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.

The Company’s significant accounting policies 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 policies that require significant judgments and estimates in the preparation of the Company’s consolidated financial statements.

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.

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.

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 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.

Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company recognizes the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company classifies interest and penalties related to income taxes as income tax expense in its Consolidated Financial Statements

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.

Total revenues were $13,177,000 in 2011, $11,054,000 in 2010 and $11,051,000 in 2009 and $16,301,000 in 2008 reflecting the consolidated results from all business units.operations. Revenues werein 2011 increased 19.2% compared to 2010, which follows two years for relatively unchanged revenues for 2010 and 2009. The increase in 20102011 is mainly due to an increase in orders from 2009, followingboth new and existing customers in the process control and metrology markets that we serve which was partially offset by a decrease of 32% in 2009 compared with 2008.  Overall, the Company’s sales in 2010 continued to reflect the reduced spending by the defense/aerospace customers we serve in the defense/aerospace customers. The net increase in revenues in 2011 is comprised of an increase of 16.8% in sales of optical components and the lingering effectsan increase of the economic recession on many45.4% in sales of our commercial customers that negatively affected the demand for the Company’s products that beganlaser system devices and instrumentation, both as compared to 2010.

Sales in 2009.

Sales in the Process Control and Metrology market, sector, the Company’s second largest market, increased in 2011 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 2009. The increase in sales was mainly the result of total sales.  This occurred asthe increasing sales demand many of our customers in this sector experienced anfor systems they sell containing our products. The increase in demand for their systems that contain the products that we supply to them.  In 2009, sales in this sector decreased both2011 and 2010, as a percentage of total sales and in relative sales dollars.  This reflectedcompared 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 in particular, 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.

The Company serves the non-military laser industry as an OEM supplier of standard and custom optical components and laser accessories. This sector’smarket’s sales increased to $539,000 from $193,000 fromin 2010 and $138,000 in 20092009. The increases over the past two year have principally come from increased demand in the medical laser industry but remained below sales in 2008 of $463,000.industry. The Company includes sales of other products that are not currently large enough to list individually, in this market segment. Sales of these other products have been in the $500,000 to $700,000 range historically and were $716,000 in 2011, $603,000 in 2010, and $628,000 in 2009 and $614,000 in 2008.2009. Overall, the market for laser systems and other products represented 10% of total sales in 2010 and 7% of total sales in 2010 and 2009, and 2008, respectively.

Sales to customers within the Universityuniversity and National Laboratoriesnational laboratories market sector increaseddecreased 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 20092009. Although the results as demanda percentage of total sales vary slightly from year to year the total dollar amount remained relatively unchanged over the past three years and is dependent on research projects and the availability of funding for such projects.

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 products serving this market increased slightly.

In 2010, the Company booked new orders totaling $12.3 million in 2010, an increase from the $9.5 million in 2009 and comparable with $13.0 million in 2008.2009. The increase in 2010 was incurred across all the business sectors that the Company serves. However, a significant portion of the 2010 bookings were recorded in the second half of the year as the result of orders from the new customers and increases from most of our existing customer base.

The decrease in bookings from the prior year reflects a decline across all the business sectors that the Company serves.  Despite the decrease, the Company was able to add several new customers while maintaining most of its existing customer base.

Cost of goods sold as a percentage of sales was 77.3%73.0%, 80.5%77.3% and 70.5%80.5%, for the years ended December 31, 2011, 2010 2009 and 2008,2009, respectively. In dollar terms, 20102011 cost of goods sold was $9,615,000 increased from $8,545,000 which isin 2010 in conjunction with the increase in sales in 2011. Cost of goods sold in 2010 was down 3.9% from $8,897,000 in 2009 even though revenues remained unchanged.

The increase in cost of goods 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 last year,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 percentage inpercentagein 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 the 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 2011 was $3,562,000 or 27.0% which is an increase from 2010 wasgross margin of $2,509,000 or 22.7% which was an increase from 2009 gross margin of $2,154,000 or 19.5%. This compares with a gross margin of $4,815,000$2,154,000 or 29.5%19.5% in 2008.

Selling, general and administrative expenses (“SSG&A”) were $3,255,000 in 2011, an increase of $150,000 or 4.8% from 2010. 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, reflects 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. The decline resulted mainly from reductions in SG&A salaries and wages and fringe benefits from personnel reductions in the second half of the year and continued cost management of other SG&A expenses throughout the year.

