statement
141R amends the goodwill impairment test requirements in Statement 142. For a goodwill impairment test as of a date after the effective date of Statement 141R, the value of the
reporting unit and the amount of implied goodwill, calculated in the second step of the test, will be determined in accordance with the measurement and recognition guidance on accounting for business
combinations under Statement 141R. This change could effect the determination of what amount, if any, should be recognized as an impairment loss for goodwill recorded before the effective date of
Statement 141R. This accounting will be required when Statement 141R becomes effective (January 1, 2009 for the Company) and applies to goodwill related to acquisitions accounted for originally
under Statement 141 as well as those accounted for under Statement 141R.

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OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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

The
Company has $14.6 million of goodwill at December 31, 2008, related to a previous business combination. The Company has not determined what effect, if any, Statement
141R will have on the results of its impairment testing subsequent to December 31, 2008.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. As the Company has no noncontrolling interest in a subsidiary, it does not believe the adoption of this statement will have a
material effect on its financial condition, results of operations and cash flows.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity's derivative instruments and hedging activities. SFAS 161 is effective for
fiscal years beginning after November 15, 2008. As the Company has no derivative instruments and does not currently participate in any hedging activities, it does not believe the adoption of
this statement will have a material effect on its financial condition, results of operations and cash flows.

In
June 2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP) EITF 03-6-1, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities," to clarify that all outstanding unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities. An entity must include participating securities in its
calculation of basic and diluted earnings per share (EPS) pursuant to the two-class method, as described in FASB Statement 128,Earnings per
Share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The
Company intends to adopt FSP EITF 03-6-1 effective January 1, 2009. The Company is currently evaluating the impact the adoption of this statement could have on
its financial condition, results of operations and cash flows.

In
December 2007, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-1,
"Accounting for Collaborative Arrangements." The guidance in EITF Issue 07-1 defines collaborative arrangements and establishes presentation and disclosure requirements for
transactions within a collaborative arrangement (both with third parties and between participants in the arrangement). The consensus in EITF Issue 07-1 is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2008. The consensus requires retrospective application to all collaborative arrangements existing as of the
effective date, unless retrospective application is impracticable. The impracticability evaluation and exception should be performed on an arrangement-by-arrangement basis. As
the Company has no collaborative arrangements, it does not believe the adoption of this statement will have a material effect on its financial condition, results of operations and cash flows.

In
September 2006, the FASB issued SFAS 157, "Fair Value Measurements". SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods
used for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial

36

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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

statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff
Position 157-2, "Effective Date of FASB Statement No. 157." This staff position delays the effective date of SFAS 157 for all non-financial assets and
liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after
November 15, 2008. In October 2008, the FASB issued FASB Staff Position 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active."
This staff position clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a
financial asset when the market for the financial asset is not active. The Company plans to adopt SFAS No. 157 on January 1, 2009. The Company does not currently expect the adoption of
SFAS 157 to have a material impact on its results of operations and financial condition.

In
April 2008, the FASB issues FASB Staff Position No. FSP 142-3, "Determination of the Useful Life of Intangible Assets," which amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible
Assets." This pronouncement requires enhanced disclosures concerning a company's treatment of costs incurred to renew or extend the term
of a recognized intangible. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not currently expect the adoption of FSP
142-3 to have a material impact on its results of operations and financial condition.

2. Accounts and Contracts Receivable

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

2008

2007(Dollars in thousands)Accounts and contracts receivable

$
10,535

$
9,824Less: Allowance for doubtful accounts


(245
)

(249
)Total Accounts and contract receivable, net

$
10,290

$
9,575


3. Inventories

Inventories consisted of the following at December 31:

2008

2007(Dollars in thousands)Production materials

$
4,164

$
3,187Work in process


745


801Finished goods


1,552


1,976Allowance for obsolescence


(679
)

(750
)Total inventories, net

$
5,782

$
5,214


37

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

4. Property and Equipment

Property and equipment consisted of the following at December 31:

2008

2007(Dollars in thousands)Laboratory equipment

$
3,377

$
3,551Office equipment


2,376


2,163Furniture and fixtures





252Leasehold improvements


1,575


1,620Computer hardware and software


2,555


2,6429,883


10,228Less accumulated deprecation and amortization


(7,820
)

