** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-K**

 

| **ý**                                       | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
|                                             |       |                                                                                           |   |   |
| **For the fiscal year ended  December 31, 2004** |       |                                                                                           |
|                                             |       |                                                                                           |   |   |
| **OR**                                           |
|                                             |       |                                                                                           |   |   |
| **o**                                            | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                                   to                                   **

** **

**Commission file number  0-11668**

 

**Photonic ProductsGroup, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **New  Jersey**                                                                                                                          | ** ** | **22-2003247**      |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of  incorporation                                                                                           |       | (I.R.S. Employer    |
| or organization)                                                                                                                         |       | Identification No.) |
|                                                                                                                                     |       |                |
| **181  Legrand Avenue, Northvale, NJ 07647**                                                                                             |
| (Address of principal executive offices)                (Zip Code) |
|                                                                                                                                     |       |                |
| **(201)  767-1910**                                                                                                                      |
| (Registrant’s telephone number, including  area code)                                                                               |

 

Securities Registered Pursuant to Section12(b) of the Act:     **None**

 

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

 

SecuritiesRegistered Pursuant to Section 12(g) of the Act:

 

| **Common  Stock, par value $0.01 Per Share** |
|----------------------------------------------|
| (Title of class)                             |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ofdelinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of thischapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K  ý

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act).  Yeso.  No ý

 

Aggregate market value of the registrant’sCommon Stock, par value $0.01 per share, held by non-affiliates as of February7, 2005 was approximately **$9,496,000**

 
| Common shares of stock outstanding as of  March 31, 2005: |
|-----------------------------------------------------------|
|                                                      |
| **7,182,194 shares**                                      |

 

Documents incorporated by reference:  **None**

 

 

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Photonic Products Group, Inc.

 

INDEX

 
| **Part I**                      | ** ** | ** **                                                                                 |
|---------------------------------|------------|--------------------------------------------------------------------------------------------|
| ** **                      | ** ** | ** **                                                                                 | ** ** |
|                            | Item 1.    | Business                                                                                   |   |
|                            |       |                                                                                       |   |
|                            | Item 2.    | Properties                                                                                 |   |
|                            |       |                                                                                       |   |
|                            | Item 3.    | Legal Proceedings                                                                          |   |
|                            |       |                                                                                       |   |
|                            | Item 4.    | Submission of Matters to a Vote of Security  Holders                                       |   |
|                            |       |                                                                                       |   |
| **Part II**                     | ** ** | ** **                                                                                 |
| ** **                      | ** ** | ** **                                                                                 | ** ** |
|                            | Item 5.    | Market for Registrant’s Common Equity and  Related Stockholder Matters                |   |
|                            |       |                                                                                       |   |
|                            | Item 6.    | Selected Financial Data                                                                    |   |
|                            |       |                                                                                       |   |
|                            | Item 7.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operation |   |
|                            |       |                                                                                       |   |
|                            | Item 7A.   | Quantitative and Qualitative Disclosures  about market risk                                |   |
|                            |       |                                                                                       |   |
|                            | Item 8.    | Financial Statements and Supplementary Data                                                |   |
|                            |       |                                                                                       |   |
|                            | Item 9.    | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure      |   |
|                            |       |                                                                                       |   |
|                            | Item 9A    | Controls and Procedures                                                                    |   |
|                            |       |                                                                                       |   |
|                            | Item 9B    | Other Information                                                                          |   |
|                            |       |                                                                                       |   |
| **Part III**                    | ** ** | ** **                                                                                 |
| ** **                      | ** ** | ** **                                                                                 | ** ** |
|                            | Item 10.   | Directors and Executive Officers of the  Registrant                                        |   |
|                            |       |                                                                                       |   |
|                            | Item 11.   | Executive Compensation                                                                     |   |
|                            |       |                                                                                       |   |
|                            | Item 12.   | Security Ownership of Certain Beneficial  Owners and Management                            |   |
|                            |       |                                                                                       |   |
|                            | Item 13.   | Certain Relationships and Related  Transactions                                            |   |
|                            |       |                                                                                       |   |
|                            | Item 14.   | Principal Accounting Fees and Services                                                     |   |
|                            |       |                                                                                       |   |
| **Part IV**                     | ** ** | ** **                                                                                 |
| ** **                      | ** ** | ** **                                                                                 | ** ** |
|                            | Item 15    | Exhibits and Financial Statement Schedules                                                 |   |
|                            |       |                                                                                       |   |
| Signatures                      |       |                                                                                       |
|                            |       |                                                                                       |   |
| Note: Page F-1 follows Page 48. |       |

 

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**PART I**

** **

**Forward Looking Statements**

** **

This Annual Report containsforward-looking statements as that term is defined in the federal securitieslaws.  The Company wishes to insure thatany forward-looking statements are accompanied by meaningful cautionarystatements in order to comply with the terms of the safe harbor provided by thePrivate Securities Litigation Reform Act of 1995.  The events described in the forward-lookingstatements contained in this Annual Report may not occur.  Generally, these statements relate to businessplans or strategies, projected or anticipated benefits or other consequences ofthe Company’s plans or strategies, projected or anticipated benefits ofacquisitions to be made by the Company, or projections involving anticipatedrevenues, earnings, or other aspects of the Company’s operating results.  The words “may”, “will”, “expect”, “believe”,“anticipate”, “project”, “plan”, “intend”, “estimate”, and “continue”, andtheir opposites and similar expressions are intended to identifyforward-looking statements.  The Companycautions you that these statements are not guarantees of future performance orevents and are subject to a number of uncertainties, risks, and otherinfluences, many of which are beyond the Company’s control, that may influencethe accuracy of the statements and the projections upon which the statementsare based.  Factors which may affect theCompany’s results include, but are not limited to, the risks and uncertaintiesdiscussed in Items 1, 7 and 7A.  Any oneor more of these uncertainties, risks, and other influences could materiallyaffect the Company’s results of operations and whether forward-lookingstatements made by the Company ultimately prove to be accurate.  Readers are further cautioned that theCompany’s financial results can vary from quarter to quarter, and the financialresults for any period may not necessarily be indicative of futureresults.  The foregoing is not intendedto be an exhaustive list of all factors that could cause actual results todiffer materially from those expressed in forward-looking statements made bythe Company.  The Company’s actualresults, performance and achievements could differ materially from thoseexpressed or implied in these forward-looking statements.  The Company undertakes no obligation topublicly update or revise any forward looking statements, whether from newinformation, future events, or otherwise.

 

The following discussion and analysisshould be read in conjunction with the Company’s consolidated financialstatements and the notes thereto presented elsewhere herein.  The discussion of results should not be construedto imply any conclusion that such results will necessarily continue in thefuture.

 

**Item 1.****                                   Business**

** **

Photonic Products Group, Inc. (the “Company” or “PPGI”), incorporated in1973, develops, manufactures and markets products and services for use indiverse Photonics industry sectors via its multiple business units.  Prior to its name change in September, 2003,PPGI was named and did business solely as Inrad, Inc.

 

The Company had announced in 2002 that it was implementing its plan totransform the Company from a single business unit into a portfolio ofbusinesses serving the Photonics industry. Company management, the Board of Directors, and shareholders approvedthe name change in 2003, reinforcing the transformation of the Company’sbusiness model into that of a portfolio of business units whose brandedproducts conform to the paradigm: Products Enabling PhotonicsTM.

 

In November 2003, the Company concluded its first acquisition, that ofthe assets and certain liabilities of Laser Optics, Inc. of Bethel, CT.  Laser Optics, Inc. was a custom optics andoptical coating services provider, in business since 1966.  PPGI integrated the Bethel team and theiroperations into the Company’s Northvale, NJ operations in mid-2004, combiningthem with Inrad’s custom optics and optical coating product lines under theLaser Optics name.

 

1

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In October 2004 the Company completed itssecond acquisition of a complementary business with the purchase of 100% of thestock of MRC Precision Metal Optics, Inc. of Sarasota, FL.  MRC Optics, now a wholly-owned subsidiary ofPPGI, is a fully integrated precision metal optics and optical assemblymanufacturer, specializing in CNC and diamond machining, polishing, plating,beryllium machining, and opto-mechanical design and assembly services.

 

PPGI’s business units’ products continue,at present, to fall into two product categories: optical components (includingstandard and custom optical components and assemblies, crystals, and crystalcomponents), and laser accessories (including wavelength conversion andwaveform metrology products that employ nonlinear crystals to perform thefunction of wavelength conversion or pulse-width measurement).  Currently, its optical components productlines and services are brought to market via three PPGI business units: INRAD,Laser Optics, and MRC Optics.  Laseraccessories are brought to market by INRAD.

 

In summary, the Company is at present an optical component, subassembly,and sub-system supplier to major original equipment manufacturers andresearchers in the Photonics industry PPGI expects that in the future itsproducts will also include other product categories.

 

Administrative,engineering and manufacturing operations are housed at present in a 42,000square foot building located in Northvale, New Jersey, about 15 miles northeastof New York City, and in a 25,000 square foot building located in Sarasota,FL.  The headquarters of the Company arelocated within its Northvale, NJ facility.

 

Custom optic manufacturing is at present a major product area forPPGI.  The Company specializes inhigh-end precision components.  Itdevelops, manufactures and delivers precision custom optics and thin filmoptical coating services via its Laser Optics and MRC Precision Optics brandedbusiness units.  Glass, metal, andcrystal substrates are processed using modern manufacturing equipment andtechniques to prepare and polish substrates, deposit optical thin films, andassemble sub-components, thereby producing optical components used in advancedPhotonic systems of many kinds.  Themajority of custom optical components and optical coating services supplied areused in inspection and process control systems, in defense and aerospaceelectro-optical systems, in laser system applications, in industrial scanners,and in medical system applications.

 

The Company also currently develops, manufactures, and delivers syntheticoptical crystals, optical crystal components, and laser accessories via itsINRAD brand.  It grows synthetic crystalswith electro-optic (EO), non-linear and optical properties for use in both itsstandard products and custom products. The majority of crystals, crystal components and laser accessories suppliedare used in laser systems, defense EO systems, and in R&D applications byresearchers within corporations, universities, and national laboratories.

 

The Company is implementing its plan toassemble a portfolio of businesses serving the Photonics industry, and isengaged in ongoing strategic acquisition discussions.  The Company is also engaged in discussionsregarding the raising of acquisition capital.

 

The following table summarizes theCompany’s product sales by product categories during the past three years:

 
| ** **          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------|------------|-----------------------------|------------|
| ** **          | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Category**        | ** ** | **Sales**                   | ** ** | **%** | ** ** | **Sales** | ** ** | **%** | ** ** | **Sales** | ** ** | **%** | ** ** |
| Optical Components* |       | $                           | 7,860,000  |   | 85 |   | $ | 4,469,000 |   | 83 |   | $ | 4,326,000 |   | 79 |   |
| Laser Accessories   |       | 1,362,000                   |       | 15 |   | 893,000 |   | 17 |   | 1,156,000 |   | 21 |   |
| TOTAL**             |       | $                           | 9,222,000  |   | 100 |   | $ | 5,362,000 |   | 100 |   | $ | 5,482,000 |   | 100 |   |

 

2

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* a) 2003 Optical Component sales included $78,000 from operations acquiredfrom Laser Optics, Inc.

 

  b)  2004 Optical Component salesinclude $901,000 from the Company’s new MRC Optics subsidiary.

 

 **  Not included above are (non-product) contractR&D sales of approximately $26,000 and $87,000 in 2003 and 2002,respectively.

 

**Products Manufactured by the Company**

 

**Optical Components**

 

a)  Custom Optics and OpticalCoating Services

 

Manufacturing of high-performance customoptics is at present a major product area for PPGI, and is addressed in themarketplace principally via its Laser Optics and its MRC Optics business units.

 

The Laser Optics business unit was formedin 2003 via the combination of INRAD’s Northvale, NJ based custom optics andoptical coating services operations and those of the former Laser Optics, Inc.of Bethel, CT.  The Company had beenactive in the field since 1973, and Laser Optics, Inc. since 1966.

 

The “new” Laser Optics provides bothstandard and custom products.  Itspecializes in the manufacture of optical components, optical coatings(ultra-violet wavelengths through infra-red wavelengths) and subassemblies formilitary, industrial, process control, photonic instrument, and medicalend-use.  Planar, prismatic, spherical,and cylindrical components are fabricated from glasses of all kinds andcrystals of most kinds, including fused silica, quartz, infra-red materials,calcite, magnesium fluoride, silicon, and yttrium aluminum garnate.  Component types include mirrors, lenses,prisms, waveplates, polarizing optics, monochrometers, x-ray mirrors, andcavity optics for lasers.

 

To meet performance requirements, mostoptical components and sub-assemblies require thin film coatings on theirsurfaces.  Depending on the design,optical coatings can refract, reflect, or transmit specific wavelengths.  Laser Optics coating service specialtiesinclude high laser damage resistance, infra-red, polarizing, high reflective,anti-reflective, and coating to complex custom requirements on a wide range ofsubstrate materials.  Laser Optics bothcoats customer furnished components and components it manufactures.  Coating deposition process technologiesemployed included electron beam, thermal, and ion assist.

 

MRCOptics, established in 1983 is a fully integrated precision metal optics andoptical assembly manufacturer.  TheCompany provides high quality precision CNC and diamond machining, polishing,plating, beryllium machining, and opto-mechanical design and assembly servicesMRC has developed custom processes to support prototypes through high rateproduction quantities of large flat mirrors, thermally stable optical mirrors***,***reflective porroprisms, low RMS surface finish polished mirrors, diamond machined and precisionaspheric and plano mirrors, and arc-second accuracy polygons and motorassemblies.  Optical plating specialtiesinclude void-free gold and electroless nickel.

