Long-Term Contracts

Certain of the Company’s agreements with customers provide for periodic deliveries at fixed prices over a long period of time. In such cases, as in most other cases as well, the Company attempts to obtain firm price commitments, as well as, cash advances from theseits suppliers for the purchase of the materials necessary to fulfill the order.

Marketing and Business Development

The Company’s two Northvale, NJ-based business units andCompany markets its MRC Optics subsidiary market their products domestically, through theirthe coordinated efforts of the sales, marketing and customer service teams, located in Northvale and Sarasota, respectively, led by the Corporate Vice President–Sales and Marketing.  teams.

The Company has moved towards a strategy of utilizing these combined sales and marketing resources for cross-selling all products, across all business lines.

Independent sales agents are used in countries in major non-U.S. markets, including Canada, UK, EU,the United Kingdom, the European Union, Israel, and Japan.

Sales and marketing efforts of all product lines and all trade show participation, Internet-basedinternet-based marketing, media and non-media advertising and promotion, and international sales representative and distributor relationships are coordinated at the corporate level under the auspices of the corporate Vice President – Marketing and Sales.

In 2011, the Company undertook a significant marketing effort in the form of a corporate name change and a new branding strategy around the “Inrad Optics” name which was supported by the development of a completely new website and other brand identity marketing efforts.

Backlog

The Company’s order backlog at December 31, 20092011 was $4,359,000,$5,021,000, essentially all of which is expected to be shipped in 2010.2012. The Company’s order backlog as of December 31, 20082010 and 20072009 was $6,102,000$5,047,000 and $9,432,000,$4,359,000, respectively.

Competition

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

Changes in the Photonicsphotonics industry have had an effect on suppliers of custom optics. As end users have introduced products requiring large volumes of optical components, suppliers have responded either by staying small and carving out niche product areas, or by ramping up their own manufacturing capacity and modernizing their manufacturing methods to meet higher volume production rates. ManyAdditionally the availability of an increasingly large variety of inventoried inexpensive catalog optics has led some OEM manufacturers to “design in” these low-cost solutions rather than utilizing custom optics manufacturers lack in-house thin film coating capability.  As a result, there are fewer well-rounded competitors in the custom optics arena,designed and many are equipped with modern facilities and manufacturing methods.  The Company has and continues to judiciously deploy capital towards modernizing its facilities, and has staffed its manufacturing groups with individuals with comprehensive experience in manufacturing management, manufacturing engineering, advanced finishing processes and optical coating processes.  The Company competes on the basis of providing consistently high quality products delivered on time, developing and maintaining strong customer relationships, and continuously improving its capabilities, labor productivity, cost structure, and product cycle times.

Competition for the Company’s laser accessoriescrystal devices and instrumentation is limited, but competitors’ products are generally lower priced.priced for OEM quantities. The Company’s laser accessoriesdevices are considered to be high quality and generally offer a combination of features not available elsewhere. BecauseAs a result of the Company’s in-house crystal growth capability, this area of the Company’s staffbusiness is knowledgeable about matching appropriate crystalshighly vertically integrated, providing a competitive advantage over other suppliers.

Our metal optics product line has several key competitors who are larger and better equipped to given applications for its laser accessories.

For the crystal product area,products, price, quality, delivery and customer service are market drivers. With advancing globalization, many of the Company’s competitors supplyingwho supply non-linear optical crystals are located overseas, and can offer significantly reduced pricing for some crystal species.  Sales in this arena are declining, but the Company has been able to retain a base by providing the quality and customer service needed by certain OEM customers not readily available from others, and by offering proprietary crystal components for which the Company is either the sole source or one of the few available sources.materials. On many occasions, the quality of the crystal component drives the ultimate performance of the component or instrument into which it is installed. Thus, qualityQuality and technical support are considered to be valuable attributes for a crystal supplier by some, but not all, OEM customers.