(7,634
)Property and equipment, net

$
2,063

$
2,594


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

2008

2007(Dollars in thousands)Laboratory equipment

$
85

$
85Office equipment


269


269354


354Less accumulated deprecation and amortization


(283
)

(231
)Net property and equipment under capital leases

$
71

$
123


Depreciation
and amortization expense was $1.0 million for each of the years ended December 31, 2008 and 2007. Amortization expense for property and equipment under capital
leases was $52 thousand and $53 thousand for the years ended December 31, 2008 and 2007 respectively and is reflected in the depreciation and amortization expense.

5. Other Intangible Assets

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

December 31,2008

2007Description

Purchase
value

Accumulated
Amortization

Net
value

Purchase
value

Accumulated
Amortization

Net
valueGoodwill:

$
14,604

$
0

$
14,604

$
15,259

$
0

$
15,259Intangible indefinite life:Tradenames

$
2,256

$
0

$
2,256

$
2,357

$
0

$
2,357Intangible amortizable:Customer Relationships

$
7,471

$
2,547

$
4,924

$
7,806

$
1,952

$
5,854Non-Compete Agreement

$
323

$
323

$
0

$
337

$
307

$
30Total Intangibles

$
24,654

$
2,870

$
21,784

$
25,759

$
2,259

$
23,500


38

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

5. Other Intangible Assets (Continued)

The
aggregate amortization expense of intangible assets was $739 thousand and $765 thousand for the years ended December 31, 2008, and 2007, respectively. Changes in
the purchase value of goodwill and other intangible assets from the date of acquisition to December 31, 2008, 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 31,2009

$
6792010


6792011


6792012


680Thereafter


2,207$
4,924


6. Income Taxes

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

2008

2007(Dollars in thousands)U.S. Operations

$
32

$
(991
)Non-U.S. Operations


1,425


2,660$
1,457

$
1,669


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

2008

2007(Dollars in thousands)Current Expense (Benefit)U.S. Operations

$
15

$
(15
)Non-U.S. Operations


1,082


1,025$
1,097

$
1,010Deferred Expense (Benefit)U.S. Operations

$
2,921

$
(430
)Non-U.S. Operations


(805
)

(192
)$
2,116

$
(622
)Total

$
3,213

$
388


39

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

6. Income Taxes (Continued)

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:

2008

2007United Sates Federal tax at statutory rates


34.0
%

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


(6.2
)%

(2.3
)%Valuation allowance related to net deferred tax assets


189.3
%

0.0
%Impact of foreign operations


7.9
%

(12.8
)%Business tax credits


(1.5
)%

(3.3
)%Change in tax rates


(0.7
)%

0.0
%Permanent differences


(1.5
)%

8.7
%Other


(0.8
)%

(0.9
)%Effective income tax rate


220.5
%

23.4
%


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.

40

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

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):

2008

2007Deferred tax assets:Excess book depreciation

$
84

$
7Inventory


129


173Accrued vacation


62


124Deferral of rent expense


94


96Bad Debt expense


21


36Tax credits


1,372


627Deferred Compensation


331


252Unrealized foreign exchange loss


670


383Other


653


210Net operating loss


266


1,108Gross deferred tax assest


3,682


3,016Valuation Allowance


(3,045
)

Deferred tax assets


637


3,016Deferred tax liabilities:Intangibles


(1,831
)

(2,037
)Other


(28
)

Total deferred tax liabilities


(1,859
)

(2,037
)Net deferred tax assets (liabilities)

$
(1,222
)
$
979Reported as:Current deferred income tax assets

$
205

$
732Long-term deferred income tax assets





2,284Long-term deferred income tax liabilities


(1,427
)

(2,037
)Net deferred income tax assets(liabilities)

$
(1,222
)
$
979


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. In accordance with
SFAS 123(R) 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, 2008, the
cumulative amount of the unrecognized tax benefit related to such option exercises and certain stock grants was $708 thousand.