 

b)  Crystals and CrystalComponents

** **

PPGI produces and brings to marketcrystals and crystal components via its INRAD business unit.  Certain synthetic crystals, because of theirinternal structure, have unique optical, non-linear, or electro-opticalproperties.  Electro-optic and nonlinearcrystal devices can alter the intensity, polarization or wavelength of a laserbeam.  Developing growth processes forhigh quality synthetic crystals and manufacturing and design processes forcrystal components lies at the heart of the INRAD product line.  Synthetic crystals currently in productioninclude Nickel Sulfate, Lithium Niobate, Beta Barium Borate, Alpha BariumBorate, KDP, deuterated KDP and Zinc Germanium Phosphide, among others.

 

The INRAD crystals and crystal componentsproduct lines also include crystalline filter materials, including patentprotected materials, that have unique transmission and absorptioncharacteristics that 

 

3

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enablethem to be used in critical applications in defense systems such as missilewarning sensors.  Other crystalcomponents, both standard and custom, are used in laser applications researchand in commercial laser systems to change the wavelength of laser light.

 

INRAD has developed and manufactures aline of Q-switches, Pockels Cells (optical shutters) and associatedelectronics, and has been a leading company in this field since 1973.  Pockels cells are used in applications thatrequire the fast switching of the polarization direction of a beam oflight.  These uses include Q-switching oflaser cavities (i.e., to generate laser output pulses), coupling light into andout from regenerative amplifiers, and light intensity modulation.  These devices are sold on an OEM basis tolaser manufacturers and individually to researchers throughout the world.  In 2002, the Company developed and introduceda new line of miniature Q-switches, designated the “IMP” series.  Additionally, the Company introduced a seriesof high speed and quick rise-time Q-switch electronic drivers designated the “RapidPulse”series.

 

INRAD Pockels Cell products include thefollowing:

 

•     Single crystal and dual crystal KD*PPockels Cells

•     PKC-21 and PKC-02

•     9 mm through 50 mm apertures

•      Single crystal Lithium Niobate PockelsCells

•     PLC-01

•     8.5 mm through 10.5 mm apertures

•     Single crystal and dual crystal BBOPockels Cells

•     PBC-03

•     2.5 mm x 2.5 mm through 2.5 mm x 7 mmsizes

•     Electronic drivers

•     Gimbal mounts

 

**Laser Accessories**

 

PPGI designs, manufactures, and brings tomarket a line of harmonic generation and pulse measurement laser accessoriesvia its INRAD business unit.

 

a)  HarmonicGeneration Systems 

 

Harmonic generation systems enable theusers of lasers to convert the fundamental frequency of the laser to anotherfrequency required for a specific end use. Harmonic generators are currently used in spectroscopy, semiconductorprocessing, medical lasers, optical data storage and scientific research.

 

Many commercial lasers have automatictuning features, allowing them to produce a range of frequencies.  The INRAD Autotracker, when used inconjunction with these lasers, automatically generates tunable ultravioletlight or infrared light for use in spectroscopic applications.

 

Products offered for such nano-secondlaser systems include the following:

 

•                  AT-III – anAutotracker with servo controlled tuning

 

•                  5-304 –temperature-stabilized crystals

 

•                  Harmonicseparators – for ultra-violet (UV), infra-red (IR), and second frequency mixing(SFM)

 

The Company produces a HarmonicGenerator, the 5-050, for use with ultra-fast lasers having pulsewidths in thefemtosecond and picosecond regime.  Thisproduct is sold on an OEM basis to manufacturers of ultra fast lasers and toresearchers in the scientific community.

 

4

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b)  LaserPulse Measurement Instruments

 

The Company markets a line ofAutocorrelators that can measure extremely short laser pulses.  Accurate measurement and characterization ofpulses is important in studies of chemical and biological reactions, as well asin the development of high-speed electronics, ultra fast lasers and laserdiodes for communications.  Since January2000, a strategic alliance has been in effect with Angewandte Physik &Electronik, GmbH of Berlin, Germany, to market a product line of fiveAutocorrelators in the U.S., manufactured by Angewandte Physik &Electronik, GmbH.  In 2002, the Companywas instrumental in conceptualizing and introducing an OEM Autocorrelator forthe medical community, the Carpe, that measures the pulsewidth of ultrafastlaser excitation pulses used in Multi-Photon Excitation microscopy right at thesurface of the specimen under test and interfaces directly with confocalmicroscopes.

 

The other products in the Autocorrelatorline include the following:

 

•                  PulseCheck-Built-incolor graphic display, options for high sensitivity, low rep rate, LabView â interface.

 

•                  PulseScope-Allthe features of a PulseCheck, plus a spectrometer.

 

•                  Mini-Compact,built-in display, femtosecond, picosecond operation.

 

•                  Micro-Ultra-compact,wavelength, femtosecond, basic alignment tool for modelocked oscillators.

 

**Research and Development**

 

The Company’s research and developmentactivities focus on developing new proprietary crystal products, improvinggrowth processes, and on new manufacturing process technologies for opticalcomponents.  This combination allows theCompany to introduce new products based on crystals, and to enhance itscapabilities and productivity in optical component manufacturing.

 

Company-funded internal research anddevelopment expenditures during the years ended December 31, 2004, 2003, and2002 were $98,000, $154,000, $134,000 or 1.1%, 2,9%, 2.5% of net product sales.

 

**Markets**

 

In 2004, 2003 and 2002 the Company’sproduct sales were made to customers in the following market areas:

** **
| **Market**                               | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
|                                     |       |      |       |     |       |     |       |
| Defense/Aerospace                        |       | $         | 4,127,000  | (45      | )%         | $        | 2,321,000  | (43 | )% | $ | 1,738,000 | (31 | )% |
|                                     |       |      |       |     |       |     |       |   |   |   |
| Process control & metrology          |       | 1,817,000 | (20        | )%       | 844,000    | (16      | )%         | 1,239,000 | (22 | )% |
|                                     |       |      |       |     |       |     |       |   |   |   |
| Laser systems (non-military              |       | 1,753,000 | (19        | )%       | 1,066,000  | (20      | )%         | 1,318,000 | (24 | )% |
|                                     |       |      |       |     |       |     |       |   |   |   |
| Telecomm                                 |       | 103,000   | (1         | )%       | 58,000     | (1       | )%         | 102,000 | (2 | )% |
|                                     |       |      |       |     |       |     |       |   |   |   |
| Universities & national laboratories |       | 763, 000  | (8         | )%       | 641,000    | (11      | )%         | 615,000 | (11 | )% |
|                                     |       |      |       |     |       |     |       |   |   |   |
| Other                                    |       | 659,000   | (7         | )%       | 458,000    | (8       | )%         | 557,000 | (10 | )% |
|                                     |       |      |       |     |       |     |       |   |   |   |
| Total                                    |       | $         | 9,222,000  | (100     | )%         | $        | 5,388,000  | (100 | )% | $ | 5,569,000 | (100 | )% |

 

5

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Major market sectors served by theCompany include defense/aerospace, process control & metrology, lasersystems (non-military), telecomm, universities and national laboratories, andvarious other markets not separately classified.  The “defense/aerospace” area consists ofsales to OEM defense systems and subsystems manufacturers, manufacturers ofnon-military satellite-based systems and subsystems, and direct sales togovernments where the products have the same end-use.  The “process control and metrology” areaconsists of customers who are OEM manufacturers of capital equipment used in manufacturingand quality assurance, such as in semiconductor (i.e., chip) fabrication andtesting.  The “laser systems” market areaconsists principally of customers who are OEM manufacturers of industrial,medical, and R&D lasers.  The “telecomm”area includes sales of sub-components and components to customers whoseproducts’ principal end-use is in the telecommunications equipmentindustry.  “Universities and NationalLaboratories” is a sector that is an indicator of product sales toresearchers.  The “other” categoryrepresents sales to market areas that, while they may be the object ofpenetration plans by the Company, are not currently large enough to listindividually, and as well sales through third parties for whom the end-usesector is not known.

 

The Company is a provider of opticalcomponents, both specialty crystal components and high precision custom opticalcomponents for customers in the aerospace and defense electro-optical systemssector.  End-use applications includemilitary laser systems, military electro-optical systems, satellite-basedsystems, and missile warning sensors and systems intended to protectaircraft.  The dollar volume of shipmentsof product within this sector depends in large measure on the U.S. DefenseDepartment budget and its priorities, that of foreign governments, the timingof their release of contracts to their prime equipment and systems contractors,and the timing of competitive awards from this customer community to theCompany.  In the post-9/11 era,government spending priorities for such systems have risen sharply anddeployment of new systems has been accelerated, as has refurbishment of fieldedsystems.  The Company’s sales of productsto this customer sector continued their upward trend, increasing by 78% in 2004from 2003, to 45% of total Company sales. The defense and aerospace sector offers continued opportunities for theCompany’s capabilities in precision optics.

 

Demand in the Process Control andMetrology (semiconductor tools) market for the Company’s products rebounded in2004 from a protracted and deep cyclical downturn in capital spending for newtools and instruments in 2002 and 2003. Sales in 2004 increased 120% over sales in 2003, representing 20% oftotal Company sales.  Sales in 2003 hadbeen down 32% from the prior year.  Theoptical and x-ray inspection segment of the semiconductor industry offerscontinued opportunities for the Company’s capabilities in precision optics,crystal products, and monochrometers.

 

Within the Laser Systems customer sector,sales in 2004 increased 64% over sales in 2003 due to stronger demand for theCompany’s laser accessories and new opportunities for its precision opticalcomponents.  Sales in 2003 had been down19% from the prior year, reflecting the impact of declines in shipments ofpulsed medical lasers and of laser system shipments for semiconductorinspection equipment by the Company’s customer community.  The Company competes for market share toincrease its revenue levels for this sector, and the Company continues todevelop, and to seek to acquire, complementary products to broaden its productlines.  The Company serves the laserindustry as a supplier of standard and custom optical components and as suchcontinues to seek opportunities to increase revenues from this customer sector.

 

The Telecommunications customer sectorexperienced a precipitous downturn since 2001 (the last year in which revenuesfrom customers in this sector were significant), and remained stagnantthroughout 2004, with virtually no sales of new components for inspectioninstruments.  The Company’s futureparticipation as a supplier to the network component manufacturers will dependupon the technology approaches employed at the time the industry recovers andcapital spending resumes.

 

Sales to customers within the Universityand National Laboratories market sector increased by 19% in 2004 from that in2003, representing 8% of total revenues. Sales in 2003 had increased by 4% 

 

6

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fromthe prior year, as research budgets and priorities stabilized after theprecipitous decline in 2002.  This sectorremains an important source of revenues and new product introductionopportunities for the Company.

 

Export sales, primarily to customers incountries within Europe, the Near East and Japan, amounted to 12%, 19% and 19%of product sales in 2004, 2003 and 2002, respectively.  No foreign customer accounted for more than10% of product sales in 2004, 2003, or 2002.

 

In 2004, two U.S. customers each accountedfor 12% of sales, and one customer accounted for 10% of sales.  The former two customers are each divisionsof defense industry prime contractors who manufacture electro-optical systemsunder multi-year production contracts for the U.S. and allied foreigngovernments.  The latter customermanufactures process control and metrology systems.  In the short-term the loss of either of thesecustomers would have a significant negative impact on the company and itsbusiness units.  In 2003, one U.S.customer accounted for 16% of total sales, and one U.S. customer accounted for10% of total sales.  Both customers aredefense industry prime contractors who manufacture electro-optical systemsunder multi-year production contracts for the U.S. and foreign governments.  In 2002, one U.S. customer accounted for13.4% of total sales.

 

**Long-Term Contracts**

 

Certain of the Company’s orders fromcustomers provide for periodic deliveries at fixed prices over a period thatmay be greater than one year.  In suchcases, as in most other cases as well, the Company attempts to obtain firmprice commitments from its suppliers for the materials necessary to fulfill theorder.

 

**Marketing and Business Development**

 

The Company’s two Northvale, NJ-basedbusiness units market their products domestically through their own sales andmarketing teams, led by the Vice President - Marketing and Sales.  Independent sales agents are used incountries in major non-U.S. markets, including Canada, Europe, the Near Eastand Japan and domestically in the west coast region of the USA.

 

The Company’s MRC Optics subsidiarymarkets its products domestically through their own sales and marketing team,led by the MRC Vice President of Marketing and Business Development.  An independent sales agent is useddomestically in the west coast region of the USA.

 

Trade show participation andInternet-based marketing and promotion are coordinated at the Corporate level.

 

**Backlog**

 

The Company’s order backlog as ofDecember 31, 2004 was $6,433,000, more than 90% of which is shippable duringfiscal year 2005.  The Company’s orderbacklog as of December 31, 2003 was $2,286,000. Backlog on December 31, 2002 was $1,328,000.

 

**Competition**

 

Within each product category in which theCompany’s business units are active, there is competition.