Although price is a principal factor in many product categories, competition is also based on product design, product performance, customer confidence, quality, delivery, and customer service.  The Company is a sole-source supplier of products to several major customers who are leaders in their industries. Based on its performance to date, the Company believes that it can continue to compete successfully, in its niches, although no assurances can be given in this regard.

Employees

As of the close of business on March 29, 2010,27, 2012, the Company had 81 full-time employees.

Patents and Licenses

The Company mainly relies on its manufacturing and technological expertise, rather than onknow-how and trade secrets in addition to its patents, to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its technical design and technical and manufacturing data, and relies onprocesses. The Company executes nondisclosure agreements with its employees to protect its proprietary information.

Regulation

Foreign sales of certain of the Company’s products to certain countries may require export licenses from the United States Department of Commerce or Department of State.Commerce. Such licenses are generally available to all but a limited number of countries and are obtained when necessary.required. All requested export licenses of Inrad Optics products have been granted or deemed not-required.

ITAR regulations govern much of the Company’s domestic defense sector business, and the Company sales in 2009, 2008is capable of handling its customers’ technical information under these regulations. Inrad Optics, Inc. is registered with the Directorate of Defense Trade Controls, and 2007 requiring U.S. State Department export approval represented less than 1.0%utilizes a supplier base of total sales.  In all cases, the required export approvals were granted.

There are no other federal regulations or any unusual state regulations that directly affect the sale of the Company’s products other than those environmental compliance regulations that generally affect companies engaged in manufacturing operations in New Jersey and Florida.

The Company cautions investors that its performance (and, therefore, any forward looking statement) is subject to risks and uncertainties. Various important factors, including but not limited to the following, may cause the Company’s future results to differ materially from those projected in any forward looking statement.

Significant economic downturns or recessions in the United States, Europe or Europe, such as the current economic environment in which the Company operates,Asia could adversely affect the Company’s business by causing a temporary or longer term decline in demand for the Company’s goods and services and thus its revenues.  The economic uncertainty has resulted in our key customers delaying orders due to decreased demand by the end users of their products and their difficulty in assessing and projecting end-user needs.

Sales to customers in the defense industry have increased in the recent past.represent a significant part of our business. These customers in turn generally contract with a governmental entity, typically the U.S. government.government agencies. Most governmental programs are subject to funding approval and can be modified or terminated with no warning upon the determination of a legislative or administrative body. The currentrecent economic crisis is havinghad significant effects on government spending and it is particularly difficult, at this time, to assess how this will continue to impact our defense industry customers and the timing and volume of business we do with them.them, in future periods. The loss or failure to obtain certain contracts or a loss of a major government customer could have a material adverse effect on our business, results of operations or financial condition.

For the year ended December 31, 2009,2011, five customer accounts represented in the aggregate of approximately 52%58% of total revenues, and three customers individually accounted for 41%more than 10% of revenues. These three customers each represented approximately 18%21%, 14%15% and 10%11% of sales, respectively. Since we are a supplier of custom manufactured components to OEM customers, and have a number of large customers in both the commercial and defense markets the relative size and identity of our largest customer accounts changes somewhat from year to year. In the short term, the loss of any of these large customer accounts or a decline in demand in the sectorsmarkets which they represent could have a material adverse effect on business, our results of operations, and our financial condition.

In order to meet the Company’s strategic objectives, the Company needs to continue to develop new processes, to improve existing processes, and to manufacture and market new products. As a result, the Company may continue to make investments in the future in process development and additions to its product portfolio. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a way that achieves market acceptance or other pertinent targeted results. The Company also cannot be sure that it will be successful in acquiring complementary products or technologies or that it will have the human or financial resources to pursue or succeed in such activities.

The Company depends on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on the Company’s ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that the Company will be able to retain or attract the personnel necessary for its success, despite the Company’s effort to do so. The loss of the services of the Company’s key personnel could have a material adverse affecteffect on its business, on its results of operations, or on its financial condition.