As
of December 31, 2008 and 2007, the Company had federal and state tax-effected net operating loss carryforwards of approximately $277 thousand and
$1.1 million, respectively, for U.S. income tax

41

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

6. Income Taxes (Continued)

purposes.
These carryforwards begin to expire in the year 2010. As of December 31, 2008 and 2007, the Company had business tax credit carryforwards of approximately $1.4 million and
$627 thousand, 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, 2008, the Company re-evaluated its deferred tax assets. In evaluating the Company's ability to recover its deferred tax assets, 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 US deferred tax assets will be realized and therefore recorded a valuation allowance of $3.0 million as of
December 31, 2008.

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
2004 to 2008 remain open to examination by U.S. and state tax authorities, and the tax years 2006 to 2008 remain open to examination by the foreign tax authorities.

As
of December 31, 2007, 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 in accordance with FIN 48, and $624 thousand related to stock compensation deductions.

The
change in the Company's unrecognized tax benefits related to FIN 48 and SFAS 123R are shown in the table below:

(In Thousands)Balance at January 1, 2008

$
720Additions related to current year windfall tax benefits not recognized under SFAS 123R


45Balance at December 31, 2008

$
765


42

---



Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

7. Notes Payable

Notes payable consist of the following at December 31:

2008

2007(Dollars in thousands)Senior term loan with a bank due Sept 2009

$
3,432

$
4,958Microsoft note payable


36


Subordinated note due March 2010(1)


12,093


12,022$
15,561

$
16,980Less: Current Portion


(3,468
)

(1,525
)Total Notes Payable(1)

$
12,093

$
15,455






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 Company also announced its bank agreed to extend the due date on the senior term facility from March 2009 to September 2009
with an opportunity for an additional extension through March 2011 if certain criteria are met by the Company. 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 and 2007.

The
balance of the senior term loan at December 31, 2008, was $3.4 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%. The term loan is subject to a 33 month amortization which is payable
over 15 months with a balloon payment in the third quarter of 2009.

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 million with a balance of $10 million on December 31, 2008. The impact from the fluctuations in foreign exchange on the intercompany note payable is
included in the 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. (the "Seller") and issued a Euro based Subordinated Note to
the Seller for a portion of the acquisition price. The principal balance of the Subordinated Note to the Seller was $10.3 million at December 31, 2008. The Subordinated Note is
denominated in Euros and the liability increased $524 thousand since issuance in March 2005 due to the impact of the exchange rate changes. Upon payment in March 2010 the
€7.3 million Euro principal balance will result in a cash payment at the

43

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

7. Notes Payable (Continued)

prevailing
exchange rate on that date. Upon completion of the previously discussed restructuring the impact from the change in foreign exchange 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 Comprehensive Income as it was considered to be a hedge in the net investment of our NKF
subsidiary.

The
Subordinated Note accrues interest at a rate of 6% per annum and is due and payable in full on March 8, 2010. $1.7 million of deferred interest payable has been accrued
from the acquisition date through December 31, 2008. 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.

In
addition, the Company has the ability to borrow up to $5.0 million under its existing bank line-of-credit, provided there are sufficient accounts
receivable and inventory. This facility allows the Company to borrow in either USD or Euros with a maximum amount not to exceed $5.0 million USD. The borrowing base under the facility is equal
to between 60% - 85% of the eligible commercial billed accounts receivable and 30% of eligible related inventory. The revolving line of credit carries interest at the rate of LIBOR plus a
margin that can range from 1.75% to 2.75% depending on the Company's leverage position. At December 31, 2008, the Company had $5.0 million available on its bank line of credit. At
December 31, 2008, the Company had no outstanding balance on its bank line of credit. At December 31, 2007, the Company had $1.0 million outstanding on its bank line of credit
with an effective interest rate of 8.6%. This line of credit expires April 1, 2009, and is currently being considered for renewal.

The
Company is required by the bank to comply with certain financial covenants including maintaining a minimum fixed charge coverage ratio and a maximum senior debt coverage ratio. The
Company was in compliance with the financial covenants at December 31, 2008.

For
the years ended December 31, 2008 and 2007, the Company recorded $858 thousand and $1.2 million respectively of interest expense,

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

Year ended December 31, (Dollares in thousands):2009

$
3,4322010


12,093
(1)2011


2012


2013









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

44

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

8. Commitments and Contingencies (Continued)

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 2009, and Spain which expires in April 2009. In the U.K. we
have a monthly lease for office facilities.