 

Changes in the Photonics industry havehad an effect on suppliers of custom optics. As end users have introduced products requiring large volumes of opticalcomponents, suppliers have responded either by carving out niche product areas orby ramping up their own manufacturing capacity and modernizing theirmanufacturing methods to meet higher volume run rates.  Many custom optics manufacturers lackin-house thin film coating capability. As a result, there are fewer well-rounded competitors in the customoptics arena, but they are equipped with modern facilities and progressivemanufacturing methods.  The 

 

7

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Company hasjudiciously deployed capital towards modernizing its facility, and has staffedthe manufacturing group with individuals with comprehensive experience inmanufacturing management, manufacturing engineering, advanced finishingprocesses, thin-film coating processes, and capacity expansion.  The Company competes on the basis ofproviding consistently high quality products, establishing strong customerrelations, and continuously improving its labor productivity, cost structure,and product cycle times.

 

Competition for the Company’s systems islimited, but competitors’ products are generally lower priced.  The Company’s systems are considered to behigh end and generally offer a combination of features not availableelsewhere.  Because of the Company’sin-house crystal growth capability, the Company’s staff is knowledgeable aboutmatching appropriate crystals to given applications.

 

For the crystal product area, quality, delivery, and customer serviceare market drivers.  Many of the Company’scompetitors are overseas and can offer significantly reduced pricing for somecrystal species.  The Company has beenable to retain and grow its customer base by providing the quality and customerservice needed by OEM customers.  On manyoccasions, the quality of the crystal component drives the ultimate performanceof the component or instrument into which it is installed.  Thus, quality and technical support areconsidered to be valuable attributes for a crystal supplier by many, but notall, OEM customers.

 

Although price is the principal factor inmost product categories, competition is also based on product design, productperformance, quality, delivery, and customer service.  Based on its performance to date, the Companybelieves that it can continue to compete successfully, although no assurances canbe given in this regard.

 

**Employees**

 

As of December 31, 2004, the Company had89 full-time employees (including 25 employees of its newly acquired MRC Opticssubsidiary) and 3 part-time employees.

 

**Patents and Licenses**

 

The Company relies on its manufacturingand technological expertise, rather than on patents, to maintain itscompetitive position in the industry. The Company takes precautionary and protective measures to safeguard itsdesign and technical and manufacturing data, and relies on nondisclosureagreements with its employees to protect its proprietary information.

 

**Regulation**

 

Foreign sales of certain of the Company’sproducts may require export licenses from the United States Department ofCommerce or Department of State.  Suchlicenses are generally available to all but a limited number of countries andare obtained when necessary.  Oneproduct, representing less than 1% of Company sales in 2004, and less than 4%of Company sales in 2003, required U.S. State Department export approval and therequired approvals were granted.

 

There are no federal regulations nor anyunusual state regulations that directly affect the sale of the Company’sproducts other than those environmental compliance regulations that generallyaffect companies engaged in manufacturing operations in New Jersey and Florida.

 

**Business Risk**

 

a)  Asgeneral economic conditions deteriorate, the Company’s financial results suffer

 

Significant economic downturns orrecessions in the United States or Europe could adversely affect the Company’sbusiness, by causing a temporary or longer term decline in demand for the 

 

8

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Company’sgoods and services.  Additionally, theCompany’s revenues and earnings may be affected by general economic factors,such as excessive inflation, currency fluctuations and employment levels.

 

b) Many of the Company’s customer’s industries are cyclical

 

The Company’s business is significantlydependent on the demand its customers experience for their products.  Many of their end users are in industriesthat historically have experienced a cyclical demand for their products,including but not limited to process control capital equipment manufacturing inthe semiconductor industry, defense electro-optics systems manufacturing, andtelecommunications infrastructure expansion. Therefore, as a result, demand for the Company’s products and itsfinancial results of operations are subject to cyclical fluctuations.

 

c)  TheCompany faces competition

 

The Company may encounter substantialcompetition from other companies positioned to serve the same market sectorsthat the Company serves.  Somecompetitors may have financial, technical, marketing or other resources moreextensive than ours, or may be able to respond more quickly than the Companycan to new or emerging technologies and other competitive pressures.  Some competitors have manufacturingoperations in low-cost labor regions such as the far-east and eastern-Europeand can offer products at lower price than the Company.  The Company may not be successful in winningorders against the Company’s present or future competitors, which may adverselyaffect the Company’s business, its growth objectives, its financial condition,and its operating results.

 

d)  TheCompany’s manufacturing processes require products from limited sources ofsupply

 

The Company utilizes many relativelyuncommon materials and compounds to manufacture its products.  Examples include optical grade quartz,specialty optical glasses, scarce natural and manmade crystals, and high puritychemical compounds.  Failure of theCompany’s suppliers to deliver sufficient quantities of these necessarymaterials on a timely basis, or to deliver contaminated or inferior qualitymaterials, or to markedly increase their prices could have an adverse effect onthe Company’s business, despite its efforts to secure long term commitmentsfrom the Company’s suppliers.  Adverseresults might include reducing the Company’s ability to meet commitments to itscustomers, compromising the Company’s relationship with its customers,adversely affecting the Company’s ability to meet expanding demand for itsproducts, or causing the Company’s financial results to deteriorate.

 

e)  TheCompany’s business success depends on its ability to recruit and retain keypersonnel

 

The Company’s existing business and itsexpansion plans depend on the expertise, experience, and continuing services ofcertain scientists, engineers, production and management personnel, and on theCompany’s ability to recruit additional personnel.  There is competition for the services ofthese personnel, and there is no assurance that the Company will be able toretain or attract the personnel necessary for its success, despite the Company’seffort to do so.  The loss of theservices of the Company’s key personnel could have a material adverse affect onits business, on its results of operations, or on its financial results.

 

f)  The Company depends on, but may not succeedin, developing and acquiring new products and****processes

 

In order to meet the Company’s strategicobjectives, the Company must continue to develop, manufacture and market newproducts, and to develop new processes and to improve existing processes.  As a result, the Company expects to continueto make investments in research and development and to continue to considerfrom time to time the strategic acquisition of businesses, products, ortechnologies complementary to the Company’s business.  There can be no assurance that the Companywill be able to develop and introduce new products or enhancements to itsexisting products and processes in a way that 

 

9

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achievesmarket acceptance or other pertinent targeted results.  Nor can the Company be sure that it will besuccessful in acquiring complementary businesses, products, ortechnologies.  Failure to do so couldhave a material adverse affect on the Company’s ability to grow its business.

 

g)  TheCompany may not be able to fully protect its intellectual property

 

The Company does not currently hold anymaterial patents applicable to its most important products or manufacturingprocesses.  The Company relies on acombination of trade secret and employee non-competition and nondisclosureagreements to protect its intellectual property rights.  There can be no assurance that the steps theCompany takes will be adequate to prevent misappropriation of the Company’stechnology.  In addition, there can be noassurance that, in the future, third parties will not assert infringementclaims against the Company.  Assertingthe Company’s rights or defending against third-party claims could involvesubstantial expense, thus materially and adversely affecting the Company’sbusiness, results of operations or financial condition.

 

h)  The Company may not succeed in its strategyof acquiring complementary businesses or in integrating acquired businesses

 

The Company’s business strategy includesexpanding its production capacities, product lines and market reach throughboth internal growth and acquisition of complementary businesses.  The Company may not succeed in finding orcompleting acquisitions of such businesses, nor can the Company be assured thatit will be able to raise the financial capital needed for such acquisitions.  Acquisitions may result in substantial pershare financial dilution of the Company’s Common Stock from the issuance ofequity securities.  They may also resultin the taking on of debt and contingent liabilities, and amortization expensesrelated to intangible assets acquired, any of which could have a materialadverse affect on the Company’s business, financial condition or results ofoperations.  Also, acquired businessesmay be experiencing operating losses. Any acquisition will involve numerous risks, including difficulties inthe assimilation of the acquired company’s people, operations and products,uncertainties associated with operating in new markets and working with newcustomers, and the potential loss of the acquired company’s key employees.  To date, the Company has had limitedexperience in acquiring or integrating businesses.

 

i)  The Company’s operations may be adverselyaffected if it fails to keep pace with industry developments

 

The Company serves industries and marketsectors which will be affected by future technological developments.  The introduction of products or processesutilizing new developments could render the Company’s existing products orprocesses obsolete or unmarketable.  TheCompany’s continued success will depend upon its ability to develop and introduceon a timely and cost-effective basis new products, processes, and manufacturingcapabilities that keep pace with developments and address increasinglysophisticated customer requirements. There can be no assurance that the Company will be successful.

 

j)  Product yield problems and product defectsthat are not detected until products are in service could increase the Company’scosts and/or reduce its revenues

 

Changes in the Company’s own or in itssuppliers’ manufacturing processes, or the use of defective or contaminatedmaterials by the Company, could result in an adverse effect on its ability toachieve acceptable manufacturing yields, delivery performance, and productreliability.  To the extent that theCompany does not achieve such yields, delivery performance or productreliability, its business, operating results, financial condition and customerrelationships could be adversely affected. Additionally, the Company’s customers may discover defects in theCompany’s products after the products have been put into service in theirsystems.  In addition, some of theCompany’s products are combined by the Company’s customers with products fromother vendors, which may contain defects, 

 

10

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makingit difficult and costly to ascertain whose product carries liability.  Any of the foregoing developments couldresult in increased costs and warranty expenses, loss of customers, diversionof technical resources, legal action by the Company’s customers, or damage tothe Company’s reputation.

 

k)  TheCompany’s stock price may fluctuate

 

Many factors, including, but not limitedto, future announcements concerning the Company, its competitors or customers,as well as quarterly variations in operating results, announcements oftechnological innovations, seasonal or other variations in anticipated oractual results of operations, changes in earnings estimates by analysts orreports regarding the Company’s industries in the financial press or investmentadvisory publications, could cause the market price of the Company’s stock tofluctuate substantially.  In addition,the Company’s stock price may fluctuate widely for reasons which may beunrelated to operating results.  Thesefluctuations, as well as general economic, political and market conditions suchas recessions, military conflicts, or market or market-sector declines, maymaterially and adversely affect the market price of the Company’s CommonStock.  In addition, any informationconcerning the Company, including projections of future operating results,appearing in investment advisory publications or on-line bulletin boards orotherwise emanating from a source other than the Company could in the futurecontribute to volatility in the market price of the Company’s Common Stock.

 

l)  International sales account for a significantportion of revenues

 

Sales to customers in countries otherthan the United States accounted for approximately 12%, 19% and 19% of revenuesduring the years ended December 31, 2004, 2003, and 2002, respectively.  The Company anticipates that internationalsales will continue to account for a significant portion of the Company’srevenues for the foreseeable future.  Inparticular, although the Company’s international sales are denominated in U.S.dollars, currency exchange fluctuations in countries where the Company doesbusiness could have a material adverse effect on its business, financialcondition or results of operations, by making the Company lessprice-competitive than foreign manufacturers.

 

m)  The Company has incurred operating losses forthe past three years

 

The Company has sustained operatinglosses for the past three years of $410,000 in 2004, $1,654,000 in 2003 and $1,504,000 in 2002.  The Company is following a strategy of growingvia acquisition into a portfolio of Photonics businesses, and in this periodhad required capital both to fund working capital needs and to acquirebusinesses.  The Company borrowed$1,000,000 via a subordinated convertible note to a major investor in December2002 providing working capital during this period, and borrowed $2,500,000million via a subordinated convertible note to finance acquisitions.  Additionally, the Company has long-term debtin the form of a secured promissory note in the amount of $1,700,000 as well toa major investor, and the Company raised over $1,170,000 via a privateplacement of stock in 2004.  The Companycannot establish lending lines from banking institutions at this time due toits net losses.  Continued losses put theCompany at risk, in that there are no assurances the Company will be able toobtain the additional financing it requires to continue to implement itsgrowth-by-acquisition strategy or to supply the working capital needs of itsexisting operations.

 

**Item 2.****                                   Properties**

** **

Administrative, engineering andmanufacturing operations are housed at present in a 42,000 square foot buildinglocated in Northvale and in a 25,000 square foot building located in Sarasota,FL.  The headquarters of the Company arelocated within its Northvale, NJ facility.

 

PPGI, INRAD and Laser Optics occupyapproximately 42,000 square feet of space located at 181 Legrand Avenue,Northvale, New Jersey pursuant to a net lease expiring on October 31,2006.  PPGI has an option to renew theNorthvale lease for an additional term of five years.  In November 2003, the 

 

11

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Companyexercised its option to lease 11,000 square feet of additional adjoining spacein the same building, which brought the total square feet of leased spaceoccupied by PPGI in Northvale, New Jersey to its present 42,000 squarefeet.  In 2003, Laser Optics Holdings,Inc., a Subsidiary of the Company, acquired the rights to the lease of 8,000square feet of space in Bethel, CT, formerly occupied by Laser Optics, Inc.,upon purchase of the assets of Laser Optics, Inc.  This lease expired in May of 2004 coincidentwith the Company’s vacating that facility and relocating the assets of LaserOptics, Inc. to its Northvale operations center.

 

PPGI’s MRC Optics subsidiary occupiesapproximately 25,000 square feet of space located at 6405 Parkland Drive,Sarasota, FL pursuant to a net lease expiring on August 31, 2006.  MRC Optics does not currently have an optionin place to renew that lease.

 

The facilities are adequate to meetcurrent and future projected production requirements.

 

The total rent in 2004 for these leaseswas approximately $370,000.  The Companyalso paid real estate taxes and insurance premiums that totaled approximately$175,000 in 2004.

 

**Item 3.****                                   LegalProceedings**

** **

There are no legal proceedings involvingthe Company as of the date hereof.

 

**Item 4.****                                   Submissionof Matters to a Vote of Security Holders**

** **

Not Applicable.