The Company currently holds one material patent applicable to an important product, but does not in general rely on patents to protect its products or manufacturing processes. The Company generally relies on a combination of trade secret and employee non-competition and nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps the Company takes will be adequate to prevent misappropriation of the Company’s technology. In addition, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company. Asserting the Company’s rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the Company’s business, results of operations or financial condition.

The Company’s business is significantly dependent on the demand its customers experience for their products. Many of their end users are in industries that historically have experienced a cyclical demand for their products. The industries include but are not limited to, the defense electro-optics industry and the manufacturers of process control capital equipment for the semiconductor tools industry. As a result, demand for the Company’s products are subject to cyclical fluctuations, and this could have a material adverse effect on our business, results of operations, or financial condition.

The Company’s stock is thinly traded. Many factors, including, but not limited to, future announcements concerning the Company, its competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding the Company’s industries in the financial press or investment advisory publications, could cause the market price of the Company’s stock to fluctuate substantially. In addition, the Company’s stock price may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts, or market or market-sector declines, may materially and adversely affect the market price of the Company’s Common Stock. In addition, any information concerning the Company, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than the Company could in the future contribute to volatility in the market price of the Company’s Common Stock.

Administrative, engineering and manufacturing operations are housed in a 42,000 square foot building located in Northvale, New Jersey and in a 25,000 square foot building located in Sarasota, FL.Florida. The headquarters of the Company are in its Northvale facility. On November 1, 2008,2011, the Company signed an extension ofnegotiated a change to the rate on its Northvale lease for two years toand extended the term until October 31, 2010.2013. The Company also has anthe option forof renewing the lease for two additional twoone year, periods, at fixed terms, through October 31, 2012.

The Company’s wholly-owned subsidiary, MRC Precision Metal Optics isInc., (DBA Inrad Optics) has its manufacturing operations in a leased facility located in the Sarasota, FLFlorida pursuant to a net lease expiring on August 31, 2010.  MRC Optics has the option of extending the lease for three additional two year periods through August 31, 2016, at fixed terms.

These facilities are adequate to meet current and future projected production requirements.

The total rent for these leases was approximately $519,000, $569,000 and $582,000 $588,000in 2011, 2010 and $570,000 in 2009, 2008 and 2007, respectively. The Company also paid real estate taxes and insurance premiums that totaled approximately $162,000 in 2011, $165,000 in 2010 and $172,000 in 2009, $179,000 in 2008 and $189,000 in 2007.

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

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

The following table sets forth the range of high and low closing prices for the Company’s Common Stock in each fiscal quarter from the quarter ended March 31, 20082010 through the quarter ended December 31, 2009,2011, as reported by the National Association of Securities Dealers NASDAQ System. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

As of March 29, 201027, 2012 the Company’s closing stock price was $1.00$0.95 per share.

As of March 15 2010,27, 2012, there were approximately 158145 shareholders of record of our Common Stock. The number of shareholders of record of common stock was approximated based upon the Shareholders’ Listing provided by the Company’s Transfer Agent. As of the same date, the Company estimates that there are an additional 590349 beneficial shareholders.

The Company has not historically paid cash dividends. Payment of cash dividends is at the discretion of the Company’s Board of Directors and depends, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company does not anticipate paying cash dividends in the immediate future.

There were no sales of unregistered securities during 2009.

The following data is qualified in its entirety by the financial statements presented elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.

Critical Accounting Policies

The Company’s significant accounting policespolicies are described in Note 1 of the Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the Company’s financial statements, the Company made estimates and judgments that affect the results of its operations and the value of assets and liabilities the Company reports. The Company’s actual results may differ from these estimates.

The Company believes that the following summarizes critical accounting policespolicies that require significant judgments and estimates in the preparation of the Company’s consolidated financial statements.

Revenue Recognition

The Company records revenue in accordance with Securitiesfrom the sale of its products and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”).  Under SAB 104, revenues are recordedservices when all four of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the sales price is fixed or determinable; and collectability is reasonably assured. Losses on contracts are recorded when identified.

Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost of manufactured goods includes material, labor and overhead.

The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.