As
of December 31, 2008, 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

Total2009

$
1,374

$


$
1,3742010


1,269





1,2692011


1,187





1,1872012


1,157





1,1572013


965





965Thereafter


699





699Gross Payments

$
6,651

$


$
6,651Less Amounts Representing Interst








Net Minimum Rental Payments

$
6,651

$


$
6,651


Rent
expense was $1.1 million and $1.0 million for the years ended December 31, 2008 and 2007, respectively.

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

9. Restructuring Charge

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. It is expected that these accrued expenses will be substantially paid out during the first quarter of 2009, with the remainder to be paid out by fourth quarter of 2009. The Company included
these severance charges in engineering and general and administrative expenses.

10. Stockholders' Equity

Common StockDuring 2008 and 2007, proceeds from the exercise of stock options for the purchase of 0.5 thousand and
12 thousand shares of common stock were $2 thousand and $57 thousand respectively.

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

45

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

10. Stockholders' Equity (Continued)

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, 2008, 85 thousand 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 thousand shares of common stock to directors in both 2008 and 2007.

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 granted to
non-employee directors at the fair market value on the date of the grant and is restricted from sale for a period of two years. There were 42,000 awards available for future grant at
December 31, 2008.

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 and consultants. The 2008 Plan provides for the grant of up to 500 thousand shares of common stock to participants, plus 70 thousand 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 2007 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, 2008 and 2007,
the Company recognized compensation expense of $670 thousand and $942 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, 2008 and 2007, the Company had $21 thousand and $29 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, 2008, 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

46

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

10. Stockholders' Equity (Continued)

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

6/5/2008

3/5/2008

2007Expected Dividend yield


0.00
%

0.00
%

0.00
%Expected volatility


52.00
%

56.00
%

54.67
%Risk-free interest rate


2.52
%

2.19
%

4.48
%Expected term


7.00


3.26


3


A
summary of the status of the Company's aggregate stock option awards under its Plans during the years ended December 31, 2008 and 2007 is presented below:

Shares
(in thousands)

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value
(in thousands)Outstanding, January 1,2007


350

$
10.45


3.01

$
373113


9.12Excercised


(12
)

4.63Forfeited


(9
)

10.71Expired


(19
)

10.22Outstanding, December 31, 2007


423

$
10.27


2.44

$
5Granted


174


8.17Excercised


(1
)

4.66Forfeited


(38
)

8.52Expired


(17
)

10.17Outstanding, December 31, 2008


541

$
9.73


3.53

$
Vested and expected to vest, December 31, 2008


517

$
9.79


3.36

$
Excercisable, December 31, 2008


310

$
10.64


1.15

$



The
weighted average fair values of each stock option granted by the Company during the years ended December31, 2008 and 2007 was $4.37 and $3.68, respectively.

47

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

10. Stockholders' Equity (Continued)

The following table summarizes information about all stock options outstanding at December 31, 2008.

Range of Exercise Prices

Number
Outstanding
(in thousands)

Weighted-
Average
Remaining Life
in Years

Weighted-
Average
Exercise
Price

Number
Exercisable
(in thousands)

Weighted
Average
Exercise
Price$6.96 to $8.36


155


8.4

$
8.15


7

$
7.90$8.37 to $9.09


168


2.1


9.05


85


9.01$9.10 to $10.40


135


0.7


9.50


135


9.50$10.41 to $27.77


83


1.9


14.43


83


14.43541


3.5

$
9.73


310

$
10.64


The
per share weighted-average fair value of stock option awards granted during the years ended December 31, 2008 and 2007 was $8.17 and $9.12, respectively, on the date of grant.
The total intrinsic value on the date of exercise of stock option awards exercised during the years ended December 31, 2008 and 2007 was $2 thousand and $464 thousand,
respectively. The total fair value of awards that vested during the years ended December 31, 2008 and 2007 was $106 thousand and $353 thousand respectively. As of
December 31, 2008, there was $510 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 1.3 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
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 share(in thousands)Balance as of January 1, 1007


25


13.96Granted


76


9.09Vested


(17
)

13.96Forfeited


(4
)

9.09Balance as of December 31, 2007


80


9.59Granted


24


8.36Vested


(8
)

13.96Forfeited


(10
)

8.85Balance as of December 31, 2008


86


8.91


48

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Table of Contents

OPTELECOM-NKF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

10. Stockholders' Equity (Continued)

The
total fair value of restricted stock units that vested were converted into common stock during fiscal 2008 and 2007 was $116 and $232 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, and $120 thousand for the years ended December 31, 2008, and 2007, respectively.