 

12

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**PART II**

 

**Item 5.****                                   Marketfor Registrant’s Common Equity and Related Stockholder Matters**

** **

a)  Market Information

 

The Company’s Common Stock, par value$0.01 per share, is traded on the OTC Bulletin Board under the symbol PHPG.

 

The following table sets forth the rangeof closing prices for the Company’s Common Stock in each fiscal quarter fromthe quarter ended March 31, 2003 through the quarter ended December 31, 2004,as reported by the National Association of Securities Dealers NASDAQSystem.  Such over-the-counter quotationsreflect inter-dealer prices, without retail mark-up, mark-down or commissionand may not necessarily represent actual transactions.

 
| ** **                       | ** ** | **Price** | ** ** |
|----------------------------------|------------|-----------|------------|
| ** **                       | ** ** | **High**  | ** ** | **Low** | ** ** |
|                             |       |      |       |   |   |
| Quarter ended December 31, 2004  |       | 1.60      |       | .70 |   |
|                             |       |      |       |   |   |
| Quarter ended September 30, 2004 |       | 1.50      |       | .65 |   |
|                             |       |      |       |   |   |
| Quarter ended June 30, 2004      |       | 2.00      |       | .46 |   |
|                             |       |      |       |   |   |
| Quarter ended March 31, 2004     |       | .65       |       | .37 |   |
|                             |       |      |       |   |   |
| Quarter ended December 31, 2003  |       | .80       |       | .45 |   |
|                             |       |      |       |   |   |
| Quarter ended September 30, 2003 |       | .58       |       | .35 |   |
|                             |       |      |       |   |   |
| Quarter ended June 30, 2003      |       | .60       |       | .36 |   |
|                             |       |      |       |   |   |
| Quarter ended March 31, 2003     |       | .60       |       | .41 |   |

 

As of March 24, 2005 the Company’s stockprice was $1.10 per share.

 

b)  Shareholders

 

As of March 24, 2005 therewere approximately 230 record owners of the Common Stock.  The number of record owners of common stockwas approximated based upon the Shareholders’ Listing provided by the Company’sTransfer Agent.

 

c)  Dividends

 

The Company did not pay any cashdividends on its Common Stock during the years ended December 31, 2004, 2003and 2002.  The Company paid a CommonStock dividend of 134,000 shares of Common Stock on its Series A and Series Bconvertible preferred stock in 2004, valued at $165,000.  The Company paid a Common Stock dividend of134,000 shares of Common Stock on its Series A and Series B convertiblepreferred stock in 2003, valued at $54,000. The Company paid a Common Stock dividend of 134,000 shares of CommonStock on its Series A and Series B convertible preferred stock in 2002, valuedat $121,000.  Payment of cash dividendswill be at the discretion of the Company’s Board of Directors and will depend,among other factors, upon the earnings, capital requirements, operations andfinancial condition of the Company.  TheCompany does not anticipate paying cash dividends in the immediate future.

 

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d)  Recent Sales of UnregisteredSecurities and Registration of Securities

 

At the end of the fourth quarter of 2002,the Company received $1,000,000 in proceeds from the issuance of a SubordinatedConvertible Promissory Note.  The Note isdue in January 2006 and bears an interest rate of 6%.  The note was amended in 2004 to clarify itsconversion features.  Interest accruesyearly and along with principal may be converted into Common Stock, (and/orsecurities convertible into common shares). As a result of the June 2004 private placement, the note becameconvertible into 1,000,000 Units consisting of 1,000,000 shares of Common Stockand Warrants to acquire 750,000 shares of Common stock at a price of $1.35 pershare.  The Holder of the Note is arelated party to a major shareholder of the Company.

 

In the second quarter of 2002, theCompany secured an asset loan from Wachovia Bank.  In January 2003 the Company was in violationof certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the assetbased loan and working capital revolver to APC Investments.  In June of 2003, the Company paid off theloan held by APC with $1,700,000 in proceeds received from the issuance of aSecured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note was for a periodof 36 months and bears interest at the rate of 6% per annum.  The Company’s Board of Directors approved theissuance of 200,000 warrants to Clarex, Ltd. as a fee for the issuance of theNote and in the 2nd quarter of 2004 approved the issuance of an additional200,000 warrants as a fee for extending the note to September 30, 2007.  The note was subsequently extended toDecember 31, 2008 without issuance of warrants or any other additionalconsideration.  The warrants areexercisable at $0.425 per share and $1.08 per share, respectively, approximatelya 20% discount to market, and expire in March 2008 and May 2008.  The Note is secured by all assets of theCompany.

 

At the end of the fourth quarter of 2003,the Company received $1,500,000 in proceeds from the issuance of a SubordinatedConvertible Promissory Note.  The Note isdue in January 2006 and bears an interest rate of 6%.  The note was amended in 2004 to clarify itsconversion features.  Interest accruesyearly and along with principal may be converted into Common Stock, and/orsecurities convertible into Common Stock. As a result of the June 2004 private placement, the note becameconvertible into 1,500,000 Units consisting of 1,500,000 shares of Common Stockand Warrants to acquire 1,125,000 shares of Common stock at a price of $1.35per share.  The Holder of the Note is amajor shareholder of the Company.  Theproceeds from the Note are intended for use in the Company’s acquisitionprogram.

 

In April 2004, the Company received$1,000,000 in proceeds from the issuance of a Subordinated ConvertiblePromissory Note.  The Note is due inMarch 2007 and bears an interest rate of 6%.  Interest accrues yearly and along withprincipal may be converted into Common Stock, (and/or securities convertibleinto common shares).  As a result of theJune 2004 private placement, the note became convertible into 1,000,000 Unitsconsisting of 1,000,000 shares of Common Stock and Warrants to acquire1,125,000 shares of Common stock at a price of $1.35 per share.  The Holder of the Note is a major shareholderof the Company.

 

During the 2nd quarter of 2004, theCompany entered into an agreement with an investment banking firm to raiseequity via a private placement, in accordance with Regulation D, that was notregistered with the Securities and Exchange Commission.  In July 2004, the Company issued 1,581,000Units consisting of 1,581,000 shares and warrants to acquire an additional1,185,750 shares at $1.35 per share.  Inaddition, 262,276 Warrants were issued to Casimir Capital, LP, the placementagent for the private placement.  Inaddition, Casimir Capital earned commissions of $142,391 as the underwriter ofthis private placement.  This privateplacement resulted in net proceeds to the Company of approximately$1,173,000.  The funds are to be utilizedin the furtherance to the Company’s M&A program, capital equipmentpurchases and to meet general working capital requirements.  Resale of the issued shares and sharesunderlying the warrants, as well as the shares into which the convertiblepromissory notes described above are convertible, were subsequently registeredwith the SEC.

 

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**Item 6.****                                   SelectedFinancial Data**

** **

The following data is qualified in itsentirety by the financial statements presented elsewhere in this Annual Reporton Form 10-K.

 
| ** **                                           | ** ** | **As of December 31, or  For the Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Revenues                                             |       | $                                                          | 9,221,857  |   | $ | 5,388,184 |   | $ | 5,569,118 |   | $ | 8,075,205 |   | $ | 7,909,967 |   |
| Net (loss) profit                                    |       | (672,933                                                   | )          | (1,777,309 | ) | (1,715,972 | ) | 43,634 |   | 707,869 |   |
|                                                 |       |                                                       |       |   |   |   |   |   |   |   |   |
| Net (loss) profit applicable to common  shareholders |       |                                                       |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | (.15                                                       | )          | (.35 | ) | (.35 | ) | (.02 | ) | .14 |   |
| Diluted                                              |       | (.15                                                       | )          | (.35 | ) | (.35 | ) | (.02 | ) | .12 |   |
|                                                 |       |                                                       |       |   |   |   |   |   |   |   |   |
| Weighted average shares                              |       |                                                       |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 5,710,354                                                  |       | 5,287,849 |   | 5,210,322 |   | 5,046,666 |   | 4,563,350 |   |
| Diluted                                              |       | 5,710,354                                                  |       | 5,287,849 |   | 5,210,322 |   | 5,046,666 |   | 5,608,513 |   |
| Dividends paid                                       |       | 164,820                                                    |       | 53,600 |   | 120,600 |   | 155,000 |   | 50,000 |   |
| Total assets                                         |       | 13,526,634                                                 |       | 8,851,121 |   | 8,508,925 |   | 8,599,072 |   | 7,829,755 |   |
| Long-term obligations                                |       | 6,459,088                                                  |       | 4,405,576 |   | 1,188,512 |   | 287,170 |   | 326,059 |   |
| Shareholders’ equity                            |       | 3,965,129                                                  |       | 3,284,439 |   | 5,049,879 |   | 6,745,489 |   | 6,388,780 |   |
|                                                      |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany completed the acquisition of the stock of MRC Precision Metal Optics,Inc. in mid-October 2004.  Also, the Companycompleted the acquisition of Laser Optics, Inc.’s assets and liabilities at theend of November 2003.  The comparabilityof information in the selected financial data is aided by details provided inthe management discussion, which attribute certain portions of revenue growthin 2004 to these two acquisitions.

 

**Item 7.****                                   Management’sDiscussion and Analysis of Financial Condition and Results of Operation**

** **

Critical Accounting Policies

** **

The Company’s significant accountingpolices are described in Note 1 of the consolidated financial statements, thatwere prepared in accordance with accounting principles generally accepted inthe United States of America.  Inpreparing the Company’s financial statements, the Company made estimates andjudgments that affect the results of its operations and the value of assets andliabilities the Company reports.  TheCompany’s actual results may differ from these estimates.

 

The Company believes that the followingsummarizes critical accounting polices that require significant judgments andestimates in the preparation of the Company’s consolidated financialstatements.

 

RevenueRecognition

 

The Company records revenue, other thanon Contract R&D revenues, when a product is shipped.  Revenue on Contract R&D is accounted forusing the percentage-of-completion method, whereby revenue and profits arerecognized throughout the performance of the contracts.  Percentage-of-completion is determined byrelating the actual cost of work performed to date to the estimated total costfor each contract.  Losses on contractsare recorded when identified.

 

15

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AccountsReceivable

 

The Company records an allowance fordoubtful accounts receivable as a charge against earnings for revenue for itemsthat have been reviewed and carry a risk of non-collection in the future.  The Company has not experienced anon-collection of accounts receivable materially affecting the results ofoperations.

 

Inventory

 

The Company records slow moving inventoryreserve as a charge against earnings for all products on hand that have notbeen sold to customers in the past twelve months.  An additional reserve is recorded for producton hand that may not be sold to customers within the upcoming twelve months.

 

From time to time, estimated accruals arerecorded as a charge against earnings based on known circumstances where it isprobable that a liability has been incurred or is expected to be incurred andthe amount can be reasonably estimated.

 

**Results of Operations**

** **

The following table summarizes theCompany’s product sales by product categories during the past three years:

 
| ** **          | ** ** | **Year Ended December 31** | ** ** |
|---------------------|------------|----------------------------|------------|
| ** **          | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Category**        | ** ** | **Sales**                  | ** ** | **%** | ** ** | **Sales** | ** ** | **%** | ** ** | **Sales** | ** ** | **%** | ** ** |
| Optical Components* |       | $                          | 7,877,000  |   | 85 |   | $ | 4,469,000 |   | 83 |   | $ | 4,325,905 |   | 79 |   |
| Laser Accessories   |       | 1,345,000                  |       | 15 |   | 893,000 |   | 17 |   | 1,155,816 |   | 21 |   |
| TOTAL**             |       | $                          | 9,222,000  |   | 100 |   | $ | 5,362,000 |   | 100 |   | $ | 5,481,721 |   | 100 |   |

 

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* a) 2003 Optical Component sales included $78,000 from operations acquiredfrom Laser Optics, Inc.

 

  b)  2004 Optical Component salesinclude $901,000 from the Company’s new MRC Optics subsidiary.

 

 **       Not included above are(non-product) contract R&D sales of approximately $26,000 and $87,000 in2003 and 2002, respectively.

 

The following table setsforth, for the past three years, the percentage relationship of statement ofoperations categories to total revenues.

 
| ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                     |       |                        |       |   |   |   |   |
| Product sales                                 |       | 100.0                       | %          | 100.0 | % | 100.0 | % |
| Costs and expenses:                           |       |                        |       |   |   |   |   |
| Cost of goods sold                            |       | 71.9                        | %          | 72.7 | % | 83.7 | % |
| Gross profit margin                           |       | 28.1                        | %          | 27.3 | % | 16.3 | % |
| Selling, general and administrative  expenses |       | 31.5                        | %          | 44.3 | % | 40.9 | % |
| Internal research and development             |       | 1.1                         | %          | 2.9 | % | 2.4 | % |
| Special charges                               |       | 0                           | %          | 10.8 | % | 0 | % |
| Loss from operations                          |       | (4.5                        | )%         | (30.6 | )% | (27.0 | )% |
| Net Loss                                      |       | (7.3                        | )%         | (32.9 | )% | (30.1 | )% |

 

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**Revenues**

 

Total revenueswere approximately $9,222,000, $5,388,000 and $5,569,000, in 2004, 2003 and2002, respectively.  Revenues increased72% in 2004 to $9,222,000, from $5,388,000 in 2003, reflecting strong new orderintake beginning in the second half of 2003 and continuing throughout2004.  Additionally, sales in 2004included twelve full months of revenues from legacy Laser Optics, Inc. lines ofbusiness acquired in November of 2003, synergies from the combination andintegration of Laser Optics and Inrad custom optics operations in 2004, and twoand one-half months of revenues from the newly acquired MRC Optics, Inc.subsidiary.  Of the $9,222,000 in total2004 revenues, approximately $901,000 were revenues from newly acquired MRCOptics.