Goodwill and Intangible assets

Intangible assets with finite lives are amortized on a straight-line basis over the assets’ estimated useful life up to 14 years. The Company periodically evaluates on an annual basis, or more frequently when conditions require, whether events or circumstances have occurred indicating the carrying amount of intangible assets may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the associated undiscounted future cash flows compared to the related carrying amount of assets to determine if an impairment loss should be recognized.

Goodwill and intangible assets not subject to amortization are tested in December of each year for impairment, or more frequently if events and circumstances indicate that the assets might have become impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

Stock-based compensation

Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.

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

The following table provides information on the Company’s sales to its major business sectors during the past three years:

The following table sets forth, for the past three years, the percentage relationship of statement of operations categories to total revenues.

Revenues

Total revenues were $13,177,000 in 2011, $11,054,000 in 2010 and $11,051,000 in 2009 $16,301,000 in 2008 and $15,100,000 in 2007 reflecting the consolidated results from all three business units.operations. Revenues decreased 32% in 20092011 increased 19.2% compared with increasesto 2010, which follows two years for relatively unchanged revenues for 2010 and 2009. The increase in 2011 is mainly due to an increase in orders from both new and existing customers in the process control and metrology markets that we serve which was partially offset by a decrease in sales to customers we serve in the defense/aerospace customers. The net increase in revenues in 2011 is comprised of 8%an increase of 16.8% in 2008sales of optical components and 8.5%an increase of 45.4% in 2007.  Overall, sales were impacted by the severe economic recessionof laser system devices and delayed defense procurement which negatively affected demand for the Company’s products.

Sales toin the Defense and Aerospace sector showed revenuemarket declined by 3.4% to $6,734,000 in 2011 compared to $6,968,000 in 2010. Sales in 2010 also declined by 6.5% to $6,968,000 in 2010 compared to $7,454,000 in 2009 which was also a decline of 27.8% compared to 2008. Although the rate of the declines down by almost 28%are smaller, the Company continued to feel the impact that the economic downturn has had on our customers spending patterns and 21% from 2008 and 2007, respectively.  Sales were $7,454,000, lower by $2,875,000 from 2008 and $2,002,000 from 2007.  Defensedue to changes in government defense spending on products or systems they supply. For instance, defense spending on existing electro-optical systems over the fiscal periodlast three years has slowed, impacting the demand for the Company’s services in manufacturing custom products for its OEM customers.

Sales in the Process Control and Metrology market, sector, the Company’s second largest market, decreasedincreased in 2009 both2011 by 72.7% to $4,752,000 compared to $2,751,000 in 2010. In 2010, sales increase by 17.6% to $2,751,000 compared to $2,339,000 in 2009. In addition, as a percentage of total sales, this sector increased to 36% compared to 25% in 2010 and 21% in relative2009. The increase in sales dollars.  This reflectedwas mainly the result of the increasing sales demand many of our customers experienced for systems they sell containing our products. The increase in sales in 2011 and 2010, as compared to 2009, reflect the severe impact of the economic downturn,recession, that year, which particularly in theaffected demand for our products by our commercial and semi-conductor markets and the customer base that the Company serves.  Sales were $2,339,000 or 21% of total sales compared to sales in 2008 of $4,692,000 or 29% of total sales, and sales in 2007 of $3,760,000 or 25% of total sales.

The Company serves the non-military laser industry as an OEM supplier of standard and custom optical components and laser accessories. In this sector, 2009This market’s sales declinedincreased to $539,000 from $193,000 in 2010 and $138,000 or 1% of total sales. In 2008, sales were $463,000 or 3% of total sales compared with sales in 2007 of $932,000 or 6% of total sales.2009. The sales declineincreases over the last few years primarily reflectspast two year have principally come from increased demand in the decline in orders from one major customermedical laser industry. The Company includes sales of other products that are not currently large enough to list individually, in this market.