Operating Income (Loss)

The Company had an operating income of $307,000 in 2009, down $580,000 or 15% from 2008, and as a percentage of sales represented 29.7% of sales in 2009 and 23.7% of sales in 2008. The decline in dollar expense resulted mainly from reductions in SG&A salaries and wages and fringe benefits reflecting personnel reductions implemented in2011 which was an improvement after the first quarter of 2009 and continued cost management throughoutlosses incurred during the year.  Overall, SG&A salary and wages decreased by 14.5% overpast two years. In 2010, the prior year.  Non-payroll SG&A expenses, excluding depreciation, also declined by 15.5% compared to 2008.

Net interest expense of $130,000 in 2011 decreased 5.3% from $138,000 in 2010. Interest expense was $163,000 in 2011 compared to $164,000 in 2010which is the result of the Company’s normal scheduled debt repayments. Interest income for 2011 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 $164,000 in 2010 compared to $167,000 in 2009 which2009which is the result of the Company’s normal scheduled debt repayments. Interest income for 2010 was $26,000 down from $38,000 in 2009 mainly as a result of reductions in bank interest rates on invested cash balances.

In 2011, the Company sold surplus equipment and recorded a loss $1,003 on the sales.

Income Taxes

In 2011, the Company recorded a current provision for state tax and federal alternative minimum tax in the amount of $130,000 in 2009 declined 23.5% from $170,000 in 2008.  Interest expense was $167,000 in 2009 compared to $236,000 in 2008 which reflects the positive impact of the Company’s continued reduction in debt and long term notes.  Interest income for 2009 was $37,000 down from $66,000 in 2008 mainly as a result of 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, 2010,2011, the Company had a net deferred tax asset balance of $2,787,000,$2,860,000, an increase of $271,000$73,000 from 2009.  Most of the increase relates primarily to the addition to the Company’s net operating loss carry forward position which resulteda $2,787,000 in 2010 and $344,000 from net operating losses$2,516,000 in 2010.  Although the Company believes that the current year’s losses were caused by the recessionary economic conditions that are improving, the Company has increased the valuation allowance to $2,379,000 to fully offset the current year’s increase in the deferred tax asset.

As of December 31, 2011, 2010 and 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, 20102011 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 projections, a full valuation allowance was no longer required.  Accordingly, 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 on 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 of $105,000.  At December 31, 2008, the Company had a  net deferred tax asset balance of $2,141,000 offset by a valuation allowance of $1,733,000.

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 debt.

In 2008, excess cash was used to retire a convertible promissory note in2011, proceeds from the amountexercise of $1,700,000, in addition to accelerating the repayment20,000 stock options and issuance of other notes payable and lease obligations, as well as, financing 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 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 as follows: The notes are convertible in the aggregate into 1,500,000 Units and 1,000,000 Units, respectively, with each unit consisting of one share of common stock and one warrant. Each warrant allows the holder to acquire 0.75 shares of common stock at a price of $1.35 per share and have an expiration date of April 1, 2016. Clarex is a significant shareholder of the Company.

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, certificate of deposits totaling $800,000 were redeemed compared to an 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 capital expenditures of $211,000 included planned expenditures primarily for manufacturing and optical testing equipment designed to increase production efficiency at our Northvale, New Jersey location. In addition, the Company purchased a manufacturing tool made from platinum at a net cost of $53,000. The cost was offset by proceeds from the sale of platinum for $16,000, as part of the purchase arrangement.

In 2011, cash decreased by $965,000 compared to capital expendituresan increase of $296,000 in 2008 of approximately $784,000.2010. In 2008, capital expenditures were primarily for increased production capacity and capability in both our Sarasota, Florida and Northvale, New Jersey locations.  Offsetting the impact of capital expenditures on2010, cash flows was the receipt of $10,000 from the sale of surplus manufacturing equipment during the second quarter of 2008.

A summary of the Company’s contractual cash obligations at December 31, 20102011 is as follows:

As shown in the accompanying financial statements, the Company reported a net lossincome of $734,000,$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 2008.  Duringavailable cash balances. In 2010 2009 and 2008,2009, 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 wasof $576,000 in 2010, $815,000 in 2009, $548,000 in 2008.2010. The decrease in cash provided by operations was primarily the results of the net changes in working capital requirements in 2010, which resultsresulted from the payment of accrued interest on the Related Party Convertible Note Payable, an increase in accounts receivable and inventory (excluding reserves)reserve) during the year and a decrease in customer advances, offset by a decrease in accounts receivable and an increase in accounts payable and accrued liabilities and customer advances.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 2011.

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, 20102011 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’sCompany's management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding disclosure.

None

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20112012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20112012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20112012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20112012 Annual Meeting of Stockholders.

The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20112012 Annual Meeting of Stockholders.

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

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.

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.