 

When consideringthe $8,321,000 in 2004 revenues net of the revenue contribution from the MRCOptics acquisition, revenue growth from 2003 was 55%. Approximately one third of that year-to-year increase in revenues wasdirectly attributable to the Company’s acquisition of the assets of LaserOptics, Inc. in November, 2003.  Theremaining two thirds of that increase was attributable to synergies realizedfrom that acquisition and from increased demand for the Company’s products ingeneral.

 

2003 sales hadbeen off 2% from sales of $5,569,000 in 2002, reflecting “flat” product salesyear to year, as demand from several industry sectors remained sluggish in2003, the third calendar year of a long and deep recession in the Photonicsindustry.

 

Examining theseresults by customer industry sector:

 

Sales to theDefense/Aerospace sector increased sharply for the third consecutive year, to$4,127,000 from $2,321,000 in 2003, up 78%. Net of the contributions from the MRC Optics acquisition, sales in thissector were still up 47%.  Sales in 2003were $2,321,000, up 34% from 2002.  Salesof $1,738,000 in 2002 were up 100% from sales of $867,000 in 2001.  Increased military spending onelectro-optical systems and R&D in the post-9/11 era combined withstrategic re-positioning has boosted demand for the Company’s products.  Sales to this sector accounted for 45%, 43%,and 31% of total sales in 2004, 2003, and 2002, respectively.

 

Revenuesincreased for the year in the Process Control and Metrology sector, reversing atwo year decline.  Revenues rose to$1,817,000 from $844,000 in 2003, up 120%. Demand from customers in the Process Control and Metrology sectorincreased as the semiconductor industry’s investments in new plant andequipment spending rebounded from the deepest and longest downturn inyears.  Sales to this sector accountedfor 20%, 16%, and 22% of total sales in 2004, 2003, and 2002, respectively.

 

Revenuesincreased in the non-military Laser Systems sector, also reversing a two yeardecline.  Sales were $1,753,000, up 64%from sales of $1,066,000 in the prior year. Stronger demand for the Company’s laser accessories and newopportunities for its precision optical components contributed to the increase.  Sales to this sector accounted for 19%, 20%,and 24% of total sales in 2004, 2003, and 2002, respectively.

 

Sales to theTelecom sector are no longer material, accounting for 1% of total sales in 2004and 2003, and 2% in 2002.  It is unlikelythat sales to the sector will rebound in the near future for the Company’s currentproduct lines.

 

Combined totalsales to Universities, National Laboratories and customers in “Other” (i.e.non-separately classified) sectors were $1,422,000 in 2004, up 29% from$1,099,000 in 2003.  Sales in thesesectors have accounted for 15%, 19%, and 21% of total sales in 2004, 2003, and2002, respectively.

 

New orders in2004 were $11,240,000, including $530,000 from newly acquired MRC Optics.  Net of the MRC bookings, new orders in 2004were $10,710,000, up 78% from 2003.  Neworders in 2003 had increased to $6,018,000, up 16% from those in 2002.  Order intake was strong in all sectors, butespecially from customers in the Defense/Aerospace, Process Control andMetrology, and Laser Systems sectors.

 

17

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The annualizedproduct book-to-bill ratio for 2004 was 1.22. The annualized product book-to-bill ratio for 2004 net of the MRC Opticsacquisition, was 1.28.  The annualizedproduct book to bill ratio in 2003 had been greater than 1.0 for the first timein three years at 1.1, reflecting a positive change overall across all marketsectors served.

 

The Company’sbacklog of product orders as of December 31, 2004 was approximately $6,433,000up 181% from the same point in the prior year. The Company’s backlog of product orders as of December 31, 2003 wasapproximately $2,286,000, an increase of 76% over the approximately $1,300,000backlog as December 31, 2002.

 

**Cost ofGoods Sold and Gross Profit Margin**

** **

As a percentage of product sales, cost ofgoods sold was 71.9%, 72.7% and 83.7% for the years ended December 31, 2004,2003 and 2002, respectively.  Grossprofit margin as a percentage of product sales was 28.1%, 27.3%, and 16.3% for2004, 2003, and 2002, respectively.

 

In 2004, the cost of goods sold remainedrelatively constant, as a percentage, to 2003 levels.  Sales increased by over 71%.  However, fixed costs for facilities relatedexpenditures and depreciation also increased and along with increases invariable costs for labor and material created a situation in which cost ofsales remained at the same relative percentage for the year.  In 2003, the cost of goods sold percentagedecreased as a result of successful implementation of cost containmentpolicies.  Such polices includedexecutive salary reductions, temporary layoffs, salary freezes and reductionsin discretionary spending.  As a result,gross margins increased despite the drop in overall sales volume.  In 2002, the cost of goods sold percentageincreased due to a declining sales volumes and a draw-down of inventories.

 

Fixed costs are a major component of theCompany’s total cost structure. Management and the Board of Directors decided to reduce such costs in2002 only up to the point where further reductions would impede the Company’sability to perform for its current customers or to rebound in the future whenmacroeconomic conditions improve.  Thisphilosophy continued throughout 2003. The implementation of head-count reduction, reduced work-hours, andother cost saving measures decreased overhead expenses by approximately 9% in2003 and 15% in 2002 over the respective prior years.

 

Costs of purchased components have beenrelatively stable in 2004, 2003 and 2002. Unit costs of raw materials such as crystal quartz and high gradeoptical glasses have increased in the last year.

 

**Selling,General and Administrative Expenses**

** **

Selling, general and administrativeexpenses in 2004 increased $526,000, or 22% compared to 2003, while revenuesincreased 72%.  Selling, general andadministrative expenses in 2003 increased $113,000 or 5% compared to 2002.  In 2002, selling, general and administrativeexpenses decreased $226,000 or 9.0% compared to 2001.

 

The increase in S, G&A costs in 2004was attributable to a full year of costs for the newly acquired Laser Opticsoperations and two and one half months of costs incurred as a result of the MRCacquisition.  Also adding to the increasewere the restoration of salaries for executive personnel to pre-2002 levels andincreased costs for commissions that resulted from the sharply higher salesvolume in 2004.

 

The increase in S, G&A costs in 2003was due in part to increased professional services costs and travel expensesrelative to the Company’s merger and acquisition program.  S, G&A expenses also increased due toincreased travel for customer visits by sales and business developmentpersonnel.  Other contributing factors tothe increase were the accelerated increase in patent reserves and an overallincrease in insurance costs.  Managementcontinued to implement its philosophy of increasing, not decreasing,expenditures on direct selling and business development activities in a periodof declining top line performance.

 

18

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**InternalResearch and Development Expenses**

** **

Company-funded research expendituresduring the years ended December 31, 2004, 2003, and 2002 were $98,000,$154,000, $134,000 or 1.1%, 2.9% and 2.5% of net product sales respectively.

 

During 2004, the Company narrowed itsfocus of internal research and development efforts onto improving certaincrystal growth processes, and on improving manufacturing process technologiesfor optical components.  Technicalresources were focused on supporting the integration of Laser Optics intoNorthvale operations and ramp-up of production rates.  As a result, internal R&D expenditureswere at a historically low level in 2004.

 

**Special Charges**

 

During 2003, the Company acquired theassets and liabilities of Laser Optics, Inc. A strategic decision was made at that time to relocate the assets andemployees from Bethel, CT to Northvale, NJ and to combine the Laser Optics,Inc. business lines with the Custom Optics business line.  The entity created by this combination is nowa PPGI business unit called Laser Optics. The assets acquired and employees were relocated to Northvale, NJ intoconsolidated operations during the spring of 2004.  The costs of relocating employees includedrelocation costs, stay on bonuses and relocation bonuses, that were accrued in2003.  The accrual amounted to $107,000($0.02 per share on a basic and diluted basis) and has been included in theconsolidated statement of operations as a special charge.

 

During 2003 theCompany determined that there was excess inventory, relative to forecastedfuture needs, of certain crystals and solutions.  Based on this determination, a reserve wastaken in the amount of $475,000 ($0.09 per share on a basic and diluted basis)in order to recognize the diminished future economic benefit of theinventory.  The increased reserve has beenincluded in the consolidated statement of operations as a special charge.

 

**OperatingIncome**

** **

Losses from operations in 2004 were$(410,000) compared to operating losses in 2003 of $(1,654,000) and$(1,504,000) in 2002.  The improvedperformance was a direct result of the success of management’s acquisitionprogram and an overall strengthening of business from existing customers.

 

Losses in 2003 and 2002 were due toslackened and continuing weak demand in major market sectors served by theCompany and its products.  These lossesoccurred despite strict cost containment measures, and they were absorbed.  The cost containment program implemented bymanagement and the Board stopped short, by design, of impeding the ability ofthe Company’s operations to perform again in the future, or of impeding theCompany’s ability to find new customers for its products.  Management’s efforts to restore profitabilityto operations are focused on building the Company’s top line through its mergerand acquisition program and through continued focus on business development andselling activities.

 

**OtherIncome and Expenses**

** **

Interest expense increased over priorperiods due to the increased borrowing needs experienced by the Company foracquisition and facility expansion purposes and the assumption of MRCdebt.  The Company’s average borrowingsin 2004 were approximately $6,500,000 versus $4,500,000 in 2003.  Interest rates in 2004 and 2003 wereapproximately 1.5% higher than in 2002. In 2003, borrowing needs increased due principally to obtaining thecapital needed for the acquisition made during 2003.  A subordinated convertible note was placedfor acquisition purposes.  Interest onthe secured and convertible notes is accrued, and payment is due upon thematurity of the notes.  Also during 2003,a secured note replaced all of the Company’s prior bank debt.

 

19

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**PreferredStock Dividend**

** **

Dividends on the Company’s two issues ofpreferred debt are paid in common stock and are fixed at 134,000 shares, andare valued at the market price when issued. During 2004 dividends in Common Stock valued at $165,000 were issued toholders of the Company’s Class B preferred stock (84,000 shares of Common Stockvalued at $1.23 per share) and the holder of the Company’s Class A preferredstock (50,000 shares valued at $1.23 per share).  During 2003 dividends in Common Stock valuedat $54,000 were issued to holders of the Company’s Class B preferred stock(84,000 shares of Common Stock valued at $0.40 per share) and the holder of theCompany’s Class A preferred stock (50,000 shares valued at $0.40 pershare).  During 2002 dividends in CommonStock valued at $121,000 were issued to holders of the Company’s Class Bpreferred stock (84,000 shares of Common Stock valued at $.90 per share) andthe holder of the Company’s Class A preferred stock (50,000 shares of CommonStock at $.90 per share).  Net incomeused in earnings per share calculations included these charges in 2004, 2003 and2002 in order to derive net income available to common shareholders.

 

**IncomeTaxes**

** **

During 2004 the Company sold its 2003 NewJersey net operating loss for $96,000. During 2003 the Company sold its 2002 New Jersey net operating loss for$135,000.  The sales were made under theState’s Technology Tax transfer Certificate program.  The Company recognizes deferred taxliabilities and assets for the expected future tax consequences of events thathave been recognized in the Company’s financial statements or tax returns.  Deferred tax liabilities and assets aredetermined based on the difference between the financial statement carryingamounts and the tax basis of assets and liabilities using enacted tax rates ineffect in the years in which the differences are expected to reverse.  At December 31, 2004, the Company had a netdeferred tax asset of approximately $3,426,000, the primary component of whichwas its significant net operating loss carry forward.  The Company has established a valuationallowance to offset this deferred tax asset in the event that the tax assetwill not be realized in the future.

 

**Inflation**

** **

The Company’s policy is to periodicallyreview pricing of its products to keep pace with current costs, market demands,and competitive factors.  As to specialand long-term contracts, management endeavors to take potential inflation intoaccount in pricing decisions.  The impactof inflation on the Company’s business has not been material to date.

 

**Liquidityand Capital Resources**

** **

At the end of the fourth quarter of 2002,the Company received $1,000,000 in proceeds from the issuance of a SubordinatedConvertible Promissory Note.  The Note isdue in January 2006 and bears an interest rate of 6%.  The note was amended in 2004 to clarify itsconversion features.  Interest accruesyearly and along with principal may be converted into Common Stock, (and/orsecurities convertible into common shares). As a result of the June 2004 private placement, the note is convertibleinto 1,000,000 Units consisting of 1,000,000 shares of Common Stock andWarrants to acquire 1,000,000 shares of common Stock and Warrants to acquire750,000 shares of Common stock at a price of $1.35 per share.  The Holder of the Note is a related party toa major shareholder of the Company.

 

In the second quarter of 2002, theCompany secured an asset loan from Wachovia Bank.  In January 2003 the Company was in violationof certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the assetbased loan and working capital revolver to APC Investments.  In June of 2003, the Company paid off theloan held by APC with $1,700,000 in proceeds received from the issuance of aSecured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note was for a periodof 36 months and bears interest at the rate of 6% per annum.  The Company’s Board of Directors approved theissuance of 200,000 warrants to Clarex, 

 

20

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Ltd.as a fee for the issuance of the Note and in the 2nd quarter of 2004 approvedthe issuance of an additional 200,000 warrants as a fee for extending the noteto September 30, 2007.  The note wassubsequently extended to December 31, 2008 without issuance of warrants or anyother consideration.  The warrants areexercisable at $0.425 per share and $1.08 per share, respectively,approximately a 20% discount to market, and expire in March 2008 andMay 2008.  The Note is secured byall assets of the Company.