Sales to customers within the university and national laboratories market sector decreased in 2011 to $436,000 or 3% of total sales compared with an increase in 2010 to $539,000 or 5% of total sales from $492,000 or 4% of total sales in 2009. Although the results as a percentage of total sales vary slightly from year to year the total dollar amount remained relatively flat at $628,000 in 2009, compared to other sector salesunchanged over the past three years and is dependent on research projects and the availability of $614,000 and $600,000 in 2008 and 2007, respectively.

Bookings

The Company booked new orders totaling $12.9 million in 2011, an increase from $12.3 million in 2010. The increase in 2011 was across all the business sectors that the Company serves and consisted of orders from the new customers and increases from most of our existing customer base. While the timing of the orders placed by customers may vary from quarter to quarter, the second half of the year was only slightly better.

In 2010, the Company booked new orders totaling $12.3 million in 2010, an increase from the $9.5 million in 2009, down from $13.0 million2009. The increase in 2007 and $17.8 million in 2007 reflecting a decline2010 was incurred across all the business sectors that the Company serves. DespiteHowever, a significant portion of the decrease, the Company was able to add several new customers while maintaining most of its existing customer base.

The Company’s backlog as of December 31, 2011 decreased to the increase in 2007$4.9 million from 2006.  One large new Defense/Aerospace OEM was added in 2007 while orders from another declined by 50%.  Additionally, a large new OEM customer in the Process Control and Metrology sector was added in 2007.

Cost of Goods Sold and Gross Profit Margin

Cost of goods sold as a percentage of sales was 80.5%73.0%, 70.5%77.3% and 60.5%80.5%, for the years ended December 31, 2009, 20082011, 2010 and 2007,2009, respectively. In dollar terms, 20092011 cost of goods sold was $9,615,000 increased from $8,545,000 in 2010 in conjunction with the increase in sales in 2011. Cost of goods sold in 2010 was down 3.9% from $8,897,000 which is down 22.5% from $11,487,000 in 2008, compared with a 32% sales decline over the comparable period.

The increase in Costcost of Goods Sold percentagegoods sold in 2011 compared to 2010 is primarily due to increases in material costs, manufacturing labor and operating costs. Compared to 2010, material costs increased by $591,000 principally due to product mix which had a higher material costs. In addition, the cost of manufacturing wages and salaries and related fringe benefits increased by $398,000 principally due to the increase in direct labor required to meet demand.

The slight decrease in cost of goods sold in 2010 compared to 2009 is primarily due to declines in labor and operating costs partially offset by an increase in material costs. Compared to 2009, total manufacturing wages and salaries decreased by $332,000 as operations continued to implement process improvements and resulted in a decrease in non-labor operating expenses of $184,000. Conversely, material costs increased by $213,000 for the Company which was mainly due to product mix at our Florida facility.

The increase in cost of goods sold percentagein 2009 compared to 2008 is primarily due to the significant decline in sales volume during the year, net of cost reductions implemented by the Company during the year. Compared to lastthe prior year, material cost as a percentage of sales remained unchanged from 2008 although in dollar terms material costs declined by $913,000, as expected with the lower sales volume levels. Total manufacturing wages and salaries declined by approximately $832,000 but rose by 5.6 percentage points, as a percentage of sales. Non-labor operating costs excluding depreciation also fell in dollar terms in 2009 by approximately $606,000 or 26.7% from 2008, but as a percentage of sales, increased by about 1.1 percentage points from the prior year.

Gross margin in 20092011 was $2,154,000$3,562,000 or 19.5%27.0% which was downis an increase from 20082010 gross margin of $4,815,000$2,509,000 or 29.5%22.7%. This compares with a gross margin of $5,959,000$2,154,000 or 39.5%19.5% in 2007.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $3,278,000$3,255,000 in 2009, down $580,0002011, an increase of $150,000 or 15%4.8% from 2008, and2010. As a percentage of sales, SG&A expenses decreased to 24.7% of 2011 sales compared to 28.1% of sales in 2010. The decline in SG&A expenses, as a percentage of sales, representedreflects the impact of cost reductions in SG&A salaries and wages and fringe benefits from personnel reductions started in the second half of the prior year, offset by higher expenses related to the increase in sales in the current year.