In
the Netherlands, pension contributions from employer and employee 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, 2008, and 2007, the Company made total contributions (mandatory and voluntary) of $709 thousand and $628 thousand, respectively.

In
December 2007 the Company amended the Employment Agreement with its Chief Executive Officer. The amended employment agreement increased the amount the CEO receives if he terminates
his employment by retirement in accordance with the Employment Agreement. The current agreement provides for a retirement benefit of three weeks of his annual base salary times the number of full
years that he has been employed by the Company. The cash payment is estimated at $672 thousand and is being accrued through the end of the current contract period on December 31, 2009.

12. Quarterly Information (Unaudited)

The following unaudited information sets forth our results of operations on a quarterly basis for the two years ended December 31, 2008 and 2007:

March 31

June 30,

September 30,

December 31,(Amounts in thousands except per share data)2008:Revenue, net

$
10,535

$
11,338

$
11,541

$
11,751Gross Profit


6,459


6,670


7,209


6,889Operating (loss) income


512


(111
)

879


1,173Net (loss) income


148


25


1,029


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

$
0.04

$
0.01

$
0.28

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

$
0.04

$
0.01

$
0.28

$
(0.81
)2007:Revenue, net

$
8,836

$
9,191

$
11,464

$
13,012Gross Profit


4,914


5,548


7,023


7,566Operating (loss) income


(50
)

(26
)

1,531


1,450Net (loss) income


(257
)

(217
)

882


873(Loss) earnings per share-basic

$
(0.07
)
$
(0.06
)
$
0.24

$
0.24(Loss) earnings per share-diluted

$
(0.07
)
$
(0.06
)
$
0.24

$
0.24


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Table of Contents

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

None.

Item 9A(T).CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed with the objective of providing reasonable assurance that information
required to be disclosed in our reports filed under the Securities and Exchange Act of 1934, or the Exchange Act, such as this Annual Report on Form 10-K is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As
of December 31, 2008, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act
Rules 13a-15(e) and 15d-15(e). This type of evaluation is performed on a quarterly basis so that conclusions of management, including our Chief Executive Officer and
Chief Financial Officer, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on Form 10-Q and Form 10-K. The overall
goals of these evaluation activities are to monitor our disclosure controls and to modify them as necessary. We intend to maintain the disclosure controls as dynamic systems that we adjust as
circumstances merit. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance
level as of the end of the period covered by this report.

Management's Report on Internal Control over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer
and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:



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Internal
control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

Management
has used the framework set forth in the report entitled "Internal ControlIntegrated Framework" published by the Committee of Sponsoring Organizations of the
Treadway Commission to evaluate the effectiveness of the Company's internal control over financial reporting. Management has concluded that the Company's internal control over financial reporting was
effective as of the end of the most recent fiscal year.

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

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B.OTHER INFORMATION

None.

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Table of Contents

PART III

Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The
information called for by this Item is set forth in the Company's Proxy Statement for the 2009 Annual Meeting in the Sections entitled "Election of
Directors", "Security Ownership of Beneficial Owners, Management, and Directors" and "The Board of Directors and its Committees" and is incorporated herein by reference.

We
have adopted a Code of Ethics that applies to all of our directors and employees including, our principal executive officer and principal financial officer and all of our employees
performing financial
and accounting functions. Our Code of Ethics is posted to our websitewww.optelecom-nkf.comunder the "Corporate Governance" section. We
intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethics by posting such
information on our website at the location specified above as necessary.

Item 11.EXECUTIVE COMPENSATION

The
information called for by this Item is set forth in the Company's Proxy Statement for the 2009 Annual Meeting in the Section titled "Executive
Compensation" and is incorporated herein by reference.

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

The
information called for by this Item is set forth in the Company's Proxy Statement for the 2009 Annual Meeting in the Section entitled "Security Ownership
of Beneficial Owners, Management and Directors" and is incorporated herein by reference.

Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The
information called for by this Item is set forth in the Company's Proxy Statement for the 2009 Annual Meeting in the Sections titled "Certain Relationships
and Related Transactions" and "The Board of Directors and its Committees" and is incorporated by reference herein.

Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The
information called for by this Item is set forth in the Company's Proxy Statement for the 2009 Annual Meeting in the Section entitled "Independent Public
Accountants' Fees" and is incorporated herein by reference.

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Table of Contents

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;The consolidated financial statements of the Company and its subsidiaries on pages 26 through 29 hereof, and the report thereon of Grant Thornton LLP appearing on page 25 hereof.(2)

Financial Statement ScheduleSchedule II for the years ended December 31, 2008 and 2007 and the report thereon of Grant Thornton 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)

Exhibits3.1

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

Subordinated Promissory Note dated March 8, 2005 (incorporated by reference from 8-K filed March 11, 2005)10.2

Amended and Restated Financing and Security Agreement dated June 25, 2008, by and among Optelecom-NKF, Inc., Optelecom UK Limited, Optelecom-NKF Limited NKF , B.V., Optelecom-NKF Holding B.V. and
Optelecom-NKF, S,.L., as Obligors and Manufacturers and Traders Trust Company, Lender (incorporated by reference Form 10-Q filed August 13, 2008).10.3

Employment Agreement of Edmund Ludwig as amended (incorporated by reference from Form 10-K filed March 31, 2006, and Form 8-K filed November 8, 2007)10.4

Employment Agreement of Thomas Overwijn (incorporated by reference from Form 10-K filed March 27, 2008)10.5

Employment Agreement of Roland Hooghiemstra (incorporated by reference from Form 8-k filed January 22, 2008 and Amendment 8-K filed December 24, 2008)10.6

Employment Agreement of Steven Tamburo, filed herewith.10.7

Adoption of 2009 Incentive Plan (incorporated by reference from Form 8-K filed December 24, 2008)10.8

Employment Agreement of David Patterson (incorporated by reference from Form 8-K filed February 9, 2009)10.9

Employee Stock Purchase Plan (incorporated by reference from Exhibit A to the Proxy Statement on Form 14A filed April 4, 2000)10.10

2001 Directors' Stock Option Plan (incorporated by reference from Exhibit D of the Proxy Statement on Form 14A file March 31, 2006)10.11

2008 Stock Incentive Plan (incorporated by reference from Exhibit A to the Proxy Statement on Form 14A filed March 27, 2008)10.12

Facility lease by and among OptelecomNKF Inc., and Guardian Realty Mgt (incorporated by reference from Form 10-Q filed May 15, 2006)21

List of Subsidiaries, filed herewith23.1

Consent of Grant Thornton LLPIndependent Registered Public Accounting Firm, filed herewith31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith32

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


53

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Table of Contents

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/ EDMUND LUDWIG Edmund Ludwig Director and CEO


Date:
March 27, 2009

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/ EDMUND LUDWIG Edmund Ludwig Director and CEO

Date: March 27, 2009By

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

Date: March 27, 2009By

/s/ STEVEN TAMBURO Steven Tamburo Chief Financial Officer

Date: March 27, 2009By

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

Date: March 27, 2009By

/s/ DAVID R. LIPINSKI David R. Lipinski Director

Date: March 27, 2009


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Table of Contents

OPTELECOM-NKF, INC.By

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

Date: March 27, 2009By

/s/ JAMES ARMSTRONG James Armstrong Director

Date: March 27, 2009


55

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Table of Contents

Schedule II

OPTELECOM-NKF, INC.        SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS        FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

(Dollars in thousands)

Balance at
Beginning
of Period

Charges to
Costs and
Expenses

Deductions

Balance at
End of
PeriodYear ended December 31, 2008Reserves and allowances deducted from asset accounts:Obsolescence reserve for inventory

$
750

$


$
(71
)
$
679Allowance for uncollectible accounts receivable


249





(4
)

245Year ended December 31, 2007Reserves and allowances deducted from asset accounts:Obsolescence reserve for inventory

$
507

$
243

$


$
750Allowance for uncollectible accounts receivable


625





(376
)

249


56

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