 

At the end of the fourth quarter of 2003,the Company received $1,500,000 in proceeds from the issuance of a SubordinatedConvertible Promissory Note.  The Note isdue in January 2006 and bears an interest rate of 6%.  The note was amended in 2004 to clarify itsconversion features.  Interest accruesyearly and along with principal may be converted into Common Stock, and/orsecurities convertible into Common Stock. As a result of the June 2004 private placement, the note is convertibleinto 1500,000 Units consisting of 1,500,000 shares of Common Stock and Warrantsto acquire 1,125,000 shares of Common stock at a price of $1.35 per share.  The Holder of the Note is a major shareholderof the Company.  The proceeds from theNote are intended for use in the Company’s acquisition program.

 

In April 2004, the Company received$1,000,000 in proceeds from the issuance of a Subordinated ConvertiblePromissory Note.  The Note is due inMarch 2007 and bears an interest rate of 6%.  Interest accrues yearly and along withprincipal may be converted into Common Stock, (and/or securities convertibleinto common shares).  As a result of theJune 2004 private placement, the note is convertible into 1,000,000 Unitsconsisting of 1,000,000 shares of Common Stock and Warrants to acquire 750,000shares of Common stock at a price of $1.35 per share.  The Holder of the Note is a major shareholderof the Company.

 

During the 2nd quarter of 2004, theCompany entered into an agreement with an investment banking firm to raiseequity via a private placement accordance with Regulation D that was notregistered with the Securities and Exchange Commission.  In July 2004 the Company issued1,581,000 Units consisting of 1,581,000 shares and warrants to acquire anadditional 1,185,750 shares at $1.35 per share. In addition, 262,276 Warrants were issued to Casimir Capital, LP, theplacement agent for the private placement. Casimir Capital earned commissions of $142,391 as the underwriter ofthis private placement.  This privateplacement resulted in net proceeds to the Company of approximately$1,173,000.  The funds are to be utilizedin the furtherance to the company’s M&A program, capital equipmentpurchases and to meet general working capital requirements.  The issued shares and shares underlyingwarrants were subsequently registered under a S-1 Registration filing.

 

Capital expenditures, including internallabor and overhead charges, for the years ended December 31, 2004, 2003 and2002 were approximately $1,014,000, $101,000, and $554,000, respectively.  A major portion of the 2004 capitalexpenditures were for the relocation and integration of the Laser Optics Betheloperations into the Northvale facility. Approximately $600,000 was used in this facility rearrangement andexpansion, including $190,000 of capitalized internal labor and overhead.  Additional large capital expenditures for theyear included a certain production-critical machine tool, upgraded coatingequipment in the Laser Optics business unit, and metrology equipment andcomputer hardware and software upgrades. Capital expenditures in 2003 and 2002 were used for expansion andrenovation of facilities and for the acquisition of equipment.  The expenditures were financed in part fromcapital raised in the 2000 private offering of Series B convertible preferredstock and in part by the asset loan secured in the second quarter of 2002.

 

21

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A summary of the Company’s contractualcash obligations at December 31, 2004 is as follows:

 
| **Contractual Obligations**        | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Greater  Than 5  Years** | ** ** |
|------------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|----------------------------|------------|
| Notes payable                      |       | $         | 1,700,000  |                  | $          | —        |       | $             | —     |                       | $          | 1,700,000 |   | $ | — |   |
| Convertible notes payable          |       | 3,500,000 |       | —                |       | 3,500,000     |       | —        |       | —                     |       |
| Note payable-other                 |       | 1,020,524 |       | 226,145               |       | 313,897       |       | 144,620       |       | 335,862                    |       |
| Operating leases                   |       | 1,155,000 |       | 375,000               |       | 780,000       |       | —        |       | —                     |       |
| Capital leases including interest  |       | 931,607   |       | 376,464               |       | 496,235       |       | 58,908        |       | —                     |       |
| Total contractual cash obligations |       | $         | 8,307,131  |                  | $          | 977,609       |       | $             | 5,090,132  |                       | $          | 1,903,528 |   | $ | 335,862 |   |

 

**Overviewof Financial Condition**

 

As shown in the accompanying financialstatements, the Company reported a net loss of approximately ($673,000) in2004, ($1,777,000) in 2003, and ($1,716,000) in the year ended December 31,2002.  During the past three years, theCompany’s working capital requirements were met by additional bank borrowings,issuance of secured and subordinated convertible notes and the issuance ofcommon and preferred stock to shareowners.

 

Net cash provided by operations was$632,000 in 2004.  The positive operatingcash flow for the full year resulted from the sharply higher level of sales,which resulted in lower operating losses than in both prior years, and customermilestone payments on certain long term contracts.  Net cash used in operations was ($283,000) in2003.  In 2003, $3,200,000 of secured andconvertible notes were issued to replace bank debt and for use in the Company’sacquisition program.  Net cash used inoperations, in 2002, was ($807,000). Operating capital was augmented by borrowings of $1,000,000 from theCompany’s asset based credit facility. Operating capital was augmented by borrowings of $750,000 from theCompany’s revolving credit agreement.  InJune of 2003, demand was made by a lender to pay approximately $1,700,000 insettlement of bank debts that were in technical default due to a violation ofcertain financial covenants.  The Companyissued a Secured Note, payable to an affiliate of a major shareholder and usedthe proceeds to satisfy the demand for payment.

 

In April 2004, the Company issued a$1,000,000 Subordinated Convertible Promissory Note to a majorshareholder.  In July 2004 the Companyraised approximately $1,173,000, net, via a private equity offering.  Proceeds from this note and the private equityplacement are to be used in the furtherance of the Company’s merger andacquisition program.

 

In October of 2003, the Company issued a$1,500,000 Subordinated Convertible Promissory Note to a majorshareholder.  Proceeds from this notewere used in the furtherance of the Company’s merger and acquisition program.

 

In December 2002, the Company received$1,000,000 in proceeds from the issuance of a Subordinated ConvertiblePromissory Note to a related party of a major shareholder.  The Company did so anticipating continueddistressed market conditions during 2003 and it used the proceeds from the noteto meet its working capital needs in 2003.

 

22

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The Company has made progress intransforming itself into a portfolio of businesses serving the Photonicsindustry.  The Company maintains anactive M&A program, and seeks financing from time to time in the privateequity and public equity financial markets. The Company’s first acquisition was completed in November 2003 and thenecessary capital was raised in-part via a $1,500,000 subordinated convertiblenote.  Additional financing was obtainedin 2004 via placement of a $1,000,000 convertible note proceeds of approximately$1,173,000 from a private placement of units consisting of the Company’s commonstock and warrants.  These funds wereearmarked for acquisitions and capital expenditures, and were partially used tocomplete its second acquisition in 2004. The Company expects to continue to similarly secure and deploy capitalfrom financings from time to time during in the next three years.

 

Where possible, the Company will continueto increase sales, and reduce expenses and cash requirements to improve futureoperating results and cash flows. Management expects that cash flow from operations and use of availablecash reserves will provide adequate liquidity for the Company’s operations in2005.

 

No assurances can be given that theCompany will be able to identify and acquire appropriate targets foracquisition or merger, or to raise the capital required for any suchacquisition.  Additional capital fromfinancings would be needed to continue the Company’s acquisition program.

 

**Item 7A.****                          Quantitativeand Qualitative Disclosures About Market Risk**

** **

The Company believes that it has limitedexposure to changes in interest rates from investments in certain money marketaccounts.  The Company does not utilizederivative instruments or other market risk sensitive instruments to manageexposure to interest rate changes.  TheCompany believes that a hypothetical 100 basis point adverse move in interestrates along the entire interest rate yield curve would not materially affectthe fair value of the Company’s interest sensitive money market accounts atDecember 31, 2004.

 

**Item 8.****                                   FinancialStatements and Supplementary Data**

** **

The financialstatements and supplementary financial information required to be filed underthis Item are presented commencing on page F-1 of the Annual Report on Form10-K, and are incorporated herein by reference.

 

**Item 9.****                                   ChangesIn and Disagreements With Accountants on Accounting and Financial Disclosure**

** **

None

 

**Item 9A.****                          Controlsand Procedures**

** **

**Disclosure controls and procedures**

 

As of December31, 2004, the Company carried out an evaluation, with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures pursuant to Securities Exchange Act Rule 13a-15.  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Officer, concluded that theCompany’s disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by the Company in the reports that it filesor submits under the Securities Exchange Act is recorded, processed, summarizedand reported, within the time periods specified in the SEC’s rules and forms.

 

23

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**Changes in internal controls over financial reporting**

 

There havebeen no significant changes in the Company’s internal controls over financialreporting that occurred during the Company’s last fiscal year to which thisreport relates that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Item 9B****                            ****Other Information**

 

None.

 

24

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**PARTIII**

 

**Item 10.****                            Directorsand Executive Officers of the Registrant**

** **

**Directors of the Registrant**

 

The following table sets forth the nameand age of each director of the Company, the period during which each suchperson has served as a director and the positions and business experience ofeach such person:  

 
| **Name and Age**  | ** ** | **Since** | ** ** | **Positions; Business  Experience**                             |
|-------------------|------------|-----------|------------|-----------------------------------------------------------------|
| John Rich,        |       | 2000      |       | Chairman of  the Board of Directors (September 2004 to Present) |
| 67                |       |      |       |                                                            | Director  (2000 to August 2004) |
|              |       |      |       |                                                            | Vice  President/General Manager (1999-2002) Power Electronics Division, C&D  technologies |
|              |       |      |       |                                                            | President  (1990-1999), Raytheon/GM Hughes Optical Systems |
|              |       |      |       |                                                            | Vice  President (1983-1989), Perkin Elmer Microlithography, Electro-Optics, and  Systems |
|              |       |      |       |                                                            | Colonel,  Commander, Air Force Avionics Laboratory and Air Force Weapons Laboratory |
|              |       |      |       |                                                            |   |
| Daniel  Lehrfeld, |       | 1999      |       | Director                                                        |
| 61                |       |      |       | President  and Chief Executive Officer (2000-present),          |
|              |       |      |       |                                                            | President  and Chief Operating Officer (1999-2000), |
|              |       |      |       |                                                            | Vice  President/General Manager (1995-1999) |
|              |       |      |       |                                                            | Raytheon/GM  Hughes Electro-Optics Center, |
|              |       |      |       |                                                            | President  (1989-1991) |
|              |       |      |       |                                                            | New England  Research Center, (subsidiary) |
|              |       |      |       |                                                            | Deputy  General Manager (1989-1995) & |
|              |       |      |       |                                                            | Director,  Business Development, International Business, |
|              |       |      |       |                                                            | Operations,  Cryogenic Products |
|              |       |      |       |                                                            | Magnavox  Electronic Systems E. Coast Div., |
|              |       |      |       |                                                            | Deputy  Sector Director & Program Director |
|              |       |      |       |                                                            | Philips  Laboratories Briarcliff |
|              |       |      |       |                                                            | North  American Philips subs. Philips Electronics NV, |
|              |       |      |       |                                                            | Group  Leader/Project Leader |
|              |       |      |       |                                                            | Grumman  Aerospace Corporation |
|              |       |      |       |                                                            |
| Frank  Wiedeman,  |       | 1998      |       | Director                                                        |
| 89                |       |      |       |                                                            | Executive  Director (1980 – Present) |
|              |       |      |       |                                                            | American  Capital Management Inc. |
|              |       |      |       |                                                            |
| Thomas  Lenagh,   |       | 1998      |       | Director –  (September 2004 to Present)                    |
| 79                |       |      |       |                                                            | Chairman of  the Board of Directors (May 2000 – August 2004). |
|              |       |      |       |                                                            | Management  Consultant (1990 - Present) |
|              |       |      |       |                                                            | Past  Chairman and CEO, Systems Planning Corporation |
|              |       |      |       |                                                            | Financial  Vice President, the Aspen Institute |
|              |       |      |       |                                                            | Treasurer  and Chief Investment Officer, The Ford Foundation |
|              |       |      |       |                                                            | Captain, US  Navy Reserve (ret.) |

 

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| Jan Winston |   | 2000   |   | Director |
|-------------|--------|--------|--------|----------|
| 68          |   |   |   |     | Principal  (1997-Present) Winston Consulting, |
|        |   |   |   |     | Division  Director/General Manager (1981-1997) IBM Corporation.  Executive positions held in Development,  Finance and Marketing. |

 

The directors hold office for staggeredterms of three years.

 

**ExecutiveOfficers of the Registrant**

** **

The following table sets forth the nameand age of each executive officer of the Company, the period during which eachsuch person has served as an executive officer and the positions with theCompany held by each such person:

 
| **Name and Age**         | ** ** | **Since** | ** ** | **Position With the Company**                          |
|--------------------------|------------|-----------|------------|--------------------------------------------------------|
|                     |       |      |       |                                                   |
| Daniel  Lehrfeld, 61     |       | 1999      |       | President  and Chief Executive Officer                 |
|                     |       |      |       |                                                   |
| William S.  Miraglia, 55 |       | 1999      |       | Vice  President, Chief Financial Officer and Secretary |
|                     |       |      |       |                                                   |
| Devaunshi  Sampat, 52    |       | 1999      |       | Vice  President – Marketing Communication         |

 

Daniel Lehrfeld has served as ChiefExecutive Officer and President since May 2000. He joined the Company in 1999 as President and Chief OperatingOfficer.  Prior to joining the Company,Mr. Lehrfeld held the position of Vice President and General Manager ofElectro-Optic Systems, a division, successively, of the Raytheon, GM/HughesElectronics and Magnavox Electronic Systems Corporations.  He has also held executive positions withPhilips Laboratories Briarcliff and Grumman Aerospace Corporation.  Mr. Lehrfeld holds B.S. and M.S. degrees fromColumbia University School of Engineering and Applied Science and an M.B.A.degree from the Columbia Graduate School of Business.