SG&A expenses were $3,105,000 in 2010, down $174,000 or 5.3% from 2009. As a percentage of sales, SG&A expenses were 28.1% of 2010 sales compared to 29.7% of sales in 2009 and 23.7% of sales in 2008.2009. The decline in dollar expense resulted mainly from reductions in SG&A salaries and wages and fringe benefits reflectingfrom personnel reductions implemented in the first quartersecond half of 2009the year and continued cost management of other SG&A expenses throughout the year.  Overall SG&A salary and wages decreased by 14.5% over

Operating Income (Loss)

The Company had an operating income of $307,000 in 2011 which was an improvement after the prior year.  Non-payroll SG&A expenses excluding depreciation also declined by 15.5% compared to 2008.

Other Income and Expenses

Net interest expense of $130,000 in 2009 declined 23.5%2011 decreased 5.3% from $170,000$138,000 in 2008.2010. Interest expense was $167,000$163,000 in 20092011 compared to $236,000$164,000 in 2008 which reflects2010which is the positive impactresult of the Company’s continued reduction innormal scheduled debt and long term notes.repayments. Interest income for 20092011 increased to $33,000 from $26,000 in 2010 mainly as a result of changes in short term cash balances and bank money market interest rates.

Net interest expense of $138,000 in 2010 increased 5.7% from $130,000 in 2009. Interest expense was $37,000$164,000 in 2010 compared to $167,000 in 2009which is the result of the Company’s normal scheduled debt repayments. Interest income for 2010 was $26,000 down from $66,000$38,000 in 20082009 mainly as a result of reductions in bank interest rates on invested cash balances.

In 2011, the positive impact ofCompany sold surplus equipment and recorded a loss $1,003 on the Company’s continued reduction in debtsales.

Income Taxes

In 2011, the Company recorded a current provision for state tax and long term notes and capital lease balances due to both scheduled amortization and accelerated principal re-payments, including the $1,700,000 subordinated convertible debtfederal alternative minimum tax in the first quarteramount of 2008.  Interest income for 2008 was $66,000, down from $163,000 in 2007 as the result of lower cash balances available for investment during the year$11,000. In 2010 and reductions in bank interest rates on invested cash balances.

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statements carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

At December 31, 2009,2011, the Company had a total net deferred tax asset balance of $2,857,000,$2,860,000, an increase of $716,000$73,000 from 2008 primarilya $2,787,000 in 2010 and $344,000 from the increase to the net operating loss carry forward position that resulted for the losses incurred$2,516,000 in 2009 and depreciation.   Although the Company believes that the current year’s losses were caused by the recent economic conditions, the Company has increased the valuation allowance to $2,449,000 to fully offset the current year’s increase in the deferred tax asset.

As of December 31, 20092011, 2010 and 2008,2009, the Company recognized a portion of the net deferred tax assets in the amount of $408,000 which the Company’s management is reasonably assured will be fully utilized in future periods. Although the Company’s current year financial results were positively affected by the strengthening economy, primarily in the second half of the year, we increased the valuation allowance to $2,452,000 to fully offset the increase in the deferred tax asset. In evaluating the Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income that is consistent with the plans and estimates that management is using to manage the underlying business.

The Company’s valuation allowance as of December 31, 20092011 will be maintained until management concludes that it is more likely than not that the remaining deferred tax assets will be realized. When sufficient positive evidence exists, the Company’s income tax expense will be reduced by the decrease in its valuation allowance. An increase or reversal of the Company’s valuation allowance could have a significant negative or positive impact on the Company’s future earnings.