 

William S. Miraglia joined the Company asSecretary and Chief Financial Officer in June 1999.  Previously, he held the position of VicePresident of Finance for a division of UNC, Inc., a New York Stock Exchangeaviation company.  Prior to his lastposition, Mr. Miraglia has held management positions in the aerospace industryand in public accounting.  He holds aB.B.A. from Pace University, and an M.B.A from Long Island University and is aCertified Public Accountant.

 

Devaunshi Sampat joined the Company in1998.  In 1999 she was appointed VicePresident of Marketing and Sales.  In2003 she also assumed the title of Vice President for Marketing Communicationsfor PPGI.  Prior to joining the Company,Ms. Sampat held sales management positions within the Photonics industry withPrinceton Instruments and Oriel Instruments. Ms. Sampat holds a B.S. in Medical Technology from the University ofBridgeport.

 

Each of the executive officers has beenelected by the Board of Directors to serve as an officer of the Company untilthe next election of officers, as provided by the Company’s by-laws.

 

**Committees of the Board of Directors**

 

Composition of the Board of Directors*.* Since the adoption of the Sarbanes-Oxley Act in July 2002, there hasbeen a growing public and regulatory focus on the independence ofdirectors.  Requirements relating toindependence are imposed by the Sarbanes-Oxley Act with respect to members ofthe Audit Committee.  The Board ofDirectors has determined that the members of the Audit Committee satisfy allsuch definitions of independence.

 

Audit Committee*.*  During 2004, the Audit Committee was comprised of 3 Directors, Thomas Lenagh, Chairman, Jan Winston and John Rich.  The Audit Committee is empowered by the Board of 

 

26

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Directors to, among other things, serve as an independent and objective party to monitor the Company’s financial reporting process, internal control system and disclosure control system, review and appraise the audit efforts of the Company’s independent accountants, assume direct responsibility for the appointment, compensation, retention and oversight of the work of the outside auditors and for the resolution of disputes between the outside auditors and the Company’s management regarding financial reporting issues, and provide an open avenue of communication among the independent accountants, financial and senior management, and the Company’s Board of Directors.

 

Audit Committee Financial Expert*. *TheBoard of Directors of the Company has determined that Mr. John Rich is an“audit committee financial expert”, as such term is defined by the SEC.  Mr. Rich, as well as Mr. Thomas Lenagh andMr. Jan Winston, have been determined to be “independent” within the meaning ofSEC regulations.

 

Compensation Committee.  During 2004, the Compensation Committee was comprised of Mr. Frank Wiedeman (Chairman), Mr. Jan Winston and Mr. John Rich.  The Compensation Committee reviews, approves and makes recommendations to the Board of Directors on matters regarding the compensation of the

 

Nominating Committee.  During 2004, the Nominating Committee was comprised of Mr. Frank Wiedeman (Chairman), Mr. Tom Lenagh and Mr. Jan Winston.  The Nominating Committee makes recommendations to the Board of Directors for the selection of individuals to be nominated  to the Board of Directors.

 

Executive Committee.  During 2004, the Executive committee was comprised of Mr. Jan Winston (Chairman), Mr. Tom Lenagh and Mr. John Rich.  The Executive committee meets with members of management on a regular basis, to discuss the operations of the Company, including approval of yearly financial plans, progress of M&A activities and other operational issues.

 

Company’s senior executive officer(s).

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) of the Securities ExchangeAct of 1934 requires the Company’s directors and officers, and persons who ownmore than 10% of a registered class of the Company’s equity securities, to fileinitial reports of ownership and reports of changes in ownership with theSecurities and Exchange Commission. These persons are required by the Securities and Exchange Commission tofurnish the Company with copies of all Section 16(a) reports that they file.  Based solely on the Company’s review of thesereports and written representations furnished to the Company, the Companybelieves that in 2004 each of the reporting persons complied with these filingrequirements.

 

**Codeof Ethics**

 

The Company has adopted a Code of Ethicsthat applies to the Company’s principal executive officer, principal financialofficer, principal accounting officer or controller (or persons performingsimilar functions).  A copy of such Codeof Ethics has been filed as Exhibit 14.1 to this Annual Report on Form 10-K.

 

**Item 11.****                            ExecutiveCompensation**

** **

**Summary ofCash and Certain Other Compensation**

** **

The following table sets forth, for theyears ended December 31, 2004, 2003 and 2002, the cash compensation paid by theCompany and its Subsidiaries, with respect to the Company’s Chief Executive Officerand other officer, whose total annual salary and bonus exceeded $100,000, forservices rendered in all capacities as an executive officer during such period:

 

27

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**Summary Compensation Table**

 
| **Name and Principal Position**       | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Securities  Underlying  Stock  Options** | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|-----------|------------|--------------------------------------------|------------|
| Daniel Lehrfeld,                      |       | 2004     |       | $          | 183,000    |      | N/A        |                                       | 200,000    |   |
| President and                         |       | 2003     |       | $          | 156,000    |      | N/A        |                                       | 85,000     |   |
| Chief Executive Officer               |       | 2002     |       | $          | 148,000    |      | 32,500     | *                                          | 110,000    |   |
|                                  |       |     |       |       |       |      |       |                                       |       |
| Devaunshi Sampat,                     |       | 2004     |       | $          | 171,000    |      | N/A        |                                       | 20,000     |   |
| Vice President,                       |       | 2003     |       | $          | 105,000    |      | N/A        |                                       | 50,000     |   |
| Marketing Comm.                       |       | 2002     |       | $          | 139,000    |      | N/A        |                                       | 59,500     |   |
|                                  |       |     |       |       |       |      |       |                                       |       |   |
| William Miraglia                      |       | 2004     |       | $          | 126,000    |      | N/A        |                                       | 25,000     |   |
| Vice President,                       |       | 2003     |       | $          | 101,000    |      | N/A        |                                       | 40,000     |   |
| Chief Financial Officer and Secretary |       | 2002     |       | $          | 105,000    |      | N/A        |                                       | 45,000     |   |

 

----

*                                         Reflectsdeferred payout of bonus granted in recognition of asset sale in 2000.  Full proceeds invested in Company Series BPreferred stock.

 

The Company is party to an employmentagreement with Mr. Dan Lehrfeld, President and CEO, that provides for a minimumannual salary during its term, and severance benefits under certain conditionsthat include a change of control of the Company.

 

The aggregate minimum commitment under thisagreement is as follows:

 
| **Year Ending  December 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| 2005                          |       | $          | 185,000    |   |
| 2006                          |       | $          | 185,000    |   |
| 2007                          |       | $          | 185,000    |   |
| 2008                          |       | $          | 185,000    |   |

 

Should Mr. Lehrfeld be terminated withoutcause during this contract period he would be entitled to one year’s salarypayable in one lump sum within 30 days of termination.

 

There is an SEC requirement to report officerreceived perquisites or other personal benefits in excess of the lesser of$50,000 or 10% of such individual’s reported salary and bonus.  During fiscal years 2004, 2003 and 2002,respectively, no officer received any such perquisites or other personalbenefits, nor were any granted.

 

**Compensationof Directors**

** **

Each non-employee director was paid $500during fiscal year 2004 and $400 during fiscal year 2003 for each board meetingattended, and $250 during FY 2004 and $200 during fiscal year 2003 for eachconference call meeting in which they participated.  Each non-employee director received 20,000stock options, exercisable at $.50, in 2004 and 12,000 stock options,exercisable at $.50 in 2003.

 

**CompensationCommittee Interlocks and Insider Participation**

** **

The following directors of the Companyserved as members of the Compensation Committee of the Company’s Board ofDirectors during 2004:  Mr. FrankWiedeman, Mr. Jan Winston and Mr. John Rich. None of these individuals are officers or employees of the Company.  Officer’s compensation is guided by overalljob performance and the market salaries for those positions for companies ofthe same 

 

28

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relativesize and within industries similar to the Company’s industry, as well asrelativity to other salaries within the Company.

 

**OptionExercises and Holdings**

** **

The following table provides informationconcerning options exercised during 2004 and the value of unexercised optionsheld by each of the executive officers named in the Summary Compensation Tableat December 31, 2004.

 

**Option Grants in Last Fiscal Year**

 

Shown below is information on grants of stockoptions pursuant to the 2000 Equity Compensation plan during the Fiscal yearended December 31, 2004 to the officers named below:

 
| **Individual Grants** |       | **Potential  Floatable  Values at  Assumed  Annual Rates** |                   | **Alternative**                                                 |   |
|-----------------------|------------|------------------------------------------------------------|------------------------|-----------------------------------------------------------------|--------|
| **Name**              |       | **Number of  Securities  Underlying  Options  Granted**    |                   | **% of Total  Options  Granted to  Employees  in Fiscal  Year** |   | **Expiration  or Base  Price  ($/Sh)** |   | **Expiration  Date** |   | **of Stock Price  Appreciation  for Option  Term** |   | **to Grant  Date Value  (a)** |   |
| **Grant Date**        |
| **5%  ($)**           | ** ** | **10%  ($)**                                               | **Payment  Value ($)** |
| Dan Lehrfeld          |       | 285,000                                                    |                   | 52.8                                                            | %      | $0.50-$0.95 |   | Jan 2014 |   |   |   |   |   | $ | 268,800 |   |
|                  |       |                                                       |                   |                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Devaunshi Sampat      |       | 24,000                                                     |                   | 4.4                                                             | %      | $0.50-$0.95 |   | Jan 2014 |   |   |   |   |   | $ | 11,520 |   |
|                  |       |                                                       |                   |                                                            |   |   |   |   |   |   |   |   |   |   |   |
| William Miraglia      |       | 24,000                                                     |                   | 4.4                                                             | %      | $0.50 |   | Jan 2014 |   |   |   |   |   | $ | 22,560 |   |

 

----

(a.)                               Based on agrant date present value of $.48 to $.94 per share, derived using theBlack-Scholes option pricing model with the following assumptions:  Volatility of 128.35% to 176.76%, Risk freerate of return of 5.20%, Dividend Yield of 0% and a 10 year option life.

 

29

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**Aggregated OptionExercises in Last fiscal Year and Fiscal Year end Option Values**

 
| ** **       | ** ** | **Shares  Acquired  on  Exercise** | ** ** | **Value**    | ** ** | **Number of  Securities Underlying  Unexercised Options  at December 31, 2004  (# of shares)** |       | **Value of   In-the-Money Options at  December 31, 2004 ($)(1)** | ** ** |
|------------------|------------|------------------------------------|------------|--------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **Name**         | ** ** | **(# shares)**                     | ** ** | **Realized** | ** ** | **Exercisable**                                                                                | ** ** | **Unexercisable**                                                | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|             |       |                               |       |         |       |                                                                                           |       |                                                             |       |   |   |   |   |
| Daniel Lehrfeld  |       | 0                                  |       | 0            |       | 566,700                                                                                        |       | 238,300                                                          |       | 40,335 |   | 143,165 |   |
|             |       |                               |       |         |       |                                                                                           |       |                                                             |       |   |   |   |   |
| Devaunshi Sampat |       | 0                                  |       | 0            |       | 105,680                                                                                        |       | 75,320                                                           |       | 34,389 |   | 55,636 |   |
|             |       |                               |       |         |       |                                                                                           |       |                                                             |       |   |   |   |   |
| William Miraglia |       | 0                                  |       | 0            |       | 64,010                                                                                         |       | 74990                                                            |       | 17,190 |   | 53,710 |   |

 

----

(1)                        Based on $1.30 per share, the closing price of the Company’s Common Stock, as reportedby the OTC Bulletin Board, on December 31, 2004

 

No stockappreciation rights were granted during the fiscal year ended December 31,2004.