Net Income (Loss)

In 2011, net income was $165,000, compared to a net deferred tax assetloss of approximately $2,041,000,$734,000 in 2010 primarily as a result of higher sales and the primary componentpositive leveraging of which was net operating loss carry forwards.  Through December 31, 2007, the Company had established a valuation allowance to fully offset this deferred tax asset in the event the tax asset will not be realized in the future.   The Company determined that basedhigher sales on a recent history of consistent earnings and future income projections, a full valuation allowance was no longer required.  Accordingly, during the year ended December 31, 2008, the Company reduced the valuation allowance and recognized a deferred tax benefit available from the Company’s net operating loss carry forward position of $408,000 based onrelatively fixed cost structure. In 2009, the effective federal tax rate of 34%.  This resulted in the Company recording a net benefit from income taxes of $303,000 after offsetting the deferred tax benefit against the current tax provision.  At December 31, 2008, the Company had net deferred tax asset balance of $2,141,000 offset by a valuation allowance of $1,733,000.

Liquidity and Capital Resources

The Company’s primary source of cash in recent years has been from operating cash flows. Other sources of cash include proceeds received from the exercise of stock options short-term borrowing, and issuance of common stock. The Company’s major uses of cash in the past three years have been for capital expenditures and for repayment and servicing of outstanding debt.

Supplemental information pertaining to our source and use of cash is presented below:

In 2011, the Company used cash to accelerate the payment of accrued interest of $1,125,000 on Related Party Convertible Notes Payable, as well as paying current interest on debt obligations, and financing capital expenditures. In 2010 and 2009, the Company primarily used excess cash to finance capital expenditures and repay outstanding debtdebt.

In 2011, proceeds from the exercise of 20,000 stock options and finance capital expenditures.issuance of 6,239 common shares totaled $18,260. In 20082010, proceeds from the exercise of 10,000 stock options and 2007, excess cash was used to retire the Company’s convertible preferredissuance of 5,906 common shares in addition to accelerating the repayment of debt and financing of capital expenditures.  

During 2009, a total of 50,000 warrants issued pursuant to a 2004 private placement were exercised by warrant holders with a total exercise price of $67,500. Also in July 2009, 893,790 warrants with an exercise price of $1.35 expired unexercised. These warrants were originally issued as part of a private placement of common stock in 2004 in which2004.

In March 2011, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”) and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were extended to April 1, 2013. The remaining terms and conditions of the notes were unchanged. These notes were previously issued on April 1, 2009 and had a maturity date of April 1, 2011. The notes bear interest at 6%. Interest accrues yearly, is payable on maturity and unpaid interest along with principal may be converted into securities of the Company issued 1,581,000as follows: The notes are convertible in the aggregate into 1,500,000 Units and 1,000,000 Units, respectively, with each unit consisting of 1,581,000 sharesone share of common stock and warrants, exercisable through August 2009,one warrant. Each warrant allows the holder to acquire an additional 1,185,7500.75 shares of common stock at a price of $1.35 per share.share and have an expiration date of April 1, 2016. Clarex is a significant shareholder of the Company.

During 2011, the Company paid a total of $1,125,000 of accrued interest, on the two notes. In addition, 276,675 warrants were issued to the agent for the private placement.  During 2008, 518,635 warrants from the private placement were exercised by warrant holders.  A total of 375,520 warrants with a total exercise price of $507,000 were surrendered to the Company paid $150,000 of current interest on the notes in exchange2011. The Company intends to stay current with interest payments for amounts that would accrue against these notes. Therefore, the issuanceCompany expects to make a payment of 375,250 shares$37,500 each quarter in 2012 and through the maturity date to satisfy the amounts of the Company’s common stock.  An additional 142,385 placement agent warrants were exercised using a cashless feature available for these warrants, in exchange for 89,702 shares of the Company’s common stock.

In May 2009, the Company repaid a Promissory Note prior to maturity, in the amount of $125,000 and accrued interest of $4,212, which represented the balance of a Note issued by the Company as part of the purchase price of MRC in 2004, to the sole shareholder of the acquired company.

In 2009, non-cash investments in the amountcertificate of deposits totaling $800,000 were redeemed compared to a purchasean investment of $800,000 in certificates of deposit 2008.