 

30

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**Item 12.****                            SecurityOwnership of Certain Beneficial Owners and Management**

 

The following table presents certaininformation with respect to the security ownership of the directors and namedexecutive officers of the Company and the security ownership of each individualor entity known by the Company to be the beneficial owner of more than 5% ofthe Company’s Common Stock outstanding (7,182,194 shares) as of March 1,2005.  Percentages that include ownershipof options or convertible securities are calculated assuming exercise orconversion by each individual or entity of the options, (including“out-of-the-money options”), or convertible securities owned by each individualor entity separately without considering the dilutive effect of optionexercises and security conversions by any other individual or entity.  The Company has been advised that allindividuals, orentities, listed have the sole power to vote and dispose of thenumber of shares set opposite their names in the table.  Unless otherwise indicated, the address ofeach beneficial owner is c/o Photonic Products Group, Inc., 181 Legrand Avenue,Northvale, New Jersey 07674.

 
| **Name and Address of Beneficial  Owner** | ** ** | **Number of shares** | ** ** | **Percent of  Common Stock** | ** ** |
|-------------------------------------------|------------|----------------------|------------|------------------------------|------------|
| ** **                                | ** ** | ** **           | ** ** | ** **                   | ** ** |
| Clarex, Ltd. & Welland Ltd.           |       | 9,971,914            | (1)        | 68.3                         | %          |
| Bay Street and Rawson Square              |       |                 |       |                         |       |
| P.O. Box N 3016                           |       |                 |       |                         |       |
| Nassau, Bahamas                           |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| Warren Ruderman                           |       | 1,172,000            |       | 16.3                         | %          |
| 45 Duane Lane                             |       |                 |       |                         |       |
| Demarest, NJ 07627                        |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| Daniel Lehrfeld                           |       | 806,350              | (2)        | 10.2                         | %          |
| C/O PPGI                                  |       |                 |       |                         |       |
| 181 Legrand Ave                           |       |                 |       |                         |       |
| Northvale, NJ 07647                       |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| Thomas Lenagh                             |       | 198,540              | (3)        | 2.7                          | %          |
| C/O PPGI                                  |       |                 |       |                         |       |
| 181 Legrand Ave                           |       |                 |       |                         |       |
| Northvale, NJ 07647                       |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| Frank Wiedeman                            |       | 140,040              | (4)        | 1.9                          | %          |
| C/O PPGI                                  |       |                 |       |                         |       |
| 181 Legrand Ave                           |       |                 |       |                         |       |
| Northvale, NJ 07647                       |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| John Rich                                 |       | 52,840               | (5)        | 0.7                          | %          |
| C/O PPGI                                  |       |                 |       |                         |       |
| 181 Legrand Ave                           |       |                 |       |                         |       |
| Northvale, NJ 07647                       |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| Jan Winston                               |       | 42,040               | (6)        | 1.0                          | %          |
| C/O PPGI                                  |       |                 |       |                         |       |
| 181 Legrand Ave                           |       |                 |       |                         |       |
| Northvale, NJ 07647                       |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| William Miraglia                          |       | 104,000              | (7)        | 1.4                          | %          |
| C/O PPGI                                  |       |                 |       |                         |       |
| 181 Legrand Ave                           |       |                 |       |                         |       |
| Northvale, NJ 07647                       |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| Devaunshi Sampat                          |       | 150,650              | (8)        | 2.1                          | %          |
| C/O PPGI                                  |       |                 |       |                         |       |
| 181 Legrand Ave                           |       |                 |       |                         |       |
| Northvale, NJ 07647                       |       |                 |       |                         |       |
|                                      |       |                 |       |                         |       |
| Directors and Executive                   |       | 1,494,460            | (9)        | 17.8                         | %          |
| Officers as a group (7 persons)           |       |                 |       |                         |       |

 

31

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----

(1)                                  Including 900,000shares subject to convertible preferred stock exercisable or convertible within60 days, 3,500,000 shares subject to convertible promissory notes at aconversion of $1.00, and 3,025,000 warrants exercisable as follows: 2,625,000at $1.35, 200,000 at $1.08 and 200,000 at $.0425.

 

(2)                                  Including 641,550shares subject to options exercisable within 60 days and 48,000 shares subjectto convertible preferred stock convertible within 60 days

 

(3)                                  Including 111,640shares subject to options exercisable within 60 days.

 

(4)                                  Including 61,640shares subject to options exercisable or convertible within 60 days.

 

(5)                                  Including 12,000shares subject to convertible preferred stock and 36,640 shares subject tooptions exercisable within 60 days.

 

(6)                                  Including 4,000shares subject to convertible preferred stock and 36,640 shares subject tooptions exercisable within 60 days.

 

(7)                                  Including 7,200shares subject to convertible preferred stock and 94,280 shares subject tooptions exercisable within 60 days.

 

(8)                                  Including 8,000shares subject to convertible preferred stock and 139,850 shares subject tooptions exercisable within 60 days.

 

(9)                                  Including 79,200shares subject to convertible preferred stock and 1,122,240 shares subject tooptions exercisable within 60 days.

 

**EquityCompensation Plan Information**

 

The following table gives informationabout the Company’s Common Stock that may be issued upon the exercise ofoptions, warrants and rights under the Company’s Key Employee Compensation Planand the Company’s 2000 Equity Compensation Program, as of December 31,2004.  These plans were the Company’sonly equity compensation plans in existence as of December 31, 2004.

 
| **Plan Category**                                       | ** ** | **(a)  Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights** | ** ** | **(b)  Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **(c)  Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column (a)** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans Approved by  Shareholders     |       | 2,129,100                                                                                               |       | $                                                                                       | 1.01       |                                                                                                                                                      | 3,890,400  |   |
| Equity Compensation Plans Not Approved by  Shareholders |       | —                                                                                                  |       | —                                                                                  |       | —                                                                                                                                                    |       |
|                                                    |       |                                                                                                    |       |                                                                                    |       |                                                                                                                                                      |       |
| Total                                                   |       | 2,129,100                                                                                               |       | $                                                                                       | 1.01       |                                                                                                                                                      | 3,890,400  |   |

 

32

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**Item 13.****                            CertainRelationships and Related Transactions**

** **

During the years ended December 31, 2004,2003 and 2002 approximately 3%, 3%, and 4%, respectively, of the Company’s netproduct sales were through a foreign agent, in which, Warren Ruderman, aprincipal shareholder of the Company, has an investment.  Terms of sales to this foreign agent weresubstantially the same as to unrelated foreign agents.

 

During 2004, Clarex, Ltd received a$1,000,000, 6% Subordinated Convertible Promissory Note that matures in March,2007.  Also during 2004 Clarex, Ltd.received 400,000 warrants for the issuance and extension, to December 2008, ofthe $1,700,000 note issued in 2003.  During2003, Clarex, Ltd., a shareowner and debt holder, received a 6% Secured PromissoryNote for $1,700,000 due December 2008.

 

In October 2003, Clarex, Ltd. received a$1,500,000 6% Subordinated Convertible Promissory Note due January 2006.

 

During 2002, Welland, Ltd., a relatedparty to Clarex, Ltd., received a 6% Subordinated Convertible Promissory Notedue January 31, 2006, resulting in proceeds to the Company of $1,000,000.

 

**Item 14.****                            PrincipalAccounting Fees and Services**

 

In accordancewith the requirements of the Sarbanes-Oxley Act of 2002 and the Audit Committee’s charter, allaudit and audit-related work and all non-audit work performed by the Company’sindependent accountants is approved in advance by the Audit Committee,including the proposed fees for such work. The Audit Committee is informed of each service actually rendered

 

Audit Fees*.*  Audit fees billed or expected to be billed tothe Company by the Company’s principalaccountant for the audit of the financial statements included in theCompany’s Annual Reports on Form 10-K, and reviews of the financial statementsincluded in the Company’s Quarterly Reports on Form 10-Q, for the years endedDecember 31, 2004 and 2003 totaled approximately $98,500 and $74,000, respectively.

 

Audit-Related Fees*. *TheCompany was billed $0 and $0 by the Company’s principal accountant for the fiscal yearsended December 31, 2004 and 2003, respectively, for assurance and relatedservices that are reasonably related to the performance of the audit or reviewof the Company’s financial statements and are not reported under the caption *Audit Fees* above.

 

Tax Fees*.*  The Company was billed an aggregate of $8,500and $7,500 by the Company’s principalaccountant for the fiscal years ended December 31, 2004 and 2003,respectively, for tax services, principally the preparation of income taxreturns.

 

All Other Fees*.*  The company incurred approximately $125,000in fees in connection with activities related to the MRC acquisition duediligence, audit of MRC, 8-K filing, S-8 registration and S-1 registration forresale of common stock issued as a result of the private equity offering.

 

Applicable lawand regulations provide an exemption that permits certain services to beprovided by the Company’s outside auditors even if they are notpre-approved.  The Company has not reliedon this exemption at any time since the Sarbanes-Oxley Act was enacted.

 

33

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**PART IV**

** **

**Item 15.****                            Exhibitsand Financial Statement Schedules**

 

**(a) (1)****               ****Financial Statements.**

 

Reference is made to the Index toFinancial Statements and Financial Statement Schedule on Page F-1.

 

**(a) (2)****               ****Financial StatementSchedule.**

 

Reference is made to the Index to FinancialStatements and Financial Statement Schedule on Page F-1.

 

All other schedules have been omitted becausethe required information is not present or is not present in amounts sufficientto require submission of the schedule, or because the information required isincluded in the Financial Statements or Notes thereto.

 

**(a) (3)****               ****Exhibits.**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                           |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |       | Stock Purchase Agreement between Photonic Products Group, Inc., MRC  Precision Metal Optics and Frank E. Montone (incorporated by reference to  Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the  Securities and Exchange Commission on October 25, 2004) |
| 3.1             |       | Restated Certificate of Incorporation of Photonics Products Group,  Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration  Statement on Form S-1 filed with the Securities and Exchange Commission on  August 25, 2004)                                  |
| 3.2             |       | By-Laws of Photonic Products Group, Inc. (incorporated by  reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on August 25, 2004)                                                                  |
| 4.1             |       | Specimen Common Stock Certificate   (incorporated by reference to Exhibit 4.1 to the Company’s  Registration Statement on Form S-1 filed with the Securities and Exchange  Commission on August 25, 2004)                                                                  |
| 4.2             |       | Form of Warrants issued pursuant to June 2004 Private Placement  (incorporated by reference to Exhibit 4.2 to the Company’s Registration  Statement on Form S-1 filed with the Securities and Exchange Commission on  August 25, 2004)                                          |
| 4.3             |       | Form of Placement Agent Warrants issued pursuant to June 2004 Private  Placement (incorporated by reference to Exhibit 4.3 to the Company’s  Registration Statement on Form S-1 filed with the Securities and Exchange  Commission on August 25, 2004)                          |
| 4.4             |       | Promissory Note Dated June 30, 2003 held by Clarex, Ltd.  (incorporated by reference to Exhibit 4.4 to the Company’s Registration  Statement on Form S-1 filed with the Securities and Exchange Commission on  August 25, 2004)                                                 |
| 4.5             |       | Subordinated Convertible Promissory Note dated April 1, 2004 held by  Clarex, Ltd. (incorporated by reference to Exhibit 4.5 to the Company’s  Registration Statement on Form S-1 filed with the Securities and Exchange  Commission on August 25, 2004)                        |
| 4.6             |       | Subordinated Convertible Promissory Note dated October 31, 2003 held  by Clarex, Ltd. (incorporated by reference to Exhibit 4.6 to the Company’s  Registration Statement on Form S-1 filed with the Securities and Exchange  Commission on August 25, 2004)                     |

 

34

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| 4.7  |   | Subordinated Convertible Promissory Note dated December 31, 2002 held  by Welland, Ltd.  (incorporated by  reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on August 25, 2004) |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.8  |   | Warrant dated March 31, 2004 issued to Clarex, Ltd. (incorporated by  reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on August 25, 2004)                                          |
| 4.9  |   | Warrant dated May 19, 2004 issued to Clarex, Ltd. (incorporated by  reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on August 25, 2004)                                            |
| 10.1 |   | 2000 Equity Compensation Program (incorporated by reference to  Exhibit 10.1 to the Company’s Registration Statement on Form S-1 filed with  the Securities and Exchange Commission on August 25, 2004)                                                             |
| 10.2 |   | Daniel Lehrfeld Employment Contract, dated October 20, 1999  (incorporated by reference to Exhibit 10.4 to the Company’s Registration  Statement on Form S-1 filed with the Securities and Exchange Commission on  August 25, 2004)                                 |
| 14.1 |   | Code of Ethics                                                                                                                                                                                                                                                           |
| 21.1 |   | List of Subsidiaries                                                                                                                                                                                                                                                     |
| 23.1 |   | Consent of Holtz Rubenstein Reminick LLP, Independent Auditors                                                                                                                                                                                                           |
| 31.1 |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                     |
| 31.2 |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                     |
| 32.1 |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      |
| 32.2 |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      |

 

35

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**SIGNATURES**

 

Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | PHOTONIC  PRODUCTS GROUP, INC. |
|--------|--------------------------------|
|   |                           |   |
|   |                           |   |
|   | By:                            | /s/ Daniel  Lehrfeld |   |
|   |                           | Daniel  Lehrfeld |
|   |                           | Chief  Executive Officer |
|   |                           |   |
|   | Dated:  April 7, 2005     |

 

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

 
| **Signature**            | ** ** | **Title** | ** **               | **Date** |
|--------------------------|------------|-----------|--------------------------|----------|
|                     |       |      |                     |     |
| /s/ John  Rich           |       |      | Chairman of  the Board   |     | April 7, 2005 |
| John Rich                |       |      | of Directors             |     |   |
|                     |       |      |                     |     |   |
| /s/ Daniel  Lehrfeld     |       |      | President,  Chief        |     | April 7, 2005 |
| Daniel  Lehrfeld         |       |      | Executive  Officer       |     |   |
|                     |       |      | and Director             |     |   |
|                     |       |      |                     |     |   |
| /s/ Frank  Wiedeman      |       |      | Director                 |     | April 7, 2005 |
| Frank  Wiedeman          |       |      |                     |     |   |
|                     |       |      |                     |     |   |
| /s/ Thomas  Lenagh       |       |      | Director                 |     | April 7, 2005 |
| Thomas  Lenagh           |       |      |                     |     |   |
|                     |       |      |                     |     |   |
| /s/ Jan  Winston         |       |      | Director                 |     | April 7, 2005 |
| Jan Winston              |       |      |                     |     |   |
|                     |       |      |                     |     |   |
| /s/ William  S. Miraglia |       |      | Chief  Financial Officer |     | April 7, 2005 |
| William S.  Miraglia     |       |      | and  Secretary           |     |   |

 

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