In 2011, capital expenditures of $304,000 were primarily to replace or refurbish both operating facilities, purchase equipment upgrades to the computer information system and manufacturing equipment. In 2011, the company purchased additional manufacturing tools made from platinum at a net cost of $318,000 to further increase our crystal growth capacity at our Northvale, New Jersey facility.

The Company had capital expenditures in 2010 in the amount of $278,000, primarily to replace or refurbish manufacturing equipment and for additional equipment required to increase our crystal growth capacity at our Northvale, New Jersey location. For the year ended December 31, 2009 werecapital expenditures of $211,000 and included planned expenditures primarily for manufacturing and optical testing equipment that increaseddesigned to increase production capacityefficiency at our Northvale, New Jersey location. DuringIn addition, the year,Company purchased a review program for planned capital expendituresmanufacturing tool made from platinum at a net cost of $53,000. The cost was instituted, in order to identify and defer expenditures, where practical, to minimize the impact on the Company’s cash flows.  Offsetting the impact of capital expenditures on cash flows was the receipt of $5,000offset by proceeds from the sale of fully depreciated surplus manufacturing equipment during the fourth quarter of 2009.  In 2009, the Company purchased precious metal manufacturing toolsplatinum for $53,000 offset by the receipt of $16,000, for similar precious metal tools that were sold as part of the purchase.

In 2011, cash decreased by $965,000 compared to capital expendituresan increase of $296,000 in 2008 and 20072010. In 2010, cash increased by $296,000 compared to an increase of approximately $784,000 and $247,000, respectively.  In 2008, capital expenditures were primarily$597,000 for increased production capacity and capability in both our Sarasota, Florida and Northvale, New Jersey locations.  Offsetting the impact of capital expenditures on cash flows was the receipt of $10,0002009 (excluding proceeds from the saleredemption of surplus manufacturing equipment during the second quarter of 2008.

A summary of the Company’s contractual cash obligations at December 31, 20092011 is as follows:

Overview of Financial Condition

As shown in the accompanying financial statements, the Company reported a net income of $165,000 in 2011 compared to a net loss of $734,000 and $2,800,000 whichin 2010 and 2009, respectively. The net loss in 2009 included a non-cash charge for goodwill of $1,558,000$1,558,000. During 2011, the Company’s working capital requirements were provided by cash from operations and recorded net income of $1,098,000 in 2008available cash balances. In 2010 and $1,880,000 in 2007.  During 2009, 2008 and 2007, the Company’s working capital requirements were provided by positive cash flow from its operations.

In 2011, net cash used by operations was $358,000 compared to net cash provided by operations was $815,000of $576,000 in 2009, $548,000 in 2008 and $3,001,000 in 2007.2010. The increase in cash provided by operationsdecrease was primarily the results of the net improvementchanges in working capital requirements, which includesresulted from the payment of accrued interest on the Related Party Convertible Note Payable, an increase in inventory (excluding reserve) during the year and a decrease in customer advances, offset by a decrease in accounts receivable and inventory (excluding reserves) offset by an increase in accounts payable and accrued liabilities and customer advances, and offset by a decrease from the net loss, after adjusting for the non-cash charge for goodwill.liabilities. The Company’s management expects that future cash flow from operations and its existing cash reserves will provide adequate liquidity for the Company’s operations and working capital requirements in 2010.

Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet arrangements at December 31, 20092011 and 2008.

The financial statements and supplementary financial information required to be filed under this Item are presented commencing on page 24 of the Annual Report on Form 10-K, and are incorporated herein by reference.

None

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures as of December 31, 20092011 are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding disclosure.

None

PART III

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20102012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20102012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20102012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20102012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20102012 Annual Meeting of Stockholders.

(a) (1)   Financial Statements.

Reference is made to the Index to Financial Statements and Financial Statement Schedule commencing on Page 24.

(a) (2)   Financial Statement Schedule.

Reference is made to the Index to Financial Statements and Financial Statement Schedule on Page 24. All other schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Financial Statements or Notes thereto.

(a) (3)Exhibits.

